Healthpeak Properties, Inc.

Good morning and welcome to the HealthPeak Properties and Physicians Realty Trust conference call. All participants will be in a 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 questions, you may press star one on your touchtone phone. To withdraw the question, again, press star one. Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations.

Please go ahead.

Thank you. Good morning, everyone. If you have not yet downloaded the press release or merger presentation related to this call, they are available on the HealthPeak and Physician Realty's website under Investor Relations. This morning, you'll hear from Scott Breaker, President and CEO of HealthPeak, Peter Scott, CFO of HealthPeak, and John Thomas, President and CEO of Physicians Realty Trust. Today's conference call will contain certain floor booking statements. Although we believe the expectations reflected in any floor booking statements are based on reasonable assumptions, floor booking statements are subject to risk and uncertainties that may cause actual results to differ materially from our expectations. Actions that could cause actual results to differ include, but are not limited to, the potential benefit of the proposed merger the expected timing and likelihood of completion of the transaction, including the ability to obtain the requisite approval of health care and physician-related shareholders, and the risk that the closing conditions are not satisfied. Please refer to the foreclosing statement notice in health care and physician-related 10-K and other SEC filings for information. Finally, this call contains financial measures. In accordance with IG, the company provides a reconciliation in their respective earnings packages. And with that, I'll turn the call over to Scott Brinker.

Thank you, Andrew. Good morning, everyone. Very excited to be here with John to discuss the merger we announced this morning and the significant benefits to both companies. This combination will create the leading real estate platform dedicated to healthcare discovery and delivery, a large and attractive playing field with strong secular growth. We also announced strong 3Q earnings, including another increase to both same store and earnings guidance. I'm going to ask Pete to summarize our results. then John will do the same for Doc, who also announced 3-2 results this morning. Then I'll be back on with John to discuss the merger.

Pete? Thanks, Scott. Despite the challenging capital markets environment, we continue to put up solid operating and financial results. I will be brief so we can get back to the merger we announced. For the third quarter, we reported FFOs adjusted at 45 cents per share, AFFO at 40 cents per share, and total portfolio same-store growth of 6%. Some additional color on segment performance. Starting with outpatient medical, same-store growth was a solid 3.4%. During the quarter, we signed 2.2 million square feet of leases, including a 20-year extension at our Medical City Dallas campus and 143,000 square feet of leases in Philadelphia. Shifting to lab. Same store growth was a strong 3.3%. During the quarter, we executed 211,000 square feet of leases, including converting all 196,000 square feet of previously announced LOIs into leases. The significant deals included a 101,000 square foot lease with Pliant Therapeutics to backfill a 2023 Amgen lease expiration at our Oyster Point campus, a 61,000-square-foot lease with Voyager Therapeutics to expand at our Hayden campus in Boston, and a 23,000-square-foot lease with Estella at our Vantage Development, bringing that project to 52% pre-lease. All three tenants were existing tenants in our portfolio and underscores the superior competitive advantage that incumbent landlords have. Finishing with CCRCs, our strategic and operational initiatives are producing strong results. Same-store growth for the quarter was an exceptional 32.1%, driven by occupancy gains, reduced labor costs, and margin improvement. Turning now to our 2023 guidance, we are increasing our FFOs adjusted and AFFO guidance by two pennies at the midpoints to $1.77 and $1.53, respectively. Additionally, we are increasing our full year blended same store guidance range by 75 basis points to 4.75% at the midpoint. Please refer to page 38 of our supplemental for additional detail on our guidance. With that, let me turn the call to John. Thank you, Pete.

Before discussing the merger, I want to take a few moments to discuss Positions Realty's trust performance during the third quarter of 2023. During this quarter, Physician Trillium Trust generated normalized funds from operations of $61.2 million, or $0.25 per share. Our normalized funds available for distribution were $60.1 million, or $0.24 per share. We paid our third quarter dividend of $0.23 per share on October 18th, which represented a payout ratio of 96%. We ended the quarter with the balance sheet in great shape, our consolidated net debt to EBITDA ratio of 5.3 times, and less than 5% of our debt carries a variable rate interest rate. Of our 2 billion of consolidated debt, only about 85 million, or 4%, matures before 2026. Our revolving line of credit is completely undrawn, providing us with 1.2 billion of near-term liquidity when combined with our nearly 200 million of cash on the balance sheet. Operations remain strong, with the leasing team achieving positive absorption of 26,000 square feet and renewal spreads of 6.7%, outpatient medical same-store cash NOI grew 1.5% year over year, and improvement from prior quarters as the team works to release the incremental vacancy incurred earlier in the year. New investments were modest at $16.8 million, including the funding of previous loan commitments on outpatient medical facilities under construction. We also remain on track for the G&A guidance of $41 million to $43 million, Our construction team is also managing to the guidance of $24 million to $26 million for recurring capital projects. And we don't expect any surprises there. We're also excited to report that Positions Realty Trust earned a score of 78 out of 100, representing a 4% year-over-year increase and a Green Star designation in the 2023 Grisby Real Estate Assessment for Sustainability Reporting. I'll now pass it over to Scott to discuss the merger.

