Q1 2021 Healthpeak Properties Inc Earnings Call
Good morning, and welcome to the Health Peak properties, Inc. First quarter conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star keep all adviser out.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I'd now like to turn the conference over to Andrew Johns Vice President Corporate Finance and Investor Relations. Please go ahead.
Thank you and welcome to healthy first quarter 2021 financial results Conference call. Today's conference call will contain certain forward looking statements. Although he believes expectations reflected in any forward looking statements are based on reasonable assumptions.
We're looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.
A discussion of risks and risk factors in COVID-19 aircraft based in detail in our filings with the SEC.
Not undertake a duty to update any reported right.
Certain non-GAAP financial measures will be discussed on this call.
The 8-K refurbished and he asked me some yesterday.
Reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg you required.
But it is also available on our website and help each dot com.
I will now turn the call over to you.
<unk> Chief Executive Officer, Tom Herzog.
Thank you Andrew and good morning, everyone.
On the call with me today are Scott Brinker, our president and CIO and Pete Scott Our CFO.
Also on the line and available for the Q&A portion of the call are Tom <unk>, our CEO and Troy Mchenry, our chief legal officer and General Counsel.
We had a strong start to the year and continued executing on all aspects of the plan, we communicated over the past few quarters.
Let me hit the high points.
Our operations across all three of our core businesses were ahead of expectations.
We closed on an additional $1 billion of rental senior housing sales and have over $400 million of additional sales under hard or soft contract.
We completed proprietary acquisitions of $422 million of on campus or affiliated Mlps with another $150 million under fixed price purchase option also we have a strong pipeline for additional off market acquisitions.
Our development pipeline progress and projected deliveries and pre leasing remained favorable.
And as we previously announced we added one new development starts from our land bank in South San Francisco and a Densification development start in Torrey Pines San Diego.
And we're already seeing strong leasing and interest in both.
As we alluded to last quarter yesterday, we announced an additional tender for $550 million of bonds.
Our decade long ESG commitment continues to produce notable achievements.
Later this month, we look forward to publishing our 10th annual ESG report.
And given our operational progress transaction timing and stronger than expected trends, we raised our <unk> as adjusted guidance by a couple of pennies at the midpoint and same store guidance by 25 basis points at the midpoint.
So everything is progressing very well.
Franco and Pete will provide the details.
That I will turn it over to Scott Brinker.
Thank you Tom.
Chart with operating results then provide an update on senior housing sales and finished with investments in life Science, we are very well positioned with our footprint relationships and strong industry fundamentals.
We reported eight 5% same store cash NOI growth in the first quarter driven by rent escalators IRA occupancy mark to market on renewals.
The results were above our internal expectations as we saw an acceleration of leasing activity and rental rates across the bay area, San Diego, and Boston, which comprised 97% of our life Science NOI.
Momentum continued into April as we signed 290000 square feet of leases with another 310000 currently under letter of intent.
Turning to medical office same store cash NOI grew two 1% in the first quarter driven by rent escalators, 2% cash mark to market on renewals and favorable expenses.
<unk> exceeded our internal forecast for the quarter leasing demand remains robust over 615000 square feet of leases commenced in the first quarter, including more than 500000 square feet on renewables contributing to a trailing 12 month retention rate of 80%.
We're seeing the benefit of our digital marketing initiatives as MLB virtual tours have increased dramatically or digital to our technology in all three business segments benefit the platform long after COVID-19 is behind us.
Turning to <unk>, the inflection point sooner than we expected as occupancy across the portfolio increased 10 basis points from December to March and an additional 40 basis points in April.
Trends are encouraging, especially of Lcs, where at least in the first quarter exceeded 2019 levels and tours increased by nearly 70% driven in part by our digital marketing initiatives entry fee sales are up 80% from the low point in <unk> 'twenty.
<unk> vaccine rollout and a strong housing market support continued improvement.
Same store cash NOI growth was negative 16, 5% for the quarter driven by year over year occupancy declines from COVID-19.
First quarter pool consists of just two properties, which limits the usefulness of that metric as the Lcs properties enter the pool starting into Q quarterly same store result will become more representative.
This fiscal year pool will remain just the two sunrise properties 2021.
Moving to senior housing dispositions, we closed on an additional $1 billion since our last earnings call, we signed purchase agreements or letters of intent on all of our remaining shop and triple net properties with the closing time lines driven by licensure in that assumption.
The majority are under hard contracts with money at risk.
And we continue to evaluate our sovereign wealth joint venture alongside our partners.
Overall pricing remains in line with previous disclosures.
The most recent $1 billion of shop assets were sold at a two 6% cap rate on annualized trailing three month NOI, Excluding cares act revenue and a four 9% cap rate on pre COVID-19 NOI.
With the vast majority of the asset sales now behind US, we're able to shift nearly 100% of our transaction focus to strategic investments in our three core business segments and advancing our densification opportunities for example, with our life science occupancy in the high nineties, we announced in March the commencement of the 159 million.
Nexus development in South San Francisco, and the $135 million Cowen Rich Densification and Torrey Pines, both projects have generated significant interest from tenants before we started to dig foundations.
We also completed development 75, Hayden and Lexington. The campus sits strategically at the intersection of group 128, and route to and now totals more than 600000 square feet across three buildings that are 100% leased.
We continue to advance our shadow development and Densification pipeline in April we closed on the first phase of the previously announced acquisition of land on Forbes Boulevard in the heart of South San Francisco.
Gaining parcels in that acquisition should close later this year.
Our bond with our existing holdings, we branded the 20 acre site under the new name advantage.
Project will become a highly prominent staged development totaling 1 million square feet or more.
Demand in South San Francisco remains robust and we hold a dominant position in the submarket controlling nearly 50% of the landlord owned lab inventory.
We have the ability to double our footprint in the sub market over time through our existing land bank and Densification opportunities.
