Q2 2024 Healthpeak Properties Inc Earnings Call
Good morning and welcome to the Healthpeak Properties, Inc. 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.
Operator: 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 touchtone phone.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your touchtone phone. To withdraw your question, press star 1 again.
Operator: To withdraw your question, press star one again. Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.
Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.
Andrew Johns: Welcome to Healthpeak's second quarter 2024 financial results conference call. Today's conference call will contain certain forward-looking statements. Although we believe expectations reflected in many forward-looking statements are based on reasonable assumptions, they are foregoing statements and subject to risk and uncertainties that may cause actual results to differ materially from our estimates. A discussion of risks and risk factors is included in our press release and in detail in our filings with the SEC. We do not undertake a duty to update any form of this statement.
Andrew Johns: Welcome to Healthpeak's second quarter 2024 financial results conference call. Today's conference call contains certain forward-looking statements. Although we believe expectations reflected in many forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.
Andrew Johns: A discussion of risks and risk factors is included in our press release and detailed in our filings to the SEC. We do not undertake a duty to update any forthcoming statements.
Andrew Johns: Certain non-GAAP financial measures can be discussed on this call. In an exhibit to the 8K we furnished to the SEC yesterday, we've 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'm now turning the call over to our president, chief executive officer, Scott Brinker. Okay, thanks, Andrew.
Andrew Johns: Certain non- GAAP financial measures can be discussed on this call. In an exhibit to the 8K we furnished to the SEC yesterday, we've 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.
Scott Brinkman: I'm now going to call over to our President, Chief Executive Officer, Scott Brinkley. Okay, thanks Andrew. Good morning everyone and welcome to Healthpeak's second quarter earnings call. Joining me today for prepared remarks is Pete Scott. Our CFO and the senior team is available for Q&A.
Scott M. Brinker: Good morning, everyone, and welcome to Healthpeak's second quarter earnings call. Joining me today for prepared remarks is Pete Scott. Our CFO and the senior team are available for Q&A. First, I'd like to congratulate our entire team on an incredible quarter.
Scott M. Brinker: We executed on every one of our stated priorities, including merger integration, leasing, asset sales, and an accretive stock buyback. Last evening, we increased our 2024 guidance for the second time this year, driven by outperformance in leasing, same store operations, and stock buyback. In addition, our conservative balance sheet and dividend payout ratio are competitive advantages that will benefit future earnings.
Scott Brinkman: First, I'd like to congratulate our entire team on an incredible quarter. We executed on every one of our stated priorities, including merger integration, leasing, asset sales, and accretive stock buybacks.
Scott Brinkman: Last evening, we increased our 2024 guidance for the second time this year, driven by outperformance in leasing, same-store operations, and stock buybacks. In addition, our conservative balance sheet and dividend payout ratio are competitive advantages that will benefit future earnings growth.
Scott M. Brinker: Merger integration continues to go exceptionally well, both financially and culturally, as we're meeting or exceeding every goal we set. For example, year-one synergies are now tracking to be a bit higher than $45 million. More important, over the last several months, our newly combined team has been focused on defining the core values of our desired culture. Those core values are now represented by the acronym WE CARE, W for Winning Mindset, E for Empower the Team, C for Collaborate and Communicate, A for Act with Integrity, R for Respect the Relationship, and E for Excellence in Execution.
Scott Brinkman: Merger integration continues to go exceptionally well, both financially and culturally, as we're meeting or exceeding every goal we set. For example, year one synergies are now tracking to be a bit higher than $45 million.
Speaker Change: More important, over the last several months, our newly combined team has been focused on defining the core values of our desired culture.
Speaker Change: Those core values are now represented by the acronym WE CARE. W for Winning Mindset, E for Empower the Team, C for Collaborate and Communicate.
Speaker Change: A for Act with Integrity, R for Respect the Relationship, and E for Excellence in Execution.
Scott M. Brinker: These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together. One of my strategic goals has been to bring Healthpeak closer to its real estate and to become fully immersed in the underlying businesses of our tenants. The merger helped us accelerate that transformation.
Speaker Change: These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together.
Speaker Change: One of my strategic goals has been to bring Healthpeak closer to its real estate and to become fully immersed in the underlying businesses of our tenants.
Scott M. Brinker: Today, 70 percent of our people directly support real estate. Two years ago, that figure was less than 50, and we're increasingly dialed into the health care ecosystem. This is critical because the health care sector is not a traditional real estate business.
Speaker Change: The merger helped us accelerate that transformation. Today, 70% of our people directly support our real estate. Two years ago, that figure was less than 50%.
