Healthpeak Properties, Inc.

Good morning, and welcome to the HealthPeak Properties Incorporated second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal 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 touchtone 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 Johns, Senior Vice President of Investor Relations. Please go ahead.

Welcome to HealthPeak's second 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 risk and uncertainties that may call actual results to differ materially from our expectations. A discussion of risk and risk factors is included in our press release and detail in our filing to the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on the call. In an exhibit to the AKB furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the 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 send a call over to our President and Chief Executive Officer, Scott Brinker.

Thanks, Andrew. Good morning and welcome to HealthPeak's second quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO, and our senior team is here for Q&A. Last evening, we increased earnings guidance and reported 4.8% blended same-store growth. The balance sheet remains in great shape. Through streamlining and automation, our G&A for 2023 is expected to be 6% below our original 2022 guidance. We're operating in a volatile macro environment, but we have a strong handle on the things we can control. Fundamental driver of demand for our real estate is the desire for improved health, which is only growing. Equally important, we benefit from the impact of technology across our playing field of medical discovery and delivery. For example, progressive health systems now have 10 plus outpatient locations for every one hospital, with a strategic plan to grow that ratio to 20 plus. The hospital remains the epicenter, but much of the growth is outpatient, made possible by technology. This shift in delivery aligns with our strategy to capture the outpatient real estate needs of leading health systems. And with tighter profit margins because of the cost of labor, health systems will increasingly seek knowledgeable third-party capital like HealthPeak to expand their footprint. Similarly, technology will reinforce and expand the need for lab space. AI and machine learning will increase the probability of success in drug research and reduce development timelines. This will drive more capital into the sector. The data needed for the algorithms and the validations comes from the laboratory, which are highly regulated and controlled environments. A Nobel laureate in chemistry recently said that she's run her lab for 30 years and never experienced the accelerating discoveries we've seen in just the last five years alone. The science is building on itself, including our understanding of genetics and improved testing, which will transform health care delivery. Today, it's reactive. We seek therapeutics after a problem arises. Technology will drive the addition of proactive care, where we detect issues and seek care before a problem arises. This will shift the allocation of health care spending and expand the total pie. Our outpatient medical and lab buildings will be a critical part of this future. A few comments on portfolio performance, starting with outpatient medical, where we have an irreplaceable portfolio and deep relationships with leading health systems. More than half of our square footage is now leased directly to a health system, which is 2x the level from 20 years ago as their business model has shifted toward outpatient care, and we've become a partner of choice. I toured a number of our buildings in recent months and saw very active parking lots and lobbies, a great sign for current and future leasing. Our concentration in high-growth markets like Dallas, Houston, Phoenix, Vegas, and Nashville will benefit our portfolio for the next decade plus. Moving to our lab business where we have significant market share in key sub-markets, a diversified tenant base, and strong relationships. Biotechs have been doing what they should do in this environment, which is to conserve cash. So the default answer has been to make do with existing space. That mindset made perfect sense the past few quarters, but will naturally run in cycles. Despite that backdrop, we've had solid leasing activity, primarily with existing portfolio tenants who accounted for 89% of year-to-date leasing. In each case, the broader market either isn't seeing the prospect or is at a big disadvantage because we can tear up an existing lease in exchange for a larger, longer-term commitment. More recently, we've seen an uptick in leasing discussions, which may reflect the more benign outlook for the Fed and interest rates. I'll close with transactions. The market remains slow given the financing markets and inactivity from core funds and non-traded REITs, many of which have redemption queues. Despite that backdrop, we've sold $130 million of fully stabilized but less core real estate year-to-date at an attractive 5.4% cap rate and used the proceeds to accretively de-lever. We're currently having good discussions on a couple hundred million dollars of additional less core asset sales. Subject to closing, which isn't guaranteed in this environment, we'll have flexibility to either accretively pay down our line of credit or buy back stock. I'll turn it to Pete to cover financial results, balance sheet, and guidance.

