Q2 2023 Healthpeak Properties Inc Earnings Call
Speaker 1: Good morning and welcome to the Health Peak Properties Incorporated second quarter conference call.
All participants will be in 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 will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone 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 Johns, Senior Vice President of Investor Relations. Please go ahead.
Welcome to HealthSeek's second quarter 2023 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 call actual results to differ materially from our expectations.
A discussion of risk and risk factors is included in our press release in detail in our filing to the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on the call. In an exhibit to the AKB furnace of the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com.
I'll now send a call over to our President and Chief Executive Officer, Scott Brinker. Thanks, Andrew. Good morning and welcome to HealthPeaks' second quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO , and our senior team is here for Q&A. We'll be right back.
Last evening we increased earnings guidance and reported 4.8% blended same-store growth.
The balance sheet remains in great shape. Through streamlining and automation, our G&A for 2023 is expected to be 6% below our original 2022 guidance. We're operating in a volatile macro environment, but we have a strong handle on the things we can control.
The fundamental driver of demand for our real estate is the desire for improved health, which is only growing. Equally important, we benefit from the impact of technology across our playing field of medical discovery and delivery.
For example, progressive health systems now have 10 plus outpatient locations for every one hospital with a strategic plan to grow that ratio to 20 plus. The hospital remains the epicenter, but much of the growth is outpatient made possible by technology. The shift in delivery aligns with our strategy.
to capture the outpatient real estate needs of leading health systems.
And with tighter profit margins because of the cost of labor, health systems will increasingly seek knowledgeable third party capital like Health Peak to expand their footprint.
Similarly, technology will reinforce and expand the need for lab space. AI and machine learning will increase the probability of success in drug research and reduce development timelines. This will drive more capital into the sector.
The data needed for the algorithms and the validations comes from the laboratory, which are highly regulated and controlled environments.
A Nobel Laureate in Chemistry recently said that she has run her lab for 30 years and never experienced the accelerating discoveries we've seen in just the last five years alone.
The science is building on itself, including our understanding of genetics and improved testing which will transform healthcare delivery. Today it's reactive. We seek therapeutics after a problem arises. Technology will drive the addition of proactive care where we detect issues and seek care before a problem arises.
This will shift the allocation of healthcare spending and expand the total pie. Our outpatient medical and lab buildings will be a critical part of this future.
A few comments on portfolio performance, starting with outpatient medical. We have an irreplaceable portfolio and deep relationships with leading health systems. More than half of our square footage is now leased directly to a health system, which is 2x the level from 20 years ago as their business model has shifted toward outpatient care.
we've become a partner of choice. I toured a number of our buildings in recent months and saw very active parking lots and lobbies, a great sign for current and future leasing.
Our concentration in high-growth markets like Dallas, Houston, Phoenix, Vegas, and Nashville will benefit our portfolio for the next decade plus.
Moving to our lab business where we have significant market share in key sub-markets, a diversified tenant base and strong relationships. Biotechs have been doing what they should do in this environment, which is to conserve cash. So the default answer has been to make do with existing space.
That mindset made perfect sense the past few quarters, but will naturally run in cycles.
Despite that backdrop, we've had solid leasing activity, primarily with existing portfolio tenants who accounted for 89% of year-to-date leasing.
In each case, the broader market either isn't seeing the prospect or is at a big disadvantage because we can tear up an existing lease in exchange for a larger, longer term commitment.
More recently, we've seen an uptick in leasing discussions, which may reflect the more benign outlook for the Fed and interest rates.
I'll close with transactions. The market remains slow given the financing markets and inactivity from core funds and non-traded REITs, many of which have redemption cues. Despite that backdrop, we've sold $130 million of fully stabilized but less core real estate year to date.
at an attractive 5.4% cap rate and use the proceeds to accretively de-lever.
We're currently having good discussions on a couple hundred million dollars of additional less core asset sales.
Subject to closing, which isn't guaranteed in this environment, we'll have flexibility to either recreatively pay down our line of credit or buy back stock. Alternative P to cover financial results, balance sheet and guidance.
Thanks, Scott. For the second quarter, we reported FFOs adjusted of 45 cents per share, AFFO of 40 cents per share, and total portfolio same-score growth of 4.8%.
In addition, our board declared a dividend of 30 cents per share, which equates to an AFFO payout ratio of approximately 75%.
Let me provide a little more color on segment performance.
starting with CCRCs.
Same store growth for the quarter was a very strong 19.3%.
Occupancy has increased 230 basis points year over year, and we see additional upside with zero new supply in our markets.