Speaker Change: and we're increasingly dialed into the healthcare ecosystem.
Scott M. Brinker: Investment outcomes are very much impacted by the underlying business taking place in our buildings, not just the attributes of the real estate itself. A thorough understanding of the operating and regulatory environment and close relationships with the leading providers will drive superior investment and portfolio management decisions over time. Okay, I'd like to provide an update on our last science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases, as our tenants have gotten more comfortable making real estate decisions. We signed 800,000 square feet of leases in the second quarter.
Speaker Change: This is critical because the healthcare sector is not a traditional real estate business. Investment outcomes are very much impacted by the underlying business taking place in our building, not just the attributes of the real estate itself.
Speaker Change: A thorough understanding of the operating and regulatory environment and close relationships with the leading providers will drive superior investment and portfolio management decisions over time.
Scott M. Brinker: 75% were renewals, and 25% were new. The release spread was positive 6%, and as has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space. 84% of that leasing was done with existing tenants, and the remaining 16% are new to the portfolio. On the one hand, this highlights our competitive advantage from existing relationships, while, at the same time, adding new ones for future growth. Sponsorship is paramount to tenants and their brokers in this environment.
Speaker Change: Okay I'd like to provide an update on our last science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases as our tenants have gotten more comfortable making real estate decisions.
Speaker Change: We signed 800,000 square feet of leases in the second quarter. 75% were renewals and 25% were new.
Speaker Change: The releasing spread was positive 6%, and as has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space.
Speaker Change: 84% of that leasing was done with existing tenants, and the remaining 16% are new to the portfolio. On one hand, highlighting our competitive advantage from existing relationships, at the same time, adding new ones for future growth.
Scott M. Brinker: Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage. Our two Q results and pipelines suggest we have hit an inflection point well ahead of the sector at large. We expect 3Q to be a big leasing quarter as well. We signed an additional 180,000 square feet of leases in July, all of which were new with an average term of 10 years, and our pipeline remains strong with 620,000 square feet under signed LOI, including Activity Advantage, Portside, and Directors Gateway, moving to our outpatient medical business.
Speaker Change: Sponsorship is paramount to tenants and their brokers in this environment. Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage.
Speaker Change: Our 2Q results and pipelines suggest we hit an inflection point well ahead of the sector at large.
Speaker Change: We expect 3Q to be a big leasing quarter as well.
Speaker Change: We've signed an additional 180,000 square feet of leases in July , all of which were new, with an average term of 10 years. And our pipeline remains strong, with 620,000 square feet under signed LOI, including Activity Advantage, Portside, and Director's Gateway.
Scott M. Brinker: We're driving strong performance through our platform, favorable industry fundamentals, and our high-quality portfolio. Occupancy in our outpatient portfolio was up 20 basis points in the quarter, and relation spreads were positive 4.7%. Operationally, we haven't skipped a beat with the merger, and our increased scale allows us to take advantage of strong volume growth across the sector, as underscored by HCA's exceptional second quarter results this week, also announced yesterday. We're very pleased to strengthen our relationship with common spirit for the next decade plus.
Speaker Change: Moving to our outpatient medical business.
Speaker Change: We're driving strong performance through our platform, favorable industry fundamentals, and our high-quality portfolio.
Speaker Change: Occupancy in our outpatient portfolio was up 20 basis points in the quarter and relation spreads were positive 4.7 percent.
Speaker Change: Operationally, we haven't skipped a beat with the merger, and our increased scale allows us to take advantage of strong volume growth across the sector, as underscored by HCA's exceptional second quarter results this week.
Speaker Change: Also, as announced yesterday, we're very pleased to strengthen our relationship with Common Spirit for the next decade plus. We sold about 900,000 square feet of space leased to Common Spirit in June and July as part of the sale transactions we announced yesterday.
Scott M. Brinker: We sold about 900,000 square feet of space leased to Common Spirit in June and July as part of the sale transactions we announced yesterday. Our go forward relationship represents 2 million square feet, or approximately 3% of our total ABR, and is well diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City. We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. The Waltz had been three years, and it now improves to more than 11 years.
Speaker Change: Our go-forward relationship represents 2 million square feet, or approximately 3% of our total ABR, and is well-diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City.
Speaker Change: We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. The waltz had been three years and now improves to more than 11 years.
Scott M. Brinker: The blended release spread is positive 13%, and the annual rent escalator will increase to a fixed 3%. Note that the terms of the existing leases will remain in effect through the original maturity date, most of which are in 2026, 27, and 28. We used our in-house leasing team to negotiate and execute the early renewal. Another example of the merger enhancing our platform capability. This was a win-win outcome, and we're very pleased with the collaboration between Healthpeak and CommonSpirit.
