Q2 2021 Healthpeak Properties Inc Earnings Call
Star then 1 on your touch 10 phone to withdraw your question. Please press Star then 2 please note that this event is being recorded I would now like to turn the conference over to Andrew Johns Vice President Corporate Finance and Investor Relations. Please go ahead.
Welcome to help feed second quarter 2021 financial results Conference call Today's conference call will contain certain forward looking statements. Although we believe expectations reflected in any 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 expectations.
A discussion of risks and risk factors are included in our press release and detailed in our filings with the SEC, we do not undertake a duty to update any forward looking statements.
Certain non-GAAP financial measures will be discussed in what's called net exhibit K refers to the SEC yesterday, we have reconciled all non-GAAP financial measures. The most directly comparable GAAP measures in accordance with Reg G requirements.
This exhibit is also available on our website at helps Peter Dot com.
Now I'll turn the call over to our 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 Thomas <unk>, Our Chief legal officer and General Counsel.
We've maintained our strong start to the year.
Life Science, MLP and <unk> businesses continue to perform well.
Our balance sheet is in great shape.
Alright exit from rental senior housing are substantially complete.
And we're having good success redeploying excess sales proceeds and have built a strong acquisition pipeline.
Let me hit the high points.
Operating results across all 3 of our core businesses were ahead of our expectations were.
We're down to the final $150 million of rental senior housing sales, which are all under binding contracts.
Leaves us with our interest in the sovereign wealth, JV, which we will continue to evaluate with our partner.
We acquired $425 million of Mlps in Q2, and another $205 million in July and.
And which combined with our first quarter activity brings our year to date MLB acquisitions to $640 million all of which were done on an off market basis.
On the development side life science market dynamics projected deliveries and pre leasing all remain favorable.
During the second quarter, we signed a full campus lease for our Calvin Rich Densification project and yesterday announced Sorrento Gateway is also fully spoken for bringing our active life science development pipeline to 73% pre leased or committed.
Earlier this month, we issued $450 million of senior unsecured bonds due in 2027, and our inaugural Green bond offering.
Given our operational progress we raised our <unk> adjusted guidance.
A penny at the midpoint and.
And same store guidance by 50 basis points at the midpoint.
Finally in July we published our 10th annual ESG report.
ESG program continues to produce meaningful results and received the industry and global recognition.
Our team at <unk> is very pleased with the progress we've made over the last decade and are continuing to pursue and invest in initiatives that improve our overall ESG performance and support our long term goals.
So everything is progressing very well with that I'll turn it over to Scott Brinker.
Thank you Tom I'll.
I'll begin with the operating results then provide an update on our development and investment activities, starting with life science.
2020 saw record setting biotech capital raises.
2021is on pace to exceed those records.
Capital inflows are fueling scientific breakthroughs and leading to accelerating real estate fundamentals.
Demand continues to exceed supply and vacancies are at all time lows driving market rent growth of 10% or more over the past year.
During the quarter, we signed 233000 feet of renewals at a 22% cash mark to market plus 121000 feet of new leases, we've already exceeded our full year internal leasing budget and 3 Q is off to a strong start.
In July we signed 90000 feet of net leases and we currently have a large pipeline under signed letters of intent, including 345000 feet of renewals.
70000 feet of new leasing and 415000 feet on new developments.
Same store NOI growth for the quarter was 7.4%, bringing year to date growth to 7.9%.
The results were driven by in place escalators leasing activity mark to market on renewals and burn off of free rent from the prior year.
As discussed on the last call. We do expect same store growth to moderate in the second half of the year due to difficult comps and proactive early terminations that will benefit future years.
Moving to medical office same store NOI growth. This quarter was 4.1% driven by leasing activity add rents strong collections and parking income.
Hospital inpatient and outpatient volumes have returned to pre COVID-19 levels benefiting our unique on campus portfolio.
Leasing activity continues to outperform we had more than 800000 feet of commencement in the quarter, which is 200000 feet. I had planned retention is strong at 78 per cent for the trailing 12 months Inc.
<unk>, 93% in June.
Year to date, we've already completed 90% of our full year internal leasing budget.
Note that total portfolio occupancy declined a bit last quarter. This was driven by recently completed development and redevelopment properties entering the portfolio that are skilled and lease up plus a few recent acquisitions with lease up opportunity.
This gives us more NOI to capture in the future.
Finishing with CCR sees where performance continues to recover occupancy was up 90 basis points from March to June.
Entry fee cash receipts were $24 million, representing the highest level since 2019, and leading indicators are now in line 2019 levels with current occupancy at 80%, we have significant upside to capture at least 500 basis points on the low end.
Same store cash NOI growth was negative <unk> 23 per cent for the quarter driven by the cares Act payments received in <unk> 'twenty absent. These 1 time payments.
Same store growth was positive 23% this quarter.
Turning to our development pipeline.
Execute a guaranteed maximum price contracts on all of our active development projects. So we have very limited exposure to rising construction cost.
Lease up continues to exceed our underwriting on both rental rate and timing.
In June we signed a full building lease on our Cowen Rich Densification project in San Diego, We expect to deliver the $140 million project in the first half of 2023 with a yield on cost in the low nines based on the book value of our land.
In July we signed a binding term sheet for the entire 163000 square foot Sorrento Gateway development also in San Diego, we expect to deliver the $117 million project in the first half of 2023 with a yield on cost in the mid age based on the book value of our Mt.
Those yields are far above what's achievable at today's land prices.
We marked our land to market the yield on cost in the core markets, where we play is more in the 6% to 7 per cent range at today's construction cost and rental rates.
Moving to investments in July we closed the off market acquisition of 3 Mlps that are leased to Atlantic helped the asset share a campus proximate to the Morristown Medical center generally regarded as the number 1 hospital in New Jersey.
Stabilized cash cap rate is in the mid fives.
The acquisition also included a land parcel on the same campus that can accommodate up to 80000 square feet of medical office development.
