Healthpeak Properties, Inc.

Good morning and welcome to the HealthPeak Properties, Inc. first quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please sign up a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Andrew Jones, Senior Vice President, Investors Relations. Please go ahead.

Welcome to HealthPeaks' first quarter 2023 financial results conference call. Today's conference call will contain 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 to differ materially from our expectations. A discussion of risk and risk factors is included in our press release and detailed in our filing to the SEC. We do not undertake a duty to update any more of those statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit to the AK we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the right to your 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.

Thanks, Andrew. Good morning and welcome to HealthPeak's first quarter earnings call. Joining me today for prepared remarks are Pete Scott, our CFO, and Scott Bone, our CDO. The senior team will be available for Q&A. Starting this quarter, we moved up our earnings call cadence by almost a full week, made possible by the strong systems we've put in place and our streamlined processes. Over the course of the calendar year, this gives the team an extra three to four weeks to focus on value-add real estate activities. After a strong fourth quarter to close out last year, 2023 is off to a solid start despite the market backdrop. We affirmed full-year FFO guidance and increased full-year AFFO guidance, which puts our payout ratio in the 80% range. Same-store growth was strong in each business segment, blending to 5.5% for the quarter, and our balance sheet is in great shape with 5.4 times leverage. Outpatient medical continues to produce best-in-sector growth, despite ever more challenging comps driven by the quality of the portfolio and platform. CCRCs are performing strongly on a cash basis in particular, with entry fee receipts at an all-time high for the first quarter. I want to make a few comments on life science. For the past 20 years, I've invested in and asset managed nearly every variation of healthcare real estate. I've seen firsthand the pluses and minuses of each and believe life science falls on the favorable end of the continuum. I say that based on secular demand, the impact of innovation, barriers to entry in core submarkets, competitive advantage of incumbents, high operating margins, and net cash flow growth over time. It's a business driven by the aging population and the desire for improved health, two things that aren't going away. At the same time, we fully acknowledge that any business runs in cycles. In fact, despite the market exuberance the past few years, we correctly underwrote the growth with slow, and we position ourselves accordingly. No new development starts in the past 18 months, no material operating acquisitions in more than 24 months, very few lease maturities this year or next due to proactive early renewals, and we didn't compromise on asset quality during the boom. The reality is that not every drug candidate will succeed, and biotechs don't raise 10 years of cash up front. It's a given that some companies won't make it, and none of this is a surprise to us. We build our portfolio around these realities. For example, one aspect of our cluster strategy is that growing tenants in our portfolio can take space when another tenant contracts, whether through a direct lease or a sublease. It's often done proactively, powered by our robust asset management. Scott Bowen will share recent examples. For several reasons, we see the pullback in sentiment as a huge opportunity for current and potential HealthPeak shareholders. One, we have a relatively small amount of near-term lease role, and when we do have availability, we continue to sign leases. New development starts will be very low across the sector for the foreseeable future. Three, higher borrowing costs and delayed lease up will create acquisition opportunities in the coming years. And four, we have a big land bank with strong progress on entitlements. When fundamentals turn, which they inevitably will, we expect to be in great shape to capitalize. Recall we were patient with our land at the cove and the shore until market conditions were right, then generated huge returns for shareholders. Perhaps goes without saying, but the best opportunities come out of downturns. Now a few Board of Director updates. First, congratulations to Kathy Sandstrom on being elected as our new chairperson. Kathy has been an independent member of our board since 2018 and brings a wealth of real estate, capital markets, and governance expertise. She was previously a senior executive at Heitman, an important public and private real estate investor. An enormous thank you to Brian Cartwright, for his five successful years as chairman while we dramatically improved the company and portfolio. Brian will remain an independent member of our board and a highly valued advisor to me personally. And I would like to formally welcome Jim Connor to our board. Jim has a strong track record of creating internal and external growth as CEO of Duke Realty, in addition to development and outpatient medical experience that will contribute to the execution of our strategic plan. Finally, we are pleased to report that we received the highest possible quality scores from ISS for the E, the S, and the G in our recent proxy statement. I'll turn it to Scott Bone for commentary on life science fundamentals.

