Healthpeak Properties, Inc.

Good morning and welcome to the HealthPeak Properties, Inc. 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 touch-tone phone. To withdraw your question, press star one again. 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.

Welcome to Healthy Second Quarter 2024 Financial Results Conference Call. Today's conference call will contain certain forward-looking statements. Although we believe expectations reflected in many forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risk and risk factors is included in our press release in detail in our filings to the SEC. We do not undertake a duty to update any form of statements. Certain non-GAAP financial measures can be discussed on this call. In an exhibit to the 8K we furnished to the SEC yesterday, we 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 turn the call over to our President, Chief Executive Officer, Scott Brinkerley.

Okay. Thanks, Andrew. Good morning, everyone, and welcome to HealthPeak's second quarter earnings call. Joining me today for prepared remarks is Pete Scott. Our CFO and the senior team is available for Q&A. First, I'd like to congratulate our entire team on an incredible quarter. We executed on every one of our stated priorities, including merger integration, leasing, asset sales, and accretive stock buybacks. last evening we increased our 2024 guidance for the second time this year driven by outperformance in leasing same store operations and stock buybacks in addition our conservative balance sheet and dividend payout ratio are competitive advantages that will benefit future earnings growth merger integration continues to go exceptionally well both financially and culturally as we're meeting or exceeding every goal we set. For example, year one synergies are now tracking to be a bit higher than $45 million. More important, over the last several months, our newly combined team has been focused on defining the core values of our desired culture. Those core values are now represented by the acronym WE CARE. W for winning mindset, E for empower the team, C for collaborate and communicate, A for active integrity, R for respect the relationship and E for excellence in execution. These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together. One of my strategic goals has been to bring Health Peak closer to its real estate and to become fully immersed in the underlying businesses of our tenants. The merger helped us accelerate that transformation. Today, 70% of our people directly support our real estate. Two years ago, that figure was less than 50%. And we're increasingly dialed into the healthcare ecosystem. This is critical because the healthcare sector is not a traditional real estate business. Investment outcomes are very much impacted by the underlying business taking place in our building, not just the attributes of the real estate itself. A thorough understanding of the operating and regulatory environment and close relationships with the leading providers will drive superior investment and portfolio management decisions over time. Okay, I'd like to provide an update on our life science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases as our tenants have gotten more comfortable making real estate decisions. We signed 800,000 square feet of leases in the second quarter, 75% were renewals and 25% were new. The releasing spread was positive 6%, and as has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space. 84% of that leasing was done with existing tenants, and the remaining 16% are new to the portfolio. On one hand, highlighting our competitive advantage from existing relationships, at the same time adding new ones for future growth. Sponsorship is paramount to tenants and their brokers in this environment. Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage. Our 2Q results and pipeline suggest we hit an inflection point well ahead of the sector at large. We expect 3Q to be a big leasing quarter as well. We signed an additional 180,000 square feet of leases in July, all of which were new with an average term of 10 years. And our pipeline remains strong. with 620,000 square feet under signed LOI, including activity advantage, port side, and director's gateway. Moving to our outpatient medical business. We're driving strong performance through our platform, favorable industry fundamentals, and our high-quality portfolio. Occupancy in our outpatient portfolio was up 20 basis points in the quarter, and relation spreads were positive 4.7%. Operationally, we haven't skipped a beat with the merger, and our increased scale allows us to take advantage of strong volume growth across the sector, as underscored by HCA's exceptional second quarter results this week. Also, as announced yesterday, we're very pleased to strengthen our relationship with Common Spirit for the next decade plus. We sold about 900,000 square feet of space leased to Common Spirit in June and July as part of the sale transactions we announced yesterday. Our go-forward relationship represents 2 million square feet, or approximately 3% of our total ABR, and is well diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City. We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. The waltz had been three years and now improves to more than 11 years. The blended releasing spread is positive 13%, and the annual rent escalator will increase to a fixed 3%. Note that the terms of the existing leases will remain in effect through the original maturity date, most of which are in 2026, 27, and 28. We used our in-house leasing team to negotiate and execute the early renewal, another example of the merger augmenting our platform capabilities. This was a win-win outcome, and we're very pleased with the collaboration between HealthPeak and CommonSpirit. Okay, moving to capital allocation. Yesterday, we announced $853 million of outpatient medical asset sales in five separate transactions at a 6.8% blended cap rate. These were non- and less core buildings, and markets were not looking to grow, such as North Dakota, rural Nebraska, and upstate New York. The sales are accretive to our future growth profile, And the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that support those statements. The net proceeds create significant dry powder to drive future earnings growth. We bought that $88 million of stock since our last earnings call, as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate. Year to date, we've repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate in the high 7% range. To accretively fund these repurchases, we've sold $1.2 billion of assets year to date at a blended cap rate of 6.5%. Portfolio fine-tuning is usually dilutive, but we took advantage of the temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings. And I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities. The two projects we announced yesterday total $53 million and are 84% pre-leased with stabilized yields in the mid-sevenths. These projects offer compelling value. At a positive spread, we're recycling out of older, non-and-less-core assets into brand-new buildings in core markets with leading health systems. We're currently underwriting an attractive pipeline of similar development projects with our health system partners. And now, Pete Scott will cover operating results, guidance, and the balance sheet.

