The Healthpeak Properties, Inc. Second Quarter Conference Call began with the operator introducing Andrew Johns, Senior Vice President of Investor Relations. Johns welcomed participants and reminded them that the call was being recorded. He then turned the call over to President and CEO Scott Brinker. Brinker congratulated the team on a successful quarter and highlighted their achievements in merger integration, leasing, asset sales, and stock buybacks. He also announced an increase in the company's 2024 guidance due to strong performance in leasing, same-store operations, and stock buybacks. The senior team was available for Q&A.

The company's conservative balance sheet and dividend payout ratio are competitive advantages that contribute to future earnings growth. The merger integration has been successful, with synergies exceeding expectations and a focus on defining core values and building a strong culture. The company's goal of becoming more involved in its tenants' businesses has been accelerated by the merger, with 70% of employees now directly supporting real estate. The company's life science business had a successful quarter, with the highest number of lease executions in several years.

The company has successfully converted their attractive pipeline into leases, with 800,000 square feet signed in the second quarter. The majority of these leases were renewals, with a positive re-leasing spread and no downsizing from tenants. The company's strong relationships and balance sheet give them a competitive advantage in the market. They expect a strong third quarter and have already signed 180,000 square feet of leases in July. Their outpatient medical business is also performing well, with increased occupancy and positive re-leasing spreads. The company has also announced a long-term partnership with CommonSpirit.

In June and July, the company sold 900,000 square feet of leased space to CommonSpirit, representing 3% of their total ABR. The remaining relationship is well diversified and has been extended to 2035 with positive re-leasing spreads and a fixed rent escalator. The company also announced $853 million in outpatient medical asset sales, which will improve their future growth profile. They have also bought back $88 million in stock, believing it to be undervalued.

In the second quarter, the company reported strong results, including FFO and AFFO per share and a 4.5% same-store growth. The outpatient medical segment showed positive rent mark-to-market and a high retention rate, while the lab segment exceeded expectations due to the company's strong portfolio, relationships, and reputation. The company also repurchased stock and sold assets at attractive rates, and is pursuing new development opportunities with health system partners.

The company reported a 3% increase in same-store growth, driven by rent escalators and rent mark-to-market. Occupancy decreased slightly due to the sale of a fully occupied property. The company has signed 1.1 million square feet of leases and has a strong leasing pipeline for the rest of the year. In CCRCs, same-store growth was positive at 2%, driven by occupancy and rate growth. The company ended the quarter with a net debt to EBITDA of 5.2 times and $3 billion of liquidity, but this does not include recent dispositions. The company has a new stock buyback authorization and has increased its FFO and AFFO guidance range due to increased same-store guidance, early renewal leasing, and stock buybacks. The company is now open for questions from analysts.

In this paragraph, Josh Dennerlein asks about the recent CommonSpirit renewal and the 3% annual escalators going forward, which is an improvement from the previous 2.5%. Scott Brinker explains that most new leases are now at 3% escalators and that the blended in-place escalator for the outpatient business is currently at 2.5% but will slowly climb to the high 2s or 3%. They also discuss the internalization of the outpatient medical segment, which has gone ahead of plan and resulted in an increase in merger synergies.

The Healthpeak leadership team is pleased with the improvements in their platform and employee interactions with properties and health systems. They plan to bring on a high-quality team in Denver and expect 50% of their outpatient and lab business to be managed internally by year-end. In regards to lab leasing, about half of the 620,000 square feet of LOIs are associated with the Vantage, Gateway, and Portside projects, with the hope to convert them to leases in the upcoming quarter. The upside from these leases will be phased in over the next couple of years, with leases expected to commence in the middle of next year.

The speaker explains that the company will see a benefit in FFO once a lease begins, with a larger increase in AFFO the following year. They estimate that about half of the projected $60 million NOI increase will come from leases in the pipeline. The speaker also notes that the company is seeing strong tenant activity and market share in their core markets.

The speaker discusses the success of their real estate platform and the advantage of having a diverse range of buildings to cater to different types of tenants. They mention working with both established and new companies, with a focus on those that have had successful capital raises. They also mention an early renewal deal with CommonSpirit that resulted in a 13% mark-to-market net effect, with modest TIs and an 8-plus year extension.

Scott Brinker discusses the company's approach to capital allocation and share buybacks, stating that they have been a top priority due to the favorable market conditions. However, with the current stock price and interest rates, the profitability of buybacks is lower. The company has a strong balance sheet and may continue buying back stock if the stock price remains low. Brinker also mentions the company's plans for growth, including a new $50 million development project.

The company has a strong presence in the life science market, with a 95% leased operating portfolio and a large pipeline of potential projects. They are focused on leasing up their existing properties first, but are open to activating their land bank for development if they continue to see success with signing leases. The company has also seen some biomanufacturing work returning to the US from international locations.

