Q1 2022 Healthpeak Properties Inc Earnings Call
Good morning, and welcome to the healthcare properties first quarter conference call.
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Now I'd like to turn the call over to Andrew Johnson, Senior Vice President Investor Relations.
Please go ahead Sir.
Welcome to help fix first quarter 2022 financial results Conference call Today's conference call will contain certain forward looking statements. Although we believe the 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.
Shneur of risks and risk factors is 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 on this call in an exhibit to the 8-K, we furnished with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements do you give it also it's also available on our website at <unk> Dot com.
I'll now turn the call over to our Chief Executive Officer, Tom Herzog.
Thanks, a J and good morning, everyone with me today are Scott Brinker, our President and Chief Investment Officer, and Pete Scott, Our Chief Financial Officer.
Also here and available for the Q&A portion of the call are Tom <unk>, Our Chief operating officer, and Troy Mchenry, our Chief legal officer and General Counsel.
First a few highlights from the quarter.
Our operating results were ahead of our initial expectations.
We delivered 500000 square feet of new development, including three new 100% leased class a life science buildings, representing an investment of $262 million along with three HCA on campus mob.
Representing an investment of $68 million.
Leasing momentum remains strong across our life science, and <unk> businesses, and <unk> entry fees and another strong quarter with cash sales volumes up 42% year over year.
We continue to advance a number of growth initiatives, including future development Amplifications and entitlements in our three core life science markets and in our HCA development pipeline.
As for our current competitive positioning.
Starting with our life science business, we are focused almost exclusively on large campuses and class eight markets and submarkets provide providing us with depth and competitive advantage versus new life science entrants and owners of conversion of one off buildings.
If science, new supply has increased and public biotech markets have been choppy occupancy and absorption within our portfolio has remained strong and rates has continued to grow.
NIH funding is at an all time high and venture capital continues to support biotech growth, we believe new technologies and scientific advancements will continue to drive strong long term demand for purpose built life science space.
Today, we estimate the mark to market opportunity within our life science portfolio is roughly 25% supporting our organic rent growth over time.
Our mlps are very well positioned and located primarily on campus with number one or number two hospitals in their respective markets with high concentrations of specialist physicians.
New competition of on campus properties as constrained as each project requires an invitation from a hospital or health care system.
The majority of our MLP growth is currently through our HCA development program. This.
<unk> benefited from strong demand in supportive housing values with almost no new competition as crc's require eight to 10 years from pre development through stabilization and our portfolio's replacement cost would be at least three times our cost basis. Additionally.
Additionally, the yield for irreplaceable <unk> portfolio is incredibly strong on a risk adjusted basis.
Turning to the impact of higher inflation on our development program.
We estimate that construction costs are up 10% to 20% over the last year dependent on the type of building location and other factors and land is up significantly more than that.
Fortunately, we have <unk> contracts in place on our entire $1 3 billion of.
The active development projects.
This pipeline is fully funded within our plan and is already 71% pre leased and we are seeing very strong interest in the remaining available space.
But the rapid rise in land values the value of our sizable land and Densification opportunities has increased significantly.
As a reminder, we have roughly $11 billion of embedded future development opportunities over the next 10 to 15 years.
Going forward, we would expect higher land and construction costs to dampen new supply at certain life science projects being contemplated by new entrants will no longer pencil, but we'll see how that plays out.
Turning to our balance sheet.
Our current net debt to EBITDA is five one times and we have $2 billion of liquidity.
We have no bond maturities until 2025, and our floating rate debt is at 17% in line with our long term target of about 15%.
Although higher short term rates will weigh a bit on our near term earnings. We believe our percentage of fixed floating debt provide appropriate match funding to our portfolio and also lower average cost through the cycles.
Given we are well below our net debt to EBITDA target of mid to high fives, we have plenty of dry powder.
Finally board changes, we announced yesterday.
Last week's Kathy Sandstorm was appointed by the board as independent Vice Chair and chair of the nominating and corporate governance Committee.
And Kathy his new role as Vice chair, she will work closely with Brian Cartwright, our chairman I'm various board matters.
And in her role as chairman of nominating and corporate governance Committee Cathie will assist in planning for future Board leadership roles in succession.
As many of you know Kathy spent two decades at heitman ultimately running a number of domestic and international businesses. In addition to the leadership of the REIT investment team with.
Let me turn it to Scott.