Also in July we acquired a $50 million medical building at Wichita, that's 100% leased to HCA. The price represents a 6.1% initial cash cap rate.
This was an off market acquisition and expands our existing presence in the market.
In June we acquired a $16 million MLB located on the campus of Hca's West side Hospital in Fort Lauderdale. The initial cash cap rate is 5.5 per cent.
Again, this was an off market acquisition and expand our existing presence on this campus.
Looking forward, we have a strategic acquisition and development pipeline across our business segments.
Against the backdrop of compressing cap rates, we remain focused on using our relationships to create opportunities not available to the broader market.
We also continue to advance densification opportunities across all 3 of our business segments, which will be a source of growth for the next decade, plus on land we already own.
Finally, we're balancing acquisitions that are immediately accretive with value, creating development opportunities that naturally come with short term earnings drag.
As a result, our acquisition pipeline is a mix of stabilized assets lease up properties and covered land plays.
Blended initial yield will depend on the relative mix of opportunities that ultimately proceed with that I'll turn it to Pete.
Yeah.
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 2021guidance.
Starting with our financial results.
For the second quarter, we reported episodes adjusted of <unk> 40 per share.
And blended same store growth of 1.2%.
Notable same store items first our 13 Lcs operated <unk> entered the quarterly same store pool in the second quarter and accounted for 12 per cent of the overall pool.
Second as Scott mentioned, our <unk> were significantly impacted by the onetime Cares Act grant we received in the second quarter of 2020.
Adjusting for cares Act grant pro forma blended second quarter same store growth across the portfolio was 7.6%.
Toby Lcs operated TCR C and for the full year same store pool in 2022, we believe our quarterly same store results are more reflective of how our overall portfolio is performing.
Last item within financial results on July 29, our board declared a dividend of <unk> 30 per share representing an <unk> payout ratio of approximately 86 per cent for the second quarter.
Turning to our balance sheet.
Since our last earnings call, we continue to improve upon our fortress balance sheet.
We completed the repayment of $550 million of bonds maturing in 2025.
We issued $450 million of 5 year green bonds at a rate of 1.35 per cent.
We completed the repayment of our $250 million term loan maturing in 2024.
And we received $246 million of seller financing.
Payments.
As a result of our balance sheet activity, we ended the quarter with a net debt to adjusted EBITDA of $4.6 times, providing us with dry powder for acquisition.
We have no significant debt maturities until February 2025, and we have ample open maturity slots in 2020.8 'twenty 32, N beyond allowing us to fund near term transactions with 5 year and 10 year debt.
Turning to our guidance, we are increasing our guidance as follows.
<unk> adjusted revised from $1.53 to $1.61 per share.
$2.55 to $1.61 per share an increase of 1 penny at the midpoint.
Blended same store NOI growth.
Revised from.
1 points out from 5 to 3.25 per cent.
2.2.25 to 3.75 per cent.
An increase of 50 basis points at the midpoint.
Let me spend a minute level setting all the major components of our revised guidance.
Starting with <unk> as adjusted.
We have had a strong start to the year with 80 per share episodes adjusted inclusive of 1 penny of nonrecurring Cares Act grants.
As a result, we have increased the midpoint of guidance by 3 pennies per share compared to our original 2021guidance.
While we are trending towards the higher end of our revised guidance range. We feel it is prudent to maintain some conservatism given the uncertain market conditions.
Turning to acquisitions we.
We have increased the low end of our acquisition guidance $800 million, an increase of $100 million to account for our recent closed transaction.
We will update our guidance further as transactions firm up and we get a better sense for timing and pricing.
As a reminder, we intend to fund acquisitions with debt until we hit our target leverage of 5.5 times.
Turning to <unk>.
We are reaffirming the $70 million to $90 million NOI range for the Lcs CCR seats.
While performance has been strong year to date, we have determined it is too early to adjust guidance given the uncertainty of the Covid Delta Varian and increased labor costs.
1 last item on cares Act grants.
We have reduced our guidance for cares act grants from $9 billion to $6 million, which represent all the grants we have received year to date.
Any additional cares act funding, we could potentially receive for the balance of the year would be upside to guidance with that operator, let's open the line for Q&A.
Thank you and we will now begin the question and answer session.
To ask a question you May Press Star then 1 on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 so that everyone may have a chance to participate we ask that participants limit their questions to 1 and a related follow up if you have additional questions. Please re queue. At this time, we will pause momentarily to assemble the roster.
Our first question today will come from Nick Julia <unk> with Deutsche Bank. Please go ahead.
Oh, Hey, everyone. So I'm just first question on life Science are you know the re leasing spreads improved this quarter. I know you also raised guidance for that segment can you just talk a little bit about you know what drove.
That is it is it a mix issue or are you just pushing rents a lot more and maybe you can give us a feel for you know an expectation on how you think life science rents could grow over the next year.
Right, Hey, Nick Scott here.
The last couple of years, our mark to market on renewals has been plus or minus in that 10 to 20 per cent range. It obviously varies from quarter to quarter, depending upon which leases are renewing.
Just given that there is a spread across the portfolio. Some are bigger than others. This quarter. We were at 22% year to date, we're in the high teens and that's probably reflective of where the portfolio is overall, if we look across the 10 plus years.
Currently says maturity is going to bounce around but that's our best guess as to our mark to market across the whole portfolio.
But you know with rents growing at 10 plus percent in all 3 core markets over the past year.
You see that mark to market could continue to grow we do see demand continuing to exceed supply at least in the foreseeable future. So we would expect to have continued success on that metric.
Okay. Thanks, Scott I guess just the second question is on on acquisitions. I mean, obviously you guys have done a very good job of setting up the balance sheet to to hit your guidance. This year, you're getting acquisitions done how.
How should we think about you know the opportunity behind what's in your guidance.
Meaning you know your comfort range on I'm looking at you know portfolios if any of those opportunities are coming up you know how you would think about maybe as well raising equity above and beyond.
You know where your near term pipeline as a way to expand the portfolio even further into the segments that you're interested in right now.
