Healthpeak Properties Inc. Q1 2023 Earnings Call

Speaker 1: Good morning and welcome to the Health Big Properties Inc. first-quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please sign-on a conference specialist by pressing the start key followed by zero.

Speaker 1: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andrew Jones.

Speaker 1: Senior Vice President, Investors Relations. Please go ahead.

Speaker 2: Welcome to HealthPeaks first quarter 2020 financial results conference call. Today's conference call will contain forward-looking statements. Although we believe the expectations 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. Whether or not inflection or Monday through Tuesday may include a

Speaker 2: A discussion of risk and risk factors is included in our press release and detailed in our filings of the SEC. We do not undertake a duty to update any board of linting statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit to the AKB burnish of the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with the right key requirements.

Speaker 2: The exhibit is also available on our website at healthpeak.com.

Speaker 2: I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker. Thanks Andrew. Good morning and welcome to HealthPeaks First-Order Earnings Call.

Speaker 2: Joining me today for prepared remarks are Pete Scott, our CFO , and Scott Bone, our CDO. The senior team will be available for Q&A. Starting this quarter, we moved up our earnings call cadence by almost a full week, made possible by the strong systems we've put in place and our streamlined processes.

Speaker 2: Over the course of the calendar year, this gives the team an extra three to four weeks to focus on value-add real estate activities.

Speaker 2: After a strong fourth quarter to close out last year, 2023 is off to a solid start despite the market backdrop.

Speaker 2: We affirmed full year FFO guidance and increased full year AFFO guidance, which puts our payout ratio in the 80% range.

Speaker 2: Same-store growth was strong in each business segment, blending to 5.5% for the quarter, and our balance sheet is in great shape with 5.4x leverage.

Speaker 2: Outpatient medical continues to produce best in sector growth despite ever more challenging comps driven by the quality of the portfolio and platform.

Speaker 2: CCRCs are performing strongly on a cash basis in particular, with entry fee receipts at an all-time high for the first quarter.

Speaker 2: I want to make a few comments on life science. For the past 20 years, I've invested in and asset managed nearly every variation of healthcare real estate. I've seen firsthand the pluses and minuses of each and believe life science falls on the favorable end of the continuum. I say that based on secular demand, the impact of innovation, and the impact of innovation does not dominate that Lauderdale-based system of human culmination.

Speaker 2: barriers to entry and core submarkets, competitive advantage of incumbents, high operating margins, and net cash flow growth over time.

Speaker 2: It's a business driven by the aging population and the desire for improved health, two things that aren't going away. At the same time, we fully acknowledge that any business runs in cycles. In fact, despite the market exuberance the past few years, we correctly underwrote the growth which slowed. And we position ourselves accordingly.

Speaker 2: No new development starts in the past 18 months, no material operating acquisitions in more than 24 months, very few lease maturities this year are next due to proactive early renewals, and we didn't compromise on asset quality during the boom.

Speaker 2: The reality is that not every drug candidate will succeed, and biotechs don't raise 10 years of cash up front. It's a given that some companies won't make it. And none of this is a surprise to us. We build our portfolio around these realities. For example, one aspect of our cluster strategy is that growing tenants in our portfolio can take space when another tenant contracts, whether through a direct lease or a sublease.

Speaker 2: It's often done proactively powered by a robust asset management.

Speaker 2: Scott Bowen will share recent examples.

Speaker 2: For several reasons, we see the pullback in sentiment as a huge opportunity for current and potential health peak shareholders. One, we have a relatively small amount of near-term lease roll, and when we do have availability we continue to sign leases.

Speaker 2: 2. New development starts will be very low across the sector for the foreseeable future. 3. Higher borrowing costs and delayed lease-up will create acquisition opportunities in the coming years. 4. We have a big land bank with strong progress on entitlements. When fundamentals turn, which they inevitably will, they will be able to integrate in best helps and benefits levels of MVP onboard, you will have the ability

Speaker 2: we expect to be in great shape to capitalize.

Speaker 2: Recall, we were patient with our land at the cove and the shore until market conditions were right, then generated huge returns for shareholders.

Speaker 2: perhaps goes without saying, but the best opportunities come out of downturns.

Speaker 2: Now a few Board of Director updates. First, congratulations to Kathy Sandstrom on being elected as our new chairperson.

Speaker 2: Kathy has been an independent member of our board since 2018 and brings a wealth of real estate, capital markets, and governance expertise. She was previously a senior executive at Heitman, an important public and private real estate investor.

Speaker 2: An enormous thank you to Brian Cartwright for his five successful years as chairman while we dramatically improved the company and portfolio. Brian will remain an independent member of our board and a highly valued advisor to me personally.

Speaker 2: And I would like to formally welcome Jim Connor to our board. Jim has a strong track record of creating internal and external growth as CEO of Duke Realty in addition to development and outpatient medical experience that will contribute to the execution of our strategic plan.

Speaker 2: Finally, we are pleased to report that we received the highest possible quality scores from ISS for the E, the S and the G in our recent proxy statement.

Speaker 2: I'll turn it to Scott Bowen for commentary on life science fundamentals.

Speaker 3: Thanks, Scott. Before I dive in, I want to touch on a few important topics.

Speaker 3: First, much like landlords analyze tenant credit, tenants are now doing the same with landlords.

Speaker 3: With record demand and minimal availability in recent years, tenants didn't always have the luxury of thoughtfully selecting their real estate assets or partners of choice, and many had to settle with what was available.

Speaker 3: Today, tenants have more ability to select a landlord that has the financial capability and operating credibility in the market, as well as one that has the ability to provide pathways to growth within its portfolio. Health Peak is exceptionally well positioned to capture the demand from these tenants. Second, with increased supply and softening demand, there will inevitably be pressure on deal economics. However, purpose-built space in the best sub-market.

Speaker 3: that is owned by large incumbents like Health Peak, will continue to outperform secondary locations with lower quality projects and sponsorship.