Thanks, Tom.
I'll cover first quarter operating results, starting with life science year to date, we've signed 311000 square feet of leases and we have an additional 610000 square feet.
On your letters of intent.
Leasing activity includes new development renewals and expansions with existing tenants.
Note that our leasing volume will naturally be lower this year, because we simply don't have much space available to lease.
The operating portfolio is now 99% occupied we have very few maturities this year and our development pipeline is 71% pre leased.
Important to note that we're still seeing strong demand for the very limited space that we do have available.
Same store NOI growth in the quarter was five 2% and exceeded expectations.
Rate was driven by contractual rent steps mark to market and a 30 basis point increase in occupancy.
We had a 100000 square foot tenant cease operations in mid April we immediately received several inbound calls from tenants wanting the space, we've already signed an LOI with an existing tenant on half the space and we have significant interest in the remainder of the <unk>.
<unk> rents were signed in 2018, and 19, and we are therefore, well below market.
The earnings impact in 2022 is roughly one penny because of downtime as we repositioned the space for heavier lab tenants more important we expect to realize a 3 million dollar annual earnings improvement in 2023 and beyond in comparison to the prior run rate.
Moving to medical office leasing is off to a great start with 870000 square feet of convention mix in the quarter above our budget.
To market on renewals was three 7% and retention was strong at over 80%.
Same store cash NOI grew three 6% in the first quarter and exceeded expectations. The drivers were broad based including occupancy mark to market parking income address at medical city, Dallas and lower bad debt.
Same store for the full year is currently trending at the high end of guidance in March three way relationship based transaction that's been in process for the past six months or so we acquired two applebee's for $43 million the buildings around the campus of HCA clear Lake the number one hospital in Webster, Texas, a suburb of <unk>.
<unk>, which is our second largest MLP market. The initial cash yield is 5% with roughly 3% rent bumps one of the buildings is LEED platinum.
Finishing with CCR sees first quarter results exceeded our expectations and we're trending above the high end of full year same store guidance.
Occupancy was up 120 basis points sequentially.
Forward looking indicators, including leads and tours exceed 2019 levels and are trending favorably.
Entry fee cash receipts totaled $21 million during the quarter exceeding the amortization amount we recognized in earnings by $2 million that gap has now occurred in four straight quarters, and we expect it to continue which is a positive sign for future earnings growth.
We continue to have strong pricing power with little or no discounting our average entry fee sale price increased 18% year over year, and Revpar increased nearly 5% year over year.
Given the uncertainty in the labor market, we're choosing to be conservative for now and not adjusted same store guidance, yet with that I'll turn it to Pete to cover financial results and the balance sheet.
Thanks, Scott starting with our financial results for the first quarter, we reported <unk> as adjusted of <unk> 43 per share and total portfolio same store growth of five 6%.
Excluding the one time cares act grants received during the quarter, our pro forma total portfolio same store growth was three 2%.
Our same store results reflect the strong industry fundamentals across all of our business segments.
Last item under financial results for the first quarter, our board declared a dividend of 30 cents per share.
Turning to our balance sheet as Tom mentioned, we ended the quarter with a five one times net debt to EBITDA.
Floating rate debt of 17% and over $2 billion of liquidity, providing us ample dry powder.
Our floating rate debt percentage takes into account $313 million of equity forwards, which remain outstanding.
A portion of our floating rate debt also helps to have certain variable rate seller financing loans, we provided during 2021.
Turning now to our guidance, we are reaffirming our <unk> as adjusted guidance of $1 68 per share to $1 74 per share and our blended same store guidance of $3 two 5% to 475%.
As you can see from our first quarter results. Our segments are performing very well and are tracking at the higher end of our guidance range for the year.
However, interest rates have increased faster than the forward curve implied when setting our initial guidance, which offsets our improved segment performance.
Please refer to page 35 of our supplemental additional detail on our reaffirmed guidance.
One last item before turning to Q&A.
A few large adjustments in our <unk> work this quarter, we incurred a $14 million nonrecurring loss, resulting from tenant relocation and demolition costs. The medical office building, we own our med capped predecessor owned for 20 plus years.
As we began opening up walls during the initial phases of our redevelopment late last year, we discovered some structural items that we along with our structural engineers concluded represent potential life safety issues and determined it appropriate to demolish and rebuild as opposed to redevelop.