Thanks, Scott. Before I dive in, I want to touch on a few important topics. First, much like landlords analyze tenant credit, tenants are now doing the same with landlords. With record demand and minimal availability in recent years, tenants didn't always have the luxury of thoughtfully selecting their real estate assets or partners of choice. and many had to settle with what was available. Today, tenants have more ability to select a landlord that has the financial capability and operating credibility in the market, as well as one that has the ability to provide pathways to growth within its portfolio. HealthPeak is exceptionally well-positioned to capture the demand from these tenants. Second, with increased supply and softening demand, there will inevitably be pressure on deal economics. However, purpose-built space in the best sub-markets that is owned by large incumbents like HealthBeak, will continue to outperform secondary locations with lower quality projects and sponsorship. Third, we proactively manage our portfolio, leveraging our scale and tenant relationships to provide real estate solutions for our tenants while enhancing our portfolio credit profile. A very recent example of this is how we proactively downsized Edvarum's footprint and simultaneously backfilled the 40,000 square foot space with Revolution Medicines, a $2.4 billion market cap company. that has raised over $600 million in two equity offerings in the past nine months. RevMed entered HealthPeak's portfolio in 2015, initially taking a 42,000-square-foot building and has grown to over 140,000 square feet across four buildings. Finally, while the IPO market has generally remained closed, we've seen continued activity and positive signs from the other funding sources. Public biopharma R&D is at record levels, VC fundraising remains strong, and the secondary equity market remains open for those with good data. Moving to the portfolio and our core markets. Pete will discuss the financial results in detail, but I will note that we had a solid leasing quarter with 311,000 square feet of leases executed with a positive 55% cash releasing spread on renewals. We delivered the final lab space at our 101 Cambridge Park Drive development, and the building is now fully placed into service, capping off another successful HealthPeak development project. Now getting into the markets, starting in Greater Boston. We have only one 22,000 square foot space rolling through year-end 2024 in the entire portfolio. Our only vacancy is in a 49% owned building, where we recently executed a lease on a portion of that space at a triple-digit rental rate and have activity on the remaining space. Moving to San Diego, our 2.6 million square foot operating portfolio is 100% leased. Only 200,000 square feet matures over the next 18 months, and we've already addressed nearly a third of those maturities. We have commenced marketing on our gateway development following a lease rejection as part of the bankruptcy proceedings. The project was designed to accommodate singular multi-tenant use and has great visibility off the 805 freeway. Finally, to South San Francisco, where we enjoy a dominant market share of approximately 40%. We have assembled a portfolio in South San Francisco that is built to accommodate tenants of all sizes and maturity levels, from brand-new Class A-plus space to small 2,500-square-foot Class B spaces. This holistic portfolio approach with different price points catering to the needs of a wide variety of tenants creates an ecosystem that no one can match in this important market. Through 2022 and early 2023, over 78% of HealthPeaks leasing in South San Francisco has been with existing tenants. Additionally, over the past two years, HealthPeaks' share of total executed leases has approached 50% of the market total, highlighting the importance of our deep tenant relationships and portfolio scale in the South San Francisco market. Now to a quick update on our top three priority campuses in South San Francisco. At Oyster Point, we have completed leasing on 87% of the recent expirations. This quarter, we placed our only vacancy at the campus, a 68,000-square-foot building that expired at the end of 2022 into redevelopment. The space has 20-year-old improvements, so we'll need some capital as we work to release it. The balance of the near-term expirations, which total 320,000 square feet, don't expire until late this year, in early 2024, and will go into redevelopment that time. So we are marketing and are in active negotiations on a portion, but still generally too early to be signing leases. At our point grant redevelopment, which we have de-risked with our strategic JV, we have leased 53% or 185,000 square feet of the active redevelopment space. We've executed three leases at the campus between December and March, totaling over 130,000 square feet, two in very late 2022 and one last month with a weighted average lease rate on those deals of just under $90 per square foot. Additionally, we are enacting negotiations with prospective tenants on portions of the remaining space. At our Vantage project, we have pre-leased a full building totaling 45% of the first phase to a cellist and have recently executed an LOI with an existing portfolio tenant for a 23,000-square-foot full-floor space, bringing the project to over 50% committed. Wrapping up with supply in South San Francisco, competitive new supply delivering in 2023 totals 800,000 square feet, of which 71% is pre-leased. There's another 1.7 million square feet delivering in 2024, 26% of which is conversion space that will be less competitive to our purpose-built product. It's critical to understand that the unleased space delivering in 2023 and 2024 resides in only five projects, and two of those are conversions. We have consistently competed successfully with these same projects over the past 12 to 18 months while leasing up our Shore, Nexus, and Vantage projects. Lease-up at HealthPeace projects have continuously outpaced the competition, and we expect the same to continue. With that, I'll turn it over to Pete to cover financial results.

Thanks, Scott. Despite the challenging market backdrop, we have started the year on a strong note. For the first quarter, we reported FFO as adjusted of $0.42 per share, AFFO of $0.38 per share, and total portfolio same-store growth of 5.5%. Notably, our FFO as adjusted this quarter was impacted by two pennies of one-time straight-line rent write-offs. Per our policy, we do not add this back to FFO as adjusted. Let me provide a little more color on segment performance. In light sciences, we finished the quarter with an occupancy rate of 98%, and same-store growth was a very solid 6.3%. The drivers of same-store growth were contractual rent bumps, positive mark-to-market, and lower free rent, partially offset by a known vacate of a non-life science user at our 8,000 marina building, which is adjacent to the shore. Turning to medical office, we had another great quarter with same-store growth of 3.7%, and we finished the quarter with an occupancy rate of 91%. Same-store growth was driven by strong in-place lease escalators and our Medical City Dallas campus, which continues to exceed our expectations. Finishing with CCRCs, Same-store growth for the quarter was a very healthy 9.5%. Cash NREF sales of $29 million set a first-quarter record. The strong starts of the year allowed us to increase our full-year NREF guidance to $107 million at the midpoint. That is $27 million, or five pennies per share, greater than what is forecast in FFO and AFFO. Last item under financial results, for the first quarter, our board declared a dividend of 30 cents per share. This equates to an AFFO payout ratio of less than 80 percent, the lowest reported payout ratio at HealthPeak in over a decade. That is a good segue to our balance sheet, which we believe continues to be a competitive advantage. Our net debt to EBITDA is 5.4 times. We have liquidity of $2.5 billion. We have limited floating rate debt exposure at 5%. We have no bonds maturing until 2025. Our development pipeline is fully funded, and we have no additional asset sales in our forecast. We have approximately $150 million of annual retained earnings, and we have stable ratings from both S&P and Moody's. Turning now to our 2023 guidance. We are reaffirming our FFO as adjusted range of $1.70 to $1.76 per share. We are increasing our AFFO range by one penny to $1.46 to $1.52 per share. And we are increasing our blended cash same store growth by 25 basis points to 3% to 4.5%. Let me expand on some important items underlying our guidance. we see three pennies of benefits from the following items. One penny from the 50 basis point increase in medical office same store growth and the $2.3 million letter of credit at Gateway. One penny due to earlier than anticipated revenue recognition at our Hayden campus in Boston. And one penny from the combined impact of lower interest expense and higher interest income. For FFOs adjusted, The positive three-penny increase is offset by a three-penny decrease in straight-line rents, inclusive of the one-time write-offs I previously mentioned. For AFFO, we were able to increase guidance by a penny while maintaining a level of conservatism as it's still early in the year. As a reminder, AFFO is not impacted by non-cash items, including straight-line rent and revenue recognition. Please refer to page 36 of our supplemental for additional detail on our guidance. A couple of quick items before turning to Q&A. On the Sorento Therapeutics operating leases, we have been paid rent in full through April. Although not guaranteed, we could receive additional rents as their strategic alternatives process is expected to run through July. With the rents received year-to-date, Combined with the potential for additional rent payments and the letters of credit, there is minimal financial impact to 2023, regardless of whether the leases are accepted or rejected. On the Kodiak leases, we have been paid rent in full through April. Due to our proactive subleasing, our annual net exposure is only $3 million across 40,000 square feet at 35 Cambridge Park Drive. I walked the space last week, and it is in A-plus condition. If the leases are rejected, we are confident in our ability to release the space on favorable terms.

With that, operator, let's open the line for Q&A.