Total NREF cash receipts were $31 million in the quarter, and for the full year, we expect our cash receipts to exceed NREF amortization by 5 pennies per share.
Turning to outpatient medical, we had another solid quarter with same store growth of 2.5%.
Demand for our space is high and leasing momentum remains strong. We have executed 83% of our full year leasing budget and have an additional 15% in documentation.
Releasing spreads were up 3.7% during the quarter, which again was at the high end of our historical 2-4% range.
Trailing 12 month tenant retention was 81%, which is a reflection of the quality of our assets and our time tested platform, which consistently produces sector leading customer satisfaction scores. Finishing with lab, same store growth for the quarter was 3.8%.
Year to date we have executed 461,000 square feet of leases.
Approximately 90% of that leasing activity has been with existing tenants, and we achieved positive releasing spreads of 52% on renewals.
In addition, we have another 196,000 square feet of executed LOIs.
with the majority of that activity occurring in July .
All of our LOIs are with existing tenants.
which further demonstrates the superior advantage that incumbent property owners like Health Peak have in their respective markets.
With the biotech index up 10% since the start of the second quarter, we are seeing an increase in tenant capital raising activity.
Equity markets are open for companies with positive data readouts.
Venture capital investment increased over $1 billion sequentially, with Series A rounds growing more popular. M&A continues with $80 billion of deals announced year-to-date.
The IPO market is showing signs of life, and reverse mergers are becoming more popular, providing an alternative for companies to go public.
An important part of our lab strategy is proactive asset management to improve our tenant credit profile. As we had previously announced, we downsized Adverum in favor of Revolution Medicines, creating a small cap credit for a $3 billion market cap company.
A quick note on Sereno Therapeutics.
We've been paid rent in full through July on the four operating leases, and we hold letters of credit or security deposits of $2.6 million, so no impact on 2023 earnings regardless of the outcome.
As you have probably seen, Sorento is working on an exit financing package, but at this point, there are no details I can provide or assurances it will be completed. We hope to have clarity on a path forward in the near term.
Turning now to our balance sheet. In May, we issued $350 million of 5.25% fixed rate bonds, bringing year-to-date issuance to $750 million at a blended yield of approximately 5.35%.
Our net floating rate debt balance was approximately $150 million at quarter end.
Our balance sheet continues to be a competitive advantage in this environment. Our net debt to EBITDA is 5.1 times. We have nearly $3 billion of liquidity. We have net floating rate debt exposure of approximately 2%. We have no bonds maturing until 2025.
We have approximately $150 million of annual retained earnings, and we have stable ratings from both S&P and Moody's.
Our development spend is self-funded without the need for equity or asset sales from a combination of retained earnings and debt capacity from higher EBITDA.
As Scott mentioned, any potential asset sales would be opportunistic and are not contemplated in guidance.
Turning now to our 2023 guidance. We are increasing our FFOs adjusted and AFFO guidance by one penny at the midpoint to $1.75 and $1.51 respectively.
As you can see from our year-to-date results, performance across our portfolio remains strong, and we are increasing our full-year blended same-store guidance range by 25 basis points to 4% at the midpoint.
Please refer to page 38 of our supplemental for additional detail on our guidance.
With that, operator, let's open 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 1 on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2.
so that everyone may have a chance to participate, we ask that participants limit their questions to one and a related follow-up.
If you have additional questions, please re-queue. At this time, we'll pause momentarily to assemble our roster.
Our first question comes from Juan Sanabria from BMO Capital Markets.
morning
I was just hoping you could talk a little bit more about the life science or lab market and the increase you've seen in demand in July and how, if you can maybe characterize or put a number around the increase in kind of...
opportunities or number of companies looking for space or the amount of space being sought after by potential tenants and how and why that's changed.
Hey Juan, it's Pete. Hope all is well. Maybe I'll just...
you know, start with that.
And perhaps Scott Bone or Scott Brinker wants to add a little bit to it. But we talked about this earlier in the year that our...
tenant credit risk profile has been improving in the lab space. We also saw that sequentially this quarter as well. I don't want to repeat a lot of what I said in my prepared remarks.
A lot of that improvement in the credit profile is because the capital markets are improving as well. You know, just a couple stats when you think about follow-on equity deals, you've had about $14 billion of deals get done year-to-date, tenants that have good data readouts or finding success raising capital.
You know, you look at the venture capital market and that has improved. It's improved a billion dollars sequentially. And in fact, we're seeing more series A capital raises occur as well, which is important because that's really new company formation and that'd be demand for new space for us. You know, M&A is strong. In fact, there was another.