We recorded a $17 million impairment on the real estate during the fourth quarter of 2021.
Additionally, we recorded a $23 million gain on sale from our Fry hospital disposition.
This asset was classified as a direct financing lease is included in NAREIT <unk> back out from <unk> as adjusted.
With that operator, let's open the line for Q&A.
Thank you now begin the question and answer session.
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First question comes from Nick Joseph of Citi. Please go ahead.
Hey, This is Michael Griffin on for Nick I'm curious on the leasing side I know brinker touched on it a bit but is there more of a push to tie future leases to some kind of CPI based system.
And Michael I'll I'll cover that and then I'll ask Takeda.
Talk about medical office as well so at least for life Science I mean, we were generally in fixed escalator markets. We tend to get three 5% in the bay area more than the 3% range in San Diego and Boston obvious.
We and a number of other landlords in those markets has been able to push the market rates quite a bit on new leases and renewals, but to date, we haven't seen any change in the actual escalator.
Clarence do you want to cover medical office.
Yeah in medical office.
We've been pretty successful over the years getting for the most part 3% increases.
We are trying to push those we're having some success right now pushing to three and a quarter, sometimes three and a half.
The market is really not accepting.
Pushed to CPI, where most of our markets at least I pushed the CPI based leases if we do get them. The doctor typically once a collar and that caller can be.
Pretty low on the low end you know we get into really implementing CPI increases.
We'd want to call or more with a 3% on the low end, maybe a 5% to 6% on the upper end and right now we're just wouldn't get that so for the time being at least we're just going to continue to push for higher fixed bumps and we think that's the way to go right now.
Gotcha, and then I know Herzog touched on the kind of embedded growth within the development pipeline you know I'm I'm curious how you view the land bank our size relative to sort of the total active development pipeline now and where you could see that maybe.
May be growing in the future.
From the land bank perspective, including Densification.
We've got about $11 billion of future development activity, which we would expect to occur over the next.
10 to 15 years.
When we're looking at just pure development spend right now it's in that $600 million range per year, maybe slightly less.
We have $1 3 billion development pipeline in place we have a number of projects on deck and we do intend to continue to have a fulsome pipeline, but with a long runway for future development.
Great. That's it for me thanks for the time thanks.
Thanks, Mike.
Thank you and the expression.
From the chemical Deutsche Bank. Please go ahead.
Oh, sorry, sorry, everyone. So I guess just following up on the future development.
Pipeline.
It is just land held for development some of it see the up zoning of projects. I mean do you have a you have an update you might be able to give us on a you know in terms of the kind of.
Value of fair market value of that land that opportunity that's not captured in the supplemental you know just as we're thinking about you talked about market value for land going up a lot any any additional thoughts there would be pretty helpful.
Yeah, Hey, Nick It's Scott I'll, let me start on that one and then you look at the six plus million square feet of land bank and the.
Our life science portfolio alone just under half of it represents vacant land.
Like vantage in South San Francisco or excess land on properties that we acquired over the past few years like the post are the towers.
In South San Francisco.
The balance, which is a little bit more than half of that six plus million square feet represents densification.
We have a one or two storey building or campus.
Threw up zoning as you noted Chris.
Turning to substantially more square footage over time.
As leases roll over so that's the general breakdown of the six plus million square feet and then in terms of in terms of value.
If you look at the vacant land most of it has been on our balance sheet for a number of years in the case advantage. Some of it was <unk> 10.
10, plus years in other cases, we bought lay out two and three years ago, and certainly land values have escalated massively in the interim even over the past year in South San Francisco, Theres, probably up somewhere in the 50% to 100% range, probably even more so in some cases and then for the for the land on op.
<unk> assets, where where Atlanta literally just came as part of the portfolio like the poster to towers.
The land is virtually on our balance sheet, but nothing so as we go through that don't need process.
And the entitlement process, which is underway now that land will become significantly more valuable than it is on our balance sheet today I don't want to put a number on it because we haven't gone through the entitlements, yet, but it's meaningful.
Okay. Thanks, Scott just second question Pete on the balance sheet floating rate debt exposure is it sounds like the guidance contemplates some of the forward equity paying down our commercial paper program.
The number of supplements like little over 300 million, but just trying to understand in terms of that commercial paper, there's still a balance there.
Billion left and is the plan to just continue to let that be floating rate you know have that exposure to higher rates over the next year or how should how should we think about that.