Thanks, Scott. We had a very strong second quarter. We reported FFOs adjusted at 45 cents per share, AFFO of 39 cents per share, and total portfolio same-score growth of 4.5%. Let me briefly touch on segment performance, starting with outpatient medical. Our results this quarter underscore the strength of the long-term demand drivers we are seeing. We reported same-store growth of 3.1%, a positive rent mark to market on renewal leasing of 4.7%, and a retention rate of 83%. Additionally, we are consistently achieving 3% fixed escalators on new leases, which should improve our earnings growth trajectory for years to come. Turning to LAB. The strength of our portfolio, relationships, and reputation are leading to outsized leasing demand and driving results that are exceeding expectations. We reported same-store growth of 3%, driven by 3% plus contractual rent escalators and a positive 6% rent mark-to-market. Occupancy did tick down a bit, but was largely the result of the fully occupied Poway sale in San Diego, that was completed earlier in the second quarter. Year-to-date, we have signed 1.1 million square feet of leases and have a robust leasing pipeline for the balance of the year. Finishing with CCRCs, we reported same-store growth of positive 21%, driven by 200 basis points of occupancy growth and strong rate growth of 7%. Shifting to the balance sheet, We ended the quarter with a net debt to EBITDA of 5.2 times and nearly $3 billion of liquidity. However, these metrics don't take into account the majority of our dispositions, which closed in July. Pro forma, these dispositions, our net debt to EBITDA is approximately five times. We have nothing outstanding on our line of credit, and we have a cash balance of $300 million. So we are sitting on significant dry powder to drive future earnings growth from acquisitions, redevelopments, developments, or stock buybacks. On stock buybacks, our existing authorization was due to expire in August, and we filed a new two-year $500 million authorization. Finishing now with guidance. We are increasing our FFO's adjusted guidance range by one penny, to $1.77 to $1.81. And we are increasing our AFFO guidance range by one penny to $1.54 to $1.58. Our guidance increase is driven by three items. First, we increased same score guidance by 25 basis points to 2.75% to 4.25%. Second, the significant early renewal leasing in lab and outpatient medical, including common spirit, provided an immediate FFO benefit. Third, we accretively bought back an incremental $88 million worth of stock at an FFO yield near 10%. With that, operator, let's open the line for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star one again. So that everyone may have a chance to participate, we ask that participants limit their questions to one and a related follow-up. If you have additional questions, please re-queue. At this time, we'll pause momentarily to assemble our roster. Our first question will come from the line of Josh Dinnerlin with Bank of America. Please go ahead.

Yeah, good morning, everyone. Thanks for the time. Just wanted to touch base on the common spirit renewal here. It looks like you got 3% annual escalators going forward. I think it was 2.5% before. Just is that 50 BIP improvement from the prior lease? Is that kind of something we should expect across like the MOB space?

I guess I'm just trying to think about like the future growth trajectory or internal growth trajectory of the MOB portfolio as you kind of re-sign leases.