Speaker Change: The blended releasing spread is positive 13% and the annual rent escalator will increase to a fixed 3%.
Speaker Change: Note that the terms of the existing leases will remain in effect through the original maturity date, most of which are in 2026, 2027, and 2028.
Speaker Change: We used our in-house leasing team to negotiate and execute the early renewal, another example of the merger augmenting our platform capabilities. This was a win-win outcome and we're very pleased with the collaboration between Healthpeak and CommonSpirit.
Scott M. Brinker: Okay, moving to capital allocation. Yesterday, we announced $853 million in outpatient medical asset sales in five separate transactions at a 6.8% blended cap rate. These were non-core buildings and markets we're not looking to grow, such as North Dakota, rural Nebraska, and upstate New York.
Speaker Change: Okay, moving to capital allocation. Yesterday we announced 853 million dollars of outpatient medical asset sales in five separate transactions at a 6.8% blending cap rate.
Speaker Change: These were non- and less-core buildings, and markets were not looking to grow, such as North Dakota, rural Nebraska, and upstate New York.
Scott M. Brinker: The sales are accretive to our future growth profile, and the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that supports those statements. The net proceeds create significant dry powder to drive future earnings growth. We've bought that $88 million of stock since our last earnings call, as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate.
Speaker Change: The sales are accretive to our future growth profile, and the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that support those statements.
Speaker Change: The net proceeds create significant dry powder to drive future earnings growth.
Speaker Change: We've bought that $88 million of stock since our last earnings call, as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate.
Scott M. Brinker: Year to date, we've repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate of 7% to fund these repurchases. Additionally, we've sold $1.2 billion of assets year-to-date at a blended cap rate of 6.5%. Portfolio fine tuning is usually dilutive, but we took advantage of the temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings. And I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities.
Speaker Change: Year to date, we've repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate in the high 7% range.
Speaker Change: To accretively fund these repurchases, we've sold $1.2 billion of assets year-to-date at a blended cap rate of 6.5%.
Speaker Change: Portfolio fine-tuning is usually dilutive, but we took advantage of the temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings.
Speaker Change: And I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities.
Peter A. Scott: The two projects we announced yesterday total $53 million and are 84% pre-leased with stabilized yields in the mid-70s. These projects offer compelling value at a positive spread. We're recycling out of older, non-core and less core assets into brand new buildings in core markets with leading health. We're currently underwriting an attractive pipeline of similar development projects with our health system partners. And now Pete Scott will cover operating results, guidance, and the balance. Thanks, Scott. We had a very strong second quarter. We reported FFOs adjusted at 45 cents per share.
Speaker Change: The two projects we announced yesterday total $53 million and are 84% pre-leased with stabilized yields in the mid-70s. These projects offer compelling value. At a positive spread, we're recycling out of older, non- and less-core assets into brand new buildings in core markets with leading health systems.
Speaker Change: We're currently underwriting an attractive pipeline of similar development projects with our health system partners.
Speaker Change: And now Pete Scott will cover operating results, guidance, and the balance sheet.
Pete Scott: Thanks, Scott. We had a very strong second quarter. We reported FFOs adjusted at $0.45 per share, AFFO of $0.39 per share, and total portfolio same-score growth of 4.5%.
Peter A. Scott: AFFO of $0.39 per share and total portfolio same score growth of 4.5%. Let me briefly touch on segment performance, starting with outpatient medical. Our results this quarter underscore the strength of the long-term demand drivers we are seeing. We reported same store growth of 3.1%, a positive rent mark to market on renewal leasing of 4.7%, and a retention rate of 83%. Additionally, we are consistently achieving 3% fixed escalators on new leases, which should improve our earnings growth trajectory for years to come.
Pete Scott: Let me briefly touch on segment performance, starting with outpatient medical. Our results this quarter underscore the strength of the long-term demand drivers we are seeing.
Pete Scott: We reported same store growth of 3.1%, a positive rent mark to market on renewal leasing of 4.7%, and a retention rate of 83%.
Pete Scott: Additionally, we are consistently achieving 3% fixed escalators on new leases, which should improve our earnings growth trajectory for years to come.
Peter A. Scott: Turning to lab, the strength of our portfolio, relationships, and reputation is leading to outsize leasing demand and driving results that are exceeding expectations. We reported same-store growth of 3%, driven by 3% plus contractual rent escalators and a positive 6% rent mark-to-market. Occupancy did tick down a bit, but that was largely the result of the fully occupied Poway sale in San Diego that was completed earlier in the second
Pete Scott: Turning to lab, the strength of our portfolio, relationships, and reputation are leading to outsized leasing demand and driving results that are exceeding expectations.