Yeah, Hey, Nick it's Pete here, that's a good question.
As you think about our floating rate exposure, we do target right around 15% and that's as a percentage of total debt.
Do adjust for the equity forwards I did mentioned in my prepared remarks, as well that we do.
Do adjust a little bit for the variable rate loan loan receivables that we have which is just an offset to our floating rate liability. When you factor that in that's about a 175 million were right at that 15% target and we like that because we try to match as best as we can.
Our weighted average lease term with our weighted average debt maturity and our weighted average lease term is around five years weighted average debt maturity is around six years.
We look at floating rate debt is a very efficient way to fund our developments and we'll term floating rate debt out as projects deliver we also look at floating rate debt over many cycles and we think that it does create some lower average cost relative to fixed rate debt and it provides us with some prepayment flexibility so we'll be right around that.
15% target.
We did include in our guidance for the year.
Some higher end increases so we're still within our guidance from an interest expense perspective, I'd say, we're probably towards the higher end today, given where the forward curve has trended, but we've seen improvement in our operating portfolio segment performance to offset that so that's probably about as much as I would want to stay in floating rate debt.
Alright, that's helpful. Thanks Pete.
Thanks, Nick.
Thank you our next call comes from Austin <unk> of Keybanc. Please go ahead.
Yeah. Thanks, everyone just wanted to touch on the CCR sees a bit and see if you could provide some additional detail around the assumptions.
Regarding both the recovery in that portfolio it sounds like you've seen some.
Awesome, we just lost you if your phone muted.
Operator, maybe we need to go to the next question and we can re queue Austin.
Thank you one moment please.
Next question from Michael Carroll RBC capital markets. Please go ahead.
Yeah. Thanks, Scott I was wondering if you could walk through your how you kind of analyze the tenant credits within your life Science segment kind of given.
What we're seeing in the public and the private markets, they're in and I believe you mentioned a specific issue already this quarter.
Yeah, I'm actually going to also ask Mike doors to comment on that and then maybe I'll come in at the end, Mike do you want to start with it.
Sure happy to.
Talk a little bit of how we look at you know kind of the.
Evaluate the risk of any lease transaction were really kind of look at it.
On two dimensions.
You know one of those is kind of the credit worthiness of the tenant itself, but we're also.
<unk> the nature and the magnitude of the landlord investment that is required for the deal.
So when we kind of focus on the tenant itself, we're really looking at.
Both quantitative and qualitative metrics. So on the quantitative side, you would look at things like cash on hand, and the cash burn rate.
You know as we're looking at is this a company that's got less than 12 months of cash here or is this a company that's raised a significant amount of money.
That's going to carry them through the next three to four years.
We would also consider market cap, obviously, if it's a public company.
If you can give a sense of the likely ability to be able to raise cash if necessary.
We're also look at a more qualitative measures things like the experience of the management team.
A team that has built companies in the past and brought them to them to an exit successfully.
Or is it a group that's on kind of their first rodeo.
We also consider the quality of the financial partners.
Is it does it back like friends and family or is it backed by quality VC firms, obviously experienced VC firm.
But it is not only known for sort of competency in being able to evaluate the investment prospects, but also for providing managerial buys and an oversight, which obviously.
It helps mitigate the risk from the landlord perspective, we also consider things like the breadth of the portfolio, obviously, all things being equal we'd prefer to not to have more shots on goal so to speak.
Obviously, having several past profitability helps mitigate the risk of insolvency.
So that's those are all the things we kind of focus on from a tenant credit and credit worthiness perspective, and we're really focused on and I think your question is more pre revenue tenants.
But we'll also look at the nature and the magnitude of landlord investment you know as or are we talking a deal where someone's going to take the space as is.
Obviously, we'd be willing to accept a little bit less credit worthiness, if it's someone who's taken as his deal and we're not putting any more money into it as opposed to attend.
I'd say that that's looking for a heavier investment from from the landlord.
And then as much as the the magnitude of that investment is important. It's also important to sort of evaluate the nature of it the reusability of those tenant improvements and the investment that's required to be made so obviously more residual values as a landlord obviously helps mitigate any risks.
Things like manufacturing vivarium chemistry spaces tend to be a little bit less reusable the basic biology space.
But the real reusability of even those cases can be improved with thoughtful.
Design and space configuration.
So you take all these factors.
Together.