Yeah, Hey, Nick it's Tom.
We've obviously.
In a number of different.
Acquisition opportunities through our relationships and scale have driven off market transactions.
And I think as Ive expressed in the past our goal has been to hit a lot of singles and doubles and occasional triple.
We do continue to see quite a lot of activity in the flow of business. We would expect to continue to grow as long as we're trading at a premium to NAV.
Scott plus or minus $700 million to put out.
That would be funded exclusively with debt.
She gets ready to get back to our 5.5 times net debt to EBITDA.
And I think the other part of your comment was your question at least you probably alluded to.
M&A opportunities that are out there I guess I would describe it this way I think you guys know we look at everything that <unk>.
Transaction could transact within our 3 core businesses, we're always aware of everything that is coming to market or could come to market with.
But just because we look at something doesn't mean that we'll actually pursue it and our primary focus is on flow of business and on development.
Okay. Appreciate it thanks Tom.
Thanks, Nick.
And our next question will come from horror incentive Rio with BMO capital markets. Please go ahead.
Hi, good morning.
Just a question on the life Science acquisition market, obviously very competitive cap rates are low tremendous amount of capital chasing that.
Have you guys thought about.
Looking at our funds strategy or John.
Current venture to where you could allocate capital to the sector.
Or stabilize kind of lower cap rate type assets.
Hey, Juan again, Tom again, Yeah, we've had these conversations.
Frankly through the years.
We're believers that you don't want too many jb's out there complicates the organization and from the investment is a strong in basketball, we prefer typically to own it.
On balance sheet.
We 100 per cent of on balance sheet.
So the fund aspect to us doesn't doesn't let us up all that much. That's the Jv's you felt differently in Boston, where we needed to build a business to get our foot in there was a lot of expertise there with King Street, both furnished that we tapped into.
And we would consider continuing that in Boston.
There was an element with jbs and life science within clusters, where a joint ventures really are disadvantageous because.
The objective is to allow biotechs to grow and easily move between our properties within clusters and joint ventures, obviously create other interest from partners that can that that can stand in the way of smoothed transactions in that respect. So that's not something that we're looking to do a lot of on the lifestyle.
Syed on the MLB side, those are relationship driven deals and we typically prefer almost always prefer to own 100%.
Almost all of those deals.
The time when it can occur where joint venture might make sense as if we're doing a development deal with.
With a player that has lots of contacts there identifying the business they use their relationships we come in with the money.
They get some kind of a promote on the backend and we ultimately on the real estate those are attractive to us as well. So that's how we think about J B's and funds are not something that that we would consider.
Okay, Great and then just.
A question on the MLP strategy.
And with regards to the internalization of management there.
I guess just.
How do you guys think about.
Why not manage your own portfolio I mean, I get it that maybe the cost savings aren't that great. If you can just outsource it and you don't have to have the head count but at the end of the day wouldn't you want to own.
The management in their relationship with us with those customers and just curious if you've begun to think about that is you've now exited seniors housing and you're essentially a pure play office company split between 2 asset types, but just curious on your latest thinking on that yeah.
I'm glad you asked.
At.
It's something that we've I'm not I'm going to start and then turn it to Tom K, whose Tom Clarke Who's a real expert.
It's something we've looked at.
A number of times and Tom <unk> and his many years has done it both ways at least a couple of times and we have a fairly extensive study we did about a year year and a half ago. We concluded that there really is not much profitability in it and then you add.
Managing masses of people.
Within our system that causes a lot of distraction that just doesn't have a lot of profit, but Tom you you've done this for a long time, maybe you could give a bit of color on how you've looked at it historically along with the analysis you did.
Yes, well 1 as you said, there's really not a lot of profit in it. So that's really not a big factor in how we look at it.
You talked about the relationships, we really manage our properties and to levels you have the property management companies.
On the ground that are dealing with things on a day to day basis, and then we have an asset management team and our leasing team that.
Overseas the property managers and the leasing agents out in the field.
Those guys are out meeting with hospitals meeting with major tenants.
Really weekly they they travel as much as 50 to 60 per cent of the time and they're maintaining the relationships at the hospital level. So we really don't lose that aspect of it and then obviously on the system side, we have.
Our b piece myself.
Or dealing with the with the major system. So I don't really see it as a real negative to relationships, we maintain those pretty well.
And it's you know having that structure just allows us to move in and out of markets really easily if you look at the the 2 larger acquisitions we did.
In the past couple of months the Midwest portfolio in Harrison Street, we very easily moved into those markets took over management in literally overnight, where we're managing those properties without having to deal with all of the person. It personnel issues that you would have to if you internalized it so.
I've always just like the third party approach and we'll continue to manage that way.
Thanks, Tom that's helpful color.
Thanks Juan.
And our next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yeah, Thanks, Tom or Scott I know the team has done a great job breaking ground on a new life science development projects, but can you talk a little bit about what you could break out on ground next would you be willing to start another project in South San Francisco, maybe on the vantage site or would you need to have some leasing on nexus on grand to be able to do that.
Well the bottom line is that we'd like to see some activity in nexus on Grand.
Scott bonus working real hard with had progress Ed.
And the simple answer is as we anchor of that asset.
But yes, we would consider another development start there based on that.
Our demand and supply fundamentals that we're seeing so I think you'll you'll there'll be more to come on that brinker or anything you'd like to add.
No I just reiterate that the momentum is very strong at John.
The remaining space at the shore as well as at Nexus and keep in mind Nexus doesn't open for another 18 months or more.
So we're pretty pleased with the activity to date and we are shovel ready on 350000 feet in the first phase of vantage, while we seek entitlements on the balance of that site, while increased entitlements. So yeah, we really like our market position, there and look forward to building it.
I've got Scott Barbour, Mike doors on the call with us.
Scott bone.
Your work in this thing 24.7 for the last.
Longer than a decade.
What what's your read on just generally demand supply how you feel about.
We're out in the status of this I think people should hear from you directly.
Sure. Thanks, John So you know in the Bay area.