Yeah, I mean, most of what we're signing now is with 3% escalators when we announced the transaction with physicians almost a year ago at this point. You know, we talked about the fact that their in-place escalator was a little bit lower, just given the timing of when they struck leases. A lot of them were single tenant, and their blended escalator was more in the kind of low to mid twos health peak, had moved its escalator in the outpatient business up into the high twos already. But as we sign new leases, almost everything's at 3%. So we do see our blended in place escalator today is at about two and a half, 2.6% in the outpatient business. Over the next few years, it will slowly climb into the high twos, if not 3%. So yeah, that should be the new normal.

Okay, that's good color. And then I wanted to talk about the internalization on that outpatient medical segment. looks like you added like two additional markets uh in july just kind of where are you in that uh process overall and then any kind of abilities to kind of uh see a better synergies as we go forward yeah i mean we started the year with 40 million of synergies we're up above 45 million at this point because in large part the internalization

that's gone ahead of plan in terms of more markets than we anticipated sooner in a little bit better upside. So that's a big reason for the increase in merger synergies. But even more important to us as a leadership team is just the improvement in the platform, in the interaction that HealthPeak employees now have with our properties and with our health systems. I think longer term is an even bigger impact than the financial. accretion it's more than 100 people now on health peaks payroll directly interacting with our team that are interacting with our tenants every day it's just a i think a terrific change um uh in terms of our platform capabilities so we've got two more planned for the balance of this year including here in denver which we're excited about it's a super high quality team that we're bringing on um that's going to manage this really high quality portfolio that we have So we'll be at about 50% of our outpatient and lab business by year end will be internally managed. And we've got, I don't know, 10 to 12 million square feet next year. It is not in process yet, but we should be able to execute in 2025.

Thanks for the time.

Our next question comes from the line of Nick Uliko with Scotiabank. Please go ahead.

Thanks. In terms of the lab leasing that got done and the pipeline activity, just hoping to understand a little bit more about how much is actually related to Gateway, Vantage, and Portside of what was leased in the second quarter in July versus the pipeline of activity still to close.

Yeah. Hey, Nick. It's Pete. 620,000 square feet of of otherwise. I would say that about half of that is associated with the three large projects. You just mentioned vantage, you know, gateway as well as port side. Um, and, you know, a couple of them are pretty large deals as well. You know, our hope is to convert all of those to leases this upcoming quarter. And as we do, we can provide, you know, more detail. I think the one thing I would add to it is, you know, the phasing in of the upside, you know, that will happen over a couple of years. You know, the leases probably on average will commence middle of next year. So we'll get an immediate FFO benefit once a lease, you know, commences. And then beyond that, it's probably the year after that where you start to see a really big pickup in AFFL as cash rent starts getting paid. So I think that that's probably the best way I can describe the, you know, LOI bucket and the upside opportunity. But we're trending in the right direction and we feel really good about the foot traffic and all of those.

okay great and then if i'm doing some math on this um i mean it seems like if you if you actually convert those leases you talked about in the pipeline um and then based on what you've already done that you know you get to almost about 50 of that 60 million dollar noi upside number that you've spoken about previously um is that correct yeah i think directionally nick that is correct i would say

You know, a lot of our lease deals that you've seen have been with existing tenants as well. And, you know, there may be a little bit of give back space that we'll have to, you know, lease up. But I'd say just on the gross numbers you mentioned, yeah, it's probably about half of that.

Okay, that's helpful. And then just last question, maybe more broadly in lab is if you could talk about, you know, what types of tenant activity you are seeing on the new leasing side, if it's um you know existing tenants expanding um you know other tenants in the market where you're you know just capturing some market share and then you know from an activity standpoint um you know how that shakes out between south san francisco uh san diego um or i think you know both i imagine the bulk of the activity is

Hey, Nick, it's Scott. I'll take that. I think our team is doing a fantastic job capturing market share. We've got the big footprint in all three of the core markets, but I really feel like we are capturing an outsized share of the market right now. So hats off to the team and the footprint that we build. Even when the kind of the business was exploding in popularity for the last decade, we held true to our strategy. stay in the core submarkets, campus model, and it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator as well. And we like the fact that we have A-plus buildings, we have B-minus buildings and everything in between so that when I talk about having a pretty broad base of demand, it's in part because of that footprint we can cater to all types of tenants and that's a huge advantage so we're working with credit tenants doing big deals early renewals we're working with series a you know relative startups and everything in between but for the most part the leasing is tied to companies that have successful capital raises whether it's private or public In 2Q, it was primarily existing tenants. The pipeline is a combination and more weighted towards new leasing, which is obviously a great thing to see.