Thank you. We will now begin a question and answer session.

To ask a question, you may press star 1 on your touchtone phone. If you're using a speaker equipment, please pick up your headset before pressing the start keys. To withdraw your question, please press start then two. So that everyone may have a chance to participate, we ask that participants limit their question to one and a related follow-up. If you have additional questions, please recue. At this time, we will pause momentarily to assemble our roster. Our first question comes from Juan Sanabria, BMO Capital Markets. Please go ahead.

Hi, good morning, guys. It's Eric on for Juan. Just starting with life science, just a quick question on occupancy and appreciate the color in the remarks. Was it just the one move out that drove the decline in 1Q23? And then what's assumed in guidance for the balance of 23? Is there any other large move outs to be aware of?

Hey, it's Pete here. I'll take that. Please send our regards to Juan. You know, we did end 2022 at 99% occupancy and in a multi-tenant portfolio, kind of hard to go up from there. You know, occupancy did decline modestly in the first quarter, but if you put it into context, 50 basis points of an occupancy decline is actually around 50,000 square feet within our portfolio. And if you equate that to the size of our leases, that's really just one lease. Our guidance for the year did assume occupancy would decline a bit in 2023. As I mentioned, it's hard to go up from that 99% number. And then as I did mention in our prepared remarks, we did have an expected tenant vacate at our 8,000 marina project. over in Brisbane, and that's adjacent to the shore, and it was a non-life sciences user, and we're evaluating, you know, converting that space to lab, and that was certainly expected. So with regards to occupancy generally, that's probably the best way to answer that question.

Great. Thank you, guys.

Next question comes from Michael Curl with RBC Capital Markets.

Please go ahead.

Yeah, thanks. How built out is the Sorrento Gateway development today? Did Sorrento Therapeutics already start its TI build or does a new tenant or potential new tenant still have a big required TI package that they need to put into that asset to make it usable?

Hey, Mike. It's Pete here again. You know, as we said in our prepared remarks, that building was designed for either a single tenant or multi-tenant users there. We were probably around three months from delivering that when Sorrento filed for bankruptcy. And so we have pushed out the date with regards to the initial occupancy in our supplemental to, you know, mid 2024 at this point in time. It's hard to comment on any additional TIs that may have to go into that if we had to build out additional lab space on individual floors at this point in time. But I think we look at the location of that right off the 805. We feel quite good about our prospects there. It's just going to take a little bit more time. So hard to comment on any additional TIs at this point, but the building is progressing.

Yeah, we should get additional rents. as well. The rents there are in the low fives per month, which is an awfully low rental rate in today's market. So I think the 8.5% return on cost that we had underwritten is still a good number.

Okay. And then how much activity has there been? I know this probably just happened, so I'm not sure how long you've had to show it. So how much activity has there been? And just kind of getting back to the underwritten rents, I mean, is it fair to assume that the TI package that's required to go into the building is significantly smaller, so it's more attractive and more like a second-gen pre-built lab than just a ground-up development where a tenant needs a pretty big cash outlay to go into the asset?

I'm not sure I followed the question in its entirety, but it's space that is probably three months from being fully built out and ready for occupancy. It was designed for that user, so if we end up multi-tenanting, we may have to take some time to build out the TIs in a little bit different way. But it's a purpose-built lab building, so I'm not sure I follow the second question.

Yeah, just I think that it is harder for tenants today to lease development projects because there's a big TI commitment that they have to put in. And if it's a second-gen pre-built lab, then there's less cash outlay. So there's more interest, and correct me if I'm wrong on that statement.

Oh, I see what you're saying. No, there wouldn't be necessarily a TI requirement from any new tenant. I mean, this project is fully funded and ready for occupancy.

Okay, great. Thank you. Yeah. Yeah.

Next question comes from Nick Ulico from Scotiabank.

Please go ahead.

Thanks. Good morning. I was hoping to get an update on your tenant watch list. You may not want to call it a watch list, but if we put aside Sorrento and Kodiak, is there a way for you to just quantify a level of the life science rents right now that you are keeping an eye on from a tenant base?

Yeah. Hey, Nick. It's Pete. I'm not going to comment on specific tenants, but I will say that our overall tenant risk profile has actually improved quarter over quarter. And I think that is a pretty key takeaway alongside of our guidance updates that we released on this call. You know, we've had a few tenants raise capital over the last month or so. Scott Bone also talked about the Edvarum RevMed transaction, that proactive lease termination that we completed. And then one of our tenants, Sarah, as I saw you put that in your note, thank you for doing that, did have their drug approved yesterday as well, and they're collecting a pretty significant milestone payment on that. You know, I will also say that our disclosure is, we think, pretty good, and we did add cash balances to our top tenants within the supplemental this quarter. So, like I said, I think the big key takeaway alongside our guidance updates is that our tenant risk profile has improved a little bit.

The only thing I would add is, hey, Nick, it's Scott. You know, when you look at our life science portfolio, we're essentially in the three core markets, but we're also essentially in five core sub-markets. So you can tour our portfolio awfully quickly. In the last two or three weeks alone, Pete, Scott, and myself, the team, I've seen the vast majority physically of the space that is either vacant today or could be vacant if there was an issue with a tenant. And it's all in good shape. So there's a number of factors that have to be considered when evaluating credit of tenants. And for sure, there's been a lot more good news over the past few months than bad news. But the qualitative aspect is important too. The real estate's in really, really good shape. And these are core sub-markets where we have meaningful market share. You know, we're not trying to compete in every sub-market across the U.S. We're in five core sub-markets. South San Francisco, Torrey Pines, Sorrento Mesa, West Cambridge, and Lexington. I mean, that's our footprint. We have huge market share in each of those local core sub-markets that puts us in awfully good shape when buildings become available.

Okay, thanks. And then second question is just on South San Francisco. If you could talk a little bit about the impact that, you know, sublease space is having in the market and in your own portfolio as well. You know, I know like Graphite Bio put 85,000 square feet of sublease space at the Nexus on Grand. Anything else you could talk about of, you know, meaningful sublease space in your existing portfolio and then how just the overall increase in sublease space in that sub-market is impacting maybe rents or overall trends in that market?