Thanks, Scott. For the second quarter, we reported FFOs adjusted of $0.45 per share, AFFO of $0.40 per share, and total portfolio same-store growth of 4.8%. In addition, our board declared a dividend of $0.30 per share, which equates to an AFFO payout ratio of approximately 75%. Let me provide a little more color on segment performance, starting with CCRCs. Same store growth for the quarter was a very strong 19.3%. Occupancy has increased 230 basis points year over year, and we see additional upside with zero new supply in our markets. Total NREF cash receipts were $31 million in the quarter, and for the full year, we expect our cash receipts to exceed NREF amortization by five pennies per share. Turning to outpatient medical, we had another solid quarter with same-store growth of 2.5%. Demand for our space is high, and leasing momentum remains strong. We have executed 83% of our full-year leasing budget and have an additional 15% in documentation. Releasing spreads were up 3.7% during the quarter, which, again, was at the high end of our historical 2% to 4% range. Trailing 12-month tenant retention was 81%, which is a reflection of the quality of our assets and our time-tested platform, which consistently produces sector-leading customer satisfaction scores. Finishing with Lab, same-store growth for the quarter was 3.8%. Year-to-date, we have executed 461,000 square feet of leases. Approximately 90% of that leasing activity has been with existing tenants, and we achieved positive re-leasing spreads of 52% on renewals. In addition, we have another 196,000 square feet of executed LOIs with the majority of that activity occurring in July. All of our LOIs are with existing tenants, which further demonstrates the superior advantage that incumbent property owners like HealthPeak have in their respective markets. With the biotech index up 10% since the start of the second quarter, we are seeing an increase in tenant capital raising activity. Equity markets are open for companies with positive data readouts. Venture capital investment increased over $1 billion sequentially, with Series A rounds growing more popular. M&A continues with $80 billion of deals announced year-to-date. The IPO market is showing signs of life, and reverse mergers are becoming more popular, providing an alternative for companies to go public. An important part of our lab strategy is proactive asset management to improve our tenant credit profile. As we had previously announced, we downsized Advarum in favor of Revolution Medicines, trading a small cap credit for a $3 billion market cap company. During the second quarter, we backfilled a significant portion of the Kodiak space to Lonza Bioscience and Bicycle Therapeutics, in both cases a significant credit upgrade. And at the Cove, we proactively facilitated an assignment of the Harpoon Therapeutics lease to a private biotech. A quick note on Sereno Therapeutics. We've been paid rent in full through July on the four operating leases, and we hold letters of credit or security deposits of $2.6 million, so no impact on 2023 earnings regardless of the outcome. As you have probably seen, Sorento is working on an exit financing package, but at this point, there are no details I can provide or assurances it will be completed. We hope to have clarity on a path forward in the near term. Turning now to our balance sheet. In May, we issued $350 million of 5.25% fixed rate bonds, bringing year-to-date issuance to $750 million at a blended yield of approximately 5.35%. Our net floating rate debt balance was approximately $150 million at quarter end. Our balance sheet continues to be a competitive advantage in this environment. Our net debt to EBITDA is 5.1 times. We have nearly $3 billion of liquidity. We have net floating rate debt exposure of approximately 2%. We have no bonds maturing until 2025. We have approximately $150 million of annual retained earnings. and we have stable ratings from both S&P and Moody's. Our development spend is self-funded without the need for equity or asset sales from a combination of retained earnings and debt capacity from higher EBITDA. As Scott mentioned, any potential asset sales would be opportunistic and are not contemplated in guidance. Turning now to our 2023 guidance, we are increasing our FFOs adjusted and AFFO guidance by one penny at the midpoints, to $1.75 and $1.51, respectively. As you can see from our year-to-date results, performance across our portfolio remains strong, and we are increasing our full-year blended same-store guidance range by 25 basis points to 4% at the midpoint. Please refer to page 38 of our supplemental for additional detail on our guidance. With that, operator, let's open the line for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. So that everyone may have a chance to participate, we ask that participants limit their questions to 1 and a related follow-up. If you have additional questions, please re-cue. At this time, we'll pause momentarily to assemble our roster. And our first question comes from Juan Sanabria from BMO Capital Markets. Please go ahead.

Good morning. I've got to repeat, I was just hoping you could talk a little bit more about the life science or lab market and the increase you've seen in demand in July and how, if you can maybe characterize or put a number around the increase in kind of opportunities or number of companies looking for space or the amount of space being sought after by potential tenants and how and why that's changed.

Yeah. Hey, Juan. It's Pete. Hope all's well. Maybe I'll just start with that and perhaps Scott Bone or Scott Brinker wants to add a little bit to it. But we talked about this earlier in the year that our tenant credit risk profile has been improving in the lab space. We also saw that sequentially this quarter as well. And I don't want to repeat a lot of what I said in my prepared remarks, but a lot of that improvement in the credit profile is because the capital markets are improving as well. Just a couple of stats. When you think about follow-on equity deals, you've had about $14 billion of Deals get done year to date. Tenants that have good data readouts are finding success raising capital. You know, you look at the venture capital market, and that has improved. It's improved a billion dollars sequentially. And in fact, we're seeing more Series A capital raises occur as well, which is important because that's really new company formation, and that'd be demand for new space for us. You know, M&A is strong. In fact, there was another M&A deal that got announced this morning. So that $80 billion is actually more like, you know, $87 billion at this point in time. And then, you know, reverse mergers are definitely popular right now. So it's a backwards way of companies going public. We saw that in our portfolio with frequency merging with Coral Bio. So I'd say really that's what's driving the improved backdrop. Obviously, there's other things going on in each individual market, but we feel like things are trending in the right direction for us and has certainly led to a little bit more leasing demand, as you saw the LOIs that got signed in July, and we hope that that's a harbinger for more to come in the next couple of quarters. But again, feeling a little bit better today than we did six months ago.