And what kind of mitigate this risk by one I think we have you know.
Excellent real estate located in complications in top markets. So, we're obviously going to assess that credit of the tenants both on the.
The quantitative side and it's qualitative metrics.
And also be mindful of the that Ti reusability and and the magnitude that we're having to invest so I think at the high level summary of how we kind of look at these tenants going until these transaction I don't know Scott do you have more to add there.
That's a comprehensive market.
Thanks.
And then could you talk about your watch list maybe is there anybody else on your watch list I mean should we be concerned about another issue popping up and over the next few quarters.
Yeah.
I can take that one Michael I mean, we always have a watch list I mean, it's a portfolio with approaching $600 million per year of NOI. So that's you know that's a lot of tenants and clearly in the biotech business you've got.
Some percentage that are always going to be pre revenue.
We have a very small percentage that's preclinical I don't think we'd ever want that percentage to be zero. Those companies end up at least a number of them needing a lot of space and you want to be there and coming landlord.
But it's not a high percentage less than 5%.
But certainly not a.
100% investment grade tenants, it's closer to 40% range. So.
It's something that we spend a ton of time on from a portfolio management standpoint, we always have a credit watch list it shrunk over the past.
And at least over time, we've had very little bad debt in the dark.
Casting that watch list shrink over the past couple of years in the last quarter, certainly because of the capital markets public.
Public markets in particular.
There are more.
Companies.
We're starting to watch more carefully but certainly feel good.
For a couple of reasons, one the quality of the real estate and locations and then the fact that we have such a significant mark to market opportunity that if one tenant doesn't make it.
At least today, where we're seeing significant demand to backfill that space very quickly like what happened in Boston.
In many cases that are very significant mark to market.
Okay, great. Thanks, Scott Yeah.
Thanks, Mike.
Thank you next call is from Rich Hill Morgan Stanley . Please go ahead hey.
Good morning, guys.
Talk about the mob portfolio just real quickly.
Seems to be some renewed interest in the public markets for medical office, the private markets I think are really attractive.
It's a nice a surrogate for traditional fixed income.
Have you thought about you know.
Maybe using selling your mob portfolio, reducing your mob portfolio and I think about this in context of your life Sciences, which seems like a really attractive growth engine.
Yeah, rich I'll take that one.
We first we like our mob business and expect it to deliver.
Above average and more consistent returns over time.
Then the typical portfolio and it will be due to the high on campus percentage.
In a trophy campuses that we literally took decades to build and could never be replicated today.
Also have the accretive development program.
The proprietary program with HCA, which we like a lot.
And we think that the stable and growing and we will be cash flows give us the ability to be more aggressive on our life Science development program and then on top of that there are a whole lot of synergies that we have with our life science business due to the robust platform we have in place.
The vast majority of our corporate back office transaction.
Capex development functions are shared resources as is leasing and data analysis systems and other areas.
So we do like the MLB business, we believe it's irreplaceable through the cycles is a very good business to have matched up against life Science and also creates for us G&A synergies and <unk>.
Cost of capital efficiencies so.
We very much like Kevin the MLB portfolio as a part of our diversified play it healthy.
Got it.
Guys, maybe just going back to the prior question about <unk>.
CPI <unk>.
CPI bumps for the medical office do you I recognize that maybe you're not getting those right now.
But it would seem like in an environment, where the world has certainly changed over the past three to four months that maybe tenants would be more open to that.
Is that just the naval naive way of thinking about it or do you think at some point in the future as the market becomes more accustomed to an inflationary environment that there might be a way to modify it to two.
To negotiate leases that have a little bit more growth kick around them.
Yeah, I mean, if you look at the last 10 years in medical office.
Our re leasing spreads were in the mid twos or NOI growth was in the mid tiers in an era or a decade, where CPI was below 2%.
So and we'll have a I think a good reputation for stability, but at least for our portfolio. We also have a decade of history, where our growth rate exceeded CPI.
Now certainly.
With the four to five year average lease term, we're not re pricing our contracts every day like some sectors, but it's not a super long lease term either at four to five years on average that if inflation continues at the pace that it has been and construction costs continue to increase our expectation.
The market rents where eventually.
Reflect that rapid growth and the same would be true of the escalator. So I think it's too early to start asking for CPI escalators.
6% rent bumps, but.
Let's see if inflation continues at the pace that it is and if so I would expect that that will be rats, which start to adjust.