Moving to acquisitions, we've been active in medical office, finding attractive opportunities to redeploy senior housing sale proceeds.
All of the acquisitions I'll describe today with John on a proprietary basis through relationships in some cases, we effectively executed asset swaps with the same counterparty.
<unk> senior housing assets for life Science, and medical office, which eliminated our risk around execution timing and tax and more than $2 billion of transactions.
In April we acquired a 14 property MLB portfolio with 833000 square feet.
The $371 million the portfolio is 100% on campus or affiliated with a seven year weighted average lease term.
The acquisition expands <unk> creates relationships, leading regional health systems, including Bon Secours in Virginia, I know other in Washington D C North shore in Chicago, HCA in Los Angeles in Fairview and Minneapolis.
Non cash cap rate is five 2%.
Theres occupancy upside at several other properties. So the stabilized cap rate is in the high fives.
That'd be back one unique aspect of healthy across all three business segments as our campus model, where we have significant scale in a single location.
And we're strategically adding to three of our most important MLB campuses.
You'll recall that we recently acquired a five four equal acre parcel at medical city, Dallas that will support up to 1 million square feet of expansion.
This is on top of the existing $2 1 million square feet that we are.
Ellen.
And in February we acquired 46% stabilized cap rate, a 48000 square foot mob on the Centennial campus in Nashville include.
Including our development deliveries in the fourth quarter helped people own 830000 square feet across nine Mlps on this market leading campus and.
And most recently in April we acquired 45, 5% stabilized cap rate a recently developed 80000 square foot MLB located on the market, leading Sky Ridge Hospital campus in Denver. This brings our ownership at the campus to 420000 square feet.
Our acquisition pipeline is sizable as well, including an option agreement for $150 million of Mlps with strong health system affiliation.
In a good position to capitalize on these opportunities, which is a good segue to <unk> to cover financial results and the balance sheet.
Thanks Scott.
I'll start today with a review of our financial results provide an update on our recent balance sheet activity.
And finish with a discussion of our 2021 guidance.
Starting with our financial results.
First quarter, we reported <unk> as adjusted of <unk> 40 per share and blended same store growth of four 3%.
In addition on April 29, our board declared a dividend of <unk> 30 per share representing a payout ratio of approximately 88% for the first quarter.
Turning to our balance sheet.
We ended the quarter with net debt to adjusted EBITDA of five four times in line with our expectation.
As previously announced we intended to use a portion of our senior housing disposition proceeds to repay near term debt.
As such during the first quarter, we completed the repayment of $145 billion of bonds maturing in 2023 and 2024.
Yesterday, we announced the tender offer to purchase up to $550 million of 2025 bonds.
<unk> got to minimize dilution from sitting on that cash and further improve our balance sheet.
Pro forma for the $550 million repayment, our weighted average maturity improved to six five years.
With our senior housing dispositions now largely complete we are not planning any further bond repayments beyond the $2 billion that had been completed or announced.
Turning to our guidance.
Tom and Scott mentioned, we have started the year on a strong note with all of our segments performing above our initial expectation.
As a result, we have made the decision to increase our guidance as follows.
<unk> was adjusted revised from $1 50 to $1 60 per share to $1 53 to $1 61 per share.
An increase of two penny at the midpoint.
Blended same store NOI growth.
<unk> from one 5% to 3%.
True.
175% to three 5% an increase of 25 basis points at the midpoint.
Let me spend a minute level setting all of the major components of our revised guidance.
We see an increase in <unk> of roughly one to two pennies from improved performance across all three of our segments.
Which impacts both the low and high end of our guidance range.
Life Science as Scott mentioned, we had a very strong first quarter.
As a result, we have increased our full year same store range to four and a half to five 5% an increase of 50 basis points we.
We do expect some modest deceleration as the year progresses, plus we proactively terminated 80000 square foot lease at our Redwood City campus.
To allow an existing tenant to grow within our portfolio.
The positive rent mark to market is over 40%.
But as a result of downtime it will negatively impact 2021 same store results by 75 basis points. However, it provides a significant earnings and same store benefit to 2022 and beyond.
In medical office, we have started the year with stronger than expected leasing with demand for outpatient elective procedures continuing to improve.
We had originally expected a more challenging first quarter due to a difficult year over year comp.
Just on the first quarter performance exceeding our forecast we have increased our full year same store range to 175% to 275% an increase of 25 basis points.
And <unk> with the success of the vaccine rollout.
And 100% of our properties open to new admissions were beginning to see improved performance.
Recent occupancy trends are favorable expenses have moderated and we are seeing an uptick in entrance fees.
As a result, we have increased the midpoint of our Lcs portfolio guidance range by $75 million and tightened the range.
There are still a lot of moving pieces.
The trends we are seeing continue to ramp at the current case, perhaps we are still a bit conservative with our forecast and we will assess as the year progresses.
Second we see an increase in <unk> roughly one to two pennies from the timing and amount of acquisition activity from the reinvestment of sales proceeds.
We have increased the lower end of our acquisition guidance to $700 million, an increase of $550 million.
As a reminder, our plan assumed funding all acquisition activity with newly issued debt, bringing net debt to EBITDA back to our target of five five times at the high Ed.
For now we have kept the high end of our acquisition assumptions unchanged, although our pipeline has been building so stay tuned.
Third interest rates have ticked up a bit so we have increased our expected issuance rate to 275% an increase of 25 basis points from our prior assumption.
One last item before Q&A.
With our portfolio repositioning winding down we completed a comprehensive review of our supplemental and realigned our disclosures to the current portfolio.
On page 40 of the supplemental we have provided a table summarizing the key addition.
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 one 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 then two.
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 will pause momentarily to assemble our roster.
The first question will be from Nick <unk> of Scotiabank.
Thanks, Hi, everyone.
First question is on the development, particularly the lab space development, and hoping to get a bit of an update on what you're seeing in your markets and then also how you're thinking about in terms of achieving a stabilized yield on the lab a lifestyle play a project underway.