We continue to see record levels of demand and.
And on the supply side.
Really we're looking at everything that's coming between now and call. It ended 2022 early 2023 is.
Probably.
60% pre leased.
In the balance of that 40%, but still not released has a significant amount of activity or otherwise on it. So we feel really good about the supply demand characteristics in the bay area and looking forward.
Yeah, and I would say that that that Scott.
Scott the 1.1 of the issues he deals with us just to be able to satisfy all of the new tenant demand from our huge tenant base in south San Francisco. So we're always looking to make sure that we've got product that's going to be coming to market to meet that demand.
Okay, Great and then can you maybe highlight some of the land sites that you have available in San Diego Indoor Boston that you can break ground on or do you need to.
By new sites to be able to support new developments and if that's the case or are there anything that you're working on that you can kind of provide some maybe general abuse that to the to the market.
You know there are a lot of things that we're working on that.
We won't speak to obviously just yet.
Maybe wait for the next conference on that but Scott Brinker, maybe you could just provide some insights into.
Some of the in a different in addition to the vantage site, which is obvious.
Some of the some of the different day adjacent land parcels that we've been doing a lot of work on.
Yes exactly.
1 example is in the route 128, Submarket and walk them a purchase that we did about 2 years ago. It came with a lot of excess land either totally unimproved or surface parking that when we made the acquisition.
We always had in mind.
<unk> continued to be strong there could be the opportunity to utilize some of that excess land on the campus for more density test.
Does require entitlements so that process is underway at a couple of our sites.
Similar example at our.
West, Cambridge campus, the Discovery Park, where the purchase came with some vacant land in excess S. A R that.
In terms of the purchase price we liked the deal on a standalone basis, the cap rate made a lot of sense the geography makes sense.
But this added benefit of having excess land on the campus that could be densify with additional entitlements overtime was pretty intriguing to us. So we do have examples like that in the portfolio and we're in the middle of that entitlement process now so that's attractive in that land across the 3.
Core markets is trading for probably at least $200 per developable foot.
And if you're able to build new properties without purchasing land that obviously it makes the economics much more accretive.
Great. Thank you thanks a lot.
Oh.
And our next question will come from Nick Joseph with Citi. Please go ahead.
Thanks, Paul.
Paul if I understand that you guys are obviously look at everything and you've been through a long repositioning process and have the company, where you want it. So when you do look at any M&A opportunities what are the most important factors for you or is it financial or strategic I'm sure. It's a blend of everything but just can you walk through how you think about those opportunities.
Yeah.
Nick very fair question. So when 1 looks at M&A, obviously, it's always enticing because you can grow your company very quickly.
But 1 of the things that that we have the advantage of as we already have huge scale.
And just adding more huge scale just for the sake of getting bigger is not what we're about we're seeking to grow.
Grow our earnings on a consistent basis and singles and doubles.
The occasional triples allow us to look at each transaction 1 by 1 to ensure that we believed that that's that those are individually. Good decisions. When you take a whole company down and I've done that a few times in my career.
There's always a group of assets that you really like maybe some that you like a little and maybe somebody really wish you didn't have to deal with so that is 1 thing when you do M&A that that that does come to mind oftentimes. It gets very competitive in the process as we all know and by the time you end up being the winning bidder. If you are you're almost at that point, where you're not.
Sure. If you wish you won the deal or didn't.
Unless it's going to be clearly accretive which in today's environment mlps or a hot commodity maybe that would maybe they wouldn't and so oftentimes you'd just be playing for synergies. We do have a tendency to look at the portfolio to see how strategic it is how does it fit in how much real estate really doesn't fit our profile, but we would need to day.
With and then there's always a social issues too I mean, there are a whole group of <unk>.
Find people on the other side of this that are trying to figure out their path in their career as well and then how does that fit in so just a lot of different things to consider with M&A that.
It seems so obvious that.
Go out and get as big as you can and grow but it comes with pros and cons and the scale is an advantage, but you got to recognize too. It's also a disadvantage it's a lot easier to move the needle with growth when you've got a smaller company than if you get huge.
So I'm not saying that you know we're for it or against it in some cases it would make sense. Some cases it wouldn't but those are the types of things we look at.
That's very helpful and then if you.
You think about just kind of operating synergies right either from a asset level or portfolio level, how do you think about.
Kind of the value that you create when you add mlps to your existing platform.
Well you know if we add M obese with existing platform.
We do have synergies between our businesses and it yet.
Which which provides benefits you know tuck in corporate back out back office transactions Capex.
Expertise leasing data analysis systems all of these different synergies exist between Mlps and life science. So there's some true benefit.
In addition to the fact that we just ended up with bigger scale and lower cost of capital.
As to your question specifically our platform is fully built out at this point, so we could easily grow it.
Drove that business without materially increasing our G&A load. So you know that's an advantage when you when you look at the whole equation.
Thank you.
Thanks, Thanks, Nick.
And our next question will come from Amanda Sweitzer with Baird. Please go ahead.
Great. Thanks, good morning.
Can you quantify how much those voluntary terminations in Redwood city in San Diego are impacting your second half life Science guidance and then beyond those termination, but are there any other 1 time items like bad debt that are holding back the life science guidance.
Yeah, Hey, Matt Amanda Scott here I'll start and then let Pete cover the other part of your question, but there were actually 2 proactive terminations 1 in Redwood City that you mentioned and then 1 in San Diego in the aggregate. It's about 125000 feet. So these releases that were due to expire over there.
Next 1 to 4 years.
Tenants that we're not going to renew and we had growth tenants in those local markets looking to expand so from an economic standpoint, it's a very easy decision to.
To do those early terminations in both cases, we did get termination fees. So economically we were made whole for the balance of the year until the new leases start, but obviously, we don't count that.
For cash NOI in terms of same store and it also impacts occupancy. So the answer to your question is those 2 proactive terminations alone represent about 140 basis points of occupancy.
In the portfolio and those are in same store.
And the impact on cash NOI in the second half of the year in the aggregate. It's about 170.180 basis points. So it's material.