That's very helpful guys I appreciate it.
I would add is keep in mind that.
Expense reimbursements are always a big part of any of these types of leases in our portfolio over time has moved toward in Mlps has moved toward being a solid two thirds triple net so as far as the expenses that are involved during an inflationary period, we're largely sheltered from them.
Thank you guys.
Thank you.
Yeah.
Thank you next question comes from Juan Sanabria of BMO capital markets. Please go ahead.
I'm wondering where are you on the line.
Sorry, you would think I would have learned by now on mute myself I apologize.
Just curious on the life science part of the business what history would tell you on the stickiness or not.
Rents in a recessionary environment and I guess the related question any sense of the slowdown or apprehension.
As a result of an IPO market that's down significantly.
Providing less liquidity to potential startup.
Tenants.
Yes, I can start with that and some of the team they have.
Commentary as well, but rents are up over the past decade, 7% to 10% in our three core markets.
They were up in the 15% to 20% range over the last 12 months and I think you've probably heard us say repeatedly we love that business and we love our market position within it but we're not underwriting that rents are going to grow at 10 plus percent forever.
So had things slowed down a bit yes, probably.
Although the funding sources into the R&D segment are quite diverse certainly the public markets are part of it but you have to think about NIH funding, which continues to escalate at about 6% per year.
Venture capital funding continues to be strong both the funds that are flowing into the venture capital firms for future investment as well as deploying to funds that they already have and those volumes are still quite strong certainly by historical standards and then you think about M&A as well as partnerships and collaborations.
Realistically slowed down a bit over the past two years because of the valuations were so high.
We would expect those to start to pick back up here in 2022, if the public equity markets remain weak in terms of demand.
We don't have much space available to lease.
So that's good.
Good thing and yet we were.
We're still active in the marketplace of course, and we're still having a ton of success.
We see in the space that we do have available, whether it's development or within the operating and redevelopment portfolio.
In terms of gross demand across the three markets that we're in.
The numbers are maybe a bit softer in <unk> versus the prior quarter, but a big part of that is driven by the fact that some huge leases got signed so those numbers came out of the.
Active demand category, but they helped.
Take up some of the new supply that was coming online so.
We're still feeling good about supply and demand in our three core markets certainly for 2022 and really into 2023 as well I mean, if you think about our portfolio in terms of the development pipeline at 71% pre leased.
It's awfully strong with huge interest on the balance not a ton of lease rollover within our portfolio over the next three years in Boston its almost zero in San Diego, It's extremely modest and in South San Francisco, we have a bit but not significant and some of those buildings will end up being redeveloped or torn.
Intensified so we actually don't have a whole lot of lease rollover.
For the next three years, if things do slow down a bit so we're still feeling pretty confident and when we look at all the new supply two things have emerged that I think are worth noting and they are consistent with how we've talked about it for the past two years, when we got a lot of questions about conversions coming to market as well as new entrants.
And we really kind of a deep dive on that.
The new supply coming into our markets over the next two years and what we found is two things that are important one is that the purpose built new developments, our pre leasing at a significantly higher level than conversions.
So in the 55% range for new builds over the next two years versus less than 30% for conversions.
And that's good because we're doing almost entirely new development of purpose built assets and then the second thing that emerged from our analysis is that the incumbents like peak.
Our pre leasing at a far higher percentage than the new entrants again in the 60% range for incumbents like L pic versus less than 30% for the new entrants so none of that surprises us.
Given the way that business functions, but I think worth passing along.
And then just as a follow up on the HCA development pipeline.
I think the 61% pre leased on the new deliveries, what's the typical budgeted timeframe to lease up that remaining space and how are the other projects that have been delivered.
Previously.
Third in terms of getting it to a kind of a 90, 95%, which I presume a bigger target.
Yeah typically type one typically.
A lot of the interest from third party tenants doesn't come until the buildings physically completed we see a lot more interest from doctors at that point.
If you look at for example, our first building that was complete which is.
Grand Strand in Myrtle Beach that building is now effectively 100% leased so it.
It took about year and a half to get there and that's kind of what we typically think of about a year and a half to two years. After initial opening we get to a stabilized occupancy rate that you know it could be anywhere from the operators to upper ninety's, depending on the market.
Size of the building a number of other factors.
Thanks, Tom.
Thanks Juan.