Scott here.
Cover that Tommy has something to add but the two most recent additions to our development pipeline from the land Bank Cowen Rich just really a densification as well we're underwriting at eight plus percent yield on that now that's helped by the fact that we own the land for a long time and are able to significantly densify.
That site I mean at current.
Market value for the land return on cost is probably 4% to 6% range just realistically from trades, we've seen recently and that project will start probably in the third quarter of this year, we still have a couple of tenants in the existing building through June.
<unk> projected we recently announced as Nexus.
South San Francisco and the underwritten.
There is a little bit lower although certainly is still higher than what we would achieve if we had to.
The current market value for the <unk>.
Land in that project.
We had the scraped and existing.
Automotive building. So thats now complete we will start construction soon it's obviously shovel ready site now and should deliver probably early.
First or second quarter of 2023, so we feel really good about both projects given the supply demand dynamics and if anything there's probably some upside in the yields versus what we've disclosed to date, we're getting a lot of interest on both sides and then in terms of what could come next.
Non bank and Densification opportunity exceeds 5 million square feet on land that we already control. The two highest priorities are probably the two shovel ready land sites, one in South San Francisco, one in Sorrento Mesa in San Diego that totals about 500000 square feet both of those sites are.
<unk> shovel ready.
And we could start those really at our discretion and if we start seeing significant momentum on the other projects that we just commenced it may be that we go ahead and start those as well, but we haven't made any final decisions Tom anything you'd add.
Scott the other company things, though.
Nick assuming that land is that market.
We would say that spreads probably are in that.
150, or probably closer to 200 basis point range relative to cap rates in those markets and Thats, what land at market, which has become very competitive as I think everybody knows.
But regardless of how we think about it as is.
We can certainly make money at a 150 basis point plus spread.
It produces a couple hundred basis points spread to our year, one funding costs, it's probably 25% to 30% accretive to NAV. When you think about the yields versus the cap rates in those markets.
But you really need that to compensate for the drag and the risk that <unk> encountered with development, but.
The significant advantage that we have is we've got a good sized land bank and even a much bigger densification pipeline that will create really strong land in.
Very well positioned locations and the three core markets over the next decade.
Okay. Thanks, guys. That's helpful. Just one other question is.
He is on the balance sheet, maybe for Peter I, just want to make sure. We're understanding this correctly in terms of the second quarter activity.
Bond tender the disposition plan and the acquisitions, we get to that and then netting to about $225 million of cash, but then you're also I think expecting to get some of your seller financing paid off later this year. So I'm just trying to understand kind of where you guys are at right now based on everything that was announced.
In terms of our cash position to go and do more acquisitions development funding and then you also mentioned taking up your debt as well thanks.
Hi, it's Nick.
Yeah, there's a few items in there I think what I would say with regards to getting back to our five five times net debt to EBITDA there still.
Paul at about 800 million of acquisitions, which is built into the high end of our guidance when you think about.
Our current revolver balance we ended the quarter at about $1 billion, that's actually come down today that that around $775 million and we've got some other transactions that will close plus we've got the.
Bond tender you just mentioned so I would say from a revolver perspective, we feel quite good about where we are from a floating rate debt in the amount that's outstanding on the revolver and like I said, we have some dry powder built in with our leverage because that tender will take us down into the low fives around five times.
About 800 million.
Capacity from an acquisition perspective, so hopefully that's helpful and happy to take it offline if you had any.
Okay on that.
Thank you.
Good day.
Yeah.
The next question will be from Jordan Sadler of Keybanc capital markets.
Thanks, Good morning.
Wanted to touch base on the acquisition acquisition pipeline you guys got off to a.
Pretty good start early in the year.
Mike M obese.
It seemed to be a pretty good opportunity.
Just curious what the rest of this pipeline looks like.
You flagged in your in your.
Your prepared remarks.
Yes, Jordan.
A few thoughts on that so we're currently seeing in transaction opportunities in both of the major sectors of life Science, and then will be.
The market for purpose built lab and well located land in the core markets for life Science.
Has been driving very strong price and as I'm sure you've all seen.
Which has caused us to stand down on a lot of the auction deals.
Or maybe all of the auction deals that we've looked at.
However, this was in our view a plus for us as we have the embedded embedded densification opportunities given our premium land location so that just.
It really increases the value of those opportunities in Atlanta, given we've got about a decade run on that side.
I flipped to Mlps for the high quality and will be it's also been quite competitive and challenging.
Especially in the auction markets, but also completed deals. So we have done have been off market.
As over the past several months and our acquisition pipeline isn't entirely relationship driven so we feel quite good on that front. So yes, theres a lot of there's a lot of competition out there Jordan, but I think we've got.
A position, where when we think about build versus buy in each of our three major segments with life science being primarily build given our land bank.
And the value add opportunities that we have.
<unk>, it's a blend of buy and build.
As long as their relationship based deals where the health service companies value of our partnership to help them achieve their objectives, which claridge has been built on and Ed for 30 years.
And then <unk>, it's more generally buy versus build given the typical 8% to 10 year from inception development and stabilization period, where natural counterparty for those that.
We're capital constrained and and and want to find a capital partner and it creates a great deal for us.
And we've also got some densification in our ccr's campuses that sum up to about a half a billion dollars over time.
Where the deliveries reduced you're probably about three years in Atlanta is free.
So if I would just summarize all those components in one remark that that would probably be Ed.
Okay and then.
As it relates to the dlcs guidance tweak to the year, Pete or maybe Scott.
And your thoughts on sort of.
What youre, assuming in the upward revision to two sort of the NOI expectation in terms of maybe occupancy from here.
So what's embedded.
I can start with that Pete you may have something to add but if you look at the first quarter Jordan just annualized the NOI that we reported you come up to about $82 million, our new guidance to 70 to 90.