M&A deal that got announced this morning so that 80 billion dollars is actually more like you know 87 billion at this point in time and then you know reverse mergers are definitely Popular right now. So it's a backwards way of companies going public. We saw that in our portfolio with
frequency merging with Corel Bio. I'd say really that's what's driving the improved backdrop. Obviously there's other things going on in each.
individual market but we feel like things are trending in the right direction for us and has certainly led to a little bit more leasing demand as you saw the LOI's that got signed in July and we hope that that's a harbinger for more to come in the next couple of quarters but
Again, feeling a little bit better today than we did six months ago. And then just our follow up question, just on the MOB guidance bump, what was the driver there? The second quarter seemed solid, but...
within I guess the typical range. Just curious on what drove the increased confidence there.
Yeah, Juan, this is Tom. We continue to see positive operations at Medical City, Dallas, and that contributed about 90 basis points for the year and 50 basis points for the quarter. In addition, our escalators remain at that kind of 2.93% range, so that's driving...
driving results and we continue to see rebounds in parking income where we're above our
pandemic level reduction. So that continues to drive our results. And as you said, 2Q was really solid at 2.5% and that was even with some headwinds against it. We had some, a fairly high comp in 2Q of 22 at 4.5% and that included some adjustments in rent debatements and we had some positives to our.
expense reconciliation billing, so that had about a 70 basis point impact. We would have been at about 3.2% to queue without those.
Thank you guys.
The next question comes from Vikram Malhotra from AzuHo. Please go ahead.
Thanks for answering the question. Just sort of building upon the life science comments you made, can you just help us think about the trajectory or the potential for your life science segment going into 2024, not looking for a specific guide but just looking for…
the sustainability given the bumps, given that if leasing velocity remains as it is today and you do have Amgen coming up which I think is now a known move out, let's assume you are not able to lease that up for the full year or it goes to redev, can you just talk about the potential of this segment?
portion of those and you know that's been a pretty known vacate for a while. I can't necessarily comment on
the you know LOIs and specificity, but I think you guys see and understand where our leasing focus is right now and obviously
releasing the Amden space is an important focus of ours but you know three of those buildings are currently leased today and don't have
explorations until the end of this year or early next year. And we've always planned to redevelop those and really bring that campus up to a little bit of a better level, it's adjacent to the cove there. So that's the Amgen portion of this. I think just a couple other things I wanted to.
point out, you know, the the mark to market we have talked about we still feel good about, you know, the 20% ish mark to market within our current portfolio when you look at where market rents are versus
in place rent in the portfolio. That's obviously going to be a nice driver the next couple years we believe of some earnings growth and you know the balance sheets in you know great shape. Again Sorrento I can't really speak to that but that could be a pretty big driver as we look at 23 relative to
you know, what 24 could look like. It's a pretty big, you know, number when you consider accepting the leases versus a liquidation there. So I can't necessarily comment on 2024 much more than that at this point in time, but just to say that I think some of those big explorations we've actually been working pretty hard on backfilling.
and actually in what we previously disclosed, we actually didn't have a lot of those Amgen leases getting.
Leased up until 2025 as there'd be some downtime and some catbacks associated with them. Hey Vikram, just maybe On just the trajectory of lab Leasing and and rants. I mean the last 18 months interest rates are up more than 500 basis points
Obviously, that has resulted in boards and management teams essentially saying not to expand real estate needs for the most part. The easy answer was just to make do with existing space. But at the same time, you've got a likely outlook where interest rates are probably going to come down over the next year or so and we are starting to see.
a little bit more interest in having those types of discussions. And you think about the activity we actually had over the last 18 months despite that change in interest rates, signed leases or LOIs on almost 2 million square feet of space. At strong rents, very modest TI's. 90% of that is with existing clients and pretty significant mark to markets.
So really in the teeth of a pretty tough market over the last 18 months, I mean we've had significant success and we see the general macro environment being more favorable over the next 12 to 18 months, not less favorable. That makes sense. You know for my follow up...
Scott or maybe even Pete, just stepping back, this is sort of a unique environment. We don't know where rates are going. You've got as you mentioned, self-funded development, solid balance sheet. I'm just wondering, are there bigger picture opportunities or changes to the portfolio you consider as we transition into whatever the next?