Speaker 3: Third, we proactively manage our portfolio, leveraging our scale and tenant relationships to provide real estate solutions for our tenants while enhancing our portfolio credit profile.

Speaker 3: A very recent example of this is how we proactively downsized Edvarum's footprint and simultaneously back-filled the 40,000 square foot space with Revolution Medicines, a $2.4 billion market cap company that has raised over $600 million and two equity offerings in the past nine months.

Speaker 3: RadMed entered HealthBeak's portfolio in 2015, initially taking a 42,000 square foot building and has grown to over 140,000 square feet across four buildings.

Speaker 3: Finally, while the IPO market has generally remained closed, we've seen continued activity and positive signs from the other funding sources.

Speaker 3: Public BioPharma R&D is at record levels, VC fundraising remains strong, and the secondary equity market remains open for those with good data.

Speaker 3: Moving to the portfolio and our core markets. Pete will discuss the financial results in detail, but I will note that we had a solid leasing quarter with 311,000 square feet of leases executed with a positive 55% cash re-leasing spread on renewals. We delivered the final lab space at our 101 Cambridge Park Drive development and the building is now fully placed into service, capping off another successful health peak development project.

Speaker 3: Now getting into the markets, starting in Greater Boston, we have only one 22,000 square foot space rolling through year end 2024 in the entire portfolio. Our only vacancy is in a 49% owned building where we recently executed a lease on a portion of that space at a triple digit rental rate and have activity on the remaining space.

Speaker 3: Moving to San Diego, our 2.6 million square foot operating portfolio is 100% leased. Only 200,000 square feet matures over the next 18 months, and we've already addressed nearly a third of those maturities. We have commenced marketing on our gateway development following a lease rejection as part of the bankruptcy proceedings. The project was designed to accommodate single or multi-tenant use and has great visibility off the 805 freeway.

Speaker 3: Finally, to South San Francisco, where we enjoy a dominant market share of approximately 40%. We have assembled a portfolio in South San Francisco that is built to accommodate tenants of all sizes and maturity levels, from brand new Class A-plus space to small, 2,500-square-foot Class B spaces. On thism, I would like to share my um, my brief presentation with the 80self dystopia

Speaker 3: This holistic portfolio approach with different price points catering to the needs of a wide variety of tenants creates an ecosystem that no one can match in this important market.

Speaker 3: Through 2022 and early 2023, over 78% of health peak leasing in South San Francisco has been with existing tenants.

Speaker 3: Additionally, over the past two years, HealthPeak's share of total executed leases has approached 50% of the market total, highlighting the importance of our deep tenant relationships and portfolio scale in the South San Francisco market.

Speaker 3: Now to a quick update on our top three priority campuses in South San Francisco.

Speaker 3: At Oyster Point, we have completed leasing on 87% of the recent exploration.

Speaker 3: This quarter, we placed our only vacancy at the campus, a 68,000 square foot building that expired at the end of 2022 into redevelopment.

Speaker 3: This space has 20-year-old improvements, so we'll need some capital as we work to release it.

Speaker 3: The balance of the near-term expirations, which total 320,000 square feet, don't expire until late this year, in early 2024, and will go into redevelopment at that time. So we are marketing and are in active negotiations on a portion, but still generally too early to be signing leases. At our point grand redevelopment, which we have de-risked with our strategic JV, we have

Speaker 3: We have leased 53% or 185,000 square feet of the active redevelopment space. We have executed three leases at the campus between December and March totaling over 130,000 square feet, two in very late 2022 and one last month with a weighted average lease rate on those deals of just under $90 per square foot. Additionally, we are enacting negotiations with prospective tenants on portions of the remaining space. We pray for a greater success than ever before.

Speaker 3: At our Vantage project, we have pre-leased the full building totaling 45% of the first space to Estellis and have recently executed an LOI with an existing portfolio tenant for 23,000 square foot full floor space, bringing the project over 50% committed.

Speaker 3: Wrapping up with supply in South San Francisco, competitive new supply delivering in 2023 totals 800,000 square feet of which 71% is pre-leased.

Speaker 3: There's another 1.7 million square feet delivering in 2024, 26% of which is conversion space that will be less competitive to our purpose-built products.

Speaker 3: It's critical to understand that the unleashed space delivering in 2023 and 2024 resides only five projects and two of those are conversions. We have consistently competed successfully with these same projects over the past 12 to 18 months while leasing up our shore, nexus and vantage projects.

Speaker 3: Lisep at HealthPeace Projects has continuously outpaced the competition and we expect the same to continue. With that, I'll turn it over to Pete to cover financial results. Thanks, Scott. Despite the challenging market backdrop, we have started the year on a strong note. For the first quarter, we reported FFO is adjusted of 42 cents per share, AFFO of 38 cents per share.

Speaker 3: and total portfolio same store growth of 5.5%. Notably, our FFO as adjusted this quarter was impacted by two pennies of one time straight line rent write offs.

Speaker 3: Per our policy, we do not add this back to FFO as adjusted.

Speaker 3: Let me provide a little more color on segment performance. In light sciences, we finish the quarter with an occupancy rate of 98% and same store growth with a very solid 6.3%.

Speaker 3: The drivers of same store growth were contractual rent bumps, positive mark to market and lower free rent partially offset by a known vacate of a non life science user at our 8,000 marina building which is adjacent to the shore. Turning to medical office, we had another great quarter with same store growth of 3.7%

Speaker 3: and we finished the quarter with an occupancy rate of 91%. Same-store growth was driven by strong in-place lease escalators and our Medical City Dallas campus which continues to exceed our expectations.

Speaker 3: Finishing with CCRCs, same store growth for the quarter was a very healthy 9.5%. Cash and REF sales of $29 million set a first quarter record. The strong starts of the year allowed us to increase our full year and REF guidance to $107 million at the midpoint. That is $27 million for five pennies per share.

Speaker 3: That is a good segue to our balance sheet, which we believe continues to be a competitive advantage.