We do expect occupancy to increase fairly materially through year end that range. We gave of 79 to 87 today with just above 79.
We are expecting that the improvement that we saw in the first quarter, but then in particular in April will continue so that might lead you to believe that there's a lot of upside in the NOI and maybe there is but in the first quarter. We did have some expenses that were quite a bit lower than we thought.
Including bad debt and insurance and even labor.
So we wanted to maintain a little bit of conservatism just to make sure. We understood exactly how expenses would shake out the balance of the year and the other thing is that the merit increases for the workers tends to be on April one.
So that number's, obviously meaningful and that will impact the balance of the year in 2021, so hopefully that helps.
No that's great.
Thank you thanks John.
The next question is from Amanda Sweitzer of Baird.
Thanks, Good morning.
On your life Science segment, and thinking about your outlook beyond the voluntary termination.
The biggest areas of uncertainty that remains in that outlook sedan.
Faxes Youre underwriting that you think could prove conservative.
I can start with that.
Yes, we always underwrite some level of bad debt.
And there could be some upside in that.
Number that would allow us to exceed our guidance we've achieved a good portion of the speculative leasing in the 2021 budget.
We do from here on out should be upside.
It's pretty close to achieve their full year leasing.
Already, especially if we can convert those existing lies into signed leases.
The credit quality of the tenant side, there's a lot less risk today than there would have been a couple of years ago for sure given how much money has been raised in the sector. We have a number of.
Our watch.
Watch list tenants from the past and are no longer on the watch list, which is great. It's a very very small number today.
Doesn't mean, we're not actively managing the portfolio of course, but just very few tenants that were actually concerned about so those are probably the biggest variables.
And for sure we feel really good about the environment the bigger challenge when you look at the reported.
Same store growth over the next three quarters. This year is that we're just coming up against the very strong comp we were up on average 7%.
In 2020 from <unk> to <unk>, so that's a very difficult comparable quarter, it will be up against and Tom may have an.
In addition.
But we do have.
Scott Mike doors on the line for questions. I think you know that there are two co leaders of life science and have been for the last I don't know.
<unk> plus <unk>.
Any color Scott for San Francisco, Boston, just briefly and then Mike for San Diego on things that Youre seeing that would add color.
Go ahead Michael.
Sure I'm happy to go on for San Diego.
For San Diego, we're certainly seeing.
Even increased velocity from margin standpoint.
In terms of market rent.
And all those leading indicators that we talked about a lot in terms of <unk>.
Venture capital raises net absorption.
Based on the first quarter that we just hit.
We had record last year and are on track to potentially do so again, if the trend holds so we feel really good about the fundamentals down here in San Diego Scott.
Scott I'll, let you talk about San Fran in Boston.
No I would agree I would just follow on that other same comments for San Francisco and Boston I mean, I think the.
Tenant demand continues to be at record levels and you're seeing a.
Significant fundraising as well I have to go along with it. So I think we do have some.
Some upside certainly and the numbers, we're showing you there.
Thanks for all the color that's helpful. And then finally, our financing lines of bet, Florida to be repaid then I think you guys. Initially expected is there any change in your your collectability of the seller financing accounts that are still outstanding.
No I can.
However, that we had one big prepayment that still.
In process and we still expect to receive it there are two properties in that pool that got held up for licensure purposes. They still haven't closed and once that gets done we do expect a pretty material.
Payment or prepayment of a lot of that seller financing. So the current balance today is just under $800 million wouldn't surprise us if about half of that got repaid by year end based on current discussions.
Great I appreciate the time.
Thanks Amanda.
The next question is from Rich Anderson with S. M D C.
Hey, Thanks, good morning out there.
So on life science.
Could you talk a little bit about.
The early renewal process in your leasing activity how much of the total.
Coming to you early because tenants perhaps fuel.
Nervous about the growth in rents and wanted to kind of lock in before it gets worse for them.
Yeah, Hey, Richard Scott most of the renewals in <unk>.
In fact early renewals it wasn't driven as much by what you just described and more so by two tenants that wanted more space. So.
So we did an expansion plus a renewal.
Mark to markets on both of those so that's really more whats driving early renewals, we don't have as many come to us for just a stand alone.
Early renewal okay.
And then the second question for me is on the on the kind of the lingering shop exposure through the JV is that probably something you just Keith for for a long time or is there.
An opportunity to come.
Come to some sort of terms with your partner to sell that as well.
Rich it's something that is currently under assessment, it's a very good partner, we're working with them to identify a solution that works for both them and for us.
We're happy to hold that long term if youre if thats what makes the most sense, but also happy to do something different so probably not a whole lot more I can say on that right at this moment.
Okay fair enough. Thanks, very much thanks rich.
The next question is from Juan Sanabria of BMO capital markets.
Hi, Good morning, just hoping to talk a little bit more about the life science acquisition opportunity set.
And just your appetite to either explore new markets, whether it's research triangle in New York City.
<unk> looked at the University based business.
Just given how tight.
Cap rates are and kind of the three markets youre in from an acquisition perspective.
Oh, Hey, one.
Scott speaking and Tom and the team they have more but we have done almost $2 billion of acquisitions over the past two years in life science. So we feel particularly good about those those types of transactions really arent available today and certainly not at the pricing that we paid now we hope we can find more of those.
They tended to be relationship driven and were active on a couple of fronts, but for sure. The oxygen market has gotten pretty pricey not a surprise the fundamentals in the business are really strong and there arent that many.
Areas or partners to play in life science, So it's not a surprise to see the valuations increased so dramatically. So we are spending more of our time.
Life Science thinking about development.
And densification, but we're certainly active in looking for acquisitions too because we may find one.
Makes sense.
Tom is there anything you'd add to that.
Actually they're probably yes.
We think.
One about looking at some of these secondary markets outside of our three core markets. We're always looking at various new supply.
Heavy competition coming in.