All right. Thanks, Scott. Yeah.

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

Hey, good morning, everybody. I'm just curious what brought on the negotiations for the early renewal with Common Spirits And is that 13% mark-to-market net effective, including any capital that you provided? Just kind of looking for some color on overall economics of that deal. Thanks.

Yeah. Hey, Austin. You know, we could have waited, but I think we were able to strike a mutually beneficial outcome. And that's the reason that we went ahead and did the early renewal. There are some TIs, but it's pretty modest. We did an eight-plus renewal. year extension on average and the ti's are roughly one year of rent so pretty modest um or at market um so we're happy uh with that outcome but more than anything it was just it was a deal that we thought was favorable to the company and we were happy to move forward with it that's helpful and then scott you've spoken a lot about kind of the environment having an impact on how you approach capital allocation

and disposition share buybacks have been top priorities up until this point. But given where the stock is today, where interest rates are, is that still the top priority or are you rethinking your approach moving forward?

Well, I mean, stock buybacks are more of a tactical move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate. We were to sell assets in match fund to accretively buy back stock we're clearly trading at a discount to consensus nav in our internal nav so just the the dynamics made that a really easy decision the profitability from buying back stock today is lower but we do have a fantastic balance sheet i mean we finished the quarter at 5.2 times and if you account for the sale proceeds from the unity transaction we're down near five times leverage, which on a balance sheet our size is pretty substantial dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back. It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets. When I think about an implied seven cap today, plus or minus, and we just sold for us relatively low quality outpatient medical by our standards at a cap rate below that. So I think that's telling in terms of where the stock is is trading but i don't expect that to continue i mean if we continue to grow earnings sign leases and put up excellent results like we just did i mean our expectation is that we're going to be trading at a premium and issuing stock and growing the company um we do have the big outpatient medical opportunity uh we announced 50 million dollars of new development today with one of our important partners core market core system highly pre-leased accretive seven and a half percent stabilized yield There's a fairly big pipeline of similar projects behind that that we could execute on and certainly have the dry powder to do so.

So I guess what would it take or what would you need to see before, you know, maybe some of the deep pipeline you spoke in a few years ago within the lab segment for you to approach, you know, commencing construction on some of that? Thanks.

Yeah.

Yeah.

So if you think about our operating portfolio in life science, we're around 95 percent least. But our development redevelopment portfolio has a lot of opportunities. So when you include the vacancy or availability there, I mean, it's more like one point five million feet that we need to lease up first. And that's our priority. But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to get comfortable with the return on cost relative to our cost of capital. But we're certainly moving closer to making decisions like that. But I wouldn't say that we're there yet, Austin.

That's really helpful. Thanks, Scott. Yeah.

Our next question comes from the line of John Kilikowski with Wells Fargo. Please go ahead.

Hi, thank you. First, I'd just like to start with a conversation we had with our biotech team recently where they said there's been a push to bring back some work from CDMOs that have been done internationally to return stateside. Have you heard or seen any of that?

Yeah.

Hey, John, Scott Bone. Yeah, we've seen some of that come through. I mean, we don't have a lot of of biomanufacturing spaces in the portfolio we've got some small scale manufacturing within some of our facilities but not a lot of true cdmos you know a handful of them throughout the portfolio we actually have a deal that we're working on out in boston with one but we are seeing some of that come back to the state a lot of that though does end up in in markets like rtp versus some of the core markets okay thank you and then

I don't know how much color you could give here, but just as far as your guidance is concerned, you know, what does it imply for lab leasing for the rest of the year or for lab and OM leasing for the rest of the year?

Yeah.