Speaker 3: Our net debt to EBITDA is 5.4 times. We have liquidity of $2.5 billion. We have limited floating rate debt exposure at 5%. We have no bonds maturing until 2025. Our development pipeline is fully funded.

Speaker 3: And we have no additional asset sales in our forecast. We have approximately $150 million annual retained earnings.

Speaker 3: and we have stable ratings from both S&P and Moody's.

Speaker 3: Turning now to our 2023 guidance, we are reaffirming our FFO as adjusted range of $1.70 to $1.76 per share. We are increasing our AFFO range by 1 penny to $1.46 to $1.52 per share.

Speaker 3: And, we are increasing our blended cash same store growth by 25 basis points to 3% to 4.5%.

Speaker 3: Let me expand on some important items underlying our guidance. We see three pennies of benefits from the following items. One penny from the 50 basis point increase in medical office same store growth and the 2.3 million dollar letter of credit at Gateway.

Speaker 3: one penny due to earlier than anticipated revenue recognition at our Hayden campus in Boston, and one penny from the combined impact of lower interest expense and higher interest income. For FFOs to just did.

Speaker 3: The positive three penny increase is offset by a three penny decrease in straight line rents inclusive of the one-time write-offs I previously mentioned.

Speaker 3: For AFFO, we were able to increase guidance by a penny while maintaining a level of conservatism as it's still early in the year.

Speaker 3: As a reminder, AFFO is not impacted by non-cash items, including straight line rent and revenue recognition. Please refer to page 36 of our supplemental for additional detail on our guidance.

Speaker 3: A couple of quick items before turning to Q&A. On the Sorrento Therapeutics operating leases, we have been paid rent in full through April . Although not guaranteed, we could receive additional rent as their strategic alternatives This process is expected to run through July .

Speaker 3: With the rents received year-to-date, combined with the potential for additional rent payments and the letters of credit, there is minimal financial impact to 2023, regardless of whether the leases are accepted or rejected.

Speaker 3: On the Kodiak leases, we have been paid rent in full through April . Due to our proactive subleasing, our annual net exposure is only $3 million across 40,000 square feet at 35 Cambridge Park Drive. I walked this space last week and it is in A-plus condition.

Speaker 3: If the leases are rejected, we are confident in our ability to release the space on favorable terms. With that, operator, let's open the line for Q&A. Thank you. We will now begin the question and answer session.

Speaker 1: To ask a question, you may press star 1 on your touchtone phone.

Speaker 1: If you are using a speaker equipment, please pick up your headset before pressing the star keys. To withdraw your question, please press Start then 2.

Speaker 1: so that everyone may have a chance to participate, we ask that participants limit their question 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.

Speaker 4: Hi, good morning guys. It's Eric on for one. I'm just starting with life science. Just a quick question on occupancy and appreciate your the color and the remarks. You know, was it just the one move out that drove the decline in one Q23? And then what's assumed in guidance for the balance of 23? Is there any other large move outs that to be on?

Speaker 3: to be able to be aware of. As Pete here, I'll take that. Please send our regards to Juan. You know, we did end 2022 at 99% occupancy, and in a multi-tenant portfolio.

Speaker 3: Kind of hard to go up from there, you know occupancy did decline modestly In the first quarter, but if you put it into context 50 basis points of an occupancy decline is actually around 50,000 square feet within our portfolio And if you equate that to the size of our leases, that's really just one lease

Speaker 3: Our guidance for the year did assume occupancy would decline a bit in 2023. As I mentioned, it's hard to go up from that 99% number. And then as I did mention in our prepared remarks, we did have an expected tenant vacate at our 8,000 marina. Team N

Speaker 3: project over in Brisbane, and that's adjacent to the shore. It was a non-Life Sciences user, and we're evaluating converting that space to lab, and that was certainly expected. So with regards to occupancy generally, that's probably the best way to answer that question.

over in Brisbane and that's adjacent to the shore. And it was a non-Life Sciences user and we're evaluating converting that space to lab. And that was certainly expected. So with regards to occupancy generally, that's probably the best way to answer that question. Great, thank you guys.

Next question comes from Michael Pearl with RBC Capital Markets. Please go ahead. Yeah, thanks. How built out is the Sorrento Gateway development today? Did Sorrento Therapeutics already start its TI build or does a new tenant or...

We were probably around three months from delivering that when Sorrento filed for bankruptcy. And so we have pushed out the date with regards to the initial occupancy in our supplemental to mid 2024 at this point in time. It's hard to comment on any additional.

TIs that may have to go into that if we had to build out additional lab space on individual floors at this point in time. But I think it, you know, we look at the location of that right off the 805. We feel quite good about our prospects there. It's just going to take a little bit more time. So hard to comment on any additional...

that we'd underwritten is still a good number. Okay, and then how much activity has there been? I know this probably just happened so I'm not sure how long you've had to show it. So how much activity has there been and, and just kind of getting back to the underwritten rents? I mean, is it fair to assume that the TI package that's required to go into the building is significantly smaller so it's

probably three months from being fully built out and ready for occupancy. It was designed for that user, so if we end up multi-tenoning, we may have to take some time to build out the TI's in a little bit different way, but it's a purpose-built lab building. So I'm not sure I follow the second question.

Yeah, just I think that it is harder for tenants today to lease development projects because there's a big TI commitment that they have to put in. And if it's a second gen prebuilt lab, then there's less cash outlay. So there's more interest and correct me if I'm wrong on that statement.

Oh, I see what you're saying. No, there wouldn't be necessarily a TI requirement for many new tenants. I mean, this project is fully funded and ready for occupancy. Okay, great. Thank you. Yeah.

you're saying no there wouldn't be necessarily a TI requirement for many new tenant I mean that this project is fully funded and ready for occupancy. Okay great thank you. Yeah.

Next question comes from Nick Ulico from Scotiabank. Please go ahead. Do you believe any spokesman or civil society should be looked at?

Thanks, good morning. I was hoping to get an update on your tenant watch list. You may not want to call it a watch list, but if we put aside Sorrento and Kodiak, is there a way for you to quantify a level of the life science?

rents right now that you are keeping an eye on from a tenant base.