And whether we have competitive advantage, we clearly have competitive advantage in the three markets. If we break into a new market. We don't we get to slug, it out with everybody else.
I think an interesting fact is that the majority of our new leasing as we develop new properties are existing.
Turner.
And then Brinker I think I had seen something that you had written up that it is in the $80 or maybe it was bone endorsement wrote it up that somewhere in the 80% plus range is the amount of new space that is leased from growing biotech tenants within our space is that accurate I had that Scott right.
Yes, it's in the mid East zone.
Yes. So one you can at that point, probably appreciate that when we've got a big.
Good sized land bank that will keep us busy for a while and then the Densification will keep us busy for a lot longer in these markets, where we have huge scale.
It's a pretty competitive advantage for others that are trying to break in so we're highly focused there.
Great and then second question just on the MLP portfolio, if I look at the geographic footprint.
A bunch of markets, where you have one or two assets.
With the long term Golby day increased local scale and and how are you thinking about approaching that because most of the markets are.
Not quite as dense as some of your top three or four markets. So just curious on your long term vision there.
Yes, so I will turn out.
But the bottom line is.
For decades.
He form Ed cap and carry that forward was to be with number one or number two hospital systems in each market and they need to be strong markets, but that has a massive impact on how we think about it strategically so Tom maybe you could give some color.
Sure I wont typically.
Our markets are driven by our relationships with the health systems and how we've acquired buildings over the years and normally if you look at our portfolio, we're at 97% either on campus or affiliated and we maintain those relationships all of those markets. So we typically are not going to sell those we would love to expand on them and we do look for opt.
Attunity.
On a market type basis.
Probably I could see us expanding in some of those as we move forward over the next.
Here or two but we if they're good markets and with a good system, where we're likely not going to exit them.
Thank you.
Paul.
The next question is from Nick Joseph of Citi.
Thanks.
You talk about the MLP deals that you've done and having the pipeline being mostly off market. So I'm wondering what sort of yield premium do you get off market versus if those assets in the open market.
Yeah, it's hard to say, Nick because they ended up not going through an auction. So.
It's reasonable to say that we're buying from sophisticated sellers, who arent going to accept a big discount I know we wouldn't if we were on the opposite side of the table. So I don't know that the valuation is some material discount to fair market value. The way, we think about it more that you were able to create a transaction.
And customize it in a way that really makes sense for both parties. We were able to ensure that there is a relationship going forward with the particular health system in the case of medical office buildings. So maybe at the margin there is a.
<unk> valuation difference between an auction and an off market transaction I think it's more of a softer points that ultimately are probably more important than the hard points on an acquisition that.
Really drives in argue the differences between doing things on a proprietary basis versus an auction.
Thanks, John.
On Densification, you talked about the opportunity at the CCR seeds.
So as we look at the recovery there.
How do you think about actually executing on that opportunity.
Yes.
Nick its Scott again, we have more than 700 acres across those 15 properties.
<unk>.
100 acres on those campuses.
Could be densify.
Five or six occasions.
Our campuses, we've done some level loans planning around what could actually be done. So we've done at least that first level of underwriting, but I would view that more as a.
An opportunity over the next decade.
Some of which could be in the next year or two that we would look to densify, particularly successful campuses in some cases, it's building more independent cottages or high rise in some cases, it's actually building out a full continuum of care of particular campus happens to lack assisted living or black memory care. So it's a combination of.
Things across its probably eight to 10 campuses that are good candidates overtime.
Yes.
Thanks. Thanks.
Net.
The next question is from Steven Valiquette of Barclays.
Hello, everyone. Thanks for taking the question so.
Couple of things here first congrats on the results and the strength in life Science and.
And Bob just a question on <unk>, recognizing it's only a small part of the overall NOI, but I guess I was curious.
Our guidance in the supplement for the inflection point in occupancy to occur in either <unk>. This year.
It does seem to be a quarter or so behind some other peers, who saw the inflection point already.
In the first quarter.
Just curious maybe what the drivers are for that slightly longer timeline within PCR seeds, whether it's just longer closing time for move ins because of a larger upfront payment maybe some other factors what the sniff component just curious here your quick thoughts around that.
Yeah, Hey, Scott Scott and.
There probably is some conservatism in the outlook because.
In the December to March timeframe, or CCR see occupancy was actually up 10 basis points. So.
The inflection point was actually well ahead of rental senior housing and then we were up another 40 basis points in April so hopefully that trajectory continues.
Peter.
Scott maybe you could just take a moment youre looking at guidance and how are you thinking about <unk>.
Yeah.
Steve just to touch on what Scott just mentioned.
If you annualize our first quarter results were actually performing quite well relative to guidance, perhaps there's some CFO conservatism in that.
Those numbers, but you know when you think about the occupancy we didn't touch the occupancy that's in our supplemental on page 42, just because it's a little.
Hard to predict although I would say we're tracking on the inflection.
The high end is this upcoming quarter. So as Brinker, just said, we're doing a bit better than that and again a lot of that big beat as well in the first quarter was expense is moderating in that that actually is a big driver as we look at the rest of the year seeing expenses moderate so again, maybe some CFO conservatism in there, but we feel quite good.
About what's in the guidance right now.
Okay. One other real quick question potentially a final question around the senior housing asset sales before the entire process moves into the rearview mirror.
So I was curious whether there was ever any consideration on your part to negotiate any earn outs that would come back to you for these assets to at least have some participation in the potential recovery of senior housing occupancy.
They are just more of a mindset just to completely wash your hands on this and just move on other than your <unk> of course.
We've talked about it for a fleeting moment.
And we recognize that if we're going to have an exit to have a clean exit so that we could move forward with our business plan and the three core.
Businesses and grow those manage the balance sheet and.
Change your Red Oak on the company and the growth trajectory. So no we did not want.
I want to hang on to modify pricing complicate deals potentially they don't get done in order to try to hang onto some kind of an upside.