And then just our follow-up question, just on the MOB guidance bump, what was the driver there? The second quarter seemed solid, but within, I guess, the typical range. I'm just curious on what drove the increased confidence there.

Juan, this is Tom. We continue to see positive operations at Medical City Dallas, and that contributed about 90 basis points for the year and 50 basis points for the quarter. In addition, our escalators remain at that kind of 2.93% range. So that's driving results. And we continue to see rebounds in parking income where we're above our pandemic level reduction. So that continues to drive our results. And as you said, the 2Q was really solid at 2.5%. And that was even with some headwinds against it. We had some a fairly high comp in 2Q of 22 at 4.5%, and that included some adjustments in rent abatements, and we had some positives to our expense reconciliation billing. So that had about a 70 basis point impact. We would have been at about 3.2% 2Q without those.

Thank you, guys. The next question comes from Vikram Malhotra from Mizuho. Please go ahead.

Thanks for the questions. Just sort of building upon the life science comments you made, can you just help us think about kind of the trajectory or the potential for your life science segment going into 24, not looking for a specific guide, but just looking for the sustainability given the bumps, given that if leasing velocity remains as it is, today, and you do have Amgen coming up, which I think is now a known move out. Let's assume you're not able to lease that up for the full year, or it goes to redef. Can you just talk about the potential of the segment, assuming trends remain as they are intact today?

Yeah. Hey, Vikram. It's Pete here. You know, on the Amgen leases that you mentioned, the good news is we've actually backfilled a significant portion of those. And that's been a pretty known vacate for a while. I can't necessarily comment on the LOIs and specificity, but I think you guys see and understand where our leasing focus is right now. And obviously, re-leasing the Amgen space is an important focus of ours. But three of those buildings are currently leased today and don't have expirations until the end of this year or early next year. And we've always planned to redevelop those and really bring that campus up to a little bit of a better level that's adjacent to the Cove there. So that's the Amgen portion of this. I think just a couple other things I wanted to point out. The mark-to-market we have talked about, we still feel good about the 20%-ish mark-to-market within our current portfolio when you look at where market rents are versus in-place rents. in the portfolio. That's obviously going to be a nice driver the next couple years, we believe, of some earnings growth. And the balance sheet's in great shape. Again, Sorrento, I can't really speak to that, but that could be a pretty big driver as we look at 23 relative to what 24 could look like. It's a pretty big number when you consider accepting the leases versus a liquidation there. So I can't necessarily comment on 2024 much more than that at this point in time. But just to say that I think some of those big explorations, we've actually been working pretty hard on backfilling. And actually, in what we previously disclosed, we actually didn't have a lot of those Amgen leases getting leased up until 2025 as there'd be some downtime and some capex associated with them.

Hey, Vikram, and just maybe a general comment on just the trajectory of lab leasing and rents. I mean, the last 18 months, interest rates are up more than 500 basis points. Obviously, that has resulted in boards and management teams essentially saying not to expand real estate needs for the most part. The easy answer was just to make do with existing space. But at the same time, you've got a likely outlook where interest rates are probably going to come down over the next year or so. And we are starting to see a little bit more interest in having those types of discussions. And you think about the activity that we actually had over the last 18 months, despite that change in interest rates, signed leases or LOIs on almost 2 million square feet of space. At strong rents, very modest TIs. 90% of that is with existing clients and pretty significant mark to markets. So really in the teeth of a pretty tough market over the last 18 months, I mean, we've had significant success. And we see the general macro environment being more favorable to over the next 12 to 18 months, not less favorable.

That makes sense. And just, you know, for my follow-up, you know, Scott or maybe even Pete, just, you know, stepping back, this is a sort of a unique environment. We don't know where rates are going. You've got, as you mentioned, self-funded development, solid balance sheet. I'm just wondering, are there bigger picture opportunities or change to the portfolio you consider as we transition into whatever the next macro is, and just related to that, I guess, Pete, specifically, would you look at monetizing more assets, delivering even further to create that buffer, assuming there are opportunities down the road?

Yeah, the answer is yes. So we covered that in the prepared remarks. We are having those discussions. These are assets that others would find attractive and aren't necessarily central to our longer-term strategy. But 100%, our expectation is that over the next 12, 18 months, I don't know if it's sooner or maybe later, our balance sheet, strong portfolio platform, efficient G&A, I mean, this will be a bigger company going forward. There will be opportunities coming out of this downturn in the lab segment. A lot of the development that's underway is with owners that aren't as well connected to the tenant base. Their balance sheets aren't in nearly the same shape that ours is. So, yes, there are going to be opportunities for us, and our whole mindset right now is to weather through this downturn, which we have, I think, really well, controlling the things that we can, continuing to put up good earnings, balance sheets in great shape. So, yeah, I think there's going to be a lot of opportunity on the other side of this.

Sorry, just to clarify, when you said you, I might have missed in the remarks. Did you mean, you know, potentially monetizing non-core? And if you did, could you give us just a broad range, like how big is that opportunity for you?