In the prepared remarks, we are having those discussions. These are assets that others would find attractive but aren't necessarily central to our longer term strategy. But 100%, our expectation is that over the next 12, 18 months, I don't know if it's sooner or maybe later, our balance sheet, strong portfolio platform, efficient G&A, I mean, this will be a bigger company.
going forward. There will be opportunities coming out of this downturn in the lab segment. A lot of the developments underway is with owners that aren't as well connected to the tenant base. Their balance sheets aren't in nearly the same shape that ours is. So yes, there are going to be opportunities for us in our own mindset right now is to weather through this downturn, which we have I think really well.
Controlling the things that we can continue to put up good earnings balance sheets in great shape So yeah, I think there's going to be a lot of opportunity on the other side of this
Just to clarify, I might have missed in the remarks. Do you mean potentially monetizing non-core and if you did, could you give us just a broad range of how big is that opportunity for you?
Yeah, it's a couple hundred million dollars that we're having discussions on. We haven't signed any contracts, so I don't want to talk about specific assets or pricing, but obviously we would only sell if we liked the pricing. These are opportunistic. We don't need to sell any assets to fund our pipeline, so we'd only do this if we liked the pricing.
And our expectation is that the cap rates would allow us to repay our line of credit accretively, which gives us more flexibility down the road when we do see opportunities.
that the cap rates would allow us to repay our line of credit accretively, which gives us more flexibility down the road when we do see opportunities.
Yeah. The next question comes from Austin Werschmit from KeyBank. Please go ahead.
Yeah, thanks and good morning everybody. With respect to the uptick in leasing discussions, is that just broadly across the portfolio or are you you know in active discussions as well for some of the vacant space and across the development, the active development projects?
I would say it's across the entire portfolio. It's across all three core markets. Obviously, we have more space to lease in South San Francisco versus Boston, San Diego, just with where the occupancy of the portfolio stands. So you'll see.
the bulk of it there. If you look at the LOIs we've talked about today, two thirds of those are for spaces in.
in South San Francisco.
Yeah, also we're not going to get into the individual LOIs today. It's just too early. I mean, these are obviously competitive deals and we've got LOIs and signatures on those, but we still need to get them across the finish line to lease execution. So probably more to come on those next quarter. That's fair. And then just last one for me. Just going to MOBs a little bit, you touched on what drove the 2Q guidance bump, but last quarter you referenced the company's track record increasing MOB guidance through the year. Clearly, success doing that this quarter, but what levers are left to pull in the back half of the year.
they can get you, you know, or maybe said differently could get you to the high end of the range. Well, we continue to see really good activity on leasing. You know, we've got our lease commencements are a little bit above where we expected to be for the year and we have quite a few executions that executed leases as well as our
they have another couple of strong quarters, that'll definitely push us up to the higher end.
Yeah, Austin, we're also having what's interesting in both segments, lab and medical, conversations with tenants or prospects about much bigger leases and spaces than we had over the last 18 months where it felt like a lot of the activity was smaller spaces. We'll see if anything proceeds, but I think that's another sign that...
boards and management teams are more willing to make big commitments today than they would have been over the past 18 months. Now I don't know any of that translates into 2023 earnings or same store, but if you look forward into 2024 and beyond, obviously it's a great time.
That's helpful. Thanks, Scott. The next question comes from Nick Ulico from Scotiabank. Please go ahead.
Thanks. Good morning. I guess first question is just in terms of, you know, as you think about the portfolio and some of the lease expirations in lab, you know, this year, next year, is there any way to just quantify, you know, what piece of that you think are, you know, tenants that you, you know, expect?
to maybe not renew or those that you would proactively look to, you know, retenant because of, you know, some potential, you know, credit issues or other factors kind of facing the tenant base. Just trying to understand like how we should think about, you know, some of the phasing of occupancy in the portfolio over the next year.
Roughly half of it is oyster point.
point grand. So assume that half of the remaining 23 and 24 lease maturities in lab are going into redevelopment because the buildings just need to be redeveloped to remain competitive. For the remaining 50% maybe I'll ask Scott to go on the comment. Yeah I mean I would, excuse me, we've only got about 250,000 square feet of unaddressed maturities.
through 2024, excluding the Amgen building that we talked about going into redevelopment. And the bulk of that rollover doesn't come until the back half of 2024. So we're really just getting into the renewal windows on those.
on those leases over the next few months. So more to come in upcoming quarters, but you know very manageable lease rollover across the portfolio the balance of this year and end at 2024.