Through the second half of the year, obviously, if we were managing the portfolio based on same store NOI, we would not make those decisions.
But we're not managing it to.
To make the best economic decisions over time, so it will be a drag in the second half a day year, but a long term benefit. Unfortunately, we were still able to increase guidance now twice in a pretty material way due to due to the strength in the balance of the portfolio Pete anything you'd add.
Yeah, I'm, Andrew you asked about bad debt, we do model some bad debt when we set guidance at the beginning of the year in both life Sciences and.
Obviously, we haven't seen as much bad debt. So far this year is perhaps.
Perhaps we've modeled and that's been 1 of the reasons amongst many as to why we've been able to raise our guidance 3 panties and I will just reiterate and as I said in the prepared remarks, we are trending towards the higher end of our revised guidance range, but given the uncertain market conditions as well as what's embedded within the high end of our guidance.
2 is our transaction pipeline firming up so as we factored all of those things into the equation, we felt that a 1 penny increase in.
In the mid point made sense right now.
Yeah that makes sense and that's helpful.
And then following up on your comments in the prepared remarks about potential development or covered land acquisition opportunities.
Spanned more on how you are thinking about balancing that potential dilution and if there are any guardrails around the proportion of acquisition activity that you're willing to have come from development.
I mean, we do have internal thresholds that we monitor when we think about how much exposure we have to development both from a capital standpoint, but also just the business risk given that these tend to be 2 year timelines between commencement and completion.
1 of the buildings given their scale.
So there are thresholds I won't share the specifics on the call, but certainly when we have our committee discussions it's not just a discussion around a particular project, but how does it fit into the balance of the portfolio.
Clearly every time, we sign a new lease like we have quite a few times this year, particularly in San Diego It gives us a little bit more confidence to commence the next development project and we definitely feel like the remaining unleashed portion of our pipeline is showing great momentum as well.
So hopefully we'll have more news to report.
In terms of new development starts.
But trying to balance that with you know more accretive near term acquisitions that is a goal we've done almost $650 million of medical office to date now they stabilize in the 5% to 6 per cent range, but not all of them achieve those yields right away. So there is some lease up.
Potential within that big acquisition portfolio, as well and it's a balance we evaluate each individual asset and opportunity on its own but also have to put it in the context of a desire to deliver some near term earnings growth. In addition to the tremendous longer term value creation.
And that comes with these big development projects covered land is an interesting play because it allows you to generate some level of earnings and given our current cost of capital it might be modestly dilutive.
But certainly not as dilutive as it would be to buy vacant land and then go through an entitlement process. So we try to balance all of those different metrics as we deploy capital P anything you'd add.
Yeah, I think Scott just the thing I would point out from just a numbers perspective is for the acquisitions, we've announced to date.
If you go into our earnings releases, we provide a lot of different cap rates in there in the blended yield is right around 5%.
The remaining pipeline the yields can range anywhere from 3% to high single digits, depending upon the type of assets, we're buying from land investments to CCR Sea. So you know.
We're not giving specifics on the remaining pipeline, but I just wanted to at least put some guardrails out there as to what it could be.
That's helpful. I appreciate the time.
Thanks Amanda.
And our next question will come from Jordan Saddler with Keybanc capital markets. Please go ahead.
Thanks, maybe Pete first I'll start with you I'm just coming back to the guide.
'cause it because the low end I'm trying to understand how you can even get to the low end at this stage of the game.
You upped.
The contribution from the cares Act grants as lower interest expense coming through it combined I think those are north of a penny sequentially.
How do we get to the low end.
Yeah, I mean, Jordan as I said and I'll repeat again, you know we are trending towards the higher end of the range. There you know there are a lot of different moving pieces and I think I'd just point out a few of them I also encourage you to take a look at.
41, and 42 the pages within the supplemental since we give a lot of detailed information on what builds up to the low.
And the high end, but you know the penny raise for this quarter comes.
Comes from a bunch of different items right..1 we did increase life Sciences and MLB same store.
<unk> 75, and 25 basis points, respectively. So those businesses are doing great.
Lowered the.
Interest expense a bit given the success of bad Green Bond deal and then you know we moderately increased our acquisition guidance, so where what would be the 2 areas, where we could see some risks today I'd say the first would be on <unk> and if you look at where we are year to date, we're at $40 million per the Lcs.
<unk> net annualized is right to the midpoint.
It's 70 million to $90 million, so theres, probably 2 pennies there from the midpoint down to the lower end and then I would also point you to acquisition guidance.
Got $800 million unidentified at this point built in so the 2 items of risk would be firming up that acquisition pipeline and the timing of that as well as the yields and then on the CCR sees again, we're trending well and that's something I want to reiterate but I think at this point, we felt like a 1 penny increase.
What made sense and we will continue to reevaluate as the pipeline firms up and as the year progresses.
Okay, That's fair and then Tom.
Tom.
Coming to you on sort of the strategy again, I mean, you guys have done it.
Paul revamp and reassessment through the pandemic.
Now out of all the shop, but I'm kind of curious.
Heavy.
And Moby invest investments year to date.
Obviously, you've got the life side.
Development pipeline.
Investments that have been very successful as well but.
As you think about sort of growth.
Going forward.
And sort of way you know, let's say you have $100 of capital to invest.
How do you see yourself looking to deploy that based on the growth growth profile of these 2 different.
Businesses.
Jordan I think it's a it's a mix there could be some element that's.
Opportunistic as to what actually arises we're constantly working on our land bank densification opportunities within.
Within life science and within the clusters that we built in the built in natural demand that comes from a tenant base.
Based on demand and supply characteristics the continued boom in biotech.
And the growth of those companies, we do believe that there's going to be substantial opportunity there for the foreseeable future coal that's at least the next 2 to 3 years. So.
So we feel that we'll have strong growth in that business in the M. Obese side. It comes down substantially to relationships for the types of M will be assets that we want to add either on campus or strongly affiliated off campus.