Hey, John, it's Pete here, and welcome to the earnings calls. I think this is your first one. I think just big picture, as we think about all three of our segments, you know, lab, we do think lab should continue to improve through the second half of this year. Certainly leasing helps, but one of the things I mentioned at the beginning of the year was we did have some free rent on a couple large leases that impacted the first half of the year. As that burns off, we expected to see acceleration in the second half of the year, and we continue to expect that. Obviously, with getting a lot of leasing done, you know, our confidence level improves as well. I think on outpatient medical, We did say that we expected the second, third, and fourth quarters to accelerate relative to the first quarter. We got a lot of questions on that. And as you saw, we were above 3% this quarter, and we continue to believe we'll be above 3% for the second half of the year. And then I know we don't spend a lot of time on CCRCs, but we've had a pretty good First half of the year, our expectation is not to hit 20% growth. I mean, that's going to normalize. Everything eventually does normalize, and it will normalize on the CCRC side, but we still feel pretty confident about our full-year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. So I know you just asked about lab, but I figured I'd give you a more fulsome update.

I appreciate it. Thank you.

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

Hi, good morning. Congratulations on all the lap leasing. Just curious if you could spend a little time talking about the cost to get that done, TIs associated with that seem to go up. So just curious or hoping you could give us some color around new and renewal TIs in today's markets.

Yeah, I mean, the renewal TIs were really low, especially given the length of the term that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point. I would say they were exceptionally low last quarter, and this year they were just a bit higher. I don't think they were outsized in any way. I mean, what, 20%, 25% of the rent is pretty modest overall. But each space is different. I mean, that's the thing that's important to comment on when you're looking quarter to quarter. It all comes down to what leases were signed, which buildings, how much work that space needed. But we don't see the TIs being outsized in any way, especially considering the improvements that were made to those buildings that should last for the next 10 to 20 years and the length of the leases that we signed. So, yeah, we would not... characterize it as high TIs to generate the leasing volume, not at all.

Thanks for that context. And then just maybe a more topical question in the news today. Alphabet was moving one of its life science companies from South San Fran to Dallas. You have an Alphabet company in the lab space in your top 10. I'm just curious if there's any conversations going there and maybe you could comment on how much term is left with your Calico exposure?

Well, we have 10 years left with Calico, but I didn't see that news, but that would be a first. I mean, despite what's happening in other sectors and industries moving out of higher cost areas to lower cost, lower tax states, it just doesn't happen in life science. It's just the reverse. In fact, a lot of times if a company has some promise, They need to move to one of the three core markets to find the talent, to hook up with the right venture capital firms, to have the infrastructure. What you just described, that's one in a million. The vast majority of our tenants are coming into South San Francisco, not out of it.

Thanks, Scott. Yeah.

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

Yeah, thanks. I just wanted to touch on your life science leasing pipeline. I know in the past you've kind of pegged that around 2 million square feet, and obviously you've got a lot of leasing done in 2Q and so far in July. I know in the call you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today and have you backfilled some new tenant interest given the space that you signed?

Yeah, we continue to cycle through. the pipeline. So obviously you don't just do a tour and sign a lease the next day. I mean, there's a process involved in terms of inquiry and tours and sign an LOI and then sign a lease. So you have pretty good leading indicators, which is why we've been more positive on our pipeline, and sure enough, this quarter it's turned into reality, and I think the third quarter will be equally strong, but we continue to see good traffic in our buildings, including the 600-plus thousand square feet we have under signed LOI, 200,000 square feet of leases signed in July alone. That's awfully strong.

Okay, but then the overall volume of the pipeline doesn't stand at that 2 million square feet anymore since you signed about roughly 1 million square feet Um, and then just real quick too, on the 180,000 square feet that you signed in July, I mean, that was, can we assume that was in the in-place portfolio, not the development projects?

Uh, that's correct. Although last night we did sign a lease at, at, uh, at one of our development projects. So yeah, that, that's always good, I guess, uh, to sign. We thought we had the most up-to-date information, but we did sign, convert one of those LOIs to a lease last night at one of our development projects, so it's great progress.

Okay, great. Thank you.

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

Hey, thanks. Good morning. So, what do you think explains this sort of behavioral switch on the life science space with tenants starting to, you know, think more constructively about, uh, doing deals. Um, you know, you, at Navy, you talked about, you know, some good signs from a capital raising standpoint in, in the, the biopharma sector, but then you, you have an alumus IPO that was, you know, looks like my, my own personal EKG right now. Um, so I'm just wondering, you know, where, where this positive sort of, you know, mindset is coming from in your mind.