Hey, it's Scott Bowen. There's certainly been an uptick in sublease space in all the markets. It's still at manageable levels. I think sublease space, it's important to note, has its own challenges, and it's not always directly competitive to a direct deal with a landlord. There's a few things to think about. There's generally no TI allowances, so any incoming subtenant is going to be coming out of pocket for any modifications to space. With those modifications, they also face restoration obligations at the end of the sublease that are additional costs. And I think most importantly, there's typically not a recognition of a sublease in the event of a mass release termination, meaning a subtenant is taking the credit risk of the sublessor on their mission-critical facilities. I think one other note I would make is that Sub-leases have historically been contributors to our leasing success. It provided our team the ability to build relationships with sub-tenants and oftentimes take them direct at the expiration of a sub-lease. Leasing directly to a sub-tenant at the end of the sub-lease has been advantageous. It's often with very little downtime, very little capital. If you just look at the code, of the million square feet here, 200,000 square feet of tenants were former sub-tenants within the project. I think subway space can certainly pull from leasing demand in the short term, but if you look at it over the long term, it provides an opportunity for us from a leasing perspective.

Okay, thanks.

Next question comes from Vikram Malhotra with Meteoro. Please go ahead.

Thanks for taking the questions. So I just wanted to step back and you talked about some subleave space. You talked about the move out you've outlined going to year end with Amgen and then the risk profile that your view is it's lower Q over Q. Can you sort of at a higher level just talk about the earnings power or trajectory if you were to take slightly longer term view? I'm not looking for a specific you know, guidance for next year. But I'm just trying to understand the guardrails with all the moving pieces, given how big of a space Amgen is. Would you give us some building blocks to think about, you know, the same store growth profile of the life science segment into 24?

Maybe I'll start with it, Vikram, and I'm sure Pete has some thoughts as well on earnings. But when I step back, you know, it's a pretty challenging capital markets situation. Over the past couple of quarters, and really it dates back to 2022, at least in the biotech sector, and despite the business being pretty capital intensive and it challenged capital markets, you see our occupancy is still at 98%. Our leasing volume continues to be strong. It would be hard to paint a tougher financing environment for tenants, and yet we just had 6.3% same-store growth. We're at 98% occupancy. So that makes us feel pretty good about our market position. And the fundamentals of the business haven't changed in terms of the aging population, desire for improved health. I mean, the science isn't going backwards. It only builds on itself, probably gets even faster in terms of the improvement with AI. If the odds of success on drug development increase with AI, which they almost certainly will, that's only going to cause more funding to come into the business. So there's plenty of reasons to be positive that this 25% mark to market that we have across the portfolio over the next decade, that should still be achievable. It's not an ideal leasing environment today, but when you think about fundamental demand drivers, it's all there. And our market position is fantastic to capture it, relationships, the team, the buildings, the locations. We're at the coast here in South San Francisco all week. I mean, it's a special place. place. We've got landlords using our building to market to tenants. That's no joke. I mean, what Scott and the team created here is pretty unique. So life science, I think, is going to continue to produce strong growth. And you think about the supply, maybe it doesn't go to zero in terms of new starts over the next year, but pretty close. So the supply-demand outlook over the next three to five years should actually be quite favorable from what we would have said two years ago. CCRC business, it's only 10% of what we do, but it continues to perform. There's still significant occupancy upside and NOI to recapture. And then the medical office platform continues to perform. It's at 90%, so maybe not dramatic upside, but if it can continue to generate that 3% to 4% same-store growth, that's an awfully attractive base of earnings growth for the company. So, Pete, anything you'd add?

Yeah, the only couple things I would add is, Obviously, we're not putting out 2024 guidance today, but I do like the question that you're asking, Vikram, because we have a diversified portfolio and a great balance sheet bolted onto it. I'm sure we'll talk about medical office and CCRCs at some point on this call, but we did put out this NOI growth trajectory for the next three years in our NAREID deck about six months ago, and we still feel good about that NOI growth trajectory. You know, the timing of when the Gateway project will work its way into our earnings has been pushed back a little bit, but the overall growth story we still feel very good about. And then with regards to Amgen in particular, and that Oyster Point campus, as Scott Bone mentioned, we have released pretty much the majority, the vast, vast majority of the leases that have expired there. We did put one building into redevelopment, And then we have three buildings that we will get the leases back over the next year, a couple the end of this year, and then some the beginning of next year as well. And we did put out a full set of assumptions on how we think we will release those and the timing of that. And I think we still feel good about those assumptions. And we will look to update that in June. future presentations as well because we do get some questions on what's going to happen with that campus. But for where we sit today, we feel quite good.

Okay, that's helpful. And I just want to maybe just try to get a bit more flavor of the, you mentioned the credit profile and your minds have improved over Q over Q. But, you know, last June, if I remember correctly, you had thrown out a number, I think the watch list at that time, you had estimated around 4% to 5%. of NOI, and that's kind of when you had pushed out development, lease up schedules, et cetera, which obviously then got refined during the subsequent quarters. You know, our work suggests today, and not from an NOI, but from a square footage perspective, that risk is probably in that still five-ish percent range of square feet. Would you be able to just comment, you know, is that in your – if you don't want to share a number, is that number – In the ballpark, is it much higher, much lower? Given your comments around Q over Q, your risk profile has been lowered.

Yeah, Vikram, appreciate your support and report and all the time you put into it. I mean, we define things a little bit differently. We obviously have access to data that not everybody would have, both public and private. So I don't want to talk about But I think Pete's point that quarter over quarter, the risk profile has definitely gone down is an important one. And that includes a lot of good news over the past two to three weeks alone with companies raising capital, doing licensing agreements. So, I mean, it's a company by company analysis, obviously, that we're doing. And we feel better where we sit today than we would have even two weeks ago.

Okay, great. Thanks so much.

Next question comes from Michael Griffin with Citi. Please go ahead.

Hey, thanks. Maybe going back to the Sorento development, I mean, you talked about it being used for single or multi-tenant potential use, but correct me if I'm wrong, was the building initially built for one tenant? Like maybe you can set up the floors differently from like TI packages, but is there anything structurally different with the building that would preclude you from multi-tenanting it?

No, I would say, hey, Michael, Scott Bowen, the core and shell of the building was certainly designed to be single or multi-tenant. You know, so the TIs for the previous deal, you know, were built as single-tenant, but, you know, you're able to flex those to multi-tenant in the building structure itself and can go multi-tenant very easily.