Pete Scott: We reported same-store growth of 3%, driven by 3% plus contractual rent escalators and a positive 6% rent mark-to-market.
Pete Scott: Occupancy did tick down a bit but was largely the result of the fully occupied Poway sale in San Diego that was completed earlier in the second quarter.
Peter A. Scott: Year-to-date, we have signed 1.1 million square feet of leases and have a robust leasing pipeline for the balance of the year. Finishing with CCRCs, we reported same score growth of positive 21%, driven by 200 basis points of occupancy growth and strong rate growth of 7%. Shifting to the balance sheet, we ended the quarter with a net debt to EBITDA of 5.2 times and nearly $3 billion of liquidity. However, these metrics don't take into account the majority of our dispositions, which closed in July.
Pete Scott: Year-to-date, we have signed 1.1 million square feet of leases and have a robust leasing pipeline for the balance of the year.
Pete Scott: Finishing with CCRCs, we reported same-score growth of positive 21%, driven by 200 basis points of occupancy growth, and a strong rate growth of 7%.
Pete Scott: Shifting to the balance sheet, we ended the quarter with a net debt to EBITDA of 5.2 times and nearly $3 billion of liquidity. However, these metrics don't take into account the majority of our dispositions, which closed in July .
Peter A. Scott: Pro forma, as of these dispositions, our net debt to EBITDA is approximately five times, we have nothing outstanding on our line of credit, and we have a cash balance of $300 million. So we are sitting on significant dry powder to drive future earnings growth from acquisitions, redevelopments, developments, or stock buybacks. On stock buybacks, our existing authorization was due to expire in August, and we filed a new two-year, $500 million authorization. Finishing now with guidance.
Pete Scott: Pro forma, these dispositions, our net debt to EBITDA is approximately five times, we have nothing outstanding on our line of credit, and we have a cash balance of $300 million.
Pete Scott: So we are sitting on significant dry powder to drive future earnings growth from acquisitions, redevelopments, developments, or stock buybacks.
Pete Scott: On stock buybacks, our existing authorization was due to expire in August , and we filed a new, two-year, $500 million authorization.
Peter A. Scott: We are increasing our FFO to the adjusted guidance range by one penny to $1.77 to $1.81. And we are increasing our AFFO guidance range by one penny to $1.54 to $1.58. Our guidance increase is driven by three items. First, we increased same-score guidance by 25 basis points to 2.75 percent to 4.25 percent.
Pete Scott: Finishing now with guidance. We are increasing our FFO as adjusted guidance range by one penny to $1.77 to $1.81 and we are increasing our AFFO guidance range by one penny to $1.54 to $1.58.
Pete Scott: Our guidance increase is driven by three items. First, we increased same-score guidance by 25 basis points to 2.75 percent to 4.25 percent.
Pete Scott: Second, the significant early renewal leasing in lab and outpatient medical, including Common Spirit, provided an immediate FFO benefit.
Pete Scott: Third, we increasingly bought back an incremental $88 million worth of stock at an FFO yield near 10%. With that, operator, let's open the line for Q&A.
Operator: Second, the significant early renewal leasing in lab and outpatient medical, including Common Spirit, provided an immediate FFO benefit. Third, we accretively bought back an incremental $88 million worth of stock at an FFO yield near 10%. With that, Operator, we will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.
Operator: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 1 again. 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 requeue. At this time, we'll pause momentarily to assemble our roster. Our first question will come from the line of Josh Dinnerlin with Bank of America. Please go ahead. Yeah, good morning, everyone. Thanks for your time.
Speaker Change: To withdraw your question, please press star 1 again. 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 requeue. At this time, we'll pause momentarily to assemble our roster.
Speaker Change: Our first question will come from the line of Josh Dinnerlin with Bank of America. Please go ahead.
Joshua Dennerlein: I just wanted to touch base on the common spirit renewal here. Looks like you got 3% annual escalators going forward. I think it was 2.5% before. Just is that 50 BIP improvement from the prior lease? Is that kind of something we should expect across like the MOB space?
Josh Dinnerlin: Hey, good morning, everyone. Thanks for the time.
Speaker Change: I just wanted to touch base on the common spirit
Speaker Change: Renewal here.