Okay perfect. Okay. Thanks, Thanks, Kevin.
The next question is from Vikram Malhotra of Morgan Stanley.
Thanks for taking the questions. Good morning, just maybe two bigger picture ones.
First on the MLB side.
Some of your peers who've also focused on on campus have recently started dabbling more on what I'd call core.
Cause I off campus or off campus.
I've done it to more J vs or looking at them more selectively so just take more wanting to get your sense about potential to grow the base, even further and specially looking more at off campus why or why not.
And then second just on life science. The results just seem to improve every quarter and given kind of tight demand supply I would envision the near term remains strong, but if one were to if you would could you give us some color on how you're thinking kind of three years out whats the sustainable kind of trajectory for <unk>.
This business on a same store NOI basis.
Okay, let's start with them obese.
<unk>.
And.
Clark why don't we just start on that one.
On that or.
Thinking about on campus has obviously been our strategy over the years, we had that.
When we started our predecessor company med capped back in the 2000 time period, we always wanted to.
Focus on on campus with the top number one or two hospital in the country.
Obviously as part of that as you develop relationships you also end up with adjacent and.
Affiliated off campus, which which quite frankly, we like but we want to make sure when we look at those that.
They have a heavy hospital presence in them either.
We employed physicians, but also.
Hospital outpatient departments such as.
Imaging or cancer treatment or or whatever whatever might fit into the into the building and the surrounding service area and then if you look quite frankly.
Campus is always outperformed.
Off campus and a number of our key growth metrics. We did a study recently looked at over 300 of our properties over a 10 year period and it was pretty consistent.
Ed on campus outperformed.
Off campus adjacent which are fairly close to the hospital also did quite well, but off campus affiliated.
While not as good as on campus they certainly perform.
Better than just unaffiliated off campus. So we certainly look at that.
Suffocation assets and we'll continue to do that as we move forward.
I would add to that.
We do intend to.
Go to NAREIT and were going to provide some.
A summary of some studies that we've done over a very prolonged period of time with our.
Group of clean assets, let's call. It 300 assets in the portfolio on campus off campus affiliated and unaffiliated and show you. Some real results in a very strict structure and how these were measured if you don't get the biases of assets that go vacant and are pulled out of the pools and whatnot.
And I think youre going to find that the results are just what you would think beyond campus has been much more steady has produced better results.
Off campus affiliated with second and non affiliated and third but we'll bring those results scenarios. So stay tuned on that one.
The second question you had was around life science.
And that as.
As we look forward for the next couple of years, the demand supply looks quite strong vikram as I think you're pointing out but how does that how do we think about three years out if I captured your question correctly and if so I'll turn that one to breaker.
That's right.
Hey, Vikram I mean, our occupancy today is in the high 90, so arguably theres not a ton of.
Upside there, although with the leases being so big with an average size of 50000 feet. It's certainly hired are easier to run a high occupancy theres just less frictional vacancy.
The medical office business.
The rent escalators that primary most consistent source of growth were in the low threes today.
So that should continue.
The mark to market in the portfolio is somewhere in the 15% range, that's probably a bit conservative given how much rents have continued to run and with current vacancy across all three markets being so low it's certainly possible that rents will continue growing much faster than our escalator, which they have for it.
Five years in a row. So that's probably the building blocks most of the leases are triple net so we don't have a ton of exposure to operating expenses anyway.
Yeah.
Great. Thanks that was helpful.
Thanks, Patrick.
The next question is from Michael Carroll of RBC capital markets.
Yeah.
Yes, Thanks, I wanted to talk a little bit about the life science developments that you have going on and how many are you willing to start in any one particular market I know you have about one spec project in each of your.
Three main clusters are you willing to break ground on a second one in either of those clusters. I mean do you have to have some leasing activity done it at some of those new projects or do you just need to see an uptick in overall activity.
Oh.
Michael we've done some of both sometimes we come out with something spec after.
Bohn endorsed do their heavy duty work on demand and supply in and all the touch points. They have in the market and feel quite convinced that they can get these things leased.
We find when we come out spec at least in the current market that before we can put a shovel in the ground that the pre leasing begins.
We have a.
Couple of more projects and probably even a third one that would have a little bit longer lead time went up in Boston or really Waltham.
Where we can pick up build to suits or heavy pre leasing and we could be ready to go anytime.
What was previously called Forbes and now vantage and directors place.
We're all set to go as soon as we feel that the leasing and look strong and that's actually quite a good outcome for us.
So yes, we would pull the trigger on a couple of more because the dilution from it or the drag from it would be quite small as long as they're pre leased that produces a great outcome force.
Okay, great. Thanks, Tom and then I guess last one for me can we talk a little bit of balance the $150 million of Mlps that are subject to a purchase option. I mean is there a big risk that those health systems are going to exercise that option and you might lose those deals or how should we think about that.
Yeah.
I mean, there's always a risk that something could happen, it's more contingent upon leases being signed.
With the health system, so until there's a 100% clarity there I guess, we cant count on it but.
Certainly expecting that we're going to have the opportunity to purchase those assets.
Okay, great. Thank you. Thanks.
Thanks, Michael.
The next question is from Steve Sochua of Evercore ISI.
Thanks, Ed good morning.
I guess two quick questions one on sort of the conversion of traditional office into life Science, you know what sort of concerns that you have in any other markets around the growing.
Discussions we're hearing both from public companies and private office owners about the life science conversion.
How do we start with.
Brinker and then we'll go to Doris and bone, who have done a fair amount of this in the past, but Scott why don't you go ahead and kick that off.
Hey, Steve We certainly study new supply carefully across all three markets. We do include any conversions or major redevelopments in those numbers. So we don't ignore the projects and yet some are more competitive than others. I mean in any event youre going to end up with a somewhat compromised product for the most part.
It's just a matter of Paul compromised.
