Q3 2022 Healthpeak Properties Inc Earnings Call

Good morning, and welcome to the Health Peak properties, Inc. Third quarter Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question.

Question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Andrew Johnson Senior Vice President Investor Relations. Please go ahead.

Welcome to <unk> third quarter 2020 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 our expectations.

A discussion of risks and risk factors is included in our press release in detail.

D C. When you got undertaken a duty to update any forward looking statements.

Certain non-GAAP financial measures will be discussed on that call.

Yeah, Jimmy furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements exhibit is also available on our website that helps keep dotcom.

I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker.

Yeah. Thanks, Andrew.

Welcome to help teach third quarter earnings call. Joining me today for prepared remarks are Pete Scott, Our Chief Financial Officer, Scott Biller, Our Chief Development Officer.

Our senior team will be available for Q&A.

First on behalf of the company I want to thank Tom for his significant contributions over the past six years.

The company for future success.

The challenges, we faced were significant and we needed every bit of this energy and attention to detail.

I also want to thank the board for this opportunity and my teammates for their strong support.

<unk> picked a better market backdrop is tough conditions, bringing unique opportunity to be your best.

And actual results in the third quarter were very solid we increased full year guidance for both earnings and same store.

Pete will provide the details.

Let's talk about the future help teach 10 years from now I want to look back and say that I was part of an entrepreneurial and collegial team with an intense focus on value creation activities and the related earnings growth.

It will be a real estate company at heart immersed in the underlying businesses that support our portfolio.

And I want us to enjoy the journey I believe that mindset will produce strong returns for shareholders and be a rewarding experience for our team and both are important to me.

As for our strategy this team with side by side in all the key decisions of the past several years. So don't expect any major changes will focus on life science and medical office, where we have the scale and expertise to maximize value creation, while minimizing risk.

These are both high margin businesses that are aligned with the modern economy.

Our real estate is and will be dedicated to human health, a highly valued asset now more than ever.

Life Science in the U S is a unique public private partnership that leads the world in biotech innovation with more than $200 billion per year spent on drug research and accelerating science, we expect a long term virtuous cycle that will support demand for our buildings.

Meanwhile, the need for cost effective and convenient health care will drive demand for Mlps, especially as the population ages.

There's strong continuity from our talented team and we enjoy working together.

The board succession plan was thoughtful and disciplined and has now been implemented.

Scott is excited to continue as CFO .

[noise], an even bigger role going forward as we streamline our approach to Investor relations in the capital markets.

We'll continue to transparent communication that you've come to expect from us.

Clarity, it's been running medical office for two decades and will continue to do so there's no one in the MLP sector more knowledgeable than Tal.

Got thrown in my doors have been running their portfolios for over a decade and will continue to do so as co heads of life science.

They know every square inch of their local markets and have the support of the local tenant base Scott.

Boeing has also taken on the role of Chief Development Officer, having established a strong track record for creativity and execution in that important value driver of our business.

<unk> has been a critical member of our transaction team the past five years as we sold acquired and developed more than $15 billion of real estate.

I'm excited to see them grow as our CIO.

Jeff Miller stepped into the general counsel role having served in that function for a decade of success at HCN.

Our critical support functions like accounting finance tax and HR would continue with the existing leadership, which includes tenured members of the executive team such as Lisa Alonso and Shawn Johnston.

We've built a best in class process and procedure. The past six years, you play a niche real estate sectors, where operational expertise drives value. So that will remain a vital part of our strategy.

The business segments will continue to report to me. This is worthwhile the past three years and allows me to remain tightly connected to what we're seeing on the ground in fact I plan to spend even more of my own time out in the market understanding trends in assessing opportunities.

Well remain committed to a strong investment grade balance sheet and prioritize liquidity Pete and the team have turned that into a competitive advantage and we'll carry that forward.

We do expect near term G&A savings given the streamlined management team.

Moving to capital allocation very purposefully, we were not aggressive on acquisitions or new development starts to past 18 months in particular, we grew life science from 15% of our NOI in 2016% to 50% today through strategic acquisitions and highly accretive development well before.

Estate values peaked as a result, the balance sheet is in great shape and our funding commitments are manageable.

We have no need to issue dilutive equity or to sell assets at the wrong time in the cycle. In fact, we're in a position to be opportunistic when the capital markets start to reopen which is the best time to go on offense.

Did that and we're advancing the entitlements across all three of our life science markets.

We expect to have the next wave of development ready to commence in the second half of 2023. So any decision to proceed will depend on market conditions at the time.

Both life Science and medical office benefit from having scale in a local market and we have deep relationships to source opportunities, but we can't always control. The timing. So my view is that we need a flexible funding plan our preference is to raise public equity at accretive prices and on assets 100%.

But that approach isn't always available at the same time, there are large and more consistent private capital flows, including sovereigns and pension funds looking to partner with premier operators like healthy.

So it will be dynamic in our capital planning and consider third party capital when appropriate, but always with the goal of benefiting peak shareholders.

We also expect to have a little bit bigger box to play in going forward, but still within our two core segments. And example is in medical office, where we benefited from our on campus concentration.

That being said, we appreciate the convenience provided by certain off campus buildings.

It'll be less dogmatic in our approach and open minded to off campus assets provided their strong health system affiliations.

We also see the potential for additional synergies between the two segments as some of our health system partners are doing medical R&D in their local market.

Turning to the <unk> portfolio, you might recall that in 2019, we dramatically reduced our brookdale concentration when we traded triple net senior housing for their 51% interest in the CCR sees that trade gave us full strategic control of the portfolio and a strong operating partner in Lcs or capital allocation.

<unk> are focused on my science and medical office. So it will be opportunistic about our <unk> position in the interim that business has favorable supply demand fundamentals and we own high quality assets concentrated in Florida and attractive destination for seniors to wrap up I've been fortunate to learn under C E OS with unique.

Skill sets one for creative growth and another for operational excellence.

My goal is to carry forward the best of both and create a company with best in class internal and external growth.

I'll turn it to Pete to cover financial results and the balance sheet.

Thanks Scott.

With our financial results for the third quarter, we reported <unk> as adjusted of <unk> 43 per share and total portfolio same store growth of five 1%.

Despite a more challenging economic backdrop, our segments continue to deliver excellent operating results.

In life Sciences.

Same store growth was a very solid five 4% and.

And we finished the quarter with an occupancy rate of 99%.

Our cash mark to market on renewals was a positive 30%.

Our tenant retention rate remained strong at 64%.

And rent collection exceeded 99%.

Got bond will expand on our life science result in industry fundamentals and a bit.

Turning to medical office.

We had another fantastic quarter with same store growth of four 9%. We finished with total occupancy at 90% a sequential increase of 10 basis points.

Also during the third quarter, we commenced one 3 million square feet of leases, including approximately 250000 square feet of new leases.

This was by far the strongest quarter of leasing we have experienced year to date.

As you would expect given our on campus focus.

Tenant retention rate remains very high at 82%.

Our same store results did benefit from a very strong quarter at medical City Dallas.

12 P campus contributes over 7% of our medical office same store NOI.

And it is a combination of base rent and percent Matt.

The percent, Brad can be lumpy and more challenging to forecast in the third quarter revenues at the hospital exceeded our forecast, which contributed to the segment performance.

Finishing with <unk> James.

Same store growth for the third quarter increased four 1%.

Our results were driven by a 110 basis point increase in occupancy at our IL al and memory care units.

This is the strongest quarter of occupancy gain in our I a M units since COVID-19.