Yeah, it's a couple hundred million dollars that we're having discussions on. We haven't signed any contracts, so I don't want to talk about specific assets or pricing, but obviously we would only sell if we like the pricing. These are opportunistic. We don't need to sell any assets to fund our pipeline, so we'd only do this if we like the pricing. And our expectation is that the cap rates would allow us to repay our line of credit accretively, which gives us more flexibility down the road when we do see opportunities.

Great. Thank you.

Yeah.

The next question comes from Austin Werschmitt from KeyBank. Please go ahead.

Yeah, thanks, and good morning, everybody. With respect to the uptick in leasing discussions, is that just broadly across the portfolio, or are you, you know, in active discussions as well for some of the vacant space and across the development, the active development projects?

Yeah, Austin, it's Gapone. I would say it's across the entire portfolio. It's across All three core markets. Obviously, we have more space to lease in South San Francisco versus Boston, San Diego, just with where the occupancy of the portfolio stands. So you'll see the bulk of it there. If you look at the LOIs we've talked about today, two-thirds of those are for spaces in South San Francisco.

And then just a clarification on the leases. The $196,000 under LOI, I guess, how many leases are comprised in that? Is any of that for the active development, and when would you expect some of that to commence?

Yeah, Austin, we're not going to get into the individual LOIs today. It's just too early. I mean, these are obviously competitive deals, and we've got LOIs and signatures on those, but we still need to get them across the finish line to lease execution. So probably more to come on those next quarter.

fair. And then just last one for me, just going to MOBs a little bit. You touched on what drove the 2Q guidance bump, but last quarter you referenced the company's track record increasing MOB guidance through the year. Clearly success doing that this quarter, but what levers are left to pull in the back half of the year that could get you, or maybe said differently, could get you to the high end of the range?

Well, we continue to see really good activity on leasing. We've got our lease Commencements are a little bit above where we expect it to be for the year, and we have quite a few executed leases as well as LOIs in place. So, you know, occupancy is going to be a piece of it. As I said earlier, the escalators and mark-to-market, we're at the upper end of our typical range on mark-to-market, so that's going to help some. And then Medical City continues to do well, and if they have another couple of strong quarters, that will definitely push us up to the higher end.

Austin, we're also having what's interesting in both segments, lab and medical, conversations with tenants or prospects about much bigger leases and spaces than we had over the last 18 months where it felt like a lot of the activity was smaller spaces. We'll see if anything proceeds, but I think that's another sign that boards and management teams are more willing to make big commitments today than they would have been over the past 18 months. Now, I don't know any of that translates into 2023 earnings or same store, but if you look forward into 24 and beyond, obviously it's a great sign.

That's helpful. Thanks, Scott. The next question comes from Nick Ulico from Scotiabank. Please go ahead.

Thanks. Good morning. I guess first question is just in terms of, you know, as you think about the portfolio and some of the lease expirations in lab, you know, this year, next year, Is there any way to just quantify what piece of that you think are tenants that you expect to maybe not renew or those that you would proactively look to re-tenant because of some potential credit issues or other factors kind of facing the tenant base? Just trying to understand how we should think about some of the phasing of occupancy in the portfolio over the next year.

Roughly half of it is Oyster Point and Point Grand, so assume that half of the remaining 23 and 24 lease maturities in lab are going into redevelopment because the buildings just need to be redeveloped to remain competitive. For the remaining 50%, maybe I'll ask Scott Bone to comment.

Yeah, I mean, I would, excuse me, hey Nick, we've only got about 250,000 square feet of unaddressed maturities through 2024, excluding the engine buildings that we talked about going into And the bulk of that rollover doesn't come until the back half of 24. So we're really just getting into the renewal windows on those leases over the next few months. So kind of more to come in upcoming quarters. But very manageable lease rollover across the portfolio, the balance of this year and the 20 to 24.

Okay, great. Thank you. And second question is just in terms of when you talked earlier about the mark-to-market on the portfolio, um, I guess, you know, in lab, um, you know, any thoughts on, you know, what you're seeing kind of across the markets right now, uh, you know, it feels like maybe, you know, South San Francisco, greater Boston, Cambridge is where there is some more vacancy that has just hit the market realizing you guys are, you know, seem like you're outperforming the market, but just, you know, any, any sort of viewpoint on whether market rents are going to remain stable or they get corrected. You see just more competitive, uh, you know, leasing concessions in the market?

Hey, Nick. Scott Bone again. You know, first and foremost, I'd say the leases that we've signed and the LOIs in all three markets have been at really strong rates in deal terms. You know, overall, I'd say looking at face rates, you know, they flattened, as I think we all know, this year, which we expect to probably continue in the near term. Rates for A buildings and A locations with with strong sponsorship like HealthBeak, have held up well. You've seen a little bifurcation between that and then the B buildings in secondary locations. Luckily, we don't have a lot of that product at all, or really any. From a net effective perspective, we've talked about some pressure on TIs with tenants looking to have a little more capital put in by the landlord to extend cash runways. And we're open to that in select cases, depending on tenant credit, reusability of TIs, etc., We talked about that dating back to the end of 2022 and 2023, but I would say no real incremental change on that this quarter versus last. I think that those asks and those TI levels have leveled off.