Yeah, hey, Nick, it's Pete, you know, I'm not going to comment on specific tenants, but I will say that our overall tenant risk profile has actually improved quarter over quarter. And I think that is a pretty key takeaway alongside of our guidance updates that we released.

this call. You know we've had a few tenants raise capital over the last month or so. Scott Bone also talked about the Adverum RevMed transaction that proactive lease termination that we completed and then one of our tenants Sarah's and I saw you put that in your note thank you for doing that did have their

drug approved yesterday as well and they're collecting a pretty significant milestone payment on that. You know, I will also say that our disclosure is, we think, pretty good and we did add cash balances to our top tenants within the supplemental this quarter. So, like I said, I think the big key takeaway alongside our guidance updates is that our tenant risk profile has improved a little bit.

The only thing I would add is, hey, Nick and Scott, you know, when you look at our life science portfolio, we're essentially in the three core markets, but we're also essentially in five core submarkets. So you can tour our portfolio awfully quickly. In the last two or three weeks alone, Pete, Scott, and myself, the team, I've seen the vast majority.

physically of the space that is either vacant today or could be vacant if there was an issue with the tenant and it's all in good shape. So there's a number of factors that have to be considered when evaluating credit of tenants and for sure there's been a lot more good news over the past few months than bad news.

But the qualitative aspect is important too. The real estate is in really, really good shape. And these are core sub-markets where we have meaningful market share. We're not trying to compete in every sub-market across the US. We're in five core sub-markets.

South San Francisco, Torrey Pines, Serenal Meso, West Cambridge, and Lexington. I mean, that's our footprint. We have huge market share in each of those local core submarkets that puts us in awful good shape when buildings become available. Okay, thanks. And then, the second question is just on South San Francisco. If you could talk a little bit about the impact that...

you know, sublease space is having in the market and in your own portfolio as well. You know, I know like Graphite Bio put 85,000 square feet of sublease space at the nexus on Grand. Anything else you could talk about of, you know, meaningful sublease space in your existing portfolio and then how...

just the overall increase in sublease space in that submarket is impacting maybe rents or overall trends in that market.

Yeah, hey, it's Scott Bowen. Yes, there's certainly been an uptick in sublease space in all the markets. It's still at manageable levels. I think sublease space, it's important to note, has its own challenges and it's not always directly competitive to a direct deal with a landlord. There's a few things to think about.

So generally no TI allowances, so any incoming subtenant is going to be coming out of pocket for any modifications to space. And with those modifications, they also face restoration obligations at the end of the sublease that are additional costs. And most importantly, there's typically not a recognition of a sublease in the event of a master lease termination. There should assume a certification.

meaning a subtenant is taking the credit risk of the sub-wassoor on their mission critical facilities.

I think one other note I would make is that subleases have historically been contributed to our leasing success. It provided our team the ability to build relationships with subtenants and oftentimes take them direct at the expiration of a sublease. Leasing directly to a subtenant at the end of sublease has been advantageous.

Very little downtime, very little capital. If you just look at the code, of the million square feet here, 200,000 square feet of tenants were former subtenants within the project. So I think subway space can certainly pull from leasing demand in the short term, but if you look at it over the long term, it provides an opportunity for us from a leasing perspective.

Next question comes from Vikram Malhotra with Meteoro. How can?t we pick this one? I think it works great.

Please go ahead. Thanks for taking the questions. I just wanted to step back. You talked about some sublease space. You talked about the move-out of the outline, going to year-end with Amgen, and then the risk profile, that your view is at lower Q over Q.

Can you sort of at a higher level just talk about the earnings power or trajectory if you were to take slightly longer term view? I'm not looking for a specific guidance for next year but I'm just trying to understand the guardrails with all the moving pieces given how big of a space Amgen is. Would you give us some building blocks to think about the same store growth profile of the life cycle?

2022, at least in the biotech sector, and despite the business being pretty capital intensive, I'm going to challenge capital markets. You see our occupancy is still at 98%.

our leasing volume continues to be strong. It'd be hard to paint a tougher financing environment for tenants and yet we just had 6.3% same store growth.

and we're at 98% occupancy. So that makes us feel pretty good about our market position. And the fundamentals of the business haven't changed in terms of the aging population, desire for improved health. I mean, the science isn't going backwards. It only builds on itself, probably gets even faster in terms of the improvement with AI.

If the odds of success on drug development increase with AI, which they almost certainly will, that's only going to cause more funding to come into the business. So there's plenty of reasons to be positive that this 25% mark to market that we have across the portfolio over the next decade, that should still be achievable. It's not an ideal leasing environment today, but when you think about fundamental demand drivers...

It's all there and our market position is fantastic to capture it, relationships, the team, the buildings, the locations. We're at the coast here in South San Francisco all week. I mean it's a special place. We've got landlords using our building to market to tenants. That's no joke. It's what Scott and the team created here.

is pretty unique. So life science I think is going to continue to produce strong growth and you think about the supply maybe it doesn't go to zero in terms of new starts over the next year but pretty close. So the supply demand outlook over the next three to five years should actually be quite favorable from what we would have said two years ago.

CCRC business, it's only 10% of what we do, but it continues to perform. There's still significant occupancy, upside and NOI to recapture. And then the medical office platform continues to perform. It's at 90%, so maybe not dramatic upside, but if it can continue to generate that 3 to 4%.

Same store growth that's out off the attractive Base of earnings growth for the company. So Pete anything today? Yeah, the only couple things I would add is obviously when I'm putting out 2024 guidance today, but I do like the question that you're asking that come because we have a Diversified portfolio and a great balance sheet bolted onto it. I'm sure we'll talk about medical office

CCRCs at some point on this call, but we did put out this NOI growth trajectory for the next three years in our NAHRE deck about six months ago and we still feel good about that NOI growth trajectory. You know the timing of when

the Gateway project will work its way into our earnings, has been pushed back a little bit, but the overall growth story we still feel very good about. And then with regards to Amgen in particular, and that Oyster Point campus, as Scott Bone mentioned, we have released pretty much the majority, the vast, vast majority of the leases that have expired there.

