Healthpeak Properties, Incorporated held a Second Quarter Conference Call, which was recorded. Andrew Johns, the Senior Vice President of Investor Relations, welcomed everyone to the call, and mentioned that forward-looking statements were included. Non-GAAP financial measures were discussed and reconciled in accordance with SEC regulations. The call was led by President and Chief Executive Officer, Scott Brinker, and CFO Pete Scott. Healthpeak reported 4.8% same store growth and updated their earnings guidance. They also mentioned that G&A for 2023 was expected to be 6% lower than 2022.

In a volatile macro-environment, the demand for real estate is increasing due to the desire for improved health and the impact of technology. Health systems are looking to third party capital such as Healthpeak to expand their footprint, and technology is reinforcing the need for lab space. AI and machine learning are accelerating discoveries in drug research and genetics, which will transform healthcare delivery to become more proactive. Outpatient medical and lab buildings will be a critical part of this future.

The portfolio performance in outpatient medical is strong due to increased leasing to health systems and focus on high growth markets. In the lab business, tenants have been conserving cash but there has been some leasing activity with existing tenants. Transactions have been slow due to financing markets, but there have been some sales of less core assets at a 5.4% cap rate.

In the second quarter, the company reported FFO's of $0.45 per share, AFFO of $0.40 per share, and total portfolio same store growth of 4.8%. The Board declared a dividend of $0.30 per share, which equates to an AFFO payout ratio of 75%. Segment performance was strong with CCRCs achieving 19.3% same store growth, occupancy increasing 230 basis points year-over-year, and NREF cash receipts exceeding amortization by 5 pennies per share. Outpatient medical had a solid quarter with same store growth of 2.5%, strong leasing momentum, and positive re-leasing spreads of 3.7%. Lab had same store growth of 3.8%, executed 461,000 square feet of leases with 90% of that being with existing tenants, and achieved positive re-leasing spreads of 52%.

Healthpeak is taking advantage of the current market conditions with LOIs with existing tenants, increased venture capital investment, M&A activity, and the opening of the IPO market. The company is also proactively managing assets to improve tenant credit profiles, such as downsizing Adverum and backfilling the Kodiak space with Lonza Bioscience and Bicycle Therapeutics. Healthpeak has received rent in full through July from Sorrento Therapeutics and holds letters of credit or security deposits of $2.6 million. In May, they issued $350 million of 5.25% fixed rate bonds, bringing year-to-date issuance to $750 million with a blended yield of 5.35%. The net floating rate debt balance was approximately $150 million at quarter end.

In July, the demand for lab space has increased, with an improvement in tenant credit risk profile. The company has increased its FFOs adjusted and AFFO guidance by 1 penny at the midpoint to $1.75 and $1.51, respectively. Additionally, the company has increased its full year blended same store guidance range by 25 basis points to 4% at the midpoint.

The improved credit profile is due to the capital markets improving, with $14 billion of follow-on equity deals, $1 billion of venture capital, and an increase in M&A and reverse mergers. This has led to more leasing demand, which was seen in the LOIs signed in July. The increased confidence in the MOB guidance was due to continued positive operations at Medical City, Dallas, which contributed 90 basis points for the year and 50 basis points for the quarter.

Pete Scott comments on the Amgen leases, which are known vacates. He notes that a significant portion of the space has been backfilled and that three of the buildings are currently leased until the end of this year or early next year. He also mentions that the company is focusing on re-leasing the Amgen space.

Scott M. Brinker discussed the Amgen portion of the project, the 20 percent mark-to-market within the portfolio, and the Sorrento liquidation. He also mentioned that they have been working hard to backfill the Amgen leases, and that there will be some downtime and CAPEX associated with them. Brinker then discussed the trajectory of lab leasing and rents, noting that interest rates have been up for the past 18 months, resulting in management teams opting not to expand real estate needs. However, he believes that interest rates will likely come down in the next year, leading to more discussions about expanding.

Scott Brinker and Pete Mavoides of the company discuss the potential opportunities that arise from the current unique market environment. They mention that the company has had success in the past 18 months in signing leases and LOIs at strong rents, despite the tough market. They also mention that they are considering monetizing more assets and delevering further to create a buffer for potential opportunities.

Scott M. Brinker and Scott R. Bohn discussed the potential to monetize noncore assets for a couple of $100 million, with the expectation that the cap rates would allow them to repay their line of credit accretively. They are also seeing an uptick in leasing discussions across their entire portfolio, with the bulk of it happening in South San Francisco.

Scott R. Bohn and Thomas M. Klaritch both answered Austin Wurschmidt's questions regarding the $196,000 under LOI, explaining that they are not able to provide details yet as the deals are still in progress. Scott M. Brinker then adds that they have conversations with tenants or prospects about larger leases and spaces than they have had in the past 18 months, which could help to increase the MOB guidance for the year.

Scott Brinker and Scott Bohn discussed the lease expirations in the portfolio for the next year. About half of the expirations are Oyster Point and Pointe Grand, which will likely be redeveloped due to the need to remain competitive. The remaining 250,000 square feet of unaddressed maturities will be addressed in the upcoming months, with the bulk of the rollover coming in the back half of 2024.