Thanks, Scott. Appreciate it.

The next question comes from Connor Siversky from Wells Fargo. Please go ahead.

Good morning. Thank you for the time. Um, interesting comment in the prepared remarks that progressive health systems now have 10 outpatient facilities for every hospital. Uh, in the context of that comment, I'm wondering how you're seeing performance trends for, um, on campus versus off campus. And then if this shift in delivery continues to align with peak strategy, I mean, what does it take for peak to start putting shovels in the ground again on medical office or outpatient medical? Sorry.

Yeah, go ahead. Yeah. Well, The good news is the hospitals are busier than ever. So at least the ones we're on the campus of, obviously we tour those as well. And a number of them are undergoing expansion or redevelopment. So they remain extremely profitable. It's just the health systems are growing their market share and the total pie is expanding. So a lot of the growth is outpatient and off campus, but the hospital campus itself is as busy as ever. So I don't see it having a negative impact on what we own today. The comment is more forward-looking, that as we grow the portfolio, we want to align our business plan with the growth in the actual underlying business itself. Clarence, do you want to take the other?

Yeah, with regards to putting shovels on the ground, you know, we did announce, I think it was two quarters ago, our Savannah building, which is with HCA and our development program with them, and we're in active discussions with quite a few buildings with them also, and probably, you know, the next quarter or so we'll have some more to announce there. So there's a lot of pent-up demand for MOB development out there. You know, in addition to HCA, we're having discussions with two or three other systems about potential new buildings with them. So I think it's going to get pretty active over the next year.

So there's definitely interest from name brand health systems to partner with us on development in particular. Obviously, a decision to proceed depends on all the normal things, right? I mean, cost of capital and returns and the spread to acquisition cap rates and pre-leasing. I mean, obviously, demand is different than saying, yes, we'll pull the trigger, but we do see a pretty big pipeline when the numbers start to make sense.

Thank you. That's helpful. And then sticking to outpatient, could you offer any color or quantify at all how much of that space is is utilized by call it administrative or maybe revenue cycle functions, or more broadly speaking, just how do you see the hybrid work environment impacting outpatient operations?

It's interesting. We had that conversation with HCA the other day, and they estimate probably high 80s, low 90s percent of their workforce is never going to work from home. It's just not If you look at our portfolio specifically, as you asked, the amount of administrative or back office space is probably 8% to 10% when we look across the portfolio, and that seems pretty stable. We haven't seen a lot of move out in that area, so the demand continues to be there.

Okay, thank you. The next question comes from Joshua Dennerlein from Bank of America. Please go ahead.

Hey, guys. Just had some questions on your same-store NOI guidance range. When I look at the CCRCs, it looks like you're tracking 14.3% year-to-date, but your full-year range is 7% to 11%. Just kind of curious what you're expecting in the back half there.

Yeah, you know, maybe I'll just take a second on that, Josh, and talk generally about, you know, what we think the second half of the year looks like relative to the first half of the year within each one of our businesses. You know, if you look at year-to-date total same-store growth, we're at 5%, right? So, pretty strong, healthy number. It's actually just a little bit above the high end of our guidance range, which was at 4.75% right now. So we're off to a good start through the first six months of the year. You know, CCRC's had a really strong first half of the year, and we hope to keep that momentum going into the second half of the year. You know, outpatient medical year to date, we're at 3.1%, which is right in line with, you know, the midpoint of our guidance, maybe a little bit better actually. And I push Tom Klarich every day on How do we get to the high end? So I think he thinks I'm a broken record on that. But we've had success getting to the high end of our guidance range pretty much every year that I've been CFO. So hopefully more to come on that for the second half of the year this year for us, not to put too much pressure on Tom. But then in the lab space, look, we had a really good first quarter. We had a strong second quarter. There is probably a little bit of deceleration in the second half of the year, but I wanted to point out the two biggest items that are impacting that. One is the Kodiak space that we got back this past quarter. We've backfilled about half of it, but we still have some space that needs to get backfilled in the second half of the year. If we don't backfill it, that could be a little bit of an impact on our overall same-store NOI. And then the second piece, just to remind everybody, you probably pay close attention to our top 20 list. has dropped out of our top 20 list. I mentioned it in my prepared remarks. There is downtime on that. The Revolution Medicines lease does not begin until January 1st of next year, so there's some downtime in the back half of the year that will certainly have an impact on occupancy as well as same-store NOI in the second half of the year. But I wanted to really point out the two biggest items that will drive that decel in life sciences in the second half.