Okay, great. Thank you. And second question is just in terms of when you talked earlier about the mark to market on the portfolio, I guess in lab, any thoughts on what you're seeing across the markets right now? Yeah, so it's like maybe.
you know, South San Francisco, Greater Boston, Cambridge is where there is some more vacancy that's just hit the market realizing you guys are, you know, seem like you're outperforming the market but just, you know, any sort of viewpoint on whether market rents are going to, you know, remain stable or they get corrected you see just more competitive.
you know, leasing concessions in the market. Hey Nick, Scott Bone again. You know, first and foremost, I'd say the leases that we've signed and the LOIs in all three markets have been at really strong rates in deal terms. You know, overall I'd say.
Looking at face rates, they flattened, as I think we all know, this year, which we expect to probably continue in the near term. Rates for A buildings and A locations with strong sponsorship like HealthBeak have held up well. You've seen some little bifurcation between that and then the B buildings in secondary locations.
Hopefully we don't have a lot of that product at all, really any.
From a net effective perspective, we've talked about some pressure on TI's with
talked about some pressure on TI's with tenants looking to...
have a little more capital put in by the landlord to extend cash runways. And we're open to that in still life cases, depending on tenant credit, reusability of TI's, etc. We talked about that going.
dating back to the end of 2022 and 2023, but I would say no real incremental change on that this quarter versus last. So I think that those asks and those TI levels have leveled off.
Thanks, Scott. Appreciate it. Thanks, Nick. The next question comes from Connor Sversky from Wells Fargo. Please go ahead.
Good morning, thank you for the time. Interesting comment in the prepared remarks that progressive health systems now have ten outpatient facilities for every hospital. In the context of that comment I'm wondering how you're seeing performance trends for on-campus versus off-campus and then
the shift in delivery continues to align with peak strategy, I mean what does it take for a peak to start putting shovels in the ground again on medical office or outpatient medical, sorry.
Go ahead.
Yeah, go ahead. Yeah, well.
The good news is the hospitals are busier than ever. So at least the ones we're on the campus of, obviously we toured those as well and a number of them are undergoing expansion or development. So they remain extremely profitable. It's just the health systems are growing their market share and the total pie is expanding. So a lot of the growth is outpatient and off campus.
Yeah, with regards to putting shovels on the ground, we did announce...
I think it was two quarters ago, our Savannah building which is with HCA and our development program with them. We're in active discussions with quite a few buildings with them also and probably in the next quarter or so we'll have some more to announce there. There's a lot of pent up demand for MOB development out there in addition to what it will Brooke before you.
HCA we're having discussions with two or three other systems about potential new buildings with them. So I think it's going to get pretty active over the next year. There's definitely interest from name brand health systems to partner with us on development in particular. Obviously a decision to proceed depends on all the normal things right. I mean cost of capital and returns and the spread to acquisition cap rates and pre-leasing I mean
that space is utilized by call it administrative or maybe revenue cycle functions or more broadly speaking just how do you see the hybrid work environment impacting outpatient operations?
They estimate probably 80, high 80s, low 90s percent of their workforces is never going to work from home. It's just not practical. If you look at our portfolio specifically as you asked, the amount of administrative or back office space is probably 8 to 10 percent when we look across the portfolio. That seems pretty stable. We haven't really had any, we haven't seen a lot of move out in that area. So the demand continues to be there.
Okay, thank you. The next question comes from Joshua Denterlein from Bank of America. Please go ahead.
Yeah, hey guys, just had some questions on your SAMHSA or NOI guidance range. I look at the CCRC that looks like you're tracking 14.3% year-to-date but your full year range is 7 to 11 percent. Just kind of curious what you're expecting the back half there.
Yeah, you know, maybe I'll just take a second on that, Josh, and talk generally about, you know, what we think the second half of the year looks like relative to the first half of the year within each one of our...
businesses. You know if you look at year-to-date total same store growth we're at 5% right so pretty strong healthy number.
It's actually just a little bit above the high end of our guidance range, which was at 4.75% right now. So we're off to a good start through the first six months of the year. You know CCRC's had a really strong first half of the year and we hope to keep that momentum going into the second half of the year. You know outpatient medical year to date we're at 3.5%
CFO so hopefully more to come on that for the second half of the year this year for us not to put too much pressure on Tom But then in the lab space, you know, look we we had a really good first quarter We had a strong second quarter There is probably a little bit of deceleration in the second half of the year But I wanted to point out that the two biggest items that are impacting that you know, one is the Kodiak
to remind everybody, you probably pay close attention to our top 20 list. Adverum has dropped out of our top 20 list. I mentioned it in my prepared remarks. There is downtime on that. The Revolution Medicines lease does not begin until January 1st of next year, so there's some downtime in the back half of the year that will certainly have an impact on.