Cash and Rep receipt receipts for the third quarter were $24 million once again, outpacing our quarterly amortization of $20 million.

While top line revenue trends are encouraging expense pressures remain a challenge, including labor food and insurance.

We did have $900000 of one time legacy insurance settlement in September which negatively impacted our results this quarter.

In addition, while labor challenges are easing from the highs experienced earlier this year it remained elevated relative to historical levels.

Last item under financial results for the third quarter, our board declared a dividend of <unk> 30 per share.

A quick update on the impact of hurricane yet.

Thankfully and most importantly, there was no loss of life, where major injuries to our residents or staff at any of our assets we.

We did experience some modest property damage.

We have insurance coverage on all of our impacted properties and expect the maximum exposure to help <unk> to be approximately $5 million when factoring in deductibles.

Which per our policy has been added back episodes adjusted this quarter.

We do anticipate temporarily lower occupancy and then wrap sale at the <unk> properties impacted by the hurricane.

We have factored this into our revised guidance for the segment, which I'll cover in a bit.

Turning to our balance sheet.

The capital markets have clearly turned more volatile over the course of 2022.

The good news is our balance sheet continues to be a competitive advantage.

A couple of key statistics, we ended the third quarter with a net debt to EBITDA of $5 three times below our target range of five five to six times.

We have no bonds maturing until 2025, which substantially reduces capital markets risk.

And we had $2 $4 billion of liquidity, which provides us with ample runway to complete our active development and redevelopment pipeline.

A few important balance sheet assumption.

Two days ago, we drew down the full $500 million of delayed draw term loan as it were.

A reminder, we swap these term loans to a fixed three 5% interest rate through initial maturity.

Second.

We anticipate settling the remaining approximate $310 million of equity forwards at year end.

Blended gross issuance price of these equity forwards was $35 60 per share.

The net proceeds from these two transactions will be used to substantially reduce our floating rate debt balances.

Turning now to our 2022 guidance, we are increasing the midpoint of our <unk> as adjusted guidance by two pennies to $1 73, and we have tightened the guidance range to $1 72 to $1 74. Additionally.

Additionally, we are increasing the midpoint of our blended same store guidance by 75 basis points.

And we have tightened the guidance range of four 5% five 5%.

The major components driving the increase in our guidance are as follows.

We increased the midpoint of our medical office same store guidance by 100 basis points, we increased the midpoint of our life science same store guidance by 50 basis points.

We reduced the midpoint of our <unk> same store guidance by 200 basis point.

We see about a half penny benefit.

In 2022 from G&A savings related to our management transition.

Please refer to page 38 of our supplemental for additional details on our guidance.

With that let me turn the call over to Scott Bok.

Yeah.

Thanks, Pete I'll start with an update on our life science portfolio.

We had a great quarter on the leasing front with over 500000 square feet of leases executed across the portfolio with 87% coming in the form of new leases versus renewals. This.

This included 155000 square foot lease advantage phase, one and 120000 square foot leaves at Oyster point <unk>.

Additionally, we executed a 55000 square foot full building lease I wonder if I point Grand redevelopment buildings.

The oyster point lease with an existing subtenant that will go direct following amgen's lease expiration at the end of 2023.

The vintage lease was with an existing tenant which tripled in size.

Grand lease was with an existing tenant growing from a 12000 square foot space, we put them in less than one year ago.

These deals again highlight the benefit and competitive advantage of our local scale and ability to provide pathways to grow with its fast growing life science companies.

It's important to note that we have very few lease maturities in the portfolio through year end 2024.

Our Boston and San Diego portfolios are especially well positioned from a lease rollover perspective.

In Boston, we only have 122000 square foot space rolling within that window.

In San Diego, we've executed leases or otherwise, where 50% of our 2023 aspirations and had minimal lease rollover in 2024.

In South San Francisco, we've been successful in back to when the Amgen leases as they come back to us and are off to a great start and our point Grand redevelopment with the previously mentioned lease execution and strong activity in other spaces.

While we do have some leasing to do in South San Francisco, We view that market is the most favorable from a supply and demand perspective. So we are confident in our ability to execute.

Additionally, we continue to capture significant growth from tenants within our portfolio.

The $1 2 million square feet of leasing done this year, 91% is done with our existing tenant base.

South San Francisco alone of the 2 million square feet of New development space. We've leased in recent years, nearly 80% has been with existing portfolio of tenants.

Our mark to market opportunity across the life science portfolio remains quite favorable at 26%.

And our tenant credit profile continues to be resilient with over 99% rent collections for the quarter in line with historical averages.

This quarter, our tenant credit profile has strengthened further as a result of the high credit lease we completed advantage and some large M&A deals.

In South San Francisco Global Blood Therapeutics, which started as a 76000 square foot tenant at the Cove and later group to take a 465000 square foot building was acquired by Pfizer for $5 4 billion.

In San Diego, turning point Therapeutics, which executed a lease for 185000 square feet at our Cowen risk development, which is set to deliver in mid 'twenty three was acquired for $4 $1 billion by Bristol Myers Squibb.

Now looking at rent growth demand and new supply.

In South San Francisco, we've seen rental rates up in the mid single digits year to date with approximately 2 million square feet of active demand.

San Diego market rents are up low to mid single digits for the year and that the demand is 1 million square feet.

Market rents are up mid single digits in Boston with after demand of approximately $2 2 million square feet.

While the demand numbers have come off their record highs of the past few years. They are inline when comparing to pre pandemic levels in the markets remained strong with low single digit vacancy rates.

Even more so when the markets tightened health peak and the other incumbent life Science landlords will continue to capture outsized percentages of the leasing activity due to having scale and tenant relationships.

Parents are unable to match.

On the supply side, we're seeing ground up and conversion projects being delayed or put on hold as a result of higher development costs and potentially more impactful the significant interest rate increases that have made many leopard projects economically unfeasible.

As we discussed our team tracks every ongoing and proposed projects within our clusters and the competitive supply we're tracking over the next three plus years is lower today than it was six months ago.

Next I'll touch on the life science funding environment.

We've seen a number of tenants raise capital via a secondary secondary equity offerings.

Offerings and private placements.

Also seen our tenants to enter into partnerships or license agreements with pharma as well as some large M&A transactions as I mentioned earlier.

VC funding during the third quarter has already surpassed 2018 in 2019 full year levels.

On pace to match, our full year 2020.

Public Biopharma R&D spending through the first half of the year with $77 billion, which is 8% higher than the first half of last year and is on pace to challenge 2021 at the highest R&D spending your ever.

Now turning to development.

Our $1 billion active life science developments are 81% pre leased and continue to progress on time and on budget with a blended yield of approximately seven 5%.

Once stabilized, we expect an incremental $75 million of cash NOI from these projects.

All developments are fully bought out under GMP effectively locking in our yields.

In South San Francisco, The General plan was passed by the City Council in October .

General plan includes the ability to develop higher densities and certain parts of the city, including our vantage land.

With the revised zoning, we expect to entitle the balance of our vantage projects. We're upwards of one 3 million square feet, which coupled with our 343000 square foot phase. One that is currently under construction will bring the total project nearly one 7 million square feet upon completion.

Following is to build on our number one market share in South San Francisco.

Lastly, an update on construction costs.

Extreme pricing volatility that the market has seen recently it was beginning to calm.

Being above average price increases on some materials, but overall escalations have come back down to the low teens year over year, well below the 20% year over year numbers, we've discussed in prior quarters.