Okay, thank you, Pete and John. From day one, the discussion with John focused on whether both companies would be better together than as standalone entities. That was the only transaction either side was willing to do, and we accomplished that goal, as the merger is expected to be accretive to both companies from every important angle. Scale, earnings, balance sheet, capabilities, team, and relationships. John and I will touch on each of these items. One of the benefits of this transaction that is most exciting to John and me is that we can combine the complementary strengths of the two companies, including Doc's internal property management and Peak's redevelopment and development expertise, just to name two. We expect this deal to fundamentally change the power of the combined platform and therefore our mutual growth opportunity. For the past year since taking on this role at Health Peak, I've talked about several initiatives we were focused on. including having a larger playing field given the evolving nature of healthcare delivery, getting closer to our real estate, deepening our relationships and streamlining our operations. This transaction accelerates every item on that list. There's an investor presentation on both company websites, but let me quickly describe the basics. This is a 100% stock merger based on the closing share price of each company as of Friday. Each DOC share will be converted into 0.674 shares of newly issued HealthPeak stock. The ownership split will be approximately 77% HealthPeak shareholders and 23% Physicians Realty shareholders. The company's name will be HealthPeak Properties, headquartered in Denver with the ticker symbol DOC or DOC. We expect to maintain our dividend at $1.20 per share resulting in an AFSO payout ratio of 80% or below. Closing is expected to occur in the first half of 2024, subject to typical closing conditions, including shareholder votes. Let me clarify, this is not a sale for either company. There's no cash changing hands. This is a relative value trade that we believe is beneficial to both companies, and our transaction structure allows all shareholders to carry forward and participate in the immediate and future value creation. Let me touch on the financial highlights. There is immediate and compelling value creation opportunity that will grow over time. The year one run rate synergies should be at least $40 million with the potential to reach $60 million by the end of year two. Any increase in occupancy or rate would be upside to those numbers. We expect a combination to be accretive to standalone year one FFO for both companies. We also expect FFO accretion So that number is subject to GAAP accounting adjustments that will be finalized just prior to closing. We're even more excited about the strategic benefits. First, we've already spent a huge amount of time thinking about the team and platform from top to bottom with a joint mindset that the status quo is never good enough. Both companies have already been operating at a high level. This is an opportunity to quickly go to the next level, combining the complimentary talent and strengths of each company. Second, broader and deeper relationships. Together, we'll have relationships with each of the 10 largest health systems in the country, the vast majority of the world's largest biopharmas, and an exciting mix of innovative biotechs and regional health systems. Those relationships are the intangible that drives out performance. Third is increased operating scale, with a combined 40 million square feet of outpatient medical real estate, including concentration in high-growth markets like Dallas, Houston, nashville phoenix and many others the combined footprint will deepen our competitive advantage in local markets so we haven't concluded any of this potential upside in our numbers four we'll retain doc's internal property management platform and expect to internalize certain markets in our medical and lab portfolios this will deepen our relationships and augment our local market knowledge the internalization will also be accretive and we've included those profits in our synergy numbers. Five, improved tenant diversification. The top 10 tenants will represent just 21% of annual base rent, and seven of those 10 are investment grade credits. Only two tenants will represent more than 1% of our combined base rent. HCA will be our biggest tenant at 9%, and they are the largest for-profit health system in the country. It's also a highly strategic relationship that goes back more than two decades. Common Spirit will move from 15% of doc standalone down to 4% of the combined company. Common Spirit is the largest not-for-profit system in the country and rated A- by S&P. We look forward to supporting the mission of these two organizations and many others in the sector in a broader way than we could as standalone companies. Sixth, This transaction will help accelerate the integration of our medical and lab operations. Independent of this merger, we're already moving toward a single operating platform as the daily blocking and tackling of property management, leasing, CapEx, forecasting, and accounting has enormous overlap between the two segments. We also see more and more of our health systems doing some level of R&D where we can be a high value add partner given our capabilities. Seven, Increase scale and liquidity for equity investors as both companies will benefit from a larger market cap. Eight is a bigger, more liquid balance sheet with leverage expected to be in the low fives at closing and well staggered debt maturities. The balance sheet will be a competitive advantage as we move forward, positioning the company to go on offense when highly levered owners are searching for answers in this new environment. Nine, lower cost of capital through more efficient G&A and enhanced liquidity making external growth more accretive. And 10, we'll use the larger portfolio to become more active in recycling capital for our pipeline opportunities, whether through outright sales or private capital joint ventures. Medical and lab remain attractive asset classes to institutional investors, and no company will be better positioned to capitalize on their desire for exposure to the sector. Moving to the team and governance, John Thomas will join our board as vice chair and have an active role in strategy, business development, and relationships, areas where I've seen firsthand that he excels. John has proved himself time and again as a leading voice in the sector and was a driving force for growth at both Healthcare and Physicians Realty. In addition, we're excited to retain the vast majority of the DOC operations and property management teams, many of whom are reimbursed by the tenants. Kathy Sandstrom will continue to be our chairperson, and the HealthPeak board will be expanded to include five directors from Physicians Realty, including John and the former U.S. Secretary of Health and Human Services, Tommy G. Thompson. After closing, outpatient medical will represent approximately 50% of the combined company's NOI. Demand exceeds supply in the outpatient sector today, and we expect that dynamic to continue given senior population growth and the high cost of new construction. We're also starting to see market rental rates catch up to inflation, which is a positive sign for future NOI growth. That being said, we do not have fixed portfolio allocation targets moving forward. We'll allocate capital based on opportunity and risk adjusted returns. And we do expect the opportunity set to be significant, driven by four major buckets and in no particular order. First is outpatient medical acquisitions from capital constrained owners or health systems. Second is new development with leading health systems. Third is distressed acquisition opportunities in life science driven by refinancing challenges or delayed lease up. And fourth is activating our 5 million square foot life science land bank when fundamentals are favorable. I'm excited for JT to provide his thoughts and the opportunity in front of us.