Thank you. Our next question comes from Steven Valiquette with Barclays. Please go ahead.
Great. Thanks, Hello, everybody.
Couple of questions just on the medical office landscape. So just to throw it out there obviously since your last earnings call. It's been a major announcement or two regarding proposed M&A activity amongst some of your <unk>.
Medical office REIT peers are you able to just at a high level comment on any puts or takes implications for you when you're thinking about your own health system relationships and opportunities are those announcements not really change anything for you one way or the other.
Can you answer that then I'll have another follow up on different topic on medical office.
Yes, Stephen Tom Herzog again.
Yes, it's interesting obviously news over the last couple of three days.
As we had indicated last quarter, we did not sign the NDA for HCA.
Nor are we involved in any merger conversations with HR.
Be clear we were not party F Party see party D or any other party named and.
Those filings nor.
Nor are we providing any financing related to the deal which is questions that have been asked of us, which we are able to now answer on this call.
Our strategy involves using our relationships and scale to drive one off market transactions hitting lots of singles and doubles that.
That is where our focus remains on the acquisition side of it we've been talking about that for quite a while as well as our development Densification and life science, primarily and with our HCA.
<unk> program so for US It certainly has been interesting press, we'll see how it all plays out but not a whole lot of impact healthy.
Okay. That's helpful to clarify that.
The other question just as we look at your current health system relationships on page 29 of the supplement for medical office.
With all the talk around elevated skilled labor costs labor pressure is still a major variable from any health system operators, so far in 'twenty two.
Particularly HCA you know with some of their own announcements are you seeing these labor dynamics really have any impact whatsoever on medical outpatient real estate expansion a reduction decisions. Among the health system do you have relationships with or is it.
Just not really impact and you know this corner of real estate landscape right now from from your own view.
Yeah. This is Tom again.
Yeah, we haven't seen any kind of impact from from the labor obviously on the hospital side, you know HCA did report.
A little lower guidance for the year, but you know when you look at the results from the quarter. They actually had a fairly good quarter as far as the revenue side their admissions were up surgeries surgeries were up so.
From a business standpoint they.
They're doing great and I think they'll correct their expense issues, but we have not seen any kind of a problem in our facilities in fact, sometimes it's a benefit because.
More and more acute services are now provided in the in the outpatient setting and it it's actually cheaper to provide those services in a building like ours. So if anything it might boost the.
The demand for.
Space in our buildings as time moves forward.
Okay. That's great just wanted to check the box on that thanks. Thanks, Steve.
Thank you next question comes from Mike Mueller Please.
Please go ahead.
Yes, Hi, I guess, Tom given your your comments about construction costs and land costs moving considerably higher would you anticipate that your 'twenty three and 'twenty four development starts have.
Somewhat lower returns, but what's in place today or where is it your expectation that market rents have kept up enough to keep those returns relatively stable.
Yes, okay.
Market rents have certainly helped.
But costs costs have risen land costs are obviously up dramatically.
Dramatically Fortunately we hold.
As you know a massive amount of land through our land bank densification opportunities, but we've said for quite a while we've been we've been.
In the mid Sevens as far as our.
Yield on cost, we've said that that can't continue forever and of course, we can't so we.
Would be shaping the estimated.
Yield on projects going forward, but not as much as most because we already own some of the best place to land that exists in some of the hottest markets in the country. So we would probably shaved that back what would you say brinker somewhere in the six 5% range. If we were swaying in it right now versus seven 5% yields in our current pipeline.
<unk> does that sound about right.
Yes, certainly a few market Atlanta market that sounds right Tom.
Yes, but.
At the same time, our returns may be higher than that because we've got that land that we're holding at historical cost. So we still feel quite good about the development program and we're keeping a very close eye on demand and supply in all three markets.
Have taken that into account in each market separately as to how aggressive we get in each market on our development starts in our timing.
Got it Okay, and then just a quick follow up.
In case I missed it is there any update on that.
Always and some potential starts interest in terms of timing.
Yes did you want to take that I can take that yeah, I mean, our team is.
Page on a regular basis with the local stakeholders.
Creating an alignment with what that neighborhood is going to become we're pretty excited about it actually the proposed policy order still making its way through the legislative process. It's not something we're particularly focused on anyway. It's ultimately just a mechanism to enact zoning for that neighborhood, which is something we.