Looking forward, we expect to see cost increases to be more in the 6% to 8% range over the next 12 months.

We continue to see long and at times unpredictable lead times for items like generators and mechanical equipment.

Our teams have done an excellent job procuring these long lead materials early in managing supply chain challenges to ensure projects are being delivered on time and on budget.

To wrap up.

While the overall economic backdrop has caused demand to return to more normalized levels. Our life science portfolio remains extremely well positioned to both strong internal growth given our minimal near term maturities continued focus on our core markets and strong mark to market opportunities across the portfolio.

With that operator, let's open up the line for Q&A.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

So that everyone may have a chance to participate we ask that participants limit their questions to one and a related follow up if you have additional questions. Please re queue. At this time, we will pause momentarily to assemble our roster.

And our first question will come from Austin, where Schmidt with Keybanc capital markets. Please go ahead.

Hey, good morning, everybody wanted to kick off with questions on life Science, you guys talked about the demand pipelines remaining strong, but certainly coming in a bit and at the same time <unk> seen projects on the supply front put on hold and I'm. Just curious how you see that balance sort of shaking out and what it could mean for market rents over the next.

A few years.

Yes.

Sure Austin, It's Scott Scott Bone I can take that one so I think for me.

From a demand perspective as I noted that demand is obviously off the record highs, but back in line with historical you know when you look at each market individually and I think the Boston has probably come down the most.

Off of the highest in the past few years, but our portfolio up there.

100% leased with Euro six excuse me one space, a 20000 square feet and no other maturities in the.

Next two years, so we feel really good about that market San.

San Francisco the supply demand ratio our balance here.

Really strong and it's quite favorable versus the other two markets in San Diego, we've seen demand come down quite a bit from the peak of about $2 8 million square feet down to 1 million square foot, but a million of those square feet, where two large deals that got executed earlier this year.

You know looking at demand, we feel pretty solid about where things are.

Compared to historical levels again.

With respect to the supply we are seeing projects getting put on hold as I mentioned in the prepared remarks.

The interest rates are certainly have an impact on unlevered projects, making them and feasible and people are you know.

Some of the new entrants are putting projects on hold as well.

So we think that the over the next 18 to 24 months. Some of these supply we were.

Previously forecasting will will decline.

But overall, we think that you know.

Our portfolio with very minimal rollover, I mean, 99% leased across the portfolio.

It went very well in those markets.

But what was the last question you have there on the market rents are.

Correct, Yes, how does that sort of stack up and what's your thought in terms of how the supply demand backdrop sets up for market rent growth and then maybe just add onto that if you've seen any increase in sublease space coming onto the market more recently.

Yeah, so if a market rent perspective.

All three markets have been in the low to mid single digits your year to date, depending on Submarkets.

We're still seeing rent growth there.

Some of that is coming from.

Capital coming in from landlords.

As far as <unk> go you know some of these tenants, especially the smaller ones are looking to outlay.

Outlay less cash in the initial deal. So you know there is some additional capital allocation from from the landlord, which is driving up rents as well.

We're still in a 1% vacant market effectively across the board you know Boston is a little bit higher but a lot of it is.

Some of the French space out in the ER.

Outer bands of the market so very little.

Space to lease.

So we think that market will continue to grow.

Albeit not at the torrid pace of.

2021 and 2020 when they were in the upper upper teens kind of asking more normalized levels in the mid <unk>.

Mid to high single digits overtime.

Sublease perspective, we have seen that tick up across all three markets and I think there's been.

More sublease space come on the market in Boston versus San Francisco and San Diego.

You know again, we feel really well positioned there with very little rollover virtually no rollover through 2024, so very minimal impact to us.

A lot of the sublease space as well that we've seen come out of the market has been.

No.

Partial space.

It has been less tenants coming out with putting their full space on the market sublease market for the full term more.

For example, if somebody has 100000 square feet, maybe there's probably some 25000 square feet for two to three years, and that's really a cash position preservation and extending our cash runway versus them falling out of the market or going under.

So I think it's.

Not it hasn't been great impactful for us and again I think that with our 98% leased it's you can ride out any sublease space.

Come to market in the near term.

Yeah.

That's helpful detail and then just last one for me is I'm, just curious where you're seeing.

To the extent rates are taking place life science cap rate today, and then how youre thinking about the appropriate risk premium for development.

And the attractiveness of the pipeline that you've got today versus kind of where your cost of capital is.

Currently.

Yeah, Hey, Austin, Scott Brinker here I'll take the <unk>.

The acquisition cap rate question, that's a hard one to answer today I think life science just in general.

It's hard to be too precise because each deal is so unique whether it's the different submarket the tenant profile the quality of the building, but even more important the mark to market and just have a dramatic impact there built into that trade with a near 100% Mark to market right versus just building that maybe at least was just signed.

So we always like to.

Look more from an IRR perspective.

That or look at the price.

Paid per foot versus the current market rents just to understand kind of what the stabilized yield might look like.

So we kind of try to approach it from a number of different angles that reported cap rate can be pretty misleading in life science unless you have a full understanding of all of those dynamics, but in all the conversations that we have with all the investors in that space, whether it's Reits pension funds private equity you know the list goes on and on obviously we haven't.

Ongoing dialogue with most of them. It does feel like Unlevered IRR is no surprises increased I'd say at least 100 basis points in the last six months and I don't know that anybody today is super active just given the chaos in the capital markets, obviously that won't last forever, but they're still interested in the space.

And for sure the higher quality Submarkets and buildings with good tenants have been less impacted than maybe more of the fringe.

So that's our view on cap rates.

On return on cost for development in our current pipeline of $1 billion is like a seven and a half that's pretty well locked in given our GMP contracts and pre leasing harder to comment on what future returns look like at least for US you know each project is unique we are making good progress.

S on entitlements across all three of our core markets, but realistically, we won't have permitting done on any of them until the second half of 'twenty three is kind of the expected timeline.

So until we know exactly how much we can build and get better pricing and we'll see what market rents look like nine to 12 months from now we'll have a better sense of what our next round of development look like from a return perspective, and you know at that time, we'll just have to decide if the premium versus our cost of capital interest as acquisition cap rates.

Is it sufficient so it's a little early for us to comment on.

On development returns.

Understood. Thanks for all the detail yet.

Our next question will come from Steve <unk> with Evercore ISI. Please go ahead.

Yeah. Thanks, good morning.

Scott you made a comment I just wanted to make sure I understood. When you talked about TCR sees in your opening comment you said you'd be opportunistic with this position with this position. So I just wanted to make sure does that mean that you could potentially exit TCR sees over time, if the pricing was right or did I misread into what you were saying.

Yes, I think you heard.

Her exactly correct, we liked that business its performing pretty well we have good real estate at a really good operating partner and we've got a good internal team to manage it. So we're happy to hold it at the same time, we realize it's not a perfect fit for health takes off at any point there was an opportunity.

That makes sense for our shareholders and our view is we would have to be open minded about that so you know it's not on the market for sale.

But it is something that we'll continue to evaluate obviously today is a great time to sell anything for cash.

At that point is not lost on US obviously, but you know we ended up exiting the shop business with $4 billion of sales in 2020 in 2021 and some of those were done for cash, but a lot of those were done at a more creative way, whether it's asset swaps or otherwise. So I think the broader point is that you're going to see us be more open.

In creative about how to utilize the assets that we have and hopefully create a story.

In a business plan that investors can really get excited about so that does that help Steve.