Okay, cool. And then just back to San Francisco Supply, I think, Scott, when you prepared remarks, you mentioned about 800,000 square feet. coming online in 2023 that's competitive. I mean, do you have a sense if, like, these proposals, I think the mayor's proposing some buildings in the CBD, the office tower converted to lab space. I mean, that stuff seems like it's going to be a tougher lift than the conversions down the peninsula. But any sense of, like, how big this supply market is and, like, how the market might be misinterpreting that headline number when, really, they just need to probably look under their hood a bit? You're talking about, sorry, Michael, in the city of San Francisco? Yeah. I presume that when you look at a market supply report for life science in San Francisco, it accounts for both the CBD and the peninsula. Now, there are probably sub-market reports, but I imagine if you type in a broker name in San Francisco life science, the whole number will come up. It's effectively like how Lofton and Waltham are different, but they'd probably be lumped into the same MSA supply.

Yeah, 100%. I mean, I think you'll see the headline numbers are always going to be much larger, and not all of that is competitive to our footprint. So we're not overly focused on that. We look at really what is truly competitive to our product within our sub-markets. As Scott mentioned, we're really in five sub-markets, and that's where we focus. When you look at San Francisco CBD, for example, I mean, there's talk, and they said the mayor mentioned conversions to life sciences. Those are challenging down there. I don't look at those as something that's on our radar. We're truly competitive.

And then a quick one I could sneak in on MOBs. It looks like guidance was raised kind of on the strength of MedCity Dallas. I feel like people almost forget about that business sometimes, but it is steady state and produced solid results. I mean, what are your expectations throughout the rest of the year? Do we maybe see another guidance increase if operating results are better than before? anticipated. And, you know, it's my opinion that, you know, if we do get a really severe downturn, medical office could be a really good place to be, essentially.

Yeah. Hey, Griff, we agree with you. It's Pete here. And then maybe I'll let Tom Claridge chime in. But we do look forward to touring Medical City Dallas with you in about two and a half weeks from now. That campus continues to exceed our expectations and certainly is helping with regards to our same store numbers, but the segment generally is performing well. Obviously, we increased our guidance for that segment this quarter by 50 basis points. We like to keep a little bit in the tank as well. If you go back and historically look in MOBs, we have been able to increase guidance as the year progresses on multiple occasions. So we feel good about that from where we sit Today, right now, there is a little bit of volatility with the MCD ad rent component, so we're going to be a little bit more conservative at the beginning of the year. But, Tom Clarke, why don't you give a little sense for what you're seeing within the segment overall?

Yeah, I think if you look, our escalators continue to perform well. We average about 3%. A lot of that's driven by our fixed escalators that are averaging 2.8%. Obviously, CPI escalators will fluctuate here and there, but They're doing well. We had a good quarter for mark-to-market on renewals at 4.1%. You know, we tend to see mark-to-market kind of the bulk of it's in that 2% to 4% range, but then you always have a number of leases that are above that and a number that are below it. And, you know, this quarter we had a lot more above it than below it. So that worked out well for us. And parking, you know, continues to get back to and sometimes above pre-pandemic levels. So we saw a little bit of a bump from that. So overall, most of the major metrics for us have been positive. And as Pete said, if Medical City continues to perform the way it has been, we might have some room there too. All right, guys.

That's it for me. Thanks for the time. Thanks, Griff.

Next question comes from Steve Valicat with Barclays.

Please go ahead.

Hello, everyone. Thanks for taking the question. Two topics here quickly. On the MODS, I know you just kind of talked about this, but I wanted to ask about whether portfolio or just development pipeline. I know one quarter does not make a trend, but just with overall health systems really seeing a major resurgence in their operating performance year-to-date in 23. Has that led to any more invigorated discussions on development opportunities, or is it too soon for just further evolution on that? Maybe I'll answer that first, then I'll ask the follow-up.

Okay. Yeah, this is Tom. Certainly we're in discussions. You know, we have the HCA development program. There's a number of buildings in that pipeline. HCA just announced, on top of having excellent results with almost every major metric being up, They're going to invest about $4.6 billion in capital into their portfolio. So as they do that and expand bed towers and services, we certainly would see the need for more medical office space. And you mentioned the health systems. Tenant reported great results. UHS reported great results. So if that continues on for the year, we would certainly expect to see good development opportunities. And one thing we were encouraged by is costs seem to be stabilizing in some instances even coming back down some. We have our Savannah development down in Georgia, and we got about 85% of that bought out, and the cost actually came in lower than our base case, and we were able to remove some assumed escalators that were going to be in there. So it improved the return on that project by at least 25 basis points, and hopefully as we finish the project up, we can get even a little better return out of it.

Okay, great. That's helpful. Quick question for Pete on a different topic here. I know there's obviously a lot of moving parts within the full-year outlook, but with the increase in the same-store cash NOI growth guidance for the year but the FFO guidance remaining unchanged, this wasn't clear. Was there a specific variable that explains the delta between the two, or is it just that a 25 basis point increase in SSNOI growth is still absorbed in the pre-existing full-year FFO guidance range? Thanks.

Yeah. Good question. And I'm glad you brought it up, Steve. You know, we did increase our AFFO guidance by a penny. And, you know, one of the drivers of that is taking up our same store guidance within MOBs, 50 basis points and then 25 basis points overall for our blended same store. You know, AFFO is not impacted by those straight line rent write-offs. So the reason we just reaffirmed FFO as adjusted at this point is because we did have those two penny impacts to FFOs adjusted and we didn't have to take that impact into AFFO. So that's really the reason for that.

Got it. Okay. All right. Thanks.

Next question comes from Connor Seberski with Wells Fargo Securities.

Please go ahead.

Hi there. Thanks for having me on the call. Last earnings call, it was mentioned that movements in cap rates were such that you could see a more favorable return profile on acquisitions at some point this year, perhaps versus development projects. So in consideration of the share price coming off a bit since then and muted activity during the first quarter, I mean, are you seeing enough movement in caps that you would feel more comfortable taking an aggressive posture through the balance of 2023?