Thank you, Scott. When John Sweet and Mark Thine asked me to join them just over 10 years ago to create a new public company focused on outpatient medical investment, I was intrigued by the opportunity to work with them to build a new kind of organization with an intense focus on serving the current, but more importantly, the future needs of healthcare providers and their patients as care continued to move from the inpatient setting to the outpatient setting. We didn't have an objective then or now to build a portfolio and sell it, but rather to build an organization built to last for the long term, one that would grow and evolve with clinical science, the needs of an aging US population, and resilient to macro and micro capital market conditions. We wanted a culture to drive those goals and overtime came to capture that culture and the acronym CARE. We communicate and collaborate, we act with integrity, we respect the relationship, and we execute consistently. I've had the privilege to know and work with Scott since 2009 when we both had the opportunity to work together under a genuine mentor to both of us, George Chapman. We worked with Pete since his days at Barclays and collaborated with him collaborated with him since he joined HealthPeak. We've had the opportunity over the past 10 years to get to know the HealthPeak team and more in recent weeks. We have common and consistent missions, goals, and more importantly, culture. Scott has articulated defined, achievable, measurable, and objective metrics we can and will achieve together. We are convinced this combination not only furthers our long-term objectives from our humble beginnings 10 years ago, but provides the best-in-class scale and operating platform to achieve together for our combined providers and the patients they serve far more than we can deliver separately. We are here to serve the best interests of our shareholders and stakeholders, and we believe with all of our analysis and discussions that one plus one in this context is not only more than three, but has the potential to be much, much more. In addition to Scott's earlier comments, there's an additional benefit to DOCC's existing shareholders as we are merging with the best-in-class lab portfolio with large footprints and lab investment platforms in Cambridge, Mass., South San Francisco, and San Diego at an incredibly great valuation in time for investment in the existing lab platform with what we believe is an outsized ROI for years to come. HealthPeaks Class A lab facilities are incredible real estate, hosting some of the world's leading scientists, clinicians, and discovery sponsored by and backed by leading pharma, venture capital, and academic proximity and involvement. The combination of HealthPeak's lab teams and Doc's operational platform further enhances the value of these assets and relationships. I've toured HealthPeak's best-in-class lab and markets and share the vision for the development of existing land owned by HealthPeak in Cambridge and South San Francisco that should generate outsized growth for years to come, focused on lab and community development, but also outpatient medical access. Scott and I led, under George Chapman's leadership, a large investment in Cambridge Lab Real Estate in 2010, and working together, learned Lab Real Estate investment, development, and operations together. The results of that investment speak for themselves. Obviously, Scott has taken that experience and executed consistently as HealthSeek's leader. I'm very excited to partner with him and our collective team to further the combined company's future opportunities in lab and, of course, outpatient medical. In conclusion, Doc is not selling an outpatient medical portfolio to HealthPeak. HealthPeak's not selling lab or outpatient facilities to Doc. Rather, we believe we are combining the best of both organizations in an all-stock merger of equals that we believe will benefit both shareholder bases and continues the mission, vision, and culture of each organization as one. This combination furthers each of our goals to have and build an organization built to last to the long term, one that would grow and evolve with clinical science, the needs of an aging U.S. population, and resilient to macro and micro capital market conditions. We believe this combination meets and exceeds all of those objectives. I look forward to working with Scott and our collective team and board, and as we say at DOC, this is an opportunity to invest in better, as HealthPeak, And you'll be able to find us at the New York Stock Exchange under the stock symbol DOC. Thank you. We'll now be happy to take your questions.

Certainly. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, again, press star, then one. so that everyone has a chance to participate, we ask that participants limit themselves to one question and one related follow-up. If you have additional questions, please recue. Our first question comes from the line of Michael Griffith with Citigroup. Your line is open.

Great, thanks. I'm curious if you can kind of elaborate, maybe, Scott, just on the on versus off campus of the combined company. I mean, PEAK historically has been more on-campus focused, Doc has been more off-campus. So is there going to be a strategy shift in terms of preference there?