Yeah. Hey, Rich. It's Pete. You know, one of the things that we have been talking a lot about is, you know, just capital raising, generally speaking. If you look at the first half of this year, and we're talking now about R&D capital spend by large cap pharma, M&A. I mean, that's a separate bucket, but the bucket we tend to focus on. A lot is on, you know, you mentioned the IPO market, but secondary equity offerings, pipe deals, venture capital raising. And when you look at the first half of this year, it was the strongest year dating all the way back to, you know, 2021, where, you know, at that point we were in that, you know, virtuous cycle within the lab space. So that's certainly helping with regards to, you know, tenants looking to lease space. We have seen a correlation between that and our leasing pipeline increasing. You know, on the Illumis IPO, I mean, that it's a great company. They are in our portfolio. Martin Babler, the CEO, you know, was previously at Principia. We've had a long-term relationship with them. They grew from 10,000 feet to 50,000 square feet with us. And I know you like to point to the EKG on the IPO, but they have raised $500 million. year to date, which is pretty darn strong. So we feel great about having them in our portfolio. And that's an example of a company as they raise capital, the demand for space has increased.

Okay, good. And then second follow up on the asset sales out of the outpatient medical. And maybe I should know this, but where is that coming from? Is that legacy doc or legacy doc? Sorry. Confusing. You know, is it the acquired portfolio or the legacy portfolio? Let's put it that way.

Yeah, Rich, we did that on purpose so that we don't have those types of conversations. But it was a mix of portfolios. I'd say it was weighted towards legacy physicians, probably obvious given a lot of common spirit was in that portfolio. But it was a mix.

Okay. That's all I got. Thanks.

Thanks.

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

Thanks. It's Nick Joseph here with Griff. I just want to follow up on the optionality with the cash and liquidity after the asset sales. You touched on the share buybacks earlier in development, but just from an acquisition standpoint, are you starting to see more interesting opportunities present themselves? And if so, kind of where are you seeing yields and IRs today?

Yeah, I mean, the market's opening up. I would still say it's pretty slow. I mean, volumes are way off their historical norms, but starting to pick up. There's still a lot of volatility in interest rates, which is a key driver of transaction volumes, certainly in the private market. You know, we were happy with the pricing that we got, high six cap for the asset quality that we sold. I think if we were to acquire anything, it would be higher quality assets. And our current stock price, although improved, is not yet where we would be out acquiring stabilized product, but we're getting closer. And certainly if our cost of capital supported it, there'd be a significant pipeline just given the depth of relationships that the key people here have across the health system environment. So that's obviously something that we think will happen in time. It's just a matter of when. um in terms of life science uh very little stabilized product is available but there's certainly signs of distress it seems like it always takes longer to play out than you might think uh the vast majority is probably not interesting to us for the reason i mentioned that we purposely did not go outside of our core markets or do a bunch of conversions but there's a handful uh that we're keeping a close eye on that that would be very interesting to us, but there has not been capitulation to date. But remember, as I said, it always takes longer to play out than you think. So we now have the flexibility to pursue things like that when and if they become available.

Thanks. That's helpful. And then just on the asset sales with the seller financing, what was the rationale of doing seller financing and what does the secured lending market look like today?

Yeah, it's pretty simple. Just certainty of execution. It's a transaction that the team's been working on for several months, if not a few quarters. And despite a lot of volatility, the buyer didn't retrade us on price and we didn't retrade them on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short term. So there's clarity and certainty on getting the balance of the proceeds back over the next two to four years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this but to do the financing.

Thank you very much. Yeah.

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

Hey, good morning, everyone. Can you quantify how much you can grow the outpatient medical development pipeline over the next few years?

This is JT. You know, there's a lot of development right now that we've disclosed in our pipeline under construction, and there's a lot of appetite by the health systems as they continue to transform more and more of their inpatient services to the outpatient setting, you know, particularly in the stronger suburban demographics around those cities like Phoenix and Atlanta, two good examples. But, you know, it could be substantial, $500 to a billion over the next few years is probably a pretty conservative guesstimate.

Thanks for that. And then you did call out the free rent to be aware of it as a potential mover in earnings going forward.

Is there any other moving parts to be aware of?