I wouldn't say an aggressive posture, not at today's cost of capital, but our view on development hasn't really changed. Tom did mention at the margin, at least, development costs are maybe starting to stabilize, if not come down in certain cases. So that's encouraging. We are making strong progress on entitlements in West Cambridge, South San Francisco, and in San Diego. So several million square feet of development that at some point the returns will make sense, but our view is development at the right point in the cycle can be spectacular, and at the wrong point in the cycle can be pretty rough. So we're not doing a whole lot of development right now, but we're preparing to do a lot of development. So I think that's important to keep in mind that we do have that land bank and development expertise when the timing makes sense. But yeah, the comment is that it could be a rough couple of years in the real estate market, especially on the private side. Now, it depends on what happens with the financing environment, but today it's pretty ugly in terms of lack of liquidity, banks really not lending money. Certainly not at portfolio level quantums. LTV's down, interest rates significantly higher. So I wouldn't be surprised to see return targets move quite a bit higher. It's just nothing's getting done right now. Well, I shouldn't say nothing, but pretty close to nothing. There's a select trade now and then, but anything material in scale that requires financing would be near impossible to get done today. So we are optimistic that this downturn is going to lead to opportunities. But obviously, we will need our cost of capital to move up, which we think it will. I mean, the sentiment overshoots in both directions. It always does. So it's nothing that we're complaining about. It's just a reality. The sentiment is way worse than the reality. And there'll be a point in the cycle when the opposite is true and we'll have a really strong cost of capital. And my guess is there'll be quite a few things to acquire. We've toured some stuff in the last two or three weeks alone in our core markets that's sitting vacant because it's, you know, on one hand, maybe not a sponsor that has the right footprint, the right relationships or scale to really fill the building that we feel like with the HealthPeak sponsorship over time, buildings like that would probably lease up. So there could be some unique opportunities over the next year or two. We'll see.

Okay. Thanks for that. That's really helpful. Quickly on leasing activity and TIs. I mean, we've heard some chatter that TIs have come up significantly from the start of the year. particularly in life science, though looks like the numbers peak posted in Q1 seem pretty reasonable. I'm just wondering what the expectation is for TIs going forward on a square foot basis.

Sure, Connor. So I think you made a good point. At least as we've executed recently, we've held our TIs as a percentage of rent pretty low at sub-10% of rents. You do have Some tenants, it's pretty deal-specific. You know, they're typically on smaller deals. You know, you have tenants asking for a higher landlord contribution, you know, to preserve cash. And, you know, depending on the deal, the space, and the tenant credit, at times we can get comfortable with that when it's appropriate. I mean, I think we focus on making sure those build-outs are highly generic and reusable to make sure that, you know, if we're putting in additional capital on any deal, that's going to be space that we can use over, you know, the next 10 to 20 years from a build-out perspective. So, you know, it's hard to give exact TIs. Every deal is different. Every space is different. I'll probably stop there.

Got it. Well, we'll just work on the guidance number. We'll work with the guidance number then. I'll leave it there. Thank you.

Thanks, Connor.

Next question comes from Ronald Camden with Morgan Stanley. Please go ahead.

Great. Hey, just a couple quick ones. Going back to the comments on the life sciences funding, I think the question earlier was trying to get at just sort of the funding environment. And is your thinking, is your view that, you know, sort of the companies with sort of the right products, there's still sort of funding to be had there? Just trying to get a sense of just, you know, we're hearing that, you know, there's a lot of companies that will need funding in the next six to nine months. Just in your mind, how are you guys thinking about how those gaps get filled?

Yeah. Hey, Ronald. It's Pete here. You know, I would say think about some of the first quarter statistics. You know, the secondary equity market, which is a big market for our tenants to raise. There were over 30 follow-on offerings raising about $4.5 billion of proceeds for biotech companies. And actually, within our portfolio, tenants raised about $1 billion. And if you have good data and some good readouts that you can raise capital off of, you certainly can, even in the volatile markets that we're in right now. Venture capital fundraising, we get a lot of questions on that. you know, fundraising for venture capitalists is actually, it was around $6 billion in the first quarter. Now, from a deployment perspective, so the venture capitalists investing into companies, that number was at $4 billion. So we're seeing a little bit of a pause or a delay in those funds getting invested into companies, but $4 billion is still pretty healthy. And then from an M&A perspective, There have been some pretty big deals that have been announced. Merck did a deal. GSK did a deal as well. I think the premiums on those were 75% to 100%. And we've continued to say that pharma has a pretty big war chest that we think they will continue to put to work in acquisitions or licensing deals with biotech companies. So despite the volatile capital markets, we are seeing capital raising occurring at a healthy pace. It's obviously down a little bit relative to where it was a year or two ago. What are we looking for going forward? Obviously, the IPO market would be something that we'd like to see improve. There is a pretty big backlog, we've been told, of companies that are trying to go public. But just at this moment in time, it's more challenging. So we'd like to see that improve And generally, I think we feel like if the capital markets volatility does subside, interest rates normalize a little bit, that it should be a more improved environment going forward.

Great. Super helpful. And then just moving on to just a quick update on CCRC, because I don't know if it's been asked about. Clearly, with the capital markets where they are, it's probably hard to get a transaction. You talked about Nothing was imminent, but just curious where we stand there, how you guys are thinking about the CCRC business and potential sale.

Yeah, there's no real update. It's a challenging capital markets to do anything strategic with that business, and it does have significant scale. We've seen some smaller things get done, but nothing remotely as big as the CCRC portfolio. We've had some outreach. but just not an opportune time to sell. In the interim, it continues to perform really well. It's a good portfolio, great partner. It's got a really strong team here that's asset managing. Performance has been good. Occupancy is up more than 200 basis points year over year. The NOI growth is strong on a cash basis. It's fantastic. On a cash NOI basis, we're essentially back to 2019 NOI levels, and yet we still have a lot of upside to recapture in terms of occupancy. So there's still some cost pressure. for sure. The labor market is improved, but it's pretty low bar. It's still challenging. But contract labor is down about 70%. Our rate growth this year for existing residents was around 10%. Some of those are mid-year based on anniversary dates. So not all of that will show up in our report growth, but 10% is pretty strong. So yeah, I mean, we like the business. It's just not a perfect fit for where we see health peak five to 10 years from now. But Unless we get a great price for it, we'll just hold it. We've got a great team managing it, and they're good assets, and they're obviously performing.