Maybe just on
I actually I remember at nary I think you guys mentioned a couple tenants might have come to you looking for space and Just giving where your portfolio occupancy was I thought this is on the life science side sound like It just didn't have the space for them
What would get you guys to kind of restart the development pipeline? It wouldn't be a tenant coming to us today. The timeline to get permits and build something would be far longer than what you would expect.
a tenant who needs space today. The thought process on near-term retenanted space is really looking towards credits that are unlikely to renew a lease in the coming years and see if we can find a way to early terminate and backfill with a growing tenant who wants a longer-term commitment. In terms of new development starts...
We are making really good progress on entitlements in the core markets that we'd be in a position potentially to start construction on something in 2024. But I would get back to my comment that I made about outpatient medical. The decision to actually start depends a lot more on our view of supply and demand, potentially pre-leasing cost of capital and returns and the like.
It's not something that we would do today, but as you look into 2024, we'll see the market can obviously turn pretty quickly and we've got a huge base of existing tenants that generally are the ones filling up these new developments.
I appreciate it. Thank you. Yep. The next question comes from Michael Griffin from Citi. Please go ahead. Great thanks. Maybe just on leasing for life science, you talked about 90% retention from existing tenants. Do you need to see the number of new tenants entering the portfolio in order to achieve longer-term growth or are you comfortable?
It's certainly easier to do a deal with someone you know. That said, we obviously would welcome tenants from the outside as well. So it's a mix of both. But I think we capture our fair share of leasing from tenants that are outside of our portfolio as well. And certainly try to cater to our client base.
as best we can to accommodate their growth. Thanks. And just a question on supply. I know there's been kind of market reports out there about elevated supply in core biotech markets, but if you sit back and look at your portfolio, how does a lot of this compare to your competitive stock? And then if you can give any color on your supply expectations for 2024 and your competitive stock, and then I know it's a bit early, but 2025 as well, maybe that would be helpful.
Yeah, from a supply perspective, not a ton of change from last quarter that we talked about in the 2023-24 deliveries.
As you'd expect, we're certainly seeing a slowdown of new starts in many of the conversions that have been advertised aren't doing anything on a spec basis, so we don't really even count many of those in the competitive supply. And as we noted before, not all supplies build equal. We think that we're positioned very well in each of our markets.
When you look at the Bay Area, competitive new supply of weediness, competitive to our portfolio, is about 800,000 square feet in 2023. It's about 70% pre-least coming in 2024. There's about 3 million square feet delivering in the North Peninsula.
about a third of that is conversion space, so we think it's gonna be less competitive to our product. So we view about 1.8 million square feet of that as competitive. The good news in South San Francisco on that is it's.
It's a small number of actual projects, so it's a decent amount of square footage of a small number of projects. So when you're thinking about competing on deals, you're not going out competing against 10 projects, right, a smaller number there. Boston will be certainly a very little rollover and ongoing development out there today. There's some big headline numbers.
What we truly look at as competitive in Lexington and Waltham and West Cambridge, our portfolios there, is really shrinks down to a little over 2 million square feet. So we feel good about our positioning there. And again, no development starts anywhere in the near term as we work through our al-life entitlements.
And in San Diego, there's about five million square feet in total under construction, but only about two million of that is in San Diego.
Torrey Pines and Sorrento Mesa, and that's about 30% pre-leased. So you know when you whittle down to what we actually view as competitive it's pretty manageable in the near term.
Hey Griff, one other thing, and you know this, every situation is different, so this isn't a statement that's true across the board, but in general what we've noticed is that the new development projects, if anything in this environment, have been a bit harder.
to lease up if you think about a new development, usually the tenant needs to invest at least $100 per foot of TI, it could be 200, 300, 400 depending upon.
their program, that's a tough ask in this environment. A new development already is going to come with higher lease rents as well as higher operating expenses, just given the amenities and the cost basis. So it's just less competitive. You think about what's happening in a real estate sector that's just the polar opposite of lab, which is office. It's like the A plus buildings are the only ones leasing up.
Lab right now is kind of the exact opposite. It's the kind of well located But lower price point in terms of rent opex as well as TI investment from the tenant it actually is the most desirable and in demand today, so we're actually benefiting from that quite a bit. We do have some new development to lease up obviously.
So we're not completely immune from that dynamic, but it actually puts the incumbents with existing operating portfolios in even better shape, I think, as you think about who's going to weather the kind of deliveries over the next 18 to 24 months.
Great, that's it for me. Thanks for the time.
The next question comes from Ronald Camden from Morgan Stanley . Please go ahead.