The speaker, Peter Scott, is responding to a question about the company's performance in the lab leasing market. He mentions that the company expects lab leasing to improve in the second half of the year, as they have completed a lot of leasing and have confidence in their growth. He also mentions that the outpatient medical segment is expected to accelerate in the second half of the year, and the CCRC segment is performing better than expected.

Juan Sanabria congratulates Scott Brinker on the lab leasing and asks about the cost and TIs associated with it. Brinker explains that renewal TIs were low and new leasing TIs were slightly higher but not outsized. He also mentions that each space is different and the TIs were not high considering the improvements made and the length of leases. Sanabria then asks about Alphabet's move to Dallas and Brinker says there are no current conversations and that they have 10 years left with Calico. He also notes that it is uncommon for life science companies to move to lower-cost areas.

The speaker discusses how companies often need to move to one of the three core markets to find talent and secure funding. They mention that while the company has had success in South San Francisco, the majority of tenants are coming into the area rather than out of it. A question is asked about the life science leasing pipeline and the speaker responds that the pipeline is strong and they have seen good traffic in their buildings. They also mention that 200,000 square feet of leases were signed in July alone, and clarify that the 180,000 square feet signed in July was in the in-place portfolio, not development projects.

The speaker discusses the recent signing of a lease at one of their development projects and mentions that there has been a positive shift in the life science sector, with tenants showing more interest in leasing space. They attribute this to strong capital raising activity in the first half of the year and mention the successful Alumis IPO, a company that is a tenant in their portfolio. They also mention their long-term relationship with Alumis and their growth from 10,000 to 50,000 square feet with the speaker's company.

The speaker is responding to a question about the company's recent asset sales and how the cash and liquidity from these sales will be used. The speaker mentions the possibility of using the cash for share buybacks and potential acquisitions, but notes that the market is still slow and there is volatility in interest rates. They are happy with the pricing they received for the assets sold and would only consider acquiring higher quality assets at their current stock price.

The company believes that there will be a significant pipeline of opportunities in the health system environment in the future, but it depends on the cost of capital. In the life science sector, there are signs of distress, but the company is only interested in a few potential deals. The company recently completed a sale with seller financing due to the lack of available financing in the market.

During a conference call, Wes Golladay from Baird asked the Operator about the potential growth of the company's outpatient medical development pipeline. John Thomas, referred to as JT, stated that there is a lot of development already in the pipeline, with a potential for $500 million to $1 billion in the next few years. Golladay also asked about any other factors that may affect earnings, to which Peter Scott replied that the timing of lease commencement and free rent burn off are the main considerations. There are no known move-outs that would impact the portfolio.

The company has a strong occupancy rate in its operating portfolio and is focused on leasing up vacancies outside of the portfolio. They have 800,000 square feet of expirations next year, of which close to half is already under discussion. The majority of the LOI pipeline is for new leasing on currently vacant space. The company is aiming for a $60 million NOI, which may be achieved in the second half of 2024 or possibly spill over into 2025.

The speaker clarifies a previous statement regarding the phasing in of $60 million in cash NOI, stating that it will be spread out over a couple of years starting in the middle of next year. They also mention that there has been good progress and accelerating growth in the Life Science segment, but deceleration in CCRCs in the second half of the year. They state that they are currently on track to exceed their guidance for same-store growth and FFO, but will not adjust their guidance until the end of the year.

The company is pleased with their performance so far this year, having raised their guidance and achieved a strong quarter. They have recently sold $850 million in assets, which they consider to be opportunistic and not part of their core portfolio. There is still interest in their remaining assets, but the company believes they have a high-quality portfolio that will produce stable and strong growth for years to come. They expect the buyer of their recent sale to use existing proceeds or refinance in the next two years to repay the company.

Scott Brinker discusses the need for refinancing loans with maturity dates and the potential for volatility in lab leasing spreads. He also mentions that the mid-single-digit renewal spread should be consistent in the second half of the year, but the overall mark-to-market is in the high single-digits. Michael Stroyeck asks a question about the lab leasing spreads.

The interviewer asks about the rationale behind seller financing in the recent deal and whether there were any bids that did not require it. The CEO explains that the deal was negotiated directly and there were no other bids to compare it to. He also mentions that not all sales had seller financing and that the cap rates ranged in the high 6s. The CFO adds that the decision to provide seller financing was more about ensuring a certain close on a large portfolio. The interviewer also asks about the mark-to-market on renewals and the CEO explains that there are no common themes and it depends on market demand.

The speaker discusses how a new MOB on a campus can drive up rents, particularly in Nashville where there were 13 leases with significant mark-to-market increases. Without these increases, the overall average would still be around 3-4%. The moderator then thanks the team and concludes the conference call.

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