Yeah, I do I mean, I guess, it would be probably challenging to sell that and redeploy it without taking some dilution. So I guess, you're even if you could put it into development at seven and a half I would suspect that Ah I believe those cap rates have kind of been north of 8%, maybe pushing 10.

Yeah, I mean, it's hard to say.

You know we feel like we got an unusually strong return when we bought those assets in.

In 2019, but even that it wasn't done for cash it was really an asset swap for triple net assets.

They don't trade often so it's hard to say for sure where cap rates are but theres quite a bit of upside in that portfolio as well. So you know it's unclear.

What kind of cap rate that business would sell for yes, we decided to sell it.

Yeah, I don't want you to over interpret that comment it was more that we would be opportunistic and open minded if there was ever a good opportunity to exit and redeploy.

Okay and I realize you know you you spent a bunch of time talking about the next wave of entitlements and and you know not really being able to start anything before the second half can you, maybe just sort of frame out for us kind of where the priorities are in terms of getting entitlements for the next round of developments, you know, which markets, which projects and maybe some of the.

Yeah.

Challenges that you're trying to overcome and getting entitlements and in some of the bigger more near term projects, yeah that sounds good I might let.

Let Scott go and run through that as our Chief Development Officer, and then I can add and where needed Scott.

Sure.

Steve.

So from that perspective, we have entitlements going on.

And all three core market I mean, obviously and in Boston, We're working on are our project there.

The City Council put together, a working group with various stakeholders, which we participate on.

We're going through that process in hopes of presenting collectively.

The working group.

Revised zoning.

The proposal to the city Council early in 2023, so that processes.

Going very well I'm out there.

The Bay area, we're working on.

A couple of different settlement, but our our towers project in Brisbane as well as our our vantage project that I mentioned.

Earlier, there and so with the revised general plan that got approved by the City Council, we have much more clarity.

Two what will you think will be able to achieve that project.

So you know.

I hope some entitlement there.

First half of 2023, and all of that is going very well as well on the one project that we're entitling down in San Diego as well.

Yes.

Great. Thanks, that's it for me.

Our next question will come from one Santa Maria with BMO capital markets. Please go ahead.

Hi, good morning, Thanks for the time.

I just wanted to.

Could you talk a little bit more on the comment you made Scott it could be getting about and.

Section between.

Life Science in Mlps, and how big that market opportunity could be and if you look or entertain university based opportunities.

Yeah. Thanks for the question one I would say the three core markets have the greatest depth of demand by far we have the relationships and the scale to have a competitive advantage. So that's our near term.

Priority for sure and we've got a big land back entitlements are progressing at the same time.

Not lost on us that R&D is an enormous business, we talked about $200 billion a year.

R&D.

Could be more it's hard to be precise on that number but its significant obviously.

So you know the victory markets are our priority.

But we would at least be open minded to considering.

Ways that we could create more synergies between our two office businesses and we have had even in the past quarter. A couple of our health system partners reach out because theyre doing R&D on their campus, but not as much with the for profit systems, but a lot of the not for profit systems, especially at the dig more academic medical.

Center types and.

We have a long standing.

This plan in Applebee's, we're always partnering with a number one or number two local health system and a lot of them tend to have some level.

Of clinical trials et cetera that are happening and they're doing a lot of research.

On their own so we do view that as an opportunity down the road I'm not sure. If we'll end up doing it or not in today's capital markets. It's not like route you don't make it.

A bunch of new commitments are but it is an opportunity that we see going forward it would utilize the.

The skill sets from both of our two core businesses in a unique way and as it relates to the University R&D certainly to the NIH funded at $50 billion a year a lot of that is going.

To the universities.

It's proven to be a very successful business. So it's not.

Exactly the same as what we do in the in the three core markets and marketing to biotech and pharma, but it it capitalizes on the same underlying capital flows into into medical research did it certainly an interesting business that's done very well so yeah, I mean that that one is interesting too.

Great and then just I.

I don't know if you would have this but do you have any sense of.

And your and your life Sciences biotech exposure.

So a rough split between the companies that have marketed versus non marketed drugs.

If I understand your question correctly I might ask Scott to comment as well, but if you're asking how many are in clinical trials versus having product on the market is that what you're asking correctly. Thank you much more eloquent.

Yeah, I believe it's around 60% have a product on the market, but Scott Boeing made correctly I know that yes percentage with that are in kind of preclinical trials is quite low less than 5%, but when do you know offhand.

Yeah, that's right about about 60% of our.

Tenants are.

AD revenues, so about 40% of pre revenue, which is would you.

Typically deem as not having a product in the market and then the only about because you mentioned, 5% of our tenants are are exclusively preclinical.

Yeah.

Thank you guys.

Thanks Warren.

Our next question will come from Rich Anderson with SM BC. Please go ahead.

Pardon me rich your line might be muted.

My apologies.

Can you hear me now.

Yes.

Okay great.

Everyone positively impacted by the recent changes there and looking forward to the future.

Scott you mentioned at the outset, no major changes, perhaps the operative word there is major.

And you talked about being more open minded.

And perhaps opportunistic on CCR sees my question. My first question is on you know a lot of your assets tied up in long term projects.

That spend 10 to 15 years to see full build out and not sure. If those types of investments, while very interesting align themselves as well with.

You know the the the immediate gratification mentality of the stock market.

So you did say all but at some point our balance sheet becomes a competitive advantage and that you might go on offense do you see yourselves.

When you say go on offense is it more of a more development through the entitlement effort you were talking about or do you think it could be more real time.

Sort of immediate cash flow type of opportunities are that you know sometimes the stock market.

Prefers not that you should just let the tail wag the dog, but I'm just curious how you feel about that.

Hopefully, it's a combination of both I mean, we have an attractive pipeline in both MLB and life science for development, but as you mentioned some of them are long.

Lead time projects, we do like the campus model, it's been quite successful for us, but we usually do it in phases, so that you're not waiting 10 years or at least the initial accretion right you might have to wait 10 years for the final accretion, but it's incremental but.

But acquisitions when when the market was pricing life science at 4% plus or minus <unk>, 5% its harder to envision.

A scenario, where youre, making a lot of money for shareholders and that kind of an environment. So you didn't see us be very active on the acquisition front, but you know things have changed it's unclear what the next six to 12 months are going to look like.

It does feel like those companies with strong balance sheets and access to capital probably we'll have opportunities over the next year that maybe didn't exist in 'twenty 2020 'twenty, one, but we'll see I mean, it's hard to predict but it feels like there is at least a pretty good opportunity or chance that we will see an environment like that.

And we'd love to be able to create more immediate accretion utilizing our scale and operational expertise. So you.

We're certainly trying to prepare ourselves.

If those situations do become available rich.

Okay Fair enough and then the second question is on senior housing more generally.

Okay. So you know we went through a process that we get the point that you know, perhaps the brookdale is in.

Your wheelhouse.

But anything that does happen there, but what is your mind has changed with senior housing over the past fiber.

Seven years since you know your former shop, where you know that was kind of the focal point do you do you feel like something about the business has changed in a way that doesn't fit well into a REIT model or is it just that it doesn't fit well into the peak model that you don't think there's anything.

Perhaps wrong or or incrementally wrong with the business, but it's just it just doesn't fit with peak is that a fair way to say it.

Yeah. That's a complicated question you talked about the tailwind in the dog and the capital markets and that's probably a fair analogy. We felt like we had a really strong portfolio and competitive advantage in life Science and medical office, that's still true cutaway.

But in senior housing.