Yeah, I would just say that the portfolios are really complementary. I mean, there's a lot of overlap in the markets themselves, something in the range of 70% market overlap. They have huge concentration in a lot of our big markets like Dallas and Houston, Phoenix. It's a pretty long list, as well as some new markets like Atlanta. We are higher on campus. That's been a good strategy over the years. It's produced good results. But I think DOCC has high quality assets in kind of a different and complementary way. Certainly healthcare is moving more off campus. Doesn't mean it's completely moving off campus. Our hospitals are still busy. Those on-campus MOBs are still performing. But as you think about the trend in delivery, you know, progressive health systems today have 10 or more outpatient assets for every one hospital. in their system with oftentimes a strategic plan to move more towards a 20 to one ratio and just almost by default, most of those new assets are off campus, trying to make care more convenient, more accessible, more affordable. So we still like on campus real estate, but we think we have to complement it and serve our health system partners more comprehensively. And off campus just has to be part of that strategy. If you look at the segment or the sector in the aggregate, it's probably only 30% on campus. So it's just not realistic to think that you can be a true partner of choice with health systems if you're only serving that 30% of the real estate footprint.

Gotcha. That's helpful. And then I'm just curious if you could maybe, you know, kind of give us a little color on sort of how these talks came to be, the murders of equals, you know, kind of over time, how did things evolve or anything there would be pretty helpful.

Yeah, I mean, we'll put out the proxy with all of that background information in the next month or two, Michael, but I'll probably defer that answer until that's made public.

Okay. Well, that's good for me. Thanks for the time. Yeah, thanks.

Our next question comes to the line of Austin Wershmitz with KeyBank. Your line is open.

Thanks. Good morning, everyone. I was hoping you could provide some additional detail around the synergy components within the 40 to 60 million that you flagged. And do you expect it will be accretive immediately upon closing? And can you give us a sense about the magnitude of accretion you expect in the first year?

Yeah. Hey, Austin. It's Pete here. It's a good question. You know, as we said, we do expect the transaction to be accretive to both AFFO and FFO. per share. I will note, and I think everybody knows this at this point, but FFO has a lot of accounting adjustments, including a mark-to-market of the debt, and that won't be finalized until the deal closes. But everything I've just said is based on our best estimates as of today, and importantly, those accounting adjustments do not impact AFFO. You know, the accretion of 40 to 60 million, I think that the biggest components of that are compensation savings. There will be some redundancies within both organizations. There's also corporate overhead savings, notably some significant professional fee savings from having one public company as opposed to two. And then the increased NOI from internalizing property management across the portfolio. So those are the biggest pieces, but to answer your initial part of the question, we do expect it to be accretive in year one.

No, that's helpful. And then I'm just curious, so with the combined companies, the peak team has kind of highlighted the potential mark-to-market growth opportunity. I think it's in 2025 within the lab space segment. And Doc has talked about, I think it's 26 when you've got the significant maturities with an attractive mark-to-market as well. I'm just curious how you thought about sort of how this would dilute that growth opportunity in the years ahead and then kind of how you backfill that through some of the other opportunities that you've discussed and highlighted.

Yeah. Hey, Austin. I'll take a shot at that. Pete and John may have comments as well. But overall, we view this transaction as augmenting our internal growth profile, certainly making it less volatile, more predictable. But in addition to just the initial synergies that that Pete just described, our capabilities in serving our clients is going to increase pretty materially, whether it's our development and redevelopment capabilities, internal property management, the additional scale in the local markets that just brings us closer to the real estate, closer to our tenants. That should drive better economics. And if you think about the last 10 years in lab versus the last 10 years in medical, it's not necessarily going to repeat itself. I mean, from where we sit, Our medical growth over the past decade has been in the mid-2% range, so slightly above inflation. But we have five- to six-year lease terms on average, and we are starting to see market rental rates catch up to inflation. There's obviously a lag given that weighted average lease term, but we are starting to see some pretty significant rental rate growth, and DOC has been reporting the same. So I think if you look at the go forward, we're pretty optimistic. about the growth rate within outpatient medical. We see demand exceeding supply really across the entire industry, including in our local market. So it should be a pretty compelling future growth rate that might look different than the last 10 years in that medical business.

That's very helpful. Thank you.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Hey, guys. Congrats on getting the deal done. Just a question on asset management, I guess, for Scott Brinker. I mean, you guys hit tremendous scale, particularly in the lab markets. And I'm just curious on kind of why the change of strategy about embracing the internal property management. And if you could dive a little into, like, how should we think about how much NOI that business generates just from a synergy or accretion perspective?

Yeah, happy to take that one, Juan. Really in the last year, one of the major initiatives that we've been pushing as a leadership team is to bring our company closer to our real estate, closer to our buildings, local markets, and relationships. And having the internal property management allows us to be that much closer to our tenants in our buildings. And we feel like we're a little bit redundant, maybe one step removed in some cases. with third party property managers. And we think we can eliminate that, improve the relationship, improve our local market knowledge. And doing it off the back of Doc's existing platform just allows us to do it faster. It's less execution risk and it will have a higher margin just given we don't have to start from scratch. So it's a pretty significant part of the synergy number that Pete described. Some of that comes immediately because there are a number of markets that we've already identified that we can internalize right away. And then over time, depending upon how it goes, we can increase that number. So it's one of the really interesting and intriguing parts of this merger that it's not only financially accretive in a pretty meaningful way, but it's strategically important in that it brings us that much closer to our real estate.