No, I think, you know, Wes, it's when the lease commences, right? Because when you sign a new lease, it doesn't typically commence the next day, right? It commences once you finish completion of the work. So I think that's kind of hurdle number one to getting to FFO recognition and then Hurdle number two is, you know, the free rent burn off to getting to AFFO recognition or cash NOI recognition. And I'd say on average, it's probably for every year of lease term, it's probably around a month of free rent on a new lease deal to the extent that, you know, we're pushing pretty darn hard for, you know, seven to 10 year terms on our new lease deals. And as you saw on the table, we disclosed we're having success achieving that. I got that. Just maybe a clarification on the question. There's no move-outs that you know of or anything in the portfolio that would cause anything that we need to model as we look at the next year? No, I think as Scott mentioned, in our operating portfolio, we're kind of in that mid-90s occupancy perspective, and we tend to be able to feel like we can hold firm at that. Really, the upside for us is leasing up the vacancy outside of the operating portfolio. And as we think about next year in lab, we have about 800,000 square feet of expirations. A lot of that is back of the year weighted. And at this point within our pipeline, I think we feel like close to half of that is under discussion at this point in time. So more to come. And We're just entering that 12-month period before expiration. So on the balance of it, we're starting to have conversations right now. But it's a pretty manageable number. And within our pipeline, a lot of it is actually spoken for already. Thanks for the time, everyone. Yep.

Our next question comes from the line of Vikram Malhotra with Mizzouho. Please go ahead.

Morning. Thanks for taking the question. Just I guess first on the life sciences side, Could you just maybe help us clarify on the LOIs, just so we know sort of from modeling, what percent roughly or what proportion is sort of existing tenants in your maybe core portfolio relocating, just so we know sort of what's move in, move out, and then versus new. And if you can maybe just expand upon your comments and talk about reaching that 60 million NOI, like is that Should we expect that sort of a second half, 24, or could some of this spill over into 25? Yeah.

On the first question, I mean, more than half of the LOI pipeline is new leasing on currently vacant space. So there's a lot of upside in that pipeline. But just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid. But obviously, great progress on that. And Pete, do you want to take the second one?

Yeah, I think you said second half 24 and into 25. Maybe you meant second half 25 and into 26, Juan. Excuse me, not Juan Vikram. You know, our thought on the phasing in of the full $60 million is that it would take a couple of years. to get to that stabilized $60 million of cash NOI. We still feel good about that, but that phasing in would start next year and would be spread out probably over a couple of years. Hard to get into more specifics. As we've said, as these LOIs convert into leases, we will provide, you know, certainly more information on it for modeling, you know, purposes, but I'd say it's best guess today spread out over a couple of years starting kind of middle of next year.

No, that's great. And a lot of good progress on the life science side. So maybe just to clarify, you mentioned, you know, accelerating growth on an MOBs, I think on the same store portfolio and life science as well in the second half. And I just want to tie that back to sort of the guide on same story, moved it up by 25 bps, but yeah, Just trying to, if you can tie the two, if you're having accelerating growth, it would seem like there's perhaps more upside. So I'm wondering if there's something, maybe the CCRCs or something else is pulling that back.

Yeah, we do see deceleration of CCRCs in the second half of the year just because you're not going to continue at a 20% plus clip. So if there's any deceleration, it's just within CCRCs and we're seeing you know, acceleration in the other two segments, I would say that a year to date, we're right around four and a half percent. The upside of our guidance is, you know, four and a quarter percent from the same store perspective. And if I were just to focus on FFO, I think year to date, we're right around 90 cents that annualizes to a buck 80, right? So you're sort of trending towards the higher end of our, you know, guidance ranges. We still have two more quarters to go so um you know we're not going to take it all the way to the max the middle of the year um there is maybe a little bit of conservatism in that but again we feel great about what we've done year to date remember we did raise our guidance two pennies each in the first quarter uh ffo and affo and one penny each again this quarter in the second quarter um so we're off to a great start we had a great quarter and you know for trending to the high end that's great

Great. Congrats on the strong quarter. Thanks.

Our next question comes from the line of Jim Camard with Evercore. Please go ahead.

Good morning. Thank you. Obviously, you've done a lot of portfolio curation to date, but theoretically, how much more of the Lab or OM portfolio would you sell if the price was right, just to understand what's really non-core remaining, if you will?