You didn't have the scale, we didn't have the portfolio, we were trying to build out the team, but it takes time you know you don't do that overnight you don't even do that and of course of the year that takes a lot of time. So we are in the process of doing that.

And we ultimately chose to go down a different path.

Certainly we did see that the industry was going to have a more difficult time.

Drink Covid I mean is it turns out it's probably been an even more difficult time than we ever would have expected.

Covid lasted a long time, so as it turns out we feel like we got you know at the time, we all we got good pricing as it turns out maybe we got really good pricing on that exit.

But you know there's plenty of ways for investors to play.

Play at senior housing that you're really good companies and you know that lead into our thinking as well so I wouldn't read into it. So much that we had some negative view on the business. It was really just do we have a story that is marketable to investors I mean, that's that's often what we're trying to do here is create a stock price that.

Rewards our shareholders and we just didn't feel like senior housing was going to help us do that.

Okay fair enough thanks very much.

Our next question will come from Michael Griffin with Citi. Please go ahead.

Great. Thanks, maybe going back to life science for a second I'm curious in the conversations that you're having with both current and prospective tenants and have you noticed any changes in sort of what they're asking for maybe in terms of special needs in terms of concessions on on T eyes or anything like that any any additional color there would be great.

Sure.

Michael its Scott.

I would say if anything as I mentioned.

They're more looking for.

Larger Ti frankly, and it coming out of pocket less and allocating less of their their their their capital towards real estate.

Just from a capital improvement perspective, so I think that they are willing to pay a higher rent.

Day one.

Having us put on the cash I think we look at that as we're protecting we're also protecting ourselves you know on that capital and making sure. Those improvements are highly reusable I'm in the space and also requiring higher letters of credit and security deposits.

More stringent on our underwriting of the financials.

Development drug development pipeline, there, but I mean, I think that would be the.

The biggest change I think people are pushing for shorter terms, but we haven't seen.

I was having to give that.

To date yet.

It's mainly in the G I.

Why why do you think it is that people would be pushing for shorter terms.

Just capital.

You bring up a smaller headline number when you were talking about talking about a full these package to the board.

Gotcha.

Helpful and I'm curious on the point Grand Redo of I mean, you describe it as an as an a plus location and then discrete opportunity. So you know I understand you have relationships with your with your JV capital partners, but just if there is upside there, but it seems like there is in a in an opportunity like this I guess why does it makes sense for for this to be George.

Ventured versus versus wholly owned.

Yeah, I mean, there is good upside in that project, but we felt like the price that was paid ultimately.

You know we were able to capture a good portion of that upside.

Even at the time, which was three or four months ago. The project was being underwritten to a mid to high fives stabilized return.

And that's it could be three to four years from now so it's a great project and it's one that the sovereign wealth partner, we'll be happy to own for a long time alongside of us, but we did feel like we got adequate value for the 30% that we gave up and you know they are paying fees and potentially promote to along the way.

In addition to that kind of preferred position in the waterfall for health peaked at.

And you add it all together, we felt like that was solid move it does help us offset some of the redevelopment capital that we'll need to spend as well. So it's a tradeoff right. There's no free lunch, we did potentially give up some upside but for all the factors I've mentioned, we felt like it was a good trade and a fantastic partner that we think could be helpful.

I'm looking forward for health peak as well you know, it's always easier to grow in existing relationship than it is to establish a new one and not as a partner that we have a lot of confidence in and you know what by your side is that as we move this company forward.

Okay.

Alright, that's it for me thanks for the time.

Our next question will come from Steven Valiquette with Barclays. Please go ahead.

Let me offer my congrats to both the Scots on the new roles and titles.

I guess for a couple of things you know there was some pretty interesting data coming out of our life Science office industry Trade conference a few weeks ago.

Specifically related to the future supply demand dynamics for life science across the big three markets.

And the punch line. It seemed like there was a lot of construction across the markets, but it's in lockstep with demand. So there was no real expectation of negative supply demand imbalance anytime soon.

Sounds like you probably share that view, but I guess the first question I just wanted to confirm that you share that view for life science across the three major markets as far as the construction and supply demand a correlation and then really the second question unrelated topic here just in your own forced ranking of the big three life science market sounded like he's still ranked south San Fran.

Cisco is the best market three of her health P. Currently.

And I guess just to simplify the message came just reinforce for everyone with the single most critical positive variable is.

In San Francisco for Health peak, that's maybe just not quite as strong in the other two markets.

Okay.

Yeah, Hey, Steve It's Scott Brinker, I'll start with it and then I'll, probably ask Scott to comment as well, but as it relates to the three markets and comparing them I mean, they're all strong low single digit they can see a lot of the development pipeline is pre leased.

I would say that the purpose built products, especially if it's being delivered by the stake incumbents that have the relationship and relationships and local scale.

I feel good with dose, including our pipeline I think some of the more fringe product some of the redevelopment.

Our office conversions, maybe new entrants.

I'm not sure about we'll see it wouldn't surprise us if overall market occupancy declined a little bit in the coming years, just given how much supply is coming online, but as it relates to the specific supply demand dynamic across the three markets. We do feel the most comfortable with south San Francisco theirs.

Less new supply coming into that market relative to the others.

But it also helps that we have number one market share and therefore, the largest number of relationships with tenants and Scott mentioned at 80% of our development has been leased up by existing tenants. That's a huge advantage so that plays a role and why.

Of the three markets, we feel the best about South San Francisco today, and then maybe more broadly to get to the first question that you asked I thought it might be helpful. Just to kind of lay out how we've been thinking about supply and demand in life science investment over the past really 18 to 24 months.

<unk>, which was.

We're almost too good to be true the rental rate growth the amount of capital coming into the business. We were a huge beneficiary of that as one of the largest players in the business and we certainly capitalized on that with huge rate growth and 99% market occupancy and basically pre leasing all of our development pipeline.

Pipeline, but no business grows to the sky.

And having experienced the sector in my past, where maybe it was underappreciated by investors for a period of time and then you can come and started to make a lot of money in that business in a huge wave of new supply comes right. All the new investors like the returns they like the supply demand fundamentals and all of a sudden.

The business can go upside down and for US we were never worried about the demand side. We didn't think it would stay at the 2021 level forever, but we do think that demand is going to be solid in that business for decades to come we were always more concerned with the supply even though we liked our competitive advantage as a large incumbent.

It was something that we were mindful of and the impact it might have on occupancy and rental rates. So we've been pretty defensive in allocating capital to that business over at least the last 12 months really with no acquisitions no new development starts that at the end of the day, we actually actually feel better about.

The outlook for that business two to three years from now today than we might have at the market peak you know call. It late 2021, right, where everybody's raising new money that capital is super easy everybody's building at some point.

Supply just outweighs demand and we saw that as a potential threat today, you see a lot of projects being delayed probably canceled returns might not make sense debt financing charges, yet debt that we actually feel like the supply demand fundamentals looking out two to three years today.

It might be in a better spot than we would've been able to say objectively nine to 12 months ago. So we actually feel like we're in a good spot and with essentially very little lease maturities over the next two years across our three markets. We don't have a whole lot of exposure if the market slows down a bit and then we'll be in a position to have our next.

The development and ready to deliver call. It 2020 for 2025, and thereafter would hopefully fundamentals are in a favorable spot so.

Some maybe broader thoughts on how we're approaching the marketplace.

Alright, I appreciate that thanks.

Our next question will come from Nick <unk> with Scotiabank. Please go ahead.