Great. That's it for me. Thanks so much.

Next question comes from Tayo Ocusonia with Credit Suisse. Please go ahead.

Yes. Good morning to all of you. And again, congrats on a very solid quarter. I wanted to go back to the capital allocation question. Just again, clearly, again, no one's kind of happy with your cost of capital today, most especially you. But if you don't see a lot of improvement near term, how does one kind of think about acquisitions versus development versus redevelopment versus stock buyback versus debt buyback? Like how would you kind of think through those kind of five options to kind of allocate capital on, what are you more likely to do or least likely to do?

Yeah, redevelopment's first on the list. The returns there are strongest in comparison to acquisition or development. And the return profile is lower risk, given we already know the asset and submarket so well. And the turnaround time is a lot lower than a new development in terms of the risk of your time period that you're trying to underwrite. So that's our best use of capital today. you know, we don't want to overreact when market sentiment overreacts. But obviously, if there was a sustained differential between our own cost of capital and acquisition cap rates, and once we have clarity on what those even are, right, and there's stability in the financing markets, you know, we could always consider stock buybacks through asset sales, but we'd certainly not lever up to do that. That's not high on our priority list right now. It's not a great time to sell assets realistically, and we don't have to. So our preference is to not But if there was a point in time where acquisition cap rates were clearly below our cost of capital and our applied trading ratios and the financing market was available to buyers, then, yeah, I mean, of course, we'd consider that. But that's not on the table today. Tie-out development, well, I think I covered it earlier, but that's not something that we'd consider starting in today's marketplace. But a year from now, two years from now, it could be. but we're happy to sit on the land and the entitlements until the timing makes sense. There's no urgency there.

Gotcha. And then a follow-up question on the life sciences side. Just kind of given everything that's happening within this space or just the overall concerns people have, any thoughts about diversifying more within life sciences? And specifically, I think about things like, again, doing more of the agri-farmer stuff in North Carolina, possibly, you know, going to a new market or even doing more of the kind of academic university-based life sciences stuff. Just kind of curious if there's any thoughts to move in those directions and whether the returns in those areas would be potentially attractive to Peak.

Yeah, I mean, the life science title for the business is a pretty broad title. Our business today is more biotech, biopharma, focused. And for that, I see us sticking into three core markets, at least for now. If you look far enough into the future, I suppose there could be enough scale that it could be interesting to us. But if you think about R&D, that could be something different than just for-profit biotech companies. There's an awful lot of R&D happening in non-profit health systems and for-profit health systems like HCA. We toured a number of them Recently, including our own portfolio, you know, lab space and a quote unquote medical building that would rival what we have here in South San Francisco. So I could see us doing things like that within the quote unquote life science bucket. But in terms of for profit biotech, I don't see us straying outside of the three core markets in the near future. We just have such a huge competitive advantage. And that's where the depth of demand is and frankly will always be.

Gotcha. Thank you.

Question comes from John Pawlowski with Green Street.

Please go ahead.

Thanks for the time. I have a follow-up question on South San Francisco. Scott, I appreciate the comments on the amount of supply coming online this year and next year. Just curious how you think through a reasonable reasonable scenario and decline in market rents and decline in market occupancy. So given the amount of supply on the way the next two years, if demand doesn't get meaningfully worse or meaningfully better from here, where do you think market rents and market occupancy in South San Francisco head to?

Yeah, I mean, I think it's hard to tell right now. I think when you look at those, again, as I mentioned, you look at the supply that's coming on. that we view as competitive to our projects. It's really only in five projects. Two of those are conversions, which aren't going to compete as well versus our purpose built. I think that with our portfolio and the demand we see from within our own portfolio, we do a lot of the majority of our leasing that we do, especially in our development. 90% of our leasing, when you go back to the Cove and the Shore and Nexus and Advantage, comes from within our portfolio. I think we're able to to capture the higher rents than some other landlords may be able to. A lot of those deals come from tenants with existing leases in place. So we're growing a tenant, say, from 50,000 square feet to 100,000 square feet. And so we're letting them out of a lease on the back end, which we're able to blend into the economics to keep the rent probably higher. Hard to tell on where exactly it goes, depending on demand, but I think we're confident that we'll be able to certainly outperform and capture the high end of market rent.

I mean, you just got one project that's an outlier that changes the quote-unquote market occupancy when 900,000 feet goes under development. That's obviously intended to be a multi-year lease-up, so how do you treat something like that in terms of market occupancy? I think that's an important consideration, and obviously to fill something that big, you're going to need a lot of large tenants, a lot of the space we have right now, frankly, it's perfect for what the market is looking for. Series A companies, 20,000 to 30,000 feet, lower op-ex, quicker time to get into the building. We're in a pretty good competitive position given today's demand to continue leasing space.

Okay, understood. Could you comment on the trajectory of what you think is a reasonable mark-to-market in your South San Francisco portfolio this year? What are you seeing on the ground right now? Is that mark-to-market kind of collapsing each month as fundamental to tier rate? Any comments there would be helpful.

Yeah, I mean, the only reason it's going down, and it's still in that 25% range for the portfolio, South San Francisco has always been on the lower end Of the range, Boston, we're on the higher end because of the Amgen leases. That's a huge amount of space that's essentially at market, and that's included in our number. When they burn off over the next year or so, that will actually be a benefit to the mark-to-market on the remaining portfolio. So it's still in that range, but keep in mind, we've had several quarters in a row now of 30%, 40%, 50%. Mark-to-markets, and as that rolls through the portfolio, obviously the mark-to-market on what remains is going to start to decline. And we said all along our lease rollover in 22, 23, and 24 is relatively small as a percentage of the portfolio and the mark-to-market just happened to be lower in those years. It's not a static number. It's going to jump around from quarter to quarter and year to year. Our biggest mark-to-markets actually take place in 2025 and thereafter, which could end up being great timing. There was a point when people were kind of disappointed that we couldn't get to our mark-to-market quicker. And as it turns out, having a really low lease maturity profile this year and next is a huge competitive advantage.