Some of the sub locations aren't great they end up being a bit isolated and not in the core submarkets in other cases, the physical plant.
Ends up being pretty severely compromised, but some are better than others and some landlords are going to be better at it than others as well so it's harder to make a black and white comment on conversions and the risk.
But certainly the market commentary seems to be weighted towards maybe overemphasizing just how much those are competitive with the class a locations and products that we end up bringing to the market, but I'll ask the guys to comment on their specific markets.
Yeah. Thanks, Scott This is Scott bone, so in San Francisco, and Boston, I think Boston, we frankly see more.
Conversion is actually being started I'm still not as many as I think there is you may read about them out there in the Bay area, there's been a lot of talk up conversion.
Not a lot of ash and frankly, I think a lot of there's been a lot of office fliers that contain the words or life science so to speak.
But not a lot of actual.
Buildings being truly converted and being put on the market today.
And this is Mike Yeah, I would say for for San Diego.
We probably seen a little bit more down here and then up in the Bay area as Scott mentioned.
We've done a couple of hundred thousand square feet ourselves.
But in the net Sorrento Mesa market has has had a lot of sort of fuel for that but.
But in general I think Scott Brinker, you kind of hit all the points you got to have the stars align in terms of a you know a.
<unk> that sort of checks the boxes from a.
Other physical standpoint, the floor to floor heights of structural integrity.
Being configured in such a way that you can get shipping receiving in there.
And if you can get all those things to align and buy it at a price where you can get appropriate yields it can make a lot of sense and they represent opportunities for us but.
You really have to other stars line, but it's certainly something that we're monitoring very closely.
Okay, and then second question.
It was really around inflation and rising material costs, and how that might impact kind of future development yields you know what are you seeing on things that you are currently underwriting and what's the risk to our yields going forward.
Okay got it.
This is Tom Claridge it Scott.
And kind of an odd year with construction pricing due to the pandemic things.
Things are rolling along and then the pandemic hit in construction kind of ground to a halt created.
Abundance of construction supplies out their production ramp down pricing was actually relatively flat to down a little bit during the pandemic and then at year end, just as quickly things ramp back up.
Production had been shut down so what we're seeing is.
Pretty high demand for certain of the.
Basic materials out there steel lumber.
All have had significant increases because of that.
But we've had other other cost categories that quite frankly have been relatively flat cement is around 1% increases lighting fixtures, one 4%. So it's kind of been a mixed bag and if you look at our construction projects probably the two biggest.
Supply areas, our steel, which obviously makes up the structure of the building that's about 9% still seeing a fairly significant increase.
About 40% since last March to this March and that's actually up pretty significantly from February.
And then on the on the flip side, you've got cement products, which make up.
Again about 9% of the cost of a building and those have been relatively flat.
We're also seeing labor at this point only at about two 5%, although that may tick up as you know construction has been picking up but for the both the MLP side and the life science side, it's been only about two 5% and we really think a lot of the surge pricing once production.
Production starts ramping up again.
The suppliers get imbalanced, we'll see that kind of normalize so we don't see it as a major impact to our our yields were still on our projects forecasting the same yields we did about a year ago and quite frankly in life science.
<unk>.
Rate increases have kind of more than matched any increase in construction. So we're pretty comfortable right now with.
Those yields sit.
Yeah.
Okay.
Great that's it for me thanks.
The next question is from Joshua <unk> of Bank of America.
Hey, everyone.
I'm curious how do you guys think about the governor on pulling forward some of the development projects in your pipeline.
10 year pipeline rather.
The governor of up of.
I'm sorry.
Yeah, Yeah, how do you guys think about the governor and pulling forward some of the lifestyle development projects you have over the next 10 years as you work to densify your campus.
While we have moved.
<unk>.
Movement in Densification, where they're operating the opportunity too.
Pretty dramatically expand the densification of our.
Some of the some of the older properties and if that's what you're referring to how we feel about it is fantastic because it's a huge opportunity force.
We haven't had pressure to move forward more quickly than what we think makes economic sense, but certainly by creating this opportunity to further densify. Some of the best located land in South San Francisco certain parts of Boston and San Diego.
Obviously, that's a windfall for us.
Brent or anything you'd add on that.
I mean, if it if the conversation is about the governor on doing more I mean in the last two months, we did announce 300000 square feet of additional development.
With Cowen rigid and Nexus and another 500000 that shovel ready between vantage and directors place those are probably up next on the Densification. It really is probably a 2023 is the soonest that that could start in earnest just because we have existing leases.
There's a timing element that's also a bit outside of our control and driven by.
Bye bye tenants and meeting their space and in the interim that gives us plenty of time to seek entitlements and approvals.
Okay. Yeah I was curious on the you made a comment on the leasing.
People would potentially have to move out for before you could start on any of these projects are not building down so.
Thanks for the color and then Scott I wanted to follow up on.
Something you mentioned in your prepared remarks, you mentioned, how all three asset classes your Investor day.
Kind of a campus cluster model.
Understand the life science side, but how does that.
Cluster campus model help on the automobile side.
Yeah, I'll ask Jay to add his thoughts as well when we look at the.
Performance over time up to 300 plus assets, we've owned for in some cases, two decades or more retention and mark to market all of the things that drive NOI and cash flow having enough presence on particularly the strong hospital campus like a medical city, Dallas or a sky Richard Centennial.
Those assets just outperform.
And if you are the only landlord in town you certainly have.
Greater flexibility around moving tenants around.
And certainly.
Driving.
Tenant satisfaction as well as rental rates.
You are not competing against third party. So she can give you that.
Yeah, I could give it an example, you know for <unk>.
For example on our Centennial campus in Nashville, we own now.
Now with the addition of the New building, we just announced 661000 square feet on that campus and we're adding another 170000 in a brand new development.