Agree with him. It does look like a working group will be put together to make recommendations on what the rezoning will look like and we would expect to work closely with that group. So we're pleased with the progress to date in the interim.
I'd be happy with the yield that we're earning on that investment.
Got it okay. Thank you thanks, Mike.
If you have a question. Please press Star then one.
Our next question comes from John Pawlowski Green Street. Please go ahead.
Thanks, just one question from me Pete I apologize I missed a few of your comments on the MLB demolition could you just give us a little bit more color in terms of age of the building when was it acquired and whether there's.
This could potentially trigger a more systemic reviews certain vintages, they don't own the buildings across the portfolio.
Tom maybe you could take that one.
Sure Yeah that building we.
It was acquired as part of the Med cap transaction.
Back in 2000 and as.
As you may or May not know health healthy purchase med cap in 2003 late 2003 so.
It's been in the portfolio of about 22 years.
You know I've been.
Either on the hospital side of the MLB side been involved with medical office building in hospital operations and construction for almost 40 years.
It's the first time ever seen something like this it was kind of an odd.
Occurrence, we went to redevelop the building sits on a great campus.
As we said it's an older building its 40 little over 40 years old when we started to take the facade off the building the contractor noticed some irregularities in the floor plate and we brought in a forensic engineer.
To check it out because it could have been fixed but you know given the age of the building and design and the cost to fix it we just thought it was more prudent to.
To vacate the building and and ultimately demolished probably happened in the third quarter, we were able to move all of the tenants. We're just moving some equipment out now we.
We did check the other buildings that are on the campus that we're at.
At least one of them I think was built by the same contractor and we did not have any of those issues in those other two buildings on campus. So I think it was just a fluke at occurrence and we don't expect that to.
To be recurring throughout our portfolio.
I would add that it could've been fixed.
Got.
Maybe not to the full standards of what it would've been built new so we assessed it instead, if theres any remaining life safety.
Possibility that it is our preference should take the building down we relocated all of our tenants did the right thing for those those physicians and felt that that was the better answers. So it cost us a few bucks but.
Obviously, we would never take life safety.
Risks so that was our decision on that one.
Okay. Thanks for the time.
Yes. Thank you.
Yeah.
Yeah, we have a question. Please press Star then one.
Next question comes from Rich Anderson.
Please go.
Go ahead, hey, thanks, good morning.
So Tom you are clear about your lack of involvement in the HR H T, a well tower et cetera et cetera saga.
And I appreciate that but.
As a company going back many years as you know.
Pre health peak named.
This was a consolidating type of entity in and perhaps some mistakes were made along the way, but by and large you are what you are today because of some of the major steps that were made 10 15 years ago.
The tone of the company changed is as a consolidator to the point, where it's all about investing within developing and continuing with the relationships on the mob and life science side and boy, that's going to be really hard to to imagine health peak being involved in some type of.
M&A type of transaction on a go forward basis is it.
It's almost hard to see something like that happening and that we should be thinking about a blocking and tackling type of mentality pretty much.
Exclusively at this point.
Yes.
Very interesting.
Insightful question rich.
I would describe it this way we spent half a dozen years.
Moving our portfolio into a place where we had scrubdown three businesses.
That where that will all represent vital.
Businesses to society in the future, we eliminated all of our problem assets.
We ended up with three businesses.
Literally irreplaceable in today's environment and and have opportunities in all three to expand.
And the expansion potential that we have is so significant and we have such competitive advantage. It leaves us in a place as we sit here today why would we go through.
The cost and effort and risk of taking on something very large when in fact, it might produce an inferior outcome to what we consider to be an excellent strategy as we look forward over the next number of years, where we do have competitive edge we have.
Land at.
At low basis, and densification opportunities and incredible relationships in Mlps and even in <unk>, a business that can't be replicated.
So our view has continued to be let us execute this strategy, let's not get distracted with something enormous.
And that could be a winter it could be a loser and we're going to continue to execute going forward on the plan that we currently have.
Okay fair enough I appreciate that.
Thank you rich.
Thank you.
That concludes our question and answer session I would like to turn the call back over to Mr. Tom Herzog for closing remarks. Please go ahead.
Thank you operator, and thank you everybody for joining US today. We do appreciate your continued interest in healthy can look forward to seeing many of you hopefully all of you at the upcoming industry events over the coming months.
So thanks, so much and we'll talk to you soon bye bye.
Oh now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.