That's super helpful. Appreciate that. Yeah. Um, maybe just on, um, uh, I, I actually, I remember at Nary, I think you guys mentioned a couple of tenants might've come to you looking for space and just given where your portfolio occupancy was, this is on the life science side. It sounds like, um, it just didn't have the space for them. What would I get you guys to kind of restart the development pipeline? Um,

It wouldn't be a tenant coming to us today.

I mean, the timeline to get permits and build something would be far longer than accommodating a tenant who needs space today. So the thought process on near-term re-tenanting space is really looking towards credits that are unlikely to renew a lease in the coming years and seeing if we can find a way to early terminate and backfill with a growing tenant who wants a longer-term commitment. In terms of new development starts, we are making really good progress on entitlements in the core markets that we'd be in a position potentially to start construction on something in 2024. But I would get back to my comment that I made about outpatient medical. The decision to actually start depends a lot more on our view of supply and demand, potentially pre-leasing, cost of capital and returns and the like. So it's not something that we would do today. But as you look into 2024, I mean, we'll see. The market can obviously turn pretty quickly, and we've got a huge base of existing tenants that generally are the ones filling up these new developments.

Appreciate it. Thank you.

Yep.

The next question comes from Michael Griffin from Citi. Please go ahead.

Great, thanks. Maybe just on leasing for life science, you talked about 90% retention from existing tenants. Do you need to see the number of new tenants entering the portfolio in order to achieve longer-term growth, or are you comfortable sort of growing with your existing tenant base to drive that growth going forward?

Sure. Hey, Griff, it's Scott Bowen. I mean, I think 90% of the leasing we've done, as we said, is with existing tenants, and That's a huge competitive advantage of ours. I mean, that's the scale we have in the local markets. It's certainly easier to do a deal with someone you know. That said, we obviously would welcome tenants from the outside as well. So it's a mix of both. But I think we capture our fair share of leasing from tenants that are outside of our portfolio as well, but certainly try to cater to our client base as best we can to accommodate their growth.

Thanks. And then just a question on supply. I know there's been kind of market reports out there about elevated supply and core biotech markets. But I mean, if you sit back and look at your portfolio, I mean, how does a lot of this compare to your competitive stock? And then if you can get any color on your supply expectations for 2024 and your competitive stock, and then I know it's a bit early, but 2025 as well, anything you can add would be helpful.

Yeah, from a supply perspective, I mean, not a ton of change from last quarter that we talked about in the 2023-2024 deliveries. As you'd expect, we're certainly seeing a slowdown of new starts, and many of the conversions that have been advertised aren't doing anything on a spec basis, so we don't really even count many of those in the competitive supply. And as we've noted before, not all supply is built equal, so we think that we're positioned very well in each of our markets. When you look at the Bay Area, competitive new supply, we think it's competitive to our portfolio. It's about 800,000 square feet in 2023. It's about 70% pre-lease coming in 2024. There's about 3 million square feet delivering in the North Peninsula. About a third of that is conversion space that we think is going to be less competitive to our product. We view about 1.8 million square feet of that as competitive. The good news in South San Francisco on that, it's a small number of actual projects. So it's a decent amount of square footage, but a small number of projects. So when you're thinking about competing on deals, you're not going out competing against 10 projects. It's a smaller number there. Boston, while we certainly have very little rollover and no ongoing developments out there today, there's some big headline numbers. But what we truly look at as competitive In Lexington and Waltham and West Cambridge, our portfolio is there. It really shrinks down to a little over 2 million square feet. So we feel good about our positioning there. And again, no development starts anywhere in the near term as we work through our air life entitlements. Then in San Diego, there's about 5 million square feet in total under construction. But only about 2 million of that is in Torrey Pines and Sorrento Mesa. And that's about 30% pre-leased. So when you whittle down to what we actually view as competitive, it's pretty manageable in the near term.

Hey, Griff, one other thing, and every situation's different, so this isn't a statement that's true across the board, but in general, what we've noticed is that the new development projects, if anything in this environment, have been a bit harder to lease up. If you think about a new development, usually the tenant needs to invest at least $100 per foot of TI. It could be $200, $300, $400, depending upon their program. That's a tough ask in this environment. A new development already is going to come with higher lease rents as well as higher operating expenses, just given the amenities and the cost basis. So it's just less competitive. You think about what's happening in a real estate sector that's just the polar opposite of lab, which is office. It's like the A-plus buildings are the only ones leasing up. Lab right now is kind of the exact opposite. It's the kind of well-located but lower price point in terms of rent, op-ex, as well as TI investment from the tenant. that actually is the most desirable and in demand today. So we're actually benefiting from that quite a bit. We do have some new development to lease up, obviously, so we're not completely immune from that dynamic. But it actually puts the incumbents with existing operating portfolios in even better shape, I think, as you think about who's going to weather the kind of deliveries over the next 18 to 24 months.

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

The next question comes from Ronald Camden from Morgan Stanley. Please go ahead.