We have a major tenant in one of our buildings that needed additional space on the campus. They are moving into about 70000 square feet of net new building and that's allowed to tenants and several other buildings on the campus to expand into the space that they're vacating. So it's similar to life science in that.
The campus model you have the ability to.
To move tenants around and let them expand in some cases contract, but most parts they are expanding in and moving into other buildings on campus. So similar type model.
Okay.
The next question will be from Daniel Bernstein of capital one.
Okay.
Good morning to you.
Just wanted to follow up on.
Inflation cost in development and just better understand how much.
The land is as a part of development costs I think it seems to me that the land do you have on the books is kind of a natural hedge and then maybe would you consider hedging other costs on the commodity side like skills cement.
Or anything else there.
Okay.
Alright.
On the first question of land.
Plus or minus 20.
20% of the development budget will vary and it's probably the biggest variable because.
Land prices tend to match up pretty well with what's happening with market rents and construction costs and <unk>.
Developers are targeting a specific return in land tends to move around pretty dramatically based upon.
Were those return parameters are so it is the biggest variable is the.
The line item that we've seen the most fluctuation in over the last year moving higher for sure, but 20% is probably a reasonable estimate for just a.
Normal course.
Ironman.
Okay.
Would you consider hedging other costs.
On the commodity side that are involved in development.
And I want you to Peter.
Net commodity traders, but just you.
And you gave a lot of development on the line so.
Yeah, Dan where we're entering into the GMP guaranteed maximum price contracts on all of these projects. So we don't have a ton of exposure in some cases, we've gone ahead and pre ordered steel when we we're highly likely to proceed like we did at the Nexus project.
But otherwise, it's not really our business day hedge commodities, we don't have that much construction activity.
Okay and then one quick question if I could go ahead sorry.
I was going to say, we actually did look into that several years ago and it really it wasn't feasible in things like steel.
The type of steel, we buy really wasn't.
One that you can hedge hedge hedge against which is more of the the rolled steel is what you can and you can hedge against so it really wasn't available to us in our construction.
Interest thank you.
If I can just one kind of.
The question there as well as it looked to me like Ti per square foot was up.
Is that just a function of the length of the leases.
Increasing it looked like it was increasing both the net movies in life science.
Or is there some inflation.
Pushing into the Capex side as well.
Yeah, Dan I'll speak to life Science, and ask you to comment on medical office.
This quarter it really was a bit of an outlier the tis were higher than normal we did sign some long leases on new leasing, but it was more driven by a couple of spaces that were currently more office.
I'll go ahead and convert to life Science lab use so that's more what drove the life science number this quarter, Tom do you want to comment on medical office.
Sure Medical office, we typically offered Ti on a per square foot per year basis, usually in kind of that two to $2 50.
Our range for renewals and four to $5 range for new this quarter for renewals were a little higher than typical at $2.34 that was really because of three items. One we had two large renewals that the tenant had to reconfigure space. So they just pay a little more in rent, we gave them a little bit more.
And then we had a renewal that was coupled with an expansion so that drove the price of the of the T. I, even though it was all it was a combination of new and renewal we called it.
If you take those two items out.
Would have been in line with historical numbers and the the new leasing at $5.08 is pretty much where we've been for the past year or so we averaged right around $5 in 2020, so really werent too far off there.
Alright, I appreciate the color.
Thanks, Dan.
The next question is from Mike Mueller of J P. Morgan.
Yeah, Hi, if you look at the development redevelopment pipeline. It's about 1 billion 1 billion too right. Now do you think that number in process number changes materially.
Either up or down say over the next five years.
No Michael it's one of those questions, where we have to see what plays out over the next.
Four to five years, but I would think as the company continues to grow.
Probably you see the development increase some.
Although carefully.
Due to the Densification opportunities.
I don't think so I think that that's probably I'll call. It maybe a $75 million year expenditure, we've got a lot of off campus irreplaceable assets on these.
Campuses and these have an average it's 'twenty two 'twenty three year redevelopment lives. So they get a real IRR in the spin and so it's actually quite economical for us to.
Time it when there are proper leases turning we've coordinated with the hospitals and have a really successful readout effort in Mlps I think youll see that every year.
But yes, I think I think we'll probably see development grow slowly over time, but we're not going to double down.
And surprise you with all at once a monstrous development program, because we're always looking at demand and supply we like to make sure. We know where the funding is coming from in advance and that Theres plenty of pre leasing and so we think we can grow it over time carefully that way.
Got it that was it.
Thank you.
Thanks, Mike.
The next question is from Lukas <unk> of Green Street.
Thanks.
On the acquisition front would you consider adding to your portfolio or is that off the table.
I'll start and then brinker pick it up no it's not off the table at all Mike.
Gives me Lucas apologize, it's not off the table at all.
We have a.
Our competitive edge in that business and that it's so hard to start a ccr's business because it requires real scale real infrastructure real expertise and you really can't build up by development.
So what that means is that growth in that business really needs to occur through acquisition and it can be fully stabilized properties or those that have some form of value add and there are plenty of not for profits that are mission driven that might turn up short on funds, but want to retain.
Their mission and where the ideal candidate to be the capital partner with them and we've got.
The best operator in the business and Lcs to join forces with us on that so we do see some annual activity that we're working toward that we'd like to see some growth, we're not going to make that an outsized business probably no bigger on a percentage basis than it is today, but every time, we do a deal it comes with a yield that is.
Quite strong stronger than what really would typically be the case other than the barrier to entry to enter that business is just so darn difficult.
Great. Thank you.
Thanks Lucas.
And this concludes our question and answer session I would now like to turn the conference back over to Tom Herzog for any closing remarks.
Well everyone. Thank you.
First thank you Carrie and thank you for joining us on the call today we.
As always appreciate your continued interest in health peak Ed.
And do look forward to seeing.
Many if not all of you at NAREIT virtually again on this particular NAREIT and some of the other industry events that are coming up in the coming months. So we will talk to you. All soon thank you so much.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.
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