Yeah, Juan, it's JT. I just add to that, you know, in the six largest overlapping markets for outpatient medical, Peak's always had a great high-performing team and and organizational structure and approach to boots on the ground operation property management. We have docked team members in each of those large markets already. So there's just a lot of synergy and scale that's already we can put in place day one and we'll be working during the process towards closing to get that plan in place and assume those responsibilities together

day one and then there's many more markets to come so just a lot of upside opportunity both financially but also as scott said to you know get people just connected to the real estate and then just as a follow-up i guess it's maybe a little two-parter here is the exchange ratio fixed or is that variable and then is there any planned dispositions or exit of any uh markets uh with the combined companies

So the exchange ratio is fixed. And in terms of dispositions, it would only be opportunistic. The balance sheet's in great shape today for both companies. It will be even stronger post-closing. We have a very high-quality portfolio. We tour the vast majority of Doc's portfolio and feel the same. So anything we do would be opportunistic. There's no forced sales as a part of this transaction, given the strength of the balance sheet. But I did make comments in my prepared remarks that we would expect to be more active in capital recycling. So doing things opportunistically, whether it's outright sales or recaps with joint venture partners, we do think that we'll be a partner of choice to the private capital community as well. We already have a number of those relationships and we think we could have more as we see a significant pipeline opportunity, as I described really across the lab and medical business. And if the stock is not trading at an creative level, we could certainly look to recycle assets to capitalize that growth pipeline.

Thank you.

Our next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.

Thanks for taking the question and congrats on the deal. I guess just first one, you know, when two of your peers merged, one of the thesis was that this creates a much larger acquisition opportunity set and theoretically the AFF4 FAD growth is higher. I think there was a five, 600 basis point number at that time. Is that part of the rationale here? Do you see a bigger acquisition set and just ultimately higher, you said steadier growth, but I'm curious if you also see higher growth?

Well, certainly on the external growth front, we do think that our balance sheet will be even more attractive to lenders, so our cost of capital should benefit. Clearly our G&A as a percentage of assets will go down, so our cost of capital should improve. Hopefully the market responds to the strategic benefits of this transaction and our cost of equity improves as well. So certainly we would expect that the external growth opportunity will be more attractive given the dock relationships and the health peak relationships on top of that improved cost of capital. But that's not part of any of the accretion or synergy numbers that we've outlined. That would be all upside.

Okay. That's helpful. I guess just, you know, one more, just, you know, following up on the whole, you know, the, I guess the offers is on campus. You know, part of what, what you mentioned is that, the consumer, the hospitals are going more off campus. But I guess that could be, you know, that has been going on for a while. So I'm just sort of wondering why today. And, you know, as part of this, do you still see, you mentioned disposition. So do you still see a path where more of the dispositions are off campus weighted?

No, I would just be opportunistic. It's not going to be by design. But I think really from Day one, 12 months ago, this management team has described the desire to have a wider playing field. If we're not servicing our tenants and health system partners in the medical business, we're not going to find maximum success. And just given the emphasis of their strategy and growth plans, we have to be a participant in that.

Okay, so I guess just to clarify, the dispositions would then still be like more broad based, including potentially the CCRC that you've always had on that list.

Yeah, I would put CCRC in a totally different bucket. That's a business that is performing well. We think it's a great asset class. We've got a great portfolio and internal team running it as well as a great third party property manager. in LCS. So the feedback and strategy on that portfolio hasn't really changed. When the financing markets make sense and we get a fair price, that's one that we'd be willing to sell and recapitalize or recycle into our core businesses. But on your specific point about on versus off campus or lab, that will just be completely opportunistic. Wherever we get the best pricing is where we would look to transact.

Okay, great. Thanks again, you and John and both teams. Thanks, Brickell.

Thanks, Brickell.

Our next question comes from the line of Rich Anderson with Wedbush. Your line is open.

Hey, good morning. So congrats to everybody. You're making it clear no one's buying the other and so on. But the fact is HealthPeak is issuing, if my math is right, 168 million shares. If I'm also doing my math right, the implied cap rate on DOC is in the low to mid sevens. And so if you do a cost of equity, if you just do an inverse of your AFFO multiple to keep it simple, it's kind of nine-ish. So I guess the question is, you need that $40 million of synergies to be able to talk about accretion. Without it, it is... at least marginally diluted out of the gate to health peak earnings. Is that a fair mathematical approach?

I'm not sure. There was a lot there, Rich. I'll do it again if you want.

168 million shares, implied cap rate on DOC of seven and a quarter, seven and a half, something like that. So based on those two forces, It's diluted without the synergies, correct?

Yeah, well, they're very different portfolios. I mean, we're not a pure play medical portfolio today. We have the CCRCs, we have lab, and NOI is one metric you could think about. It's certainly one that real estate investors tend to point to, but it's certainly not the only metric. I mean, when you think about CapEx and volatility of earnings, but CapEx in particular, DOC given the nature of their portfolio, just has a very low CapEx burden relative to ours. So that certainly drives a lot of the accretion as well on an FFO basis, which feels more like a cash economics analysis to us. And I'm not sure that I would agree with your point in terms of FFO, kind of the true economics of the deal. I think there's probably some accretion even without all the synergies, Rich.

Our next question comes from the line of Taiyu Akusanya with Deutsche Bank. Your line is open.