Hey, just two quick ones, or one and a follow-up, I should say. Just on the lab portfolio, you know, I think you talked about it, I think, last November about the billion three total peak NOI opportunity. I think part of that was sort of lab development earnings as well as sort of the lab mark-to-market. just, you know, half a year into it from those. Maybe can you talk about what the puts and takes are? You know, how do you feel about that billion three plus opportunity in 2025? Or is there incremental upside or incremental downside?

Yeah, hey, Ron, it's Pete here. You know, I think the billion three you're referring to was about 200 million of NOI growth over three years. I would say we still feel good about that NOI growth opportunity today, it may take a little longer to get there. That shouldn't be a surprise. And within that, we didn't include new development starts. That was basically the lease up and the stabilization of the existing development pipeline. So there were no new starts that was feeding into that. So it's a good question. Again, we feel good about it. It may just take a little bit longer to get there.

Great. And then just on the lab guidance, and I know this has been asked a lot of different ways, so I'll take a stab at it too. So the 3% to 4.5% same store and a Y, is the bottom and the top end of that range, is that mostly Sorrento? Why is that range so wide with five months of the year left? Just can you talk about what's at the top end and the bottom end? being contemplated. Thanks.

Yeah. Look, we're right at the midpoint through the first six months of the year. I would say that the biggest item is any unknown tenant credit issues like you point out with Sorrento or with the likes of Kodiak. We do have some conservatism. We embed within the guidance at the beginning of the year, and as we get further along in the year, we try and tighten and or increase that. I'd say two quarters into the year, we still feel good about hitting the midpoint within that segment, but I think it's still a little too soon for us to either trim the range or consider increasing the range right now, but obviously more to come when we get to the fall and our third quarter call. Thanks so much.

The next question comes from Stephen Valiquette from Barclays. Please go ahead. Thanks.

Good morning, guys. Just my question here is around just the industry transaction volumes obviously are way down again this year versus historical averages, both in life science and medical office. But despite this, I guess I'm just curious if you can comment on whether you're – I've noticed any recent directional shifts in either direction in just industry cap rates and recent LS or medical office industry transactions. Thanks.

I feel like there's enough volume to draw any conclusions. A lot of the transactions that have happened in the lab space have been more recaps, but the pricing has been pretty strong, whether you look at it on a cap rate or a price per foot basis. Obviously, the buyers are thinking about IRRs as well. They're definitely up. from the peak 18 months ago, 100, 150 basis points, but I don't know that there's been a difference in the last couple of months that is noteworthy. There's just not enough activity to state that definitively.

Do you have a different view on outpatient, Tom? No, same. I mean, there just hasn't been a lot of transactions. We saw the spike two, three quarters ago, and it's been pretty consistent since then.

Okay.

Okay. That's fair. Okay. Thanks.

The next question comes from Mike Moeller from JP Morgan. Please go ahead.

Thanks. Hi. Just two quick ones here. I guess first, how much was the ad rent in 2Q from Med City Dallas and how much of that was above normal? And then on the CCRC front, where do you think occupancy can go the next, say, three years?

On the ad rent, we typically run about 2.3 to 2.4 million dollars a quarter. So it's up about 8% from last year. We've had as high as 3 million. So it's going to be in that range, kind of 2.4 to the upper twos moving forward.

Yeah. And then CCRC today, we're around 83%. That portfolio is mostly independent living So longer length of stay and then there's big barriers to entry. So there's essentially no new supply. I mean, hopefully we can get back into the 90% range from 83% today. We've got one or two campuses that don't do as well. So, you know, that may be a limit on the upper end of occupancy for that business, at least in the current environment. But good progress to date. Our NOI is essentially back to where it was in 2019, at least on a cash basis. occupancy's recovered, but we still have quite a bit to go. So, yeah, good upside for that portfolio.

Sorry, this is Tom again. Just to clarify, the numbers I was quoting are monthly numbers, so in a quarter, it's between $8 million and $9 million.

Got it. Okay, thank you.

The next question comes from John Pawlowski from Green Street. Please go ahead.

morning thanks for the time um scott brenker just a follow-up question about the dispositions um or the appetite to sell assets just curious with the pretty resilient private market pricing on life science and life science properties that have traded curious why you aren't selling assets more aggressively to help close the disconnect between public and private market values yeah well we have sold assets year to date and we just said we're going to look to sell

some more. We're doing exactly that. It's not an easy market to transact in, but that is our expectation. That feels like the best move, at least for assets that we view as highly desirable by some buyers, but maybe not core to our strategy. It's tougher to sell super core assets within our big campuses and clusters. At some point, we may have to consider that, but we don't feel like we're in that spot today. We certainly, from a balance sheet perspective, don't need to. And, you know, sentiment, it comes and goes. Obviously, it's been more negative lately. We don't think that lasts forever, certainly. I think the results today, the fundamentals are a lot better than the sentiment. So, you know, we'll see if that, in fact, transpires in the coming quarters. If not, then we'll continue to look at additional asset sales.