Hey, just two quick ones, or one in a follow-up I should say. Just on the lab portfolio, you know, I think you talked about it, I think last November , about the billion three total peak NOI opportunity. I think part of that was sort of lab development earnings as well as sort of the lab market to market.
Just, you know, half a year into it from those, maybe you can talk about what the puts and takes are. You know, how do you feel about that? Billion three plus opportunity in 2025. Where is there incremental upside or incremental downside?
Hey Ron, it's Pete here. I think the billion three you're referring to is about 200 million of NOI growth over ever.
three years. I would say we still feel good about that NOI growth opportunity today. It may take a little longer to get there. That shouldn't be a surprise. Within that we didn't include new development starts. That was basically the lease up.
and the stabilization of the existing development pipeline. So there were no new starts that was feeding into that. So it's a good question. Again, we feel good about it. May just take a little bit longer to get there. Great.
And then just on the lab guidance, and I know this has been asked a lot of different ways, so I'll take a stab at it too. So the 3 to 4.5% same store in Hawaii, is the bottom and the top of that range, is that mostly...
You know, so rental, like why is that range so wide with five months of the year left? Just keep talking about what's at the top and the bottom end being contemplated. Thanks.
Sorento, why is that range so wide with five months of the year left? Can you talk about what's at the top end and the bottom end being contemplated? Thanks. Yeah.
You know, look, we're right at the midpoint through the first six months of the year. I would say that the biggest item is any unknown tenant credit issues like you point out with Sorrento or with the likes of Kodiak. We do have some conservatism we embed.
Within the guidance at the beginning of the year, and as we get further along in the year, we try and tighten and or increase that. I'd say, excuse me, two quarters into the year, we still feel good about.
hitting the midpoint within that segment, but I think it's still a little too soon for us to either trim the range or consider increasing the range right now, but obviously more to come when we get to the fall and our third quarter fall.
you know segment but I think it's still a little too soon for us to either trim the range or consider increasing the range right now but obviously more to come when we get to the fall and our third quarter fall. Thanks so much.
Yeah. The next question comes from Stephen Valaket from Barclays. Please go ahead.
No thanks, good morning guys. Hey, just my question here is around just the industry transaction volume is obviously our way down again this year versus historical averages both in life science and medical office. But despite this, I guess I'm just curious if you can comment on whether you've noticed any recent directional shifts and either direction in just industry cap rates and recent LS or
Obviously, the buyers are thinking about IRRs as well. They're definitely off from the P-18 months ago, 150 basis points, but I don't know that there's been a difference in the last couple of months that is not worried. There's just not enough activity to state that definitively. Do you have a different view on outpatient time? No, it's the same. I mean, there just has been a lot of transactions. We just...
Thanks, hi. Just two quick ones here. I guess first, how much was the ad rent in 2Q from Med City Dallas and how much of that was above normal? And then on the CCRC front, where do you think occupancy can go the next, say, three years? On the ad rent, um...
We typically run about $2.3 to $2.4 million a quarter. It's up about 8% from last year.
We've had as high as 3 million so you know it's going to be in that range kind of 2.4 to...
We've had as high as 3 million, so it's going to be in that range, kind of 2-4 to the upper twos.
moving forward.
CCRC today we're around 83 percent. That portfolio is mostly independent living, so longer length of stay, and then there's big barriers to entry, so there's essentially no new supply. I mean, hopefully we can get back into the 90 percent range from 83 percent today. We've got one or two campuses that don't do as well, so that may be a limit on the upper end of it.
the numbers I was quoting are monthly numbers, so you know, in the quarter it's...
It's between eight and nine million
Got it. Okay, thank you.
The next question comes from John Pawlowski from Green Street. Please go ahead. The next question comes from
Good morning, thanks for the time. Scott Brinker, just a follow-up question about the dispositions or the appetite to sell assets. Just curious with the pretty resilient private market pricing and life science properties that have traded, curious why you aren't selling assets more aggressively to help close the disconnect between public and private market values.
Yeah, well, we have sold assets year-to-date and we just said we're going to look to sell some more. So, I mean, we're doing exactly that. It's not an easy market to transact in, but that is our expectation. That feels like the best move, at least for assets that we view as...
Highly desirable by some buyers, but maybe not core to our strategy tougher to sell super core assets within our big campuses and clusters.
You know at some point at some you know we may have to consider that but that we don't feel like we're in that spot Today we certainly from a balance sheet perspective don't need to And you know sentiment it comes and goes obviously it's been more negative lately. We don't think that lasts forever certainly I think the results today the fundamentals are a lot better
than the sentiment. So we'll see if that in fact transpires in the coming quarters. If not then we'll continue to look at additional asset zones.