Thanks, So I just wanted to follow up on South San Francisco and see if there's any activity you're able to talk about it advantage or a point granted additional to the third quarter activity you got done in terms of.

Letters of intent or any other sort of far along leasing discussions for your development and redevelopment there.

Hey, Nick its Scott I can take that one so I think that there's certainly activity appoint.

At the point grant campus as well.

Second building advantage.

No nothing in the.

Far enough, along we would be willing to announce it today, but no definite activity, there's some big larger requirements in the market looking for new space as well as you know a lot of activity in that.

25000 square foot range, and that's kind of fits really well within our point Grand redevelopment assets. So it's nothing really too.

Today fully but good activity I would say across the across the board there.

Okay, great. Thanks, and then I guess a question for Peter I, just want to make sure you know in terms of the balance sheet, you made a lot of steps to reduce floating rate debt exposure.

But you know you do still have.

$500 million left on the existing development pipeline.

Is the plan there basically I understand you have some free cash flow after the dividend, but is the plan there basically to just fund that on.

The line of credit you know over the next year I mean is there anything else, we should be thinking about from a capital.

Inflow to the portfolio I don't you know I know you have the vantage next development joint venture, which could close next year. So I don't I don't know if there's a dollar number you can talk about a bit about capital coming into the portfolio.

From that thanks.

Yeah, Hey, Nick it's Pete.

You know when you think about our balance sheet and floating rate debt exposure.

We will always have some floating rate debt exposure just purely as a result of the development and redevelopment spend that we have.

When projects the liver that is why we will look to put more permanent debt financing in place.

Art.

Well putting rate debt exposure I'll just use gross numbers for a second we were at around 1 billion by the end of this quarter. We did close on those term loans, which we swapped to a fixed rate at very attractive fixed rate and then we also have those equity forward. So that will take our line balance down all the way around 700.

<unk> million dollars just from from the impact of those two.

So we certainly have the liquidity to fund the balance of our spend from our development and redevelopment perspective without.

Really what I would say levering up from a net debt to EBITDA perspective, because we don't have actually that NOI in our numbers right now from the projects coming online. So it doesn't actually lever us up from a net debt perspective, but certainly it would take our floating rate debt out and that's something that we are paying a lot of attention to.

Comfortable at the levels currently, but if we had to find everything on the line I think the levels would go to a number that frankly, we just don't think it's a good run rate and comfortable number for us creates more earnings volatility going forward. So at some point, we would certainly look to.

Find other sources of capital that could include doing a bond deal or that could include additional asset sales.

Our flexible funding strategy is the way, we're thinking about it I'm repeating some of you know Scott Brinker. His words in his prepared remarks, but I think we have a good strategy as to how we're approaching it we think our balance sheets in great shape and our projects right now are fully funded.

Sources of that May change based upon market conditions over the next year or so.

Okay No. That's that's that's.

I guess just in terms of the vantage next JV I mean is there any capital inflow to think about on that for early next year.

Yeah Yeah.

<unk> payment that's likely there is an upfront payment, it's a little less than $150 million on that one that when we close on that transaction moneys would flow in so there is a source there and we also have another asset in and held for sale. We haven't spent a lot of time talking.

About that but we will selectively look to monetize non core assets. We've talked about this in the past we do have one asset in held for sale not a whole lot more to expand on that but.

That would certainly minimize the needs from a bond perspective or additional sources.

Alright, Thanks I appreciate it.

Our next question will come from Michael Carroll with RBC capital markets. Please go ahead.

Yeah. Thanks, just Pete just on that asset that's held for sale. It does look like that you reduced the expected sale proceeds on that by about $10 million can you talk a little bit what's going on there is that just the overall market that that is the reduced that value.

Yeah, I wouldn't read much more into it other than that.

Mike.

Factoring in that you know cap rates are likely gone up since that asset went into held for sale and so we've taken it down just a little bit, but there's not a whole lot more to add on that.

Okay that makes sense I guess when you guys talk a little bit about your next development starts I know you did a pretty good job of highlighting some of the entitlement I mean should we assume that vantage phase two and three once those entitlements get given at the beginning of the year in that JV closes in will you break ground on those sites or do you have a little bit more leeway, where you can.

See where the market kind of falls before you start pursuing those to actual projects.

Yeah, Hey, Michael It's Scott Brinker, our advantage is when you talk about phase two and three those are separate phases and they're both <expletive> I mean, Scott mentioned, one 3 million square feet now in total so called phase II and phase III roughly equal in the 600 to 700000 foot range. So that's a lot of product to put in the March.

We would do that over time not all at once.

But whether or not we would choose to proceed we'd probably would be ready with permits by the second half of 2023, if all goes according to plan, but it's just to my point earlier, it's just too early to comment on whether or not we would actually pull the trigger now will prepare ourselves right will keep doing the.

The pre development work on the construction drawings the bidding so.

So that we're in a position to go forward, if we choose to do so but that's a decision that we'll be able to make in the second half of 2023 based on cost of capital and acquisition cap rates and all the other things that are relative to that decision, including supply and demand.

Yeah.

Okay, great. Thanks, Yeah.

Our next question will come from Ronald Camden with Morgan Stanley . Please go ahead.

Hey, a couple of quick ones Congrats on leadership changes.

Just going through I think the 8-K. It said there was like a sovereign.

<unk> of $25 million to $30 million potentially being recognized just can you just comment more on what that is and what's going on there and then sort of broader comments on you know.

With this sort of new leadership should we is there any other changes or is everything sort of all done also in the place.

Hey, Ronald speed here, you know that approximate $25 million to $30 million. We previously disclosed that that was as a result of the leadership transition that we announced couple of weeks ago.

It's not in our numbers this quarter since that happened in.

Early October so you should expect to see that as we get towards.

The fourth quarter numbers that'll be in with.

With regards to any other leadership transition.

You know items that you asked about you know we did.

Promote Jeff Miller to.

Our general counsel role so as we think about the fourth quarter number that we'd previously disclosed $25 million to $30 million it will be approximately $30 million and you'll see that in all our Q and that will incorporate both our general counsel his departure as well as our CEO departure.

Got it.

So that so the the the charge will come through in essentially in four Q is sort of your point.

Correct, you'll see that a couple of quarters.

Okay helpful.

And then just if I can sneak a quick one on the life Sciences business.

You know I was just thinking about sort of organic growth.

Going forward.

You sort of talked about.

The guidance for this year is 5% give sort of the MLP at four.

Is there anything specific unique to this year.

Or should we think about just the long term growth rate for those businesses as being at sort of those those pretty high levels if that makes sense.

Yeah, maybe I'll start with that Scott Brinker here, and let others comment a medical office is more straightforward. This year was an exception a positive exception.

But an exception I think the normalized run rate in that business is probably more in the two 5% to 3% rich and then it will vary year by year, depending upon lease roll and mark to market.

Now that's above the industry average.

But it's not a business that grows at four plus percent forever right. I mean, I guess, she inflation stays at 8% I might change my opinion, but I'm, assuming that inflation comes back at some point to more normalized levels and at that point Mlps are probably more than 2.5% to 3% same store growth life science.

It's more complicated.

The average escalator in our portfolio is in the low threes.

And it's mostly fixed escalators with triple net leases. So that's your baseline growth rate and then when you look at our mark to market across the entire portfolio.

Around 26% positive, but it varies by year. So one thing that we're likely to do at the upcoming NAREIT meeting as you give more clarity in disclosure around the mark to market opportunity by year because in 'twenty two three and four we just don't have much.