Those relationships ships are critical because you have to have an invitation from that the health system or the hospital and so we have people that are working those relationships continuously we've had good success with that.
We've got people that have been in the business for decades, Tom clearer just got about 3 decades in this business I think he knows just about everybody out there.
Justin Hill, others, and what that we think will get more than our fair share. So some of that can be through development and the MLP side is what they're each day development program and others that we're working on with some health interest.
Health systems, as well as being able to go out and compete with our scale and our cost of capital at times when assets come to market that fit our investment profile.
So it's certainly competitive out there there's no question about that but we're very well positioned to get more than our fair share and then occasionally there will be a CCR seed that pops up or 2 or 3.
That there could be Ah Ah.
Not for profit that's that are based on their capitalization or it could be a for profit that would like to connect in with a well capitalized entity and where the natural player to go to and those those types of transactions are going to yield 8.9 even 10% F F.
Yields.
When we identify those so yeah I think we've got opportunities in about 3 different fronts, both from an acquisition and from a development perspective, and the same thing applies from CCR CS We've got a lot of what we'll just call at Jason Developable land to expand on these huge parcels we've got over 150 acres of land.
Ah connected with with 15 different mega campuses in infill locations that are irreplaceable.
So we've been you know we're going to move forward on a couple of those.
Developments as well, where we've got waiting lists and our independent living units and those are going to be profitable force too. So those those are probably Jordan. The plays that we're looking to make.
Last 1 maybe for Brinker, just done in San Diego, what what else is available and you've got a lot of success here real recently is there anything else.
Thank you Gayla, Paul in terms of the scale up or to build anything there.
Right Yeah, 3 projects commenced in the last year, all 100% pre.
Pre leased before opening in some cases before it can starting construction so that does.
Take up the vacant land that we had available and we do have some longer term or intermediate term densification opportunities in some great submarkets, but that is.
The market that the team is hard at work trying to find additional opportunities to grow our gift.
Given our tenant base continues to look for space.
The footprint that we have in Sorrento Mesa and Torrey Pines is outstanding.
And you'd like to do more Mike anything you'd add.
No I think I think you hit it Scott we've got some some embedded potential densification opportunities on our own assets that we are working on them, but we are certainly scouring the market for.
For more opportunities to.
Right.
We need to build more.
But I'd like to add Mike, you're you're not starting from a.
Scanning stop either you're in the middle of a number of deals within your acquisition pipeline that that could certainly create opportunity just to keep us busy and have made great progress on that so I don't want to make it sound like were.
We're not well underway on identifying those opportunities and I think we'll have some success, Mike anything you'd add on that.
No that's.
That's exactly right.
Yeah.
Thanks, guys. Thanks Jordan.
And our next question will come from Steven Valiquette with Barclays. Please go ahead.
Alright, great. Thanks, Hello, everyone.
So I just wanted to circle back quickly on the mob study that you presented in greater detail back at REIT week back in June.
Spend so much time conducting it.
The headline results showed obviously the non campus mobs performed better than off campus affiliated properties I guess I was curious to hear more about how we're originally this may shape your strategy more near term in particular.
Perhaps some additional near term divestitures that you look to upgrade the mob portfolio or is this just more about what you will focus on going forward, just from an acquisition and or development perspective.
Yeah, Yeah yeah.
Scott.
Just to just to.
Update people are or refresh memories, we had done a 10 year study a very extensive study it took us cash.
Gosh I forget now it was like about a quarter to completed across our entire portfolio.
To look at every asset that are as to what the outcome has been within our portfolio on on campus versus off campus affiliated versus off campus unaffiliated.
And just based on our knowledge and intuition as to what our portfolio are done with we had a pretty good sense for what the answer would be.
But the NOI less Capex returns, we wanted to get to a total cash flow return.
We ended up across our entire portfolio at a plus 2.3% growth.
For on campus for off campus affiliated it was a positive 1.4%.
And for off campus unaffiliated it was a -1.7%.
And based on a sample size, which was pretty extensive far fewer on the off campus non affiliated so I recognize some others could have different outcomes.
But that that has.
Has dictated our approach from the very beginning of <unk>.
Med capped before.
We acquired med cap and for the for the couple of decades sense that we've always had a view that on campus would perform better than off campus affiliated would also performed quite well due to the fact that there are specialists the stickiness.
Of the nature of those of those tenants and the difficulty in and adding new supply and in the off campus non affiliated especially the single tenant.
At least a triple net lease exposure, where our property can do great. During the lease period and then it can end up empty or you're at the mercy of the 1 tenant so how does that affect us going forward.
It does not change our fundamental view on the value of on campus and off campus affiliated that we will lean in that direction off campus non affiliated it'd be very rare you'll see us.
Seeking those types of assets, but I'm going to turn it to Tom and to Brinker to see if that clarity, especially why don't you jump in first what additional color might you have on that because this was a pretty big topic for us.
And the <unk>.
You asked if we were just looking at this moving forward or looking at our existing portfolio.
If you look at the non system affiliated Mlps the off campus ones. We have today, we only have 13 properties 2 of those are actually in <unk>.
Held for sale, so there'll be going away and 1 has a purchase option that likely would be.
Exercise, so we'd be down to just under 3% maybe in the 2% range at that point the rest of the buildings are actually performing pretty well so out in the near term I don't see divesting some of them will probably just continue to operate them, but certainly as Tom said moving forward, we would not be targeting off campus are affiliated in App.
I don't know Scott, if you have anything else to that.
I would just.
Quickly add that the Atlantic health portfolio was technically off campus, but highly affiliated its less than a mile from their flagship hospital.
And they just signed an 11 year lease on all 3 buildings showing their dedication to that campus so assets like that.
With the right system and affiliated with the right Hospital, we think can be tremendous long term investment. So we'll continue to look for those as well.
I'm Gonna add also that you.
You can certainly make money and off campus assets affiliated or even unaffiliated with the right assets. So there may be some of our peers that have a different point of view on this and based how they position their portfolio. They feel very good about.