Yeah, I mean, even the 850 that we just did, I would characterize as mostly just opportunistic. They're perfectly fine assets. They were performing. We're managing them well. But they were, by our standards, relatively low quality. And to my point earlier, usually when you fine tune the portfolio, it's dilutive. This environment just gave us a unique opportunity to fine tune the portfolio in an accretive way. and increase the growth profile of what's remaining. So how much of that is left? It's pretty modest, but a lot of it depends on where are we trading. So, I mean, we could sell, there's a lot, there'd be a lot of interest in our remaining assets, but hopefully that's not the environment that we're in. I think we have a very high quality portfolio across the three segments that should produce stable, strong growth at the high end of the peer group for years to come.

That's great. And just a quick housekeeping. In an earlier question response, you noted that you thought it was pretty likely that the buyer of the OM portfolio here in July would, you know, you're assuming they have other existing proceeds or you're just expecting them to refinance kind of the next two years or so, and that's going to be your source of repayment?

Yeah, refinance. I mean, there's a maturity date on these loans that they will have to repay, refinance the loans by that date, if not sooner.

Got it. All right. Thank you.

Our next question comes from the line of Mike Moeller with JP Morgan. Please go ahead.

Yeah, hi. I know you quote renewal spreads for lab and outpatient leasing, but how similar or different would the lab spreads be if you included comparable new leasing spreads as well?

It just would be misleading. I mean, we could give you that information, but sometimes you're doing, you know, a pretty significant TIs or changing the use of the buildings that I think it would be misleading. I don't think there'd be a material difference, but you'd have even more volatility quarter to quarter depending upon which space, meaning somebody could be paying five bucks in a 25-year-old space and you put a bunch of money into it and it's almost brand new and now they're paying seven bucks. Well, is that really a 30% mark to market or whatever the number is? It's kind of misleading. So we choose to just go with the releasing spread on on renewals.

Got it. Okay. And then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expirations?

For the lab business, yeah, if anything, yeah, it should be. I mean, our mark-to-market across the portfolio is in the high single digits. That's not hard to do that number with precision. um but but that's where we're at best estimate across the entire portfolio just acknowledging that it bounces around quarter to quarter but the six percent is good but it's below the the average throughout the portfolio got it okay thank you yeah our next question comes from the line of michael stroek with green street please go ahead thanks good morning um i know you already touched on the rationale behind the seller financing

Were there any bids that didn't require seller financing? And if so, are you able to share where those cap rates were shaking out? I'm just trying to understand if seller financing may have ultimately impacted pricing on the deal or if it is a fairly clean comp and it was just needed to get the deal done.

Yeah, I mean, we didn't chop the deal. This was a direct negotiation. So there really isn't even an answer to that question. These are just the terms that were discussed from day one. There's not exactly a deep market of loans of this size in the outpatient medical business in recent years. So, yeah, not a great comp.

Yeah, the other thing to just add to that, not all the sales had seller financing. Obviously, smaller portfolios or smaller asset deals, you don't necessarily need financing to get those done. And I'd say the cap rates... ranged pretty much on average in the high fixes on those as well relative to the high fixes we got on the portfolio we provided seller financing on. So just to go back to what Scott said earlier, it was really more just about certainty of close on a portfolio that large. And we've had success providing seller financing on asset sales in the past. We did a pretty large amount on our senior housing sales years ago, and we have very little left within that, you know, stellar financing bucket. In fact, you know, the vast, vast majority has been paid off, and we feel confident the same thing will happen here.

Got it. That's helpful. And then maybe one just on the market on renewals. Saw a nice step up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power?

I think, you know, if you look at our tenancy, about 69% is – really the hospitals. So we don't see a lot of difference there. I mean, it's basically, you know, where are we at in the market, how much demand is. A lot of times what's interesting is if we've got a new MLB on a campus, that helps drive rents a little higher. Most of the mark-to-market increases we saw this quarter were in Nashville. We do have a couple of new buildings in Nashville, so that's been driving things. But You know, we had 13 leases that had anywhere from 11% to 32% mark to markets this quarter, and that drove the overall average up. Absent that, we'd probably be still at the upper range of our 3% to 4% number, but in the upper threes.

Great. Thanks for the time. You're welcome.

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

Okay, yeah, thank you for joining today, everyone, and thanks again to our team for an incredible quarter. So enjoy the weekend. Take care.

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