Yes. Can you all hear me? Yes. Yeah. Excellent. So, question just around the transaction. I mean, summer of 2022, we have the HRHPA transaction go down. A lot of questions around someone who's primarily on campus buying someone who has a lot of off campus. A lot of questions around someone who has a higher seems to NOI growth for the MOB portfolio buying someone who has a lower seems to NOI growth profile. A lot of questions around pricing. Again, your implied cap rate today is higher than the implied cap rate for GOC. A lot of questions around, again, someone who has, you know, managed their portfolio externally. buying someone who's managing them internally. It just seems like there's a lot of similarities, you know, a year and a half ago when people were kind of struggling with the HTA-HR deal. How do you convince shareholders this time around that the doc health peak transaction is different, especially when, again, it seems to be taken away a little bit from the lab science theory that you guys have been trying to tell for the past few years?

Hey, Ty, it was JT. You know, we couldn't be more excited about this opportunity. And, you know, Scott and Pete and our teams, you know, sat down and kind of evaluated the opportunity. We looked at it as really combining the best parts of both organizations and kind of the different strategies. Everything was on the table to evaluate what was the best go-forward strategy for, you know, all the questions you just asked. You know, I've talked about a lot. This question has come up a lot today is, You know, Doc's always had the reputation as the off-campus outpatient medical read. You know, we're 50% on and 50% off. The assets we've helped finance to develop over the last five years have been off-campus and have won awards and are full and, you know, leased to the best health systems in the country. PEAK's been doing the same thing. So it's really not a difference in strategy. It is adding relationships, adding In a lot of cases, mutual. Honor Health's a great mutual client of ours in Scottsdale, and we're doing more growth with them on and off campus. So it's really what meets the needs of the providers and the patients that they're serving. And during the pandemic, you've heard me talk about this a lot, we did a survey and people didn't want to go anywhere near a hospital for their routine care if they didn't have COVID. And that really has driven a lot of health systems to evaluate their strategies, as I mentioned before. you know, kind of 10 off-campus outpatient facilities for every hospital, and that just continues to grow, and the pandemic showed the need for even more of that. So it's not so much as, you know, changing one strategy or the other. It's about looking at each other's strategies and maximizing the combined opportunities that we have in front of us. So it's a, you know, we're not going to, don't really need to talk about other transactions. I would just say very different structures, very different way to put the companies together, very different strategies. You know, this opportunity makes sense for all of us without leasing one more foot because we, you know, effectively are 95% leased already. The outpatient, or excuse me, the lab business is highly leased as well. So it's a great opportunity for the doc shareholders to, you know, work with, invest in one of the best labs. businesses and portfolios in the world and opportunity for the peak shareholders to get the combined strengths of both teams.

Your next question comes from the line of Ronald Camden with Morgan Stanley. Your line is open.

Hey, guys. It's Adam Kramer on Ferrand. Congrats on the deal. Congrats to everyone involved here. Look, just, you know, it's been covered a little bit, but maybe I'll ask it a little bit of a different way, which is, you know, look, obviously this deal is focused on outpatient medical. Wondering kind of what read-throughs we should have, if any, towards the legacy peak life science business.

Yeah, I mean, it really is completely independent of the lab business, which... You know, our confidence in that platform and portfolio and segment has never been stronger. This was just a unique opportunity to make the company better in pretty much every important way, balance sheet, capabilities, relationships, scale. It's a pretty long list, so I wouldn't have, I wouldn't make any read-through to the lab business. This is just something that made sense independently. It was a unique opportunity that fortunately, because of our balance sheet, and relationships we were able to put together and execute. So no read through at all to the lab business.

Yeah, that's helpful. And then just on kind of the go forward financing kind of growth plan, you know, I guess how do you think your cost of capital, kind of think through your cost of capital, you know, in terms of the kind of the combined entity, you know, you know, or is this kind of more of a kind of capital recycling story, right? Bigger asset base now, and you can kind of focus more on capital recycling, you know, or versus kind of a cost of capital kind of accretion plan.

Yeah, I think one of the things we haven't talked about yet that's a very big, you know, competitive rationale for doing this was the combination of our two balance sheets. I mean, Doc has a great balance sheet. We think we have a sector-leading balance sheet as well. And we're not levering up to do this. In fact, if anything, we're modestly deleveraging with the synergies, so we have a little bit of dry powder. But when you look at a combined basis, we've got a weighted average interest rate of less than 4%. We've got a weighted average debt maturity of greater than five years, almost no secured debt, liquidity of approximately $3 billion. We did put a new term loan in place, which enhances the liquidity of the pro forma combined company, and our net debt diva does in the low fives. And as Scott mentioned, we've got less G&A, improved cost of capital. So from a balance sheet perspective, from a cost of capital perspective, this is a big win for both companies and for shareholders and for our bondholders as well.

Great. Thanks so much for the time, and congrats again.

Our next question comes from the line of Jim Kammer with Evercore. Your line is open.

Thank you. Good morning. I appreciate all the color regarding the potential synergies on the OM side, but I was just wondering, could you help me walk through kind of the map a little bit? I mean, peak just reported third quarter, I think 3.4% seems to know I grow from the medical office, and I believe doctors reported about 1.5% for the third quarter. So on a pro forma basis, are you suggesting that the overall combined portfolio could be you know, at kind of like peaks operating performance level or greater, just trying to understand how the synergies work through and what you're quantifying, what that impact is. Thanks.