A strategy that differs from ours.
We've also been influenced by the dramatic increase in urgent care.
And and and tell a telemedicine.
<unk>, which for the obvious reasons has continued to expand.
As a way to contain increased health care costs, but I don't want to make it seem like our study in our point of view indicates that we couldn't have peers that do well with other strategies, but that this is our point of view.
Okay.
A real quick follow up on this it's just that.
At REIT week, you also highlighted you had the highest percentage of on campus assets in the industry at 84% and.
And I guess, just you know notwithstanding a prior question on the internal versus external management of the mob portfolio and everything you just talked about a second ago are there any other ways to help people may be differentiated in its mob strategy versus other health care Reits.
Our focus on this priority type of it is just worth reiterating just given our discussion around this with the government.
That's fine, but just throw it out there or anything else popped into your margin.
Steve.
When you grant good Tom.
Did you hit 2 of the Big Differentiators I'd say the other 1 is we've you know we've always been highly.
Tenant satisfaction focused and we actually are scores and tenant satisfaction have.
And well above the the MLP index for for years and continue to grow. So that's another area I think were differentiated deal we're very focused on the.
The tenant in affiliated hospital relationships.
Got it.
No I think you've covered it.
Okay, great. Thanks.
Thanks, David.
And our next question will come from Joshua dinner, 1 with Bank of America. Please go ahead.
Hi, everyone.
Just wanted to follow up on Scott's.
Scott's comments about covered land plays.
Curious where the best opportunities.
Is it more on the MLP side or life Science, and then how would you kind of utilize those to fit into your broader strategy.
Yes. The covered land plays are definitely in the life science business with medical office those.
Those are highly targeted with specific hospitals or development partners and were generally not closing.
Those are land acquisitions or in some cases, signing a ground lease until the project is almost ready to start so it's a very different profile medical office development versus life science, It's a much shorter development timelines are generally significant pre leasing.
And always strong sponsorship from the hospital.
So really never covered land plays there.
But in my Science, we do have a big presence in particular submarkets in all 3 of the core markets that we find to be compelling and we want to continue to maintain if not grow our market share.
So those tend to be the focus of the covered land place Josh.
Okay.
And then just 1 quick 1 on.
The medical office portfolio.
Where some parking revenue.
Is it kind of back to normal or is it still going to trend higher across the second half Peter.
Hey, Josh this is Tom Claridge.
It actually is a pop back pretty significantly it's not up to pre COVID-19 levels at this point, but if you look at the results for the second quarter were 4.1% is obviously well ahead of where our typical average of 2% to 3% is.
About 100 basis points of that was from improvement in parking revenue.
You know, it's a big factor and we continue to see it grow.
You know, there's still certain restrictions on visitors obviously with the.
With the increase in cases, we probably would see more restriction on restrictions on visitors. So we'll continue to watch that but so far year to date, it's done very well.
Okay. Thanks, Paul appreciate the color thanks, Josh.
And our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking the questions I know the MLB side has been beaten to death, but just 2 quick ones.
First of all I know you had started a capex program for redevelopment, maybe a year and a half 2 years ago can you give us an update where you are with that transformation from the portfolio.
And second maybe just your high level thoughts on how you think inflation impacts your M b portfolio.
Yeah, I'll start and then I'll turn it to Claridge.
As far as as far as Capex redevelopment.
Vikram.
When you think in terms of an M O b it has a much longer lie.
Life to the improvements that are added throughout through a readout so when.
When we do our when we do a read up on an MLP those those improvements last anywhere from.
Somewhere in the in the low twenties as far as the years and if you went out and toured with us before and after property.
On an on campus, where we're where we're trying to maintain a high quality product it would become very very apparent the.
The difference that it makes in an M will be and how you can then capture rents and have a.
Happy Hospital partner and it produces real IRR. So we've been we've been projecting to spend about $75 million a year on that and we have been somewhere in that range, maybe a little less.
At times, it could be a little bit more but it's in that range, we've been quite happy with that and that does produce real long term returns and IRR.
As far as inflation on M. Obese, that's kind of a broad question.
I always I always think in terms of inflation.
Inflation with Reits in general So why don't I, just take a moment on that and I'm not going to get too deep into it because I think everyone. On this call has a pretty informed view on this topic, maybe not everybody has the same opinion, but a pretty informed view but.
I'll give you my take which is only might take.
There are simply elements of any REIT.
That are both bond like and stock like.
Inflation drives higher rental rates over time.
But it also puts pressure on rates in the short term.
Act, a little bit bond like as well so the interaction of that almost becomes impossible to break apart into its components I thought exactly had a pretty nice study on this by the way whenever it was 3.6 months ago, where he lined out different sectors and what the historical impact of inflation.
<unk> has been I started it I talked to Steve about it I thought it was quite interesting.
But.
It's a I think it's again well knowing that that bond.
Unlike stock like and then how do you how do you figure out what the interaction of those 2 is it's kind of impossible, but I do come back to real estate produces a yield.
It produces it produces a hedge against inflation and it's based on tangible assets and when you think about people that are a retirement age that want a yield on their money they want inflation.
And they Wanna be intangible assets for the for the obvious reasons real estate creates an outstanding opportunity and will continue to so I think inflation just becomes.
Noise in the process, but over time, I think that that balances out and it'll it'll be a very strong investment.
Overtime.
And our next question will come from Mike Mueller with JP Morgan. Please go ahead.
Yeah, Hi, just have a quick question here I know the lifestyles developments can be big ticket projects, but when you look at the new development pipeline, It's roughly 90.10 split between.
Dollars allocated to life science versus I'm opening east and I'm curious over the next reported mirrors do you see that balancing out a little bit more with movies or staying.
We skew towards life science.
Mike Great again, it's Tom right right now, it's heavily skewed toward life science.
With the clusters concept and the inability to typically buy quality product at a reasonable price while you have a growing tenant base. Fortunately we've got.
You know some form of land bank and Densification and life Science development has produced a tremendous return for us.