But the size of this position in your mind right now is in a couple hundred million dollar range likely.
But the size of this position in your mind right now is in a couple hundred million dollar range likely Yeah
kind of concession on rents for certain operators just to accommodate different work patterns in the post-COVID environment? Yeah, I mean, John , we signed more than 5 million square feet of leases since COVID, so three years ago, both existing spaces and new spaces. And the allocation between the lab and the collaboration space really hasn't changed. So I understand the headlines and the theories, but when we look at real tenants and real leases and real buildings, the mix hasn't really changed much. So we have not seen that. Could it flex a little bit in the future? I'm sure it could.
And our purpose-built assets can actually accommodate that. A lot of the redevelopment type properties struggle to get to 30-40% of the lab mix, whereas our purpose-built labs could go up to, I don't know Scott, 75% lab, if they needed to, but we're just not seeing that.
Okay, makes sense. Thank you. The next question comes from Wes Galladay from Baird. Please go ahead.
Hey, good morning everyone. I want to go back to that comment about seen an uptick in discussion with lab tenants. Has that been broad-based or is that more the pharma or the biotech tenants or anything in between?
I think it's broad based. We spent a lot of time talking to both our large scale pharma clients as well as VCs talking about company formation and startups. There's probably more activity favoring the sub 50,000 square foot type tenants. There's a lot of series A funding going on, a lot of company formation going on.
overall the activity, as well as the LOI as we talked about, are a broad range of...
as well as the LOIs we talked about are a broad range of tenants.
sizes as well as where they're at in the spectrum from a funding perspective.
Okay, and then do you have a lot of traction on some potential contingent leases for the Sorrento space if they do get rejected? And if so, how quickly can you turn the space?
Yeah, I mean I think on Sorrento we obviously have contingency planning with regards to what we would do with those assets if they were rejected. As I said in my prepared remarks, I mean they're not looking necessarily today to reject those leases and to liquidate. They're clearly trying to...
exit bankruptcy and put a financing package together to achieve that. Too soon for us to comment on what that means for the leases but I would say that we generally feel like that could be a positive thing with regards to the existing leases. You know those leases actually have
pretty significant below market rents. But obviously if they were rejected, there would be some downtime and some.
TI's and capital spend that varies across the four different properties. But again, I think it's too soon to start delving into the individual properties right now.
Great, thanks for the time everyone. The next question comes from Jim Kammert from Evercore. Please go ahead. Good morning, thank you. Given the high retention in the lab side, is it safe to assume that those tenants are less likely to be price shoppers, if you will?
Do you have any examples in the last 12 to 18 months where youíve done leasing with existing tenants in the lab side where they might have been able to go down the street to a new development or something at a lower rent but stuck with peak? Thank you.
Yeah, it's Scott Fohn. Labs aren't easy to move at the end of the day. There's a lot that goes into the build out of those labs. There's FDA approvals within certain labs that are hard to relocate. So I think that that's one thing. Labs tend to be relatively sticky. I also think that
But the actual price per square foot isn't always the most important thing to them from a tenant perspective. I mean, the lab sophistication balance sheet portfolio of a landlord weighs in, you know, oftentimes, most times much heavier than the actual, you know.
actual price per square foot isn't always the most important thing to them from a tenant perspective. I mean the lab's sophistication balance sheet portfolio of a landlord weighs in you know oftentimes most times much heavier than the actual you know the cheaper option down the street so to speak.
Right, and so, but do you have examples maybe where you were able to keep them and you even extract a nice bump as opposed to them moving? I'm just curious if that's been a phenomenon, insulating you from the new supply, in other words.
It's a good question, Jim, and actually, I think if you go back to our...
you know, NAHRE deck from November of last year, we actually included a slide and we have in the past about you know tenants that have gone from you know small amounts of square footage with us and grown to you know well over a hundred thousand if not even more than that square feet within our portfolio It's one of the things that we think differentiates us and gives us a competitive advantage.
square footage to a lot of square footage with us through the years and we've been continuing to pound the table that we think that's a competitive advantage for all the incumbent landlords.
Yeah, I can't forget too many bidding wars. Obviously, Scott and Mike are on the front lines, but they're talking to us on any of the big leases. Interesting.
have like a strong recollection of them coming to us where we're like bidding aggressively against another landlord. Maybe there's one or two of those, but that's a very rare situation.
Terrific, 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.
Thanks everyone for joining. We'll see a lot of you in September at the Bank of America Conference. Enjoy the rest of your summer. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.