We did put one building into redevelopment. And then we have three buildings that we will get the leases back over the next year, couple the end of this year, and then some the beginning of next year as well. And we did put out a full set of assumptions on how we think we will release those and the timing of that.

Maybe just try to get a bit more flavor of the, you mentioned the credit profile and your minds have improved over the, over Q over Q, but, you know, last June , May, read if I remember correctly, you were thrown out a number. I think the watch list at that time, you had estimated around four to 5%.

of NOI and that's kind of when you had pushed out development, leads up, schedules, etc., which obviously even got refined during the subsequent quarters. Our work suggests today, not from an NOI but from a square footage perspective that risk is probably in that still 5-ish percent range of square feet.

would you be able to just comment, you know, is that in your, without, if you don't want to share a number, is that number in the ballpark? Is it much higher, much lower? Given your comments around Q over Q, your risk profile has been lowered.

Yeah, Vikram, I appreciate your support and report and all the time you put into it. I mean, we define things a little bit differently. We obviously have access to data that not everybody would have, both public and private. So I don't want to talk about...

but I think Pete's point that quarter over quarter the risk profile has definitely gone down is an important one and that includes a lot of good news over the past two to three weeks alone with companies raising capital, doing licensing agreements. So I mean it's a company by company analysis obviously that we're doing and we feel better where we sit today than we would have even two weeks ago.

you talked about it being used for single or multi-tenant potential use, but correct me if I'm wrong, was the building initially built for one tenant? Like, maybe you can set up the floors differently for like the TI packages, but is there anything structurally different with the building that would preclude you from multi-tenanting it?

No, I would say, and Michael Scott-Bowens, the core and shell of the building was certainly designed to be single or multi-tenant. So the TI's...

for the previous deal, you know, we're built as single tenants, but you know, you're able to flex those to multi-tenant and the building structure itself and can go multi-tenant very easily.

Okay, cool. And then just back to San Francisco Supply, Scott, when you prepared remarks, you mentioned about 800,000 square feet coming online in 2023. That's competitive. I mean, do you have a sense if like these proposals, I think the mayor's proposing some buildings in the CBD, the office towers converted to lab space.

I mean, that stuff seems like it's going to be a tougher lift than the conversion down the peninsula, but any sense of how big this supply market is, and how the market might be misinterpreting that headline number when really they just need to probably look under their hood a bit.

You're talking about, sorry Michael, in the city of San Francisco? I presume that when you look at a market supply report for life science in San Francisco, it accounts for both the CBD and the Peninsula. Now there are probably sub market reports, but I imagine if you type in a broker name in San Francisco Life Science.

the whole number will come up. It's effectively like how Lofton and Waltham are different, but they'd probably be lumped into the same NSA supply. Yeah, 100%. I think you'll see the headline numbers are always going to be much larger, you know, and not all that is competitive to our footprint. So we're not overly focused on that. You know, we look at really what is truly competitive to our products within our sub-market.

as Scott mentioned, we're really in five sub-markets, and that's where we focus. When you look at San Francisco CBD, for example, there's talk, and the mayor mentioned inversions to life sciences. Those are challenging down there. So I don't look at those as something that's on our radar, we're truly competitive.

And then a quick one I could sneak in on MOBs. Looks like guidance was raised kind of on the strength of Bend City, Dallas. I feel like people almost forget about that business sometimes, but it is steady state and produced solid results. I mean, what are your expectations throughout the rest of the year? We maybe see another guidance increase if operating results are better than anticipated. And it's my opinion that we do get a really severe downturn.

medical office could be a really good place to be essentially. Yeah, hey Griff, we agree with you. It's Pete here and then maybe I'll let Tom Clerich chime in. But we do look forward to touring Medical City, Dallas with you in about two and a half weeks from now. That campus continues to exceed our expectations and certainly is.

helping with regards to our same score numbers, but the segment generally is performing well. Obviously, we increased our guidance for that segment this quarter by 50 basis points. We like to keep a little bit in the tank as well. If you go back and historically look in MOBs, we have been able to increase guidance as the...

year progresses on multiple occasions. So we feel good about that from where we sit today. Right now, there is a little bit of volatility with the MCD ad rent component, so we're going to be a little bit more conservative at the beginning of the year. But Tom Clerich, why don't you give a little sense for what you're seeing within the segment overall? I think if you look, our escalators continue to perform well where we average about 3%.

A lot of that's driven by our fixed escalators that are averaging 2.8%. Obviously CPI escalators will fluctuate here and there, but they're doing well. We had a good quarter for mark-to-market on renewals at 4.1%. We tend to see...

mark to market kind of the bulk of it's in that two to four percent range but then you always have a number of leases that are above that a number that are below it and you know this this quarter we had a lot more above it than below it so that that worked out well for us

And parking, you know, continues to get back to and sometimes above pre-pandemic levels. So we saw a little bit of a bump from that. So overall, you know, most of the major metrics for us have been positive. And as Pete said, if Medical City continues to perform the way it has been, yeah, we might have some room there too. So. All right, guys, that's it for me. Thanks for the time.

you know continues to get back to and sometimes above pre-pandemic levels so we saw a little bit of a bump from that so overall you know most of the major metrics for us have been positive and as Pete said if Medical City continues to perform the way it has been yeah we might have some room there too. Alright guys that's it for me thanks for the time. Thanks Griff.

Next question comes from Steve Valicat with Workplace. Please go ahead..

Hello everyone, thanks for taking the question. Two topics here quickly. On the MOZ, I know you just kind of talked about this, but I wanted to ask about the for whether portfolio or just development pipeline, I know one quarter does not make a trend, but just with overall health systems, really seeing a major resurgence in their operating performance year to date in 23.