Okay. But the size of this position in your mind right now is in a couple hundred million dollar range, likely?

Yeah.

That's right. Okay. Last question for me. Curious, in the last few years, if you've seen any case studies in your life science portfolio where just lower utilization of back office space is requiring maybe an uptake in capital spending from you to repurpose the space or a kind of concession on rents for certain operators just to accommodate different work patterns in a post-COVID environment.

Yeah, I mean, John, we've signed more than 5 million square feet of leases since COVID, so three years ago, both existing spaces and new spaces. And the allocation between the lab and the collaboration space really hasn't changed. So I understand the headlines and the theories, but when we look at real tenants and real leases and real buildings, the mix hasn't really changed much. So we have not seen that. Could it flex a little bit in the future? Sure, it could. And our purpose-built assets can actually accommodate that. A lot of the redevelopment-type properties struggle to get to 30%, 40% of the lab mix, whereas our purpose-built labs could go up to, I don't know, Scott, 75% lab if they needed to. But we're just not seeing that.

Okay. Makes sense. Thank you.

The next question comes from Wes Galladay from Baird. Please go ahead.

Hey, good morning, everyone. I want to go back to that comment about seeing an uptick in discussion with lab tenants. Has that been broad-based or is that more the pharma or the biotech tenants or anything in between?

I think it's broad-based. We spend a lot of time talking to both our large-scale pharma clients as well as VCs talking about company formation and startups. There's probably more activity favoring the sub-50,000 square foot type tenants. There's a lot of Series A funding going on, a lot of company formation going on. I think those companies that are still in that Series B, C range or the early publics are probably the ones that are just now starting to feel more comfortable, as Scott mentioned, and have more clarity on the interest rate and macro environment. We expect to see more of that coming over the next few months, but overall the activity, as well as the LOIs we talked about, are a broad range of tenant sizes as well as kind of where they're at in the spectrum from a funding perspective.

Okay. And then do you have a lot of traction on some potential contingent leases for the Sorrento space if they do get rejected? And if so, how quickly can you turn the space?

Yeah. I mean, I think on Sorrento, we obviously have contingency planning with regards to what we would do with those assets if they were rejected. As I said, My prepared remarks, I mean, they're not looking necessarily today to reject those leases and to liquidate. They're clearly trying to exit bankruptcy and put a financing package together to achieve that. Too soon for us to comment on what that means for the leases, but I would say that we generally feel like that could be a positive thing with regards to the existing leases. Those leases actually have pretty significant below market rents. But obviously, if they were rejected, there would be some downtime and some TI's and capital spend that varies across the four different properties. But again, I think it's too soon to start delving into the individual properties right now.

Great. Thanks for the time, everyone. The next question comes from Jim Kamert from Evercore. Please go ahead.

Good morning. Thank you. Given the high retention in the lab side, Is it safe to assume that those tenants are less likely to be price shoppers, if you will? And do you have any examples in the last 12 to 18 months where you've done leasing with existing tenants in the lab side where they might have been able to go down the street to a new development or something at a lower rent but stuck with peak? Thank you.

Yeah, it's Scott Vaughn. Labs aren't easy to move at the end of the day. I mean, there's a lot that goes into the The build-out of those labs, there's FDA approvals within certain labs that are hard to relocate. So, you know, I think that that's one thing. A lot of tenants tend to be relatively sticky. I also think that, you know, the actual price per square foot isn't always the most important thing to them from a tenant perspective. I mean, the lab sophistication balance sheet portfolio of a landlord weighs in, you know, oftentimes, most times much heavier than the actual, you know, the cheaper option down the street, so to speak.

Right. And so, but do you have examples maybe where, you know, you were able to keep them and even extract a nice bump as opposed to them moving? I'm just curious if that's been a phenomenon, you know, insulating you from the new supply, in other words.

Yeah. You know, it's a good question, Jim. And actually, I think if you go back to our From November of last year, we actually included a slide, and we have in the past, about tenants that have gone from small amounts of square footage with us and grown to well over 100,000, if not even more than that, square feet within our portfolio. It's one of the things that we think differentiates us and gives us a competitive advantage. I mean, we don't know if the tenant turned down another deal. To be honest with you, oftentimes they're just talking to us. and expanding with us. So I'm not sure I can give a specific example except to point to the amount of tenants that have gone from a small amount of square footage to a lot of square footage with us through the years. And we've been continuing to pound the table that we think that's a competitive advantage for all the incumbent landlords. Yeah, I can't think of too many bidding wars.

Obviously, Scott and Mike are on the front lines, but they're talking to us on any of the big leases. I don't have like a strong recollection of them coming to us where we're like bidding aggressively against another landlord. Maybe there's one or two of those, but that's a very rare situation.

Terrific. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks.

Yeah, thanks everyone for joining. We'll see a lot of you in September at the Bank of America conference. Enjoy the rest of your summer. Thanks.

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