Maturing in terms of leases so the impact of the Mark to market for US is just lower and then it should pick up in the years thereafter, but if you were to just straight line that mark to market opportunity.

It's in the range of 200 basis points a year on average.

But not all of that will flow through same store because some of it will be captured via redevelopment, but just to give you a rough estimate of the normalized growth rate for that business, that's probably a pretty decent estimate to start with R. R.

Contractual escalator in the low threes, and then add in the Mark to market over time, but then in any given year, you're going to have some things that could move that number up or down whether it's bad debt free rent.

The tenants that you know it is a negative one year and that is a positive next year. So all those things can make a difference and obviously that assumes that we keep occupancy at the very high level that it is today to produce that kind of a same store number.

Super helpful. Thanks, so much.

Our next question will come from Joshua <unk> with Bank of America. Please go ahead.

Yeah, Hey, everyone.

Scott I wanted to explore your comment.

In your opening remarks on earnings earnings growth priority.

Good how are you thinking about balancing long term and near term growth.

I think one of the kind of concerns I've heard from investors I'm. Keith was just most of the growth is longer dated with your.

The older pipeline.

Right.

Yeah, it'd be great to kind of hear your thoughts around this.

Well, we've got to find the right <unk>.

Balance so I tried to say and hopefully I didn't say that.

There's going to be an intense focus on value creation activities and the related earnings growth. So it really is both certainly as a real estate investor you know that there has to be a long term mindset.

As part of the mindset, but it's not lost on us there's a public REIT. There is also a near term mandate heavy tonnage 20 years.

Public health care REIT.

Seeing what works and what doesn't.

Feel like we need to find the right balance I mean, certainly if you're not making the right long term real estate decisions eventually catches up with you.

So we do need to keep the long term in mind and in our two core businesses life science in particular, most of the value creation opportunity is naturally through development redevelopment, which take some time.

At least in most markets right, where cap rates are Super Bowl.

But it's not lost on us that to get that value creation for investors. We've also got to create the near term earnings growth.

So there is going to be a balance you know it is a balanced it.

Sometimes is relatively straightforward and other times, it's more complicated than that point Grand redevelopment is it a pretty good example of that that the long term value creation there.

<unk> was asked earlier and they're probably right is if youre not publicly traded maybe Hugh maybe you hold onto that entire development.

But as a publicly traded REIT that you're also trying to create earnings growth for investors today selling.

Selling off the 30% stake allowed us to create an earnings outcome. It was far preferable to the alternative of owning 100%. So each project is unique.

But our mindset is going to be finding a way to balance.

Both.

The long term value creation as well as the short term earnings impact.

Okay I appreciate that color, Yeah, and then I noticed where.

It looks like on page 20 years on the development page it looks like the vantage is one.

Total.

Cost to complete went up by.

The $45 million or what was driving that.

Sure. This is Scott phones, so that that's related to the amenities building facilities that where we're.

We're building there.

Got more clarity with the general plan being completed we upsize besides that amenities building and increase the scope to be able to.

Service, the full $1 7 million square feet in totality of.

Of that project.

Okay, but that's not reflected in our hubs for square footage.

Correct.

Okay.

You're generating or we're just kind of a nutrition.

Yeah.

Tenants will pay their pro rata.

Pro rata rent based on their square footage based on the overall campus build out.

There will be a return on that.

Okay. So it sounds like there.

Costs went up but maybe the return profile is the same.

Correct.

Alright awesome thanks, everyone.

Our next question will come from Dave Rodgers with Baird. Please go ahead.

Yeah, Hi, everyone, Scott Brinker I wanted to ask about the Mlps in your opening comment about doing more off campus. Just wanted clarity on whether that was a function of where you saw the intersection of life science and M O be happening.

That's a function of perhaps just doing more development off campus and what kind of changed in the mindset and if you had said it earlier I missed it.

No I'm happy to take that.

Last time, Claire just to comment as well, but if you look at the inventory medic.

Medical office real estate around the country about 30% of it is on campus, 30%, it's a pretty small number.

Look at the new supply that gets built every year. It's also about 30% on campus so given a choice.

Our preference is to own on campus real estate, especially if it's a leading health system, but our view is to ignore the 70% of the market are that that's probably a bit too much there.

There are certainly some really good opportunities within that very large off campus market provided you've got the strong health system affiliations, where all health care consumers as well because it's not lost on us that a lot of times when we need health care, we end up going to an off campus setting it's more convenient which is helpful.

Times. So we just we're going to find a better balance we still love on campus real estate I'm glad we're at 81% of.

It's helped us produce the best same store growth in the peer group for quite a while now and we hope that continues but.

But we will at least be open minded to select off campus mlps going forward, whether we're acquiring them or developing a bearish is there anything you'd add to that.

Yeah, I mean, I've always liked certain off campus properties. It really depends on the profile of the building you want some higher acuity hospital outpatient departments in those buildings that tends to drive a lot of services.

A patient can go to the the off campus facility and get a lot of the same services they could get on.

On campus as Scott said, it's just a lot more convenience so we like that type of project.

Certainly.

Our core has always been on campus. So we would continue to.

ROE there, but there are a lot of.

Nice off campus projects that we would love to be involved.

Okay.

Great. That's helpful. And then maybe just a follow up for me on stock buyback just with the change in leadership Scott Your view on stock buyback you did a little bit in the quarter wasn't aggressive so I don't know if Pete or Scott any thoughts on kind of where that might go in the future.

Yeah.

Yeah.

I think I think it's pretty straightforward.

Prefer to preserve our cash right now for future opportunities and we're going to prioritize funding our active development pipeline and reducing our floating rate debt and we think that's more important than that the minimal accretion we could get from any type of buyback.

Great. Thanks, guys.

Okay.

Our next question will come from Vikram Malhotra with Mizuho. Please go ahead.

Thanks for taking my question. So just maybe first one on life Sciences specifically.

I think.

June NAREIT, you talked about your watch list sort of being core to 5%.

Within the life Science bucket, and then I think last quarter that it came down can you just update us where does your watch list stand and what are the risks maybe by market.

Hey, Vikram scuff on we're currently.

All remaining sub 5% of our portfolio on the watch list.

Those spaces.

About a 38% mark to market.

<unk> hasn't really changed since last quarter.

Still generally in line with.

With historical levels over the course of the quarter, we had a few tenants come off the watch list following M&A or funding events and some of those come on due to mainly to the timing of their funding cycles.

Which is a normal part of the business you know I think that when you look at our watch list. We're looking at cash balances you know groups, who are announcing layoffs or coupled with low cash balances, but yeah. Those are general criteria and there's other factors, where we're impacting them or they are impacting our analysis and we do it and we do it companies.

Pacific assessment on top of that general screening so.

Short story, there's not a lot of change in the overall headline number on that on that watch list.

The breakdown by market in front of me, but I could not I can get that to you.

Okay, Great and then just one.

Maybe just revisiting some of that come to the questions and wanted to get maybe be more specific comments.

In terms of you mentioned a couple of times you know you get some of the changes you'd like to get investors more excited.

And I'm wondering sort of how you balance that with growth.

They could maybe more risk. So for example in medical office tilting more towards off campus, even a little bit your own data has shown you know off campus has lower growth.

Laurie attention so I'm just.

You know if you can just balance kind of how do you achieve you know maybe more growth versus quality.

And then if you can break that out between kind of near term and long term.

Yes.

We would do it when capital markets makes sense. So don't misinterpret any comments that were made to suggest we're going to go out and issue stock at $22 and buy a bunch of assets that that's not.