Has that led to any more invigorated discussions on development opportunities or is it too soon for just further evolution on that? Maybe I'll answer that first and then I'll ask a follow up.

Okay, yeah, this is Tom. Certainly we're in discussions. You know, we have the HCA development program. There's a number of buildings in that pipeline. HCA just announced on top of having excellent results with almost every major metric being up, they're going to invest about 4.6 billion in capital into their portfolio. So as they do that and expand bed towers and

services, we certainly would see the need for more medical office space. And you mentioned the health systems tenant reported great results, UHS reported great results, so you know if that continues on for the for the year we would certainly expect to see good.

development opportunities. And one thing we were encouraged by is cost seemed to be stabilizing in some instances even coming back down some. We have our Savannah development down in Georgia and we got about 85% of that bought out and the cost actually came in lower than our base case and we were able to remove some assumed escalators that were going to be in there.

It improved the return on that project by at least 25 basis points and hopefully as we finish the project up we can get even a little better return out of it. Okay, great. That's helpful. Quick question for Pete on a different topic here. I know there's obviously a lot of moving parts within the full year outlook, but with the increase in the same store cash NOI growth guidance for the year but the FFO guidance remaining unchanged. Considering the ticketed visit cost the FFO guidance, will there actually be a Apply on the eively Workplace toe

our AFFO guidance by a penny. And one of the drivers of that is taking up our same store guidance within MOBs, 50 basis points and then 25 basis points.

Overall for our blended same store, you know a FFO is not impacted by those straight line rent write-offs So the reason we just reaffirmed FFO as adjusted at this point is because we did have those, you know, two penny Impacts to FFO is adjusted and we didn't have to take that impact into a FFO. So that's really the reason for that

Got it. Okay. All right. Thanks. Next question comes from Connor Siberski with Wells Fargo Securities. Please go ahead.

Hi there, thanks for having me on the call. Last earnings call, it was mentioned that movements in cap rates were such that you could see a more favorable return profile in acquisitions at some point this year, perhaps versus development projects. In consideration of the share price coming off a bit since then and muted activity during the first quarter.

I mean, are you seeing enough movement in caps that you would feel more comfortable taking an aggressive posture through the balance of 2023? I wouldn't say an aggressive posture, not at today's cost of capital, but our view on development hasn't really changed. Tom did mention at the margin at least development costs are maybe starting to stabilize if not come down in certain cases. So that's encouraging. We are making strong progress on entitlements in West Cambridge, South San Francisco, and in San Diego.

So several million square feet of development that at some point the returns will make sense, but our view is development at the right point in the cycle can be spectacular and at the wrong point in the cycle can be pretty rough. So we're not doing a whole lot of development right now, but we're preparing to do a lot of development. So I think that's important to keep in mind that we do have that land bank.

development expertise when the timing makes sense. But yeah the comment is that it could be a rough couple of years in the in the real estate market especially on the private side. Now it depends on what happens with the financing environment but today it's pretty ugly in terms of lack of liquidity, banks really not lending.

certainly not at portfolio level quantum. LTVs down, interest rates significantly higher. So I wouldn't be surprised to see return targets move quite a bit higher, it's just nothing's getting done right now. Well, I shouldn't say nothing, but pretty close to nothing. There's a select trade now and then, but anything material in scale that requires financing would be near impossible.

to get done today. So we are optimistic that this downturn is going to lead to opportunities, but obviously we will need our cost of capital to move up, which we think it will. I mean the sentiment overshoots in both directions, it always does. So it's nothing that we're complaining about. It's just a reality. The sentiment is way worse than the reality.

And there'll be a point in the cycle when the opposite is true and have a really strong cost of capital and my guess is There'll be quite a few things to acquire We toured some stuff in the last two or three weeks alone in our core markets that's sitting vacant Because it's you know on one hand maybe not a sponsor that has the right footprint the right Relationships or scale to really fill the building that we feel like with the health peak sponsorship

Over time buildings like that would probably be sub so there could be some unique opportunities over the next year or two. We'll see Okay, thanks for that that's really helpful Quickly on leasing activity and TI's I mean we've heard some chatter that TI's have come up significantly from the start of the year Particularly in life science though looks like the numbers peak posted in q1 seemed pretty reasonable I'm just wondering what the expectation is for TI's going forward on a square foot basis

Sure, Connor. So, I think you made a good point. At the least that we've executed recently, we've held our TI with a percentage of rent. Pretty low, it's up 10% of rent. You do have... Some tenants, it's pretty deal specific. They're typically on smaller deals. You have tenants asking for a higher landlord contribution to preserve cash.

And depending on the deal, the space, and the tenant credit, at times we can get comfortable with that when it's appropriate. I think we focus on making sure those build-outs are highly generic and reusable to make sure that if we're putting in additional capital on any deal that that's going to be space that we can use over the next 10 to 20 years from a build-out perspective.

It's hard to give exact TI's because every deal is different, every space is different. I'll probably stop there. Got it. Well, we'll just work on the guidance number. We'll work with the guidance number then. I'll leave it there. Thank you.

of exact TI's because every deal is different, every space is different. I'll probably stop there. Got it, well we'll just work on the guidance number, we'll work with the guidance number then. I'll leave it there, thank you. Thanks Connor.

Next question comes from Ronald Camden with Morgan Stanley . Please go ahead. Great. Hey, just a couple of quick ones. Going back to the comments on the life sciences funding, I think the question earlier was trying to get at just sort of the funding environment and is your thinking, is your view that sort of the companies with sort of the right products.

there's still sort of funding to be had there. Just trying to get a sense of just, you know, we're hearing that, you know, there's a lot of companies that will need funding in the next six to nine months. Just in your mind, how are you guys thinking about how those gaps...

sort of funding to be had there. Just trying to get a sense of just, we're hearing that there's a lot of companies that will need funding in the next six to nine months. Just in your mind, how are you guys thinking about how those gaps get filled?