Yeah, I think we'll bring the same stored growth rate more in line over time. I mean, there's a couple of differences. We do have a higher base escalator than Doc. We're in the high twos. They're more in the mid twos, just given the nature of their portfolio performance. But over time, as we restrike leases, we'd expect to bring those escalators more in line. They have had better releasing spreads than us, in part because they have the lower escalator, so there's just a bigger mark-to-market opportunity. Those things usually go together, obviously. But we do have the redevelopment capabilities. As some of their older properties mature, we would expect that we would bring our redevelopment capabilities to this portfolio as well. which means that they're really not part of the same store pool, either on the downside or the upside. And Doc just has a different model. So I think that will change as well. And then clearly the internalization of the property management should be a benefit to the portfolio as well. So I do think you'll see those two numbers look more in line and consistent among the two portfolios over time, Jim.

Okay, great. Thank you. And if I could, a second one. You know, I think you've touched upon this in different aspects on the call, but is there not potentially more distress, if you will, evaluation-wise in lab? And just trying to figure out how the company came to the decision to maybe just the opportunity is presenting itself, but, you know, pivot a little bit incremental exposure to OM. And my perception is that the distress component is less so in OM versus lab. I'm just curious why now to make that kind of allocation.

There's going to be opportunities in both segments. I think having a bigger balance sheet and cost of capital just allows us to be better positioned to take advantage of those opportunities, whether it's in lab or medical. But no question, in lab, we will start to see distressed opportunities, whether it's from refinancing risk or delayed lease up. So that hasn't started in earnest yet, but I would expect over the next 12 to 24 months that there will be quite a bit of opportunity. And I just don't see any way that our company isn't better positioned to capitalize on those opportunities as a result of this deal, just given the balance sheet, the improved G&A, improved liquidity. So I view this as a positive step in positioning ourselves for that distress, which I think is coming, but we haven't really seen much of it yet. And then in medical, I wouldn't call it operational distress, but there will be plenty of refinancing-related risk. in the coming years in that sector, just given what's happened with interest rates and cap rates. It was harder for us to compete or not to compete for that matter when secured financing rates were in the 3% to 4% range and LTVs were at 70%. But guess what? Like that world is long gone. And a lot of the private market has in place financing with those exact terms. And it's not going to look like that even remotely when they refinance. So I think you'll see a lot of opportunity there as well, but more driven by refinancing. than operational distress. So, Jim, we're going to be opportunistic across the whole portfolio. I wouldn't view it as one or the other. Hopefully, we'll position ourselves to do both.

Terrific. Thank you.

Our next question comes from the line of Nick Ulico with Scotiabank. Your line is open.

Thanks. Yeah, just first question is on the HealthPeak side related to just the existing portfolio. I was hoping we can get an update on just Oyster Point. If you could remind us how much, you know, square footage is still you have to lease there. And, you know, how are you thinking about rents on that space? And then also for Sorrento, you know, if you have any update on, you know, outcome you're expecting from the bankruptcy and then also any activity you're seeing on the development asset there.

Yeah, maybe, Nick, I'll hit on Sorrento first, and then I'll have Scott go and touch on Oyster Point. On Sorrento, you know, we got our rents paid in October. No update yet since it's still October on November rents. But no matter what happens on that outcome, you know, we're prepared to release those assets, and we have a plan, and we think the rents are, you know, still below market on those operating assets. At this point in time, we've received our rents, but no additional update beyond that. Obviously, we did announce a nice lease at our Oyster Point campus, 100,000 square foot lease with Pliant Therapeutics. I'll turn it to Scott. He can talk about what else is going on on that campus.

Yeah. Hey, Nick. Yeah. I mean, with the lease with Pliant on the campus, we took another 100,000 square feet off the table there. So, you know, the 940,000 square foot campus, we've now completely leased on about 70% of that. We've got the one 70,000 square foot building that's currently in redev that we got back at the end of last year. And now we have two buildings that total about 189,000 square feet that we'll get back in January of 24. But both those buildings will go into a relatively extensive redev in nine to 12 months. So we're talking about not leasing out until 2025, so some time there.

All right.

Thanks, guys. Second question is just, again, on the HealthPeak side, if you could tell us a little bit more about, you know, how the board thought about this decision to do M&A right now versus, you know, whether there were other options considered, right? Like, you know, to maximize shareholder value. I mean, in these situations where, you know, stock price has been impacted you know were there other considerations about maybe trying to sell your company or selling assets uh doing you know something else um besides this m a as a way to kind of address the future of the company thanks yeah we've already uh had some asset sales this year we have other things that are potentially in process so so certainly with the stock trading where it's at capital recycling has been

On the list of priorities, it's not a highly liquid market today, just given the financing environment, but neither company is viewing this as a sale. This is just a combination based on relative value that made sense in and of itself. It's a unique opportunity, so no, this isn't a situation where we're considering a broad range of of options. We just thought this was highly compelling for all the reasons that we mentioned, both strategically and financially.

Thanks, Scott.

Our next question comes from John Peterson with Jefferies. Your line is open.