Scott R. Bohn explains that the leases and LOIs in the three markets they operate in have been signed at strong rates, and that rates for A buildings and locations with strong sponsorship have held up well. He also notes that there is some pressure on TIs with tenants looking to have more capital put in by the landlord, but that this has leveled off. He also mentions that Progressive Health Systems now have 10 outpatient facilities for every hospital.

Scott M. Brinker and Thomas M. Klaritch discussed the performance trends of on-campus and off-campus delivery, and the potential for peak to start putting shovels in the ground again for medical office or outpatient medical. They noted that hospitals are busier than ever and the health systems are growing their market share, which is driving growth in the outpatient and off-campus sector. They also mentioned that they have announced their Savannah building with HCA in their development program and are in active discussions with other health systems for potential new buildings. Finally, they noted that any decision to proceed with development depends on cost of capital, returns, spread to acquisition cap rates, and pre-leasing.

Peter A. Scott is discussing HCP's same-store NOI guidance range for the year. The year-to-date total same-store growth is currently at 5%, which is just above the high end of the guidance range of 4.75%. HCA estimates that 80-92% of their workforce will not be working from home, and the amount of administrative or back office space in HCP's portfolio is 8-10%.

CCRC has had a successful first half of the year, with outpatient medical year-to-date at 3.1%, which is in line with their guidance. However, there may be some deceleration in the second half of the year due to Kodiak space not being backfilled yet and Adverum dropping out of the top 20 list, resulting in downtime until January 1st of next year. Joshua Dennerlein asked for clarification on this.

Scott M. Brinker explains that when it comes to near-term re-tenanting, they are looking towards leases that are unlikely to renew and backfilling with tenants who want a longer-term commitment. He also mentions that they are making progress on entitlements for new developments, but they will not start construction until they have a better view of the market, pre-leasing cost, and returns. Scott R. Bohn adds that they have achieved 90% retention from existing tenants and that this is a huge competitive advantage.

Scott R. Bohn notes that there has been a slowdown in new starts and spec conversions, but that not all supply is equal. He states that the Bay Area's competitive new supply is 800,000 square feet in 2023 and 70% pre-leased coming into 2024, with 1.8 million square feet of it being competitive. He also notes that in South Francisco, there is a small number of actual projects with a decent amount of square footage.

Scott M Brinker explains that in the current environment, new development projects are harder to lease up due to the tenant needing to invest a large amount of money in TI, higher lease rents and higher operating expenses. He then goes on to explain that the 8 plus buildings are the only ones leasing up and that lower-priced buildings with lower rent and OPEX are the most desirable and in demand.

Pete Scott answers a question from Ronald Kamdem about the $1.3 billion NOI growth opportunity in the lab portfolio. He states that they still feel good about the opportunity, but it may take longer to get there. He also mentions that this number did not include new development starts. In regards to the lab guidance, the range of 3-4.5% same-store NOI is mostly due to Sorrento, with the top and bottom ends of the range being contemplated.

Peter A. Scott and Thomas M. Klaritch both agree that there is not enough activity in the lab and outpatient spaces to draw any conclusions about directional shifts in cap rates or pricing for industry transactions. Scott M. Brinker mentioned that the pricing has been strong for recaps and buyers are thinking about IRRs, but there has not been enough activity to definitively state that there has been a difference in the last couple of months.

Scott Brinker discussed the ad rent in the second quarter, which was up 8% from the previous year at $2.3-2.4 million a quarter. He also discussed the CCRC portfolio, which is currently at 83% occupancy and the goal is to get back to 90% occupancy. Thomas Klaritch clarified that the numbers he quoted were for the month, not the quarter. John Pawlowski asked a follow-up question about the appetite to sell assets.

Scott M. Brinker discusses the possibility of asset sales to close the disconnect between public and private market values. He also notes that it is not an easy market to transact in, but that they are looking into further asset sales if necessary. He then mentions that they have signed over 5 million square feet of leases since COVID, and the allocation between the lab and collaboration space has not changed. He does not mention any case studies of lower utilization of back office space requiring an uptick in capital spending or concessions on rents.

Scott Bohn and Peter Scott discussed an increase in discussions with lab tenants, which is broad-based and includes both large-scale pharma and VC-backed startups. They also mentioned that they have a lot of traction on potential contingent leases for the Sorrento space if it gets rejected and that they can turn the space quickly.

Scott Bohn explains that lab tenants tend to be sticky due to the difficulty of relocating the build-out and FDA approvals. Price per square foot is not always the most important factor for tenants, as the sophistication, balance sheet, and portfolio of the landlord are weighed more heavily than cheaper options.

Scott Bohn and Scott Brinker from NAREIT discussed how their competitive advantage is that tenants often expand their square footage within their portfolio. They are rarely involved in bidding wars, and they have examples of tenants that have gone from small amounts of square footage to over 100,000 square feet. They invited listeners to join them at the Bank of America conference in September and concluded the conference.

This summary was generated with AI and may contain some inaccuracies.