Yeah, hey, Ronald, it's Pete here. I would say, think about some of the first quarter statistics. The secondary equity market, which is a big market for our tenants to raise capital, there were over 30 follow-on offerings, raising about $4.5 billion.

even in the volatile markets that we're in right now. You know, venture capital fundraising, we get a lot of questions on that. You know, fundraising for venture capitalists is actually, it was around $6 billion in the first quarter. Now from a deployment perspective, so the venture capital is investing into companies.

that number was at $4 billion. So we're seeing a little bit of a pause or a delay in those funds getting invested into companies. But $4 billion is still pretty healthy. And then from an M&A perspective.

You know, there have been some pretty big deals that have been announced. Merck did a deal. GSK did a deal as well. I think the premiums on those were 75 to 100 percent. And we've continued to say that pharma has a pretty big war chest that we think they will continue to put to work in acquisitions or licensing deals with biotech companies. So despite the volatile capital markets, you know, we are seeing a lot of

capital raising occurring at a healthy pace. It's obviously down a little bit relative to where it was a year or two ago. What are we looking for going forward? Obviously the IPO market would be something that we'd like to see improve. There is a pretty big backlog we've been told of companies that are trying to go public, but just at this moment in time it's more challenging. So we'd like to see that improve.

You know and you know generally I think we feel like if the capital markets volatilities does does subside Interest rates normalize a little bit that it should be a more improved environment going forward Right super helpful And then just moving on to just just a quick update on on CCRC So, I don't know if it's been asked about you know clearly with with the capital markets where they are

It's probably hard to get a transaction. You talked about that nothing was imminent, but just curious what, where we stand there, how are you guys thinking about the CCRC business and potential sale? Yeah, there's no real update as to challenging capital markets to do anything strategic with that business, and it does have significant scale. It seems some smaller things get done, but nothing remotely as big as CCRC portfolio. We've had some outreach, but just not an opportunity time to sell it. Any interim that continues to perform.

it's pretty well bar it's still challenging but contract labor is down about 70% a rate growth this year for existing residents was around 10% some of those are mid-year based on anniversary date so not all of that will show up in our in our red port growth but 10% is pretty strong

So yeah, we like the business, it's just not a perfect fit for where we see health peak five to ten years from now, but unless we get a great price for it, we'll just hold it. We're managing it, and they're good assets, and they're obviously performing.

Great. That's it for me. Thanks so much. The next question comes from Taira Okusonya with Credit Suisse. Please go ahead. Yes. Good morning to all of you. And again, congrats on a very solid quarter. I wanted to go back to the capital allocation question.

versus debt buyback. Like, how would you kind of think through those kind of five options to kind of...

allocate capital and what are you more likely to do or least likely to do? Yeah, redevelopment is first on the list. The returns there are our strongest in comparison to acquisition or development and the return profile is lower risk, given we already know the asset and sub market so well and the turnaround time is a lot lower than a new development.

in terms of the risk of your time period that you're trying to underwrite. So that's our best use of capital today. We don't want to overreact when market sentiment overreacts, but obviously if there was a sustained differential between our own cost of capital and acquisition cap rates, and once we have cleared in what those even are, right, and there's the building the financing markets.

know we could always consider stock buybacks through asset sales but we'd certainly not lever up to do that. That's not high on our priority list right now. It's not a great time to sell assets realistically and we don't have to. So our preference is to not do that but if there was a point in time where acquisition cap rates were clearly below our cost of capital and our applied trading ratios and the financing market was available to buyers then yeah I mean of course we'd consider that but that's not on the table today. I think I covered it earlier but that's not something.

doing more of the agri-farmer stuff in North Carolina, possibly, you know, going to a new market or even doing more of the kind of academic university-based life sciences stuff. Just kind of curious if there's any thoughts to moving those directions and whether the returns in those areas would be potentially attractive to...

to peak. Yeah, I mean the life science title for the business is a pretty broad title. Our business today is more biotech, biopharma focused and for that I see us sticking in the three core markets at least for now.

If you look far enough into the future, I suppose there could be enough scale that it could be interesting to us. But if you think about R&D, that could be something different than just for-profit biotech companies. There's an awful lot of R&D happening in nonprofit health systems and for-profit health systems like HCA. We toured a number of them.

recently including our own portfolio, you know lab space and a quote unquote medical building that would rival what we have here in South San Francisco. So I could see us doing things like that within the quote unquote life science bucket, but in terms of for-profit biotech I don't see us strain outside of the three core markets in the near future. We just have such a huge competitive advantage and that's where the death of demand is and frankly will always be.

Thank you. Our next question comes from John Polovski with Green Street. Please go ahead.

Thanks for the time. I have a follow-up question on South San Francisco. Scott, I appreciate the comments on the amount of supply coming online this year and next year. Just curious how you think through a reasonable scenario and decline in market rents and decline in market occupancy. Yes, I'd prefer to.

when you look at those again, as I mentioned, you look at the supply that's coming on, that we view as competitive to our project, it's really only in those five projects. Two of those are inversions, which aren't gonna compete as well, versus our purpose built. So I think that with our portfolio, and the demand we see from within our own portfolio, we do a lot of the majority of our leasing that we do, especially in our development.

90% of our leasing, when you go back to the Cove and then the Shore and Nexus and now Vantage has come from within our portfolio. So I think we're able to capture the higher rents than some other landlords may be able to. A lot of those deals come from tenants with existing leases in place. So we're growing a tenant, say from...

50,000 square feet to 100,000 square feet, right? And so we're letting them out of the lease on the back end, which we're able to blend into the economics to keep the rent probably higher. So hard to tell on where exactly it goes, depending on demand, but I think we're confident that we'll be able to certainly outperform and capture the high end of market rent. Yeah, I mean, you just got one project that's an outlier that changes the quote unquote market occupancy when 900,000 feet goes under development. That's obviously intended to be a multi-year lease up. So how do you treat something like that in terms of market occupancy?