Great, thanks. As we do these merger models, we have to deal with some annoying GAAP accounting rules, so I realize this is in cash, but I know we're going to have to mark-to-market docs debt if you have any thoughts on what the interest rate there might be seems to me like it would be probably very high sixes today and then i was just curious on the revenue side if you you know are those rents below market do we think there would be any significant revenue mark to market that we would have to think about from a gap accounting perspective again i realize this is not cash yeah no problem john this is pete i'll take that um you know first of all we we do have to restrate line

the rents as of when we would anticipate this deal to close. I know Doc has some public disclosures out there that you guys could do your best to come up with some estimates there. But, you know, straight lining is almost always a positive when you do it in these types of transactions. Second, you know, the lease mark to market, you know, where you do compare in-place rents to market rents. And more often than not in these deals, there is a positive adjustment we do think there will be a positive adjustment as part of this as well although not as significant as perhaps the the straight line rent adjustment and then the third one you mentioned which you know works against you is the debt mark to market importantly though you mark that to our cost of debt not to doc's cost of debt and i think we would be sort of in the six and a quarter to six and three quarter range depending upon the term, and again, that's as of today. We will do that mark to market as of the date of the close, so that will fluctuate between now and the closing date, but that's probably the best guidance I can give you. And then from an assumption perspective, I would say our hope is to assume all of Doc's debt except for the private placement notes. There's no ability to assume those, but our goal would be to assume all the bonds that are outstanding absent the private placement notes and then the term loan as well. And then we take on the secure debt, you know, a lot of that, which is encumbering the joint venture portfolio. That's it.

Very thorough. Very helpful. Thank you.

Yep.

Our next question is a follow-up from Rich Anderson with Wedbush. Your line is open.

Thanks. And I was going to say, Scott, I totally got you on the AFFO response to my previous question. but I got knocked off. I want to know if there was, what happens between now and closing? You mentioned just, Scott, you just went through some of these accounting adjustments, transaction costs, break fee, what's to stop a third party to kind of come in and take a look? How would you respond to some of those potential events between now and closing?

Hey, Rich, this is JT. I think we're going to be focused on Again, integrating the team, integrating processes, taking – I don't know if you heard, if you got knocked off, but we have six markets that overlap where we already have doc and team on the ground, and we will put those markets all in our internal management going forward and be planning to do that hopefully day one or very early on right after closing. So besides that, we'll just be working through the process with the SEC and get our shareholder vote.

I think just on some of the specifics there, Rich, in addition to what JT just said, the merger agreement will get filed in the next couple of days, and then you should expect a proxy to get filed probably late November, early December. You'll get a lot of information in that. Our anticipated closing would be in the first half of next year. We'd all prefer it to be the earlier part of the first half of next year to help with the integration and to kick that off as quickly as possible. But I think the best guidance we can give right now is first half of 2024. Okay.

Sounds good. Thanks.

Yep.

Our final question comes from the line of Steve Sackler with Evercore ISI. Your line is open.

Yeah, thanks. Sorry to beat a dead horse on the synergies. I just want to be a hundred percent clear. The 40 to 60 million that you're talking about, is that, cash savings, and then anything on mark-to-market, FAS 141, and then the debt mark-to-market would be pluses and minuses on top of that?

So the gap adjustments are on top of the $40 to $60 million. The vast majority of the $40 to $60 million is cash. There's a small non-cash comp component that would not flow into AFFO, but I'd say you know, the 40 to 60, all of it would hit effectively FFO. Uh, then you have the gap adjustments on top of that. And then, you know, the vast majority of those synergies hit AFSO. Does that make sense?

Yes. Great. Yes, it does. Thanks. Um, and I know this is kind of far in the future, just given the challenges we're seeing in, in life sciences today, but you, you did get these approvals for the L wife, um, you know, land and the upzoning. Just any comments around that, what it might mean? You know, do you jumpstart anything with multifamily? Just, you know, what are the, I guess, forward look on that project now that you've gotten these new entitlements?

Yeah, the team really did a fantastic job with the entitlement process to really become and establish a partnership with not only the city and the city counselors, but a lot of the local stakeholders and neighborhood advocates. Just really proud of what our team has done in a high barrier market like Cambridge. We think it's a great outcome for the city in terms of the mixed use and infrastructure that will come into that sub market and the residential housing in addition to the overtime lab opportunity. So just a really, really great outcome. But now that the rezoning is done, that was the big discretionary entitlement that we needed. So we would look sooner than later to recycle some of the multifamily parcels. That's obviously not our core business. We have no intention of being a multifamily developer. But there's a lot of recent apartment development in that submarket that's been highly successful. So we do think that there will be a long list of participants that are eager to participate.

Sorry, and just one quick follow-up on that. Scott, would you look to actually monetize those, or would you stay in as a joint venture partner or just sell them outright?

The multifamily parcels, we would sell outright.

Okay, great. Thanks. That's it for me. Okay, thanks.

The Q&A session has now ended. We'll now turn the call back over to our presenters for closing remarks.

All right. Well, thank you for your interest. Today, we're really excited about this and look forward to speaking to you, if not this week and next, then hopefully in Los Angeles at the conference here in mid-November. Have a great week.

This concludes today's conference. We thank you for your participation.

You may now disconnect.