Okay, I appreciate it. Last one for me, for Tom Klarich. I'm just looking through your market-level occupancy on page 28 of the SUP medical office. I'm just curious, a few of these big markets are kind of stuck in the mid-80% occupancy range, Denver, Nashville, Houston, and a few of them actually went down quarter over quarter. So can you just help me understand why vacancy in some of these markets is so high? What's structurally different on the ground in terms of demand and supply in these markets versus the rest of the portfolio?

Yeah, typically it's because of really developments in many cases. In Houston, we just built a – A new building was 130,000 feet that's not yet stabilized. So that's brought the occupancy down some there. We bought a building in Denver a year ago, Pinnacle, that was, we bought it at 7% occupancy. It's up to 50 and it's actually leased to close to 90. So some of it's just because there's leasing out there that's not yet commenced in some cases. Some of it's because we put a non-stabilized asset into play and And some of them we have redevelopments. So, for example, we have two redevelopments we're working on in Denver that are close to 100% leased, but they're not fully occupied yet. In fact, one of those redevelopments, we were able to add some square footage. So, you know, we don't increase the actual capacity in that building. So there's a variety of reasons for it. But some of the, you know, most of the big reasons are the non-stabilized developments and redevelopments.

All right. Thanks for your time.

Question comes from Mike Miller, JP Morgan. Please go ahead.

Yeah, hi. Two quick life sciences as well, one being a follow-up from a prior question. I guess in terms of the lease mark to market that you had this quarter, 55%, how do you see that trending, even though I know the roles are a little bit more limited? How do you see that trending in the balance of the year? And then can you remind us what portion of your tenant roster in life sciences is more tech as opposed to life science?

The first one, or the last one first, we have almost no tech. So, I mean, it's low single digits. We purposely stayed away. from the office market. So that's an easy question. The first question you asked, you know, we won't speculate on mark to mark. It just depends on exactly which tenant renews. And those are chunky leases. So depending upon which one does or which one does not, it could move the number pretty materially. So that is going to bounce around quarter to quarter. So we're not going to give you a specific target or projection for that.

Got it. Okay. Thank you.

Next question comes from Josh Dennerlein with the OA.

Please go ahead.

Hey, guys. Thanks for the time. Just thinking about the life science guide and just your results for 1Q, looks like you did 6.3 on the same score cash basis, and the guide you kept at 3% to 4.5% for the year. I guess how are you thinking about the cadence, and could you remind us what the typical – rent bump is on an annual basis for the... Yeah.

Hey, it's Pete here. You know, when you think about the rent bumps, I'll take the last part first. When you blend the three markets, our rent bumps are in the 3.2 to 3.3 range, and most of our same-store growth this year is driven by those rent bumps because, as we said last quarter, and we'll just repeat again on this call you know when you're at 99 or 98 occupancy it's hard to get same store benefit from increasing occupancy at those levels so the majority of our growth is coming from those escalators um with regards to the you know six three in the first quarter as you know yes that is meaningfully ahead of our full year guidance range um you know the 55 mark to market, that will get spread out over the balance of the year. And then a couple other items I do think are important to mention. We don't have clarity on the Sorrento operating leases. That certainly could swing the second half of 2023. I wish I could give you guys perfect information on that. We'd like perfect information on it. We just don't have it at this point in time. And then also another item as we get towards the back half of the year, with regards to the Advarum RevMed Proactive Lease Termination. There will be some downtime as we get to the back half of the year. Again, this is a great positive 10 to 12 year benefit for us as a company and for our segment, but we do have a little bit of downtime and we incorporate that stuff into our guidance as well. So we feel good about reaffirming the three to four and a half percent. Obviously, we're still early in the year. we will maintain some level of cushion as well within our numbers. It's, you know, more volatile within life sciences today than it has been the last couple of years. But again, we had a great first quarter and we feel good about reaffirming guidance for the balance of the year.

Okay. That's, that's great color. And maybe just one follow-up on that. I guess what, what are the assumptions that get you to the low end of the life science? Same story. Yeah.

Yeah, I don't know that I want to get into assumptions for high and low. I would say, as I mentioned, there is a little bit of cushion still within those numbers with regards to a variety of things. We think about cushion as it could be three different items. It could be a proactive lease termination and some downtime. It could be a delay in some revenue recognition as a result of some development projects delivering a month or two or it could be bad debt, right? I know everyone likes to talk about the third one. First, I wanted to take that in reverse order. So I don't know that I want to say what's going to be, you know, the assumptions at the low end or the high end. You know, I just sort of keep it at we feel good about the three to four and a half percent that we reaffirmed.

Great. Thank you.

Next question comes from Nick Ulico with Scotiabank. Please go ahead.

Thanks. I just wanted to follow up on Sorrento and the operating leases. I think it's 210,000 square feet, which is a fair amount of space. And so I guess I'm just wondering at this point, how are you thinking about the need of Sorrento for all that space versus some of it? And then if you could also just talk about if they were to reject the operating leases what you think the man would be like for that possible, you know, downtime, et cetera. Thanks.

Yeah, Nick, on the first one, I mean, the company's in bankruptcy, so it's not like you just pick up the phone and call their CEO and ask, you know, what their outlook is. There's quite a few people involved in that process. So we're not going to speculate on what they're saying behind closed doors. We're also on the creditors committee and in some cases privy to certain information that's just not public. So obviously we're not going to, Share that we don't have clarity yet on whether they're going to accept or reject, but you would expect us to be doing some contingency planning either way. So we'll see what they end up doing, but yeah, we're obviously thinking about alternatives.

Okay. And if you had to, if they do reject some of the space, I mean, how would that work from a releasing repositioning standpoint, those buildings?

Yeah. So it depends on which building, but it's all part of the same campus, essentially director's place with the gateway. development. It's a spectacular location. Sorrento Mesa is a big sub-market and we think we've got the best footprint in all of Sorrento Mesa in terms of visibility and accessibility. Those are buildings that are in some cases already built out fully for lab and other cases could accommodate a range of uses and pretty flexible. So each building is a little bit different and we'd have a different game plan for each, but we got a big presence in that local market. We got a fantastic team and great relationships. So if there's demand out there, I think Mike and the guys will behind the list of those capturing it.

Thanks, appreciate it, Scott.

This concludes our question and answer session.

I would like to turn the conference back over to Scott Brinker for any closing remarks. Please go ahead.

Yeah, thanks for joining today and have a great weekend.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.