I think that's an important consideration and obviously to fill something that big you're going to need a lot of large tenants, a lot of the space we have right now frankly is perfect for what the market is looking for. Series A companies 20 to 30,000 feet, lower OpEx, quicker time to get into the building. We're in a pretty good competitive position given today's demand to continue leasing space. Okay, understood. Can you comment on the trajectory of your mark to mark, what you think is a reasonable mark?

in our number when they burn off.

Over the next year or so that will actually be a benefit to the mark-to-market on the on the remaining Portfolio, so it's still in that range, but you know keep in mind We've had several quarters in a row now of 30 40 50 percent mark to markets and as that rolls through the portfolio obviously the what the mark to market on what remains is going to

It's started to decline and we said all along our least role over in 22, 23 and 24 is relatively small as a percentage of the portfolio and the market to market just happened to be lower. In those years it's not a static number. It's going to jump around from quarter to quarter year to year.

our biggest mark to market to actually take place in 2025 and thereafter, which could end up being great timing. There was a point when people were kind of disappointed that we couldn't get to our mark to market quicker. And as it turns out, having a really low lease maturity profile this year and next is a huge competitive advantage. Okay, I appreciate it. Last one for me, for Tom Clarich. I'm just looking through your market level occupancy on page 28 of the sub medical.

Really, developments in many cases. In Houston, we just built a

A new building was 130,000 feet that's not yet stabilized, so that's brought the occupancy down some there. We bought a building in Denver a year ago, Pinnacle, that was, we bought it at 7% occupancy, it's up to 50, and it's actually leased to close to 90. So some of it's just because there's leasing out there that's not yet commenced in some cases. It's just because we...

You know, we don't...

we increase the actual capacity in that building. So there's a variety of reasons for it. But some of the, you know, most of the big reasons are the non-stabilized developments and redevelopments.

Thanks for your time. Next question comes from Mike Mueller, J.P. Morgan. Please go ahead.

Yeah hi, two quick life sciences as well. One being a follow-up from a prior question. I guess in terms of the least mark to market that you had this quarter 55%, how do you see that trending even though I know the roles are a little bit more limited? How do you see that trending in the balance of the year? And then can you remind us what portion of your tenant roster in life sciences is more tech as opposed to life science?

The first one, or the last one first, we have almost no tech. So I mean it's low single digits, we purposely stayed away from the office market. So that's an easy question. The first question you asked, we won't speculate on more.

Thank you. Next question comes from Josh Dunderline with the OA. Please go ahead. Okay.

Hey guys, thanks for the time. Just thinking about the life science guide and just your results for 1Q. Looks like you did 6.3 on the same score cash basis. And the guide you kept at 3 to 4.5.

percent for the year. I guess how are you thinking about the cadence and do you remind us what like the typical rent bump is for an annual basis for the Yeah. Hey, it's Pete here. You know, when you think about the rent bumps, I think the last part

First when you blend the three markets our rent bumps are in the three two to three three Range and most of our same store growth this year is Driven by those rent bumps because as we said last quarter and I will just repeat again on this call You know when you're at 99 percent or 98 percent Occupancy it's hard to get same store benefit from increasing occupancy at those levels So the majority of our growth is coming from those

escalators. With regards to the you know 6-3 in the first quarter as you note yes that is meaningfully ahead of our full year guidance range you know the 55% mark to market you know that will get spread out over the balance of the year and then a couple other items I do think are important to

Mention, you know, we don't have clarity on the Sorrento operating leases that certainly could swing the second half of 2023 I wish I could give you guys Perfect information on that. We'd like perfect information on it. We just don't have it at this point in time And then also on another item as we get towards the back half of the year with regards to the adverum rev med

proactive lease termination. There will be some downtime as we get to the back half of the year. Again, this is a great positive 10 to 12 year benefit for us as a company and for our segment, but we do have a little bit of downtime and we incorporate that stuff into our guidance as well. So we feel good about reaffirming the three to 4 1 1 2%. Obviously, we're still early in the year. We will maintain some level of cushion as well within our numbers.

you know, more volatile within life sciences today than it has been the last couple years. But again, we had a great first quarter and we feel good about reaffirming guidance for the balance of the year.

Okay, that's great color. Just one follow up on that. What are the assumptions that get you to the low end of the life science same story guide? Yeah, I don't know that I want to get into assumptions for high and low. I would say, as I mentioned, there is a little bit of cushion still within those numbers with regard to the fingertips of the returns.

debt right I know everyone likes to talk about the third one first I wanted to take that in reverse order so I don't know that I want to say what's going to be you know the assumptions at the low end or the high end you know I just want to keep it at we feel good about the three to four and a half percent that we reaffirmed

Great, thank you. Next question comes from Nick Ulico with Koshia Bank. Please go ahead. Am I Stop?

Thanks, I just wanted to follow up on Sorrento and the operating leases. I think it's 210,000 square feet, which is a fair amount of space. And so I guess I'm just wondering at this point, how you think, how you're thinking about the need of Sorrento for all that space versus some of it.

And then if you could also just talk about if they were to reject the operating leases, what you think the man would be like for that possible downtime, etc. Thanks. Yeah, Nick, on the first one, I mean, the company's in bankruptcy, so it's not like you just pick up the phone and call their CEO and ask what their outlook is. There's quite a few people involved in that process, so we're not going to speculate on what they're saying behind closed doors. We're also on the creditors committee.

work from a releasing, repositioning standpoint, those buildings? Yes, so it depends on which building, but it's all part of the same campus, essentially Director's Place with the Gateway development. It's a spectacular location. Sorento Mesa is a big submarket and we think we've got the best footprint in all of Sorento Mesa in terms of visibility.

and accessibility. Those are buildings that are in some cases already built out fully for lab and other cases could accommodate a range of uses and pretty flexible. So each building is a little bit different and we'd have a different game plan for each. But we got a big presence in that local market, we got a fantastic team and great relationships. So if there's demand out there, I think Mike and the guys will be behind the list of those capturing it. Thanks, appreciate it Scott.

This concludes our question and answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks. Please go ahead. Thanks for joining today and have a great weekend.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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