We're still modeling even today 150 to 200 basis points amazingly exceed that even at current land costs. So it's it's a natural way to invest in life Science I would say, it's a natural way to invest in M obese too with relationship with health systems.
But that Theres a lot of work involved in and capturing those relationships identifying the opportunities of moving them forward. We've been successful on that front too and if you look at our pipeline. We do have a pretty good sized pipeline right now of M will be development opportunities and I think that will continue to grow I think life science, though.
On the development side will continue to be a larger opportunity and and probably on the acquisition side. We may see more activity that makes sense for us across our across the M O b.
Portfolio, Scott Brinker, what are what would you add to that or we're modifying.
I don't have much to add I think medical office could go higher we are prioritizing that as an opportunity things slowed down.
Covid, but we're starting to see some real activity and it is an area we'd like to continue to grow but just by the sheer scale and cost per foot of life science, plus the dramatic growth in that industry I think it's fair to say that.
There is a larger opportunity.
That market. So I would expect it might not be 90, 10 going forward, but it would certainly be more than 50 per cent.
Got it okay. Thank you thanks.
Thanks Martin.
And our next question will come from Lukas Heart Rich with Green Street. Please go ahead.
Thanks.
So life science that you keep moving up and I'm just curious how much higher they'd have to go before you would consider being a seller.
Oh, that's a good question.
You know I tell you what Lucas 1 of the things about being a seller. Yes. The money then has to go somewhere and I recognize there's always opportunities for special dividends and whatnot, but.
That that's not really the play that we would typically be looking at.
The fact is is that if life science is continuing to have a decline and an in cap rates just because of the growth opportunity in rents and the supply demand dynamic continues to be strong.
I've always said, we're in the real estate business to be in the real estate business and we want to diversify between the 2 businesses and even the third with CCR sees.
To smooth out the inevitable.
Cyclical nature of each of the 3 businesses.
So at the same time I recognize there can be times. When there is a price that somebody is willing to pay that you absolutely cannot refuse and that always comes into play.
But when I look at life science in the let's just call it per quality product in the low 4 cap rates.
It's because the it's because there is such a.
The enormous demand for this quality product within these clusters and obviously that means there has gone up some.
And Oh, that's a good thing at the same time, then it becomes harder to grow so thank goodness, we've got a good sized densification pipeline to grow high quality product to meet our tenant demand.
So I don't know that that's probably the topic of a 15 minute conversation because it's a great question, but if I was just to give you a quick.
Answer that time might respond brinker, you've thought about this a lot to you and I've talked about it what would you add.
Yeah, I mean, I think there's the initial cap rate and then there's considerations around NOI growth and how much capex is necessary to.
Produce an IRR and how does that compare to other real estate sectors and when we do the math.
Life science, although on an absolute basis, those cap rates seem awfully low on a relative basis to other real estate sectors or even a broader bond and equity markets. It still feels like there's a pretty compelling total return so.
You can't just focus on initial cap rate, we still think there's a lot of growth to capture in that business and long term returns that will make a lot of sense.
I'd add I'd add the same thing is true of M obese.
For for a number of years it wasn't it.
It wasn't the Darling child of different asset classes.
I remember some years back Green Street wrote a piece that said M. O B cap rates are just much too high it doesn't make any sense relative to office and other sectors..1 can look at the same thing today and then we'll be in life science against some of the other really hot sectors.
And make the argument that these 2 businesses.
Especially with the high barrier to entry from campus M. Obs in life Science, and the 3 big markets from the clusters.
Or a very high quality irreplaceable and probably still have some some value to capture.
To equate to cap rates in some other sectors. So that's an arguable item that again, the investors and analysts on the screen are experts in that and that's up for you guys to decide but we still feel quite comfortable that that the value is there in those assets and there is further upside.
Great I appreciate it Ed and then could you provide an update on the shadow supply pipeline for life science in your market.
That mostly noise still or are you seeing traction there.
Yeah.
Sure I would call it noise, but I'll give you the best estimate that we have I might ask Mike and Scott to comment to you, but if you just go 1 marketed at time, Inc.
In Boston, there's about 6 million square feet underway that will deliver through year end 2022.
It's about 80 plus percent pre leased at least for the amounts that are delivering in 2021, we're getting great traction on our 1 to 1 Cambridge Park drive development deliveries in late 'twenty..2 so we feel really good about the near term outlook now there is a shadow pipeline of another 6 million square feet.
The timing of that is obviously less certain some projects may get pushed back some may get delayed indefinitely.
Some of them May go Tac because in the 3 core markets that market for tech tenants continues to be really strong we've seen that happened in the past it.
It will probably continue to be the case that some of this quote unquote lab product will end up being occupied by tech tenants and all of these numbers that we quote Lucas do include conversions, even though in many cases those aren't as competitive.
We certainly don't ignore them.
That's the Boston outlook.
In the Bay area today, there's about 2 million square feet underway virtually everything that's delivering through year end 2021 is pre leased.
And we're getting great traction on some of our deliveries in 2022 really into 2023 should.
So we feel really good about the outlook over the next 2 to 3 years in the Bay area. There is a shadow pipeline there as well naturally.
By our estimate it's about 3 million square feet subject to all the same comments I made about Boston.
And then San Diego, there's about 2 million square feet underway.
It's about 50% pre leased most importantly, our 3 projects totaling almost 600000 feet are 100% pre leased so that's the most relevant from our standpoint and again there is a shadow pipeline of about 2 million square feet in San Diego that we're keeping a very close eye on that applies to all 3 markets.
Right, there's a lot of demand, but certainly there is the potential for increased supply and it's something that we continue to monitor them.
On a regular and very very detailed basis.
Yes.
Thanks, so much.
Thanks Lucas.
And this will conclude our question and answer session I would like to turn the conference back over to Tom Herzog for any closing remarks.
Well, thank you operator, and thanks to all of you for joining US today. We appreciate your continued interest in health peak and look forward to seeing many of you at the upcoming industry events.
Talk to you all soon bye bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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