The plan right the economics need to make sense, let me just make that clear.

The second point is we do have relationships and operating expertise that allow us to reduce risk relative to what other investors.

They underwrite so that to me is the key is we need to utilize the platform.

To our advantage and offset our underwrite risk in a different way.

In the general marketplace is able to do so hopefully that answers your question.

Okay.

It does and then just last one.

I'm just trying to think about where eventually whether it's three years five years or longer just where you anticipate this mix of.

On and off campus due to trend you know some of your peers that 50 50, others are more like in.

'twenty, just you know as a as a high level view today, where do you think that mix ends up between on and off.

I mean, its still heavily weighted towards off campus I mean, we're at 25 million square feet.

81% on campus.

Other six or 7% that's directly adjacent to campus.

So that's a pretty high level, we'd have to do an awful lot of development and acquisitions to materially move that number so I would expect us to still be substantially.

On campus moving forward again, we still think that is the right model. It's just with 70% of the inventory being off campus. There are almost certainly select properties in that huge bucket that would make sense to own long term and it would have favorable growth profiles to match on campus real estate.

Great. Thank you.

Our next question will come from John Pawlowski with Green Street. Please go ahead.

Hey, Thank you for keeping the call going just one question maybe for Tom Clarridge there's.

There's a few health systems that you partner with and then it'll be business on page 31 that we're concerned about just the financial solvency. So can you just help us understand if a major health system goes bankrupt in the adjacent hospital. It means they get re tenanted what type of occupancy in.

Pack would be reasonable to see in your medical office portfolio.

Yeah.

Yes, John .

If you look.

Our strategy has always been to partner or be affiliated with top one or two hospital in the market typically there they're owned by some of the great systems out there.

But when we underwrite a transaction where underwriting health of the hospital more than the health of the system.

We see if we get a guarantee from the system that's great.

We certainly look at that and we monitor them, but we want to make sure that the actual hospital. We're affiliated with has good market share good margins. They are profitable and it doesn't really matter who owns them in the long run those hospitals are going to continue to operate maybe under a different health system, but they'll continue to perform well.

And I really wouldn't anticipate any drops in occupancy for.

Any of those changes.

But does that hold in the near term could we see a two to three year period, if we get a community health systems go go dark do you see a near term impact on occupancy.

No not at all a few and community health systems, we monitor those.

Buildings, we bought four or five years ago under that Master lease program every six months, we get financial statements on those hospitals. They did when we bought them and they continue to perform at the high end of any of the CHS hospitals. Their margins are sometimes two to three times higher than the corporate averages. So those hospitals will just continue to.

Operate there's needs in those communities and we.

We wouldn't anticipate any near term drop where long term dropped in the operations of those facilities. If there was a change in ownership.

John just one final point on that because it's an important one.

Is that the.

CHS. So I used that example, as well, but they have a lot of corporate debt.

That's their issue their issue is not the profitability of these specific hospitals. So I have to imagine that in any bankruptcy right I have no insight whatsoever as to whether that's in the future and not just using it because that was your example, or I would have to imagine that whoever owns CHS now or in the future we'd be doing everything they can.

Hold on to these hospitals, because they're highly profitable. Okay. These are the hospitals are not their problem at the corporate level.

So we have no exposure to that.

Okay understood. Thanks for the time.

Our next question will come from Takeda belly with J P. Morgan. Please go ahead.

Hey, guys good morning.

Do you have any other significant percentage rent structures and the portfolio outside of medical City Dallas I believe those words and second one is you talked about the 80, 81% pre leasing on developments.

What about the pre leasing stats for your redevelopment pipeline is roughly 200 million or so.

Okay.

This is Tom clarity I'll take the.

The percent rent question, we have one or two very small percent rent leases out there other than medical city, but medical city makes us probably 90, 899% of our percent rents.

Yeah.

They're kind of odd structure to have in a medical officer.

Scott do you want to take the other question.

Yeah.

Scott do you want to take the pre leasing on the redevelopment.

Portfolio question.

Yeah.

Sure so on the readout.

On the life Science side, certainly we are.

We're not going into those of those pre leased you know we've had some leasing success appoint grant that I mentioned you know we've got one of the full Bill has done we've got some really good activity on the other buildings.

That we're working on.

And then the Mlp's I don't know TJ, if you want to talk about any of those oh, the readouts so much pre leasing done.

But the pre leasing on the on the projects has always been in kind of that 40% to 60% range. We continue to see that if you look at the project, we just put into the program.

This quarter, it's 53% pre leased than theirs.

Theres always some discussions and potential LOI is behind that but.

Right now if you look at the total HCA program at 68% pre leased probably another 8% under LOI or inactive discussions.

Yeah, just like just to follow on a couple of more of the.

You know in South San Francisco, We've got Colorado was one of the Oyster point campus and wanted to.

Hours, where we're doing some conversions there.

So what's your point, 100% pre leased.

And then the towers.

Two of the three floors there are pre leased and then in Boston at Hayden.

That is a 100% pre leased as well.

Yeah.

Our next question will come from Tayo Okusanya with credit Suisse. Please go ahead.

Yeah.

Yeah.

Good morning, Thanks for keeping the call going two quick ones for me on the MLB side Joe.

A lot of really tough news coming out of the hospital space in general just curious without it impacting kind of demand pool and will be development, whether that's impacting your ability to kind of push rent just kind of curious what you're starting to hear from the hospital systems, given the very tough fundamentals that are happening right now.

Yeah.

I can speak to our development pipeline, we're in discussions with HCA about quite a few projects. Obviously, we you know we're monitoring costs.

Potential returns on those before we commit to anything but there hasn't been really any any impact to us from a leasing standpoint, you are leasing for the year actually the past couple of years is significantly above what we expected it to be and if you look at some of the issues like I'll take HCA as exact as an example, this quarter.

You know their actual lower admissions.

It really wasn't the result of core operations.

If you look back to <unk> 'twenty, one there was actually a surge in COVID-19 admissions last year because of the delta there. It obviously luckily that didn't continue this year and were 13% of their admissions last year were the result of Covid cases. This year. It was only 5%. So if you you basically take that up.

Their core admissions were up six 9%. So I think as we move forward, we're going to see continued strong results out of.

Many of our health systems, and you can see that with the CHS results. They actually were higher than anticipated in their stock is up about 50% since they announced lately.

Late last week.

Yes.

That's helpful.

The life Sciences side again.

I think we got good commentary on the di sounds like you are on movement optimistic yeah.

But the overall space, but just curious how I believe that the.

Clean leasing in the development pipeline.

<unk> grew quarter over quarter, I don't know, whether it's just a.

A soft quarter in particular, and you're expecting to kind of improve overtime.

Any kind of comments you can provide around that.

Hey, Scott about yeah, I mean, I think that we can.

We maintained our 81% pre leasing.

But if you look at the list of developments right I mean, there's only.

The only one development that has any space available.

So it's just a matter of.

Not getting away from that one building.

So there's not a big sample size of available spaces within the development portfolio.

Great. Thank you.

This concludes our question and answer session I would like to turn the conference back over to Scott Brinker for any closing remarks.

Okay.

Yeah.

Mr. <unk> your line might be me at all I think Scott's line might've been muted, but this is Pete I think I'll say that concludes our call for today and we actually really look forward to seeing all of you at NAREIT in the next couple of weeks at our property tour and meetings after that so thanks.

Very much look forward to seeing you back by.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.