Josh Dinnerlin: Looks like you got 3% annual escalators going forward. I think it was 2.5% before just
Speaker Change: Is that 50 BIP improvement from the prior lease? Is that kind of something we should expect across the MOB space? I guess I'm just trying to think about the future growth trajectory or internal growth trajectory of the MOB portfolio as you kind of re-sign leases.
Scott M. Brinker: I guess I'm just trying to think about the future growth trajectory or internal growth trajectory of the MOB portfolio as you kind of re-sign leases. Yeah, I mean, most of what we're signing now is with 3% escalators. When we announced the transaction with physicians almost a year ago at this point, we talked about the fact that their in-place escalator was a little bit lower, just given the timing of when they struck leases. A lot of them were single-tenant, and their blended escalator was more in the kind of low to mid twos. Healthpeak had moved its escalator in the outpatient business up into the high twos already.
Speaker Change: Yeah, I mean most of what we're signing now is with 3% escalators when we
Speaker Change: announced the transaction with physicians almost a year ago at this point. You know, we talked about the fact that their in-place escalator was a little bit lower.
Speaker Change: Just given the timing of when they struck leases, a lot of them were single-tenant, and their blended escalator was more in the kind of low-to-mid twos, Healthpeak.
Scott M. Brinker: But as we sign new leases, almost everything's at 3%. So we do see our blended in-place escalator today is at about 2.5, 2.6% in the outpatient business. Over the next few years, it will slowly climb into the high twos, if not 3%. So yeah, that should be the new normal. Okay, that's good color.
Speaker Change: had moved its escalator in the outpatient business up into the high twos already.
Speaker Change: But as we sign new leases, almost everything's at 3%. So we do see our blended-in-place escalator, today's at about 2.5, 2.6% in the outpatient business. Over the next few years, it will slowly climb into the high twos, if not 3%. So yeah, that should be the new normal.
Joshua Dennerlein: And then I'm wondering about the internalization of the outpatient medical segment. It looks like you added two additional markets in July. Just kind of where are you in that process overall, and then any kind of ability to kind of see better synergies as we go forward? Yeah, I mean, we started the year with 40 million synergies; we're up above 45 million at this point because, in large part, the internalization has gone ahead of plan in terms of more markets than we anticipated sooner, with a little bit better upside.
Speaker Change: Okay, that's a good caller. And then I'm wondering to talk about the internalization on that outpatient...
Speaker Change: Medical segment. It looks like you added like two additional markets in July . Just kind of where are you in that process overall and then any kind of abilities to kind of see a better synergies as we go forward?
Speaker Change: Yeah, I mean we started the year with 40 million of synergies. We're up above 45 million at this point because in large part the internalization.
Speaker Change: has gone ahead of plan in terms of more markets than we anticipated sooner.
Joshua Dennerlein: So that's a big reason for the increase in merger synergies. But even more important to us as a leadership team is just the improvement in the platform and the interaction that Healthpeak employees now have with our properties and with our health systems. I think that, longer term, will have an even bigger impact than the financial accretion.
Speaker Change: in a little bit better upside. So that's a big reason for the increase in merger synergies. But even more important...
Speaker Change: To us, as a leadership team, it's just the improvement in the platform, in the interaction that Healthpeak employees now have with our properties and with our health systems.
Scott M. Brinker: It's more than 100 people now on Healthpeak's payroll directly interacting with our team that interacts with our tenants every day. It's just a terrific change in terms of our platform capabilities. So we've got two more planned for the balance of this year, including here in Denver, which we're excited about.
Speaker Change: I think longer term is an even bigger impact than the financial.
Speaker Change: accretion. It's more than a hundred people now on Healthpeak's payroll directly interacting with their team that are interacting with their tenants every day. It's just a
Speaker Change: I think a terrific change in terms of our platform capabilities. So we've got two more planned for the balance of this year, including here in Denver, which we're excited about. It's a super high-quality team that we're bringing on.
Scott M. Brinker: It's a super high-quality team that we're bringing on board that's going to manage this really high-quality portfolio that we have in Denver. So we'll be at about 50% of our outpatient and lab business by year end will be internally managed. And we've got, I don't know, 10 to 12 million square feet next year. It is not in the process yet, but we should be able to open in 2025. Our next question comes from the line of Nick Ulico with Scotiabank. Please go ahead.
Speaker Change: that's gonna manage this really high-quality portfolio that we have in Denver. So we'll be at about 50% of our outpatient and lab business by year-end will be internally managed.
Speaker Change: And we've got, I don't know, 10 to 12 million square feet next year that is not in process yet, but we should be able to execute in 2025.
Speaker Change: Thanks for the time.
Speaker Change: Our next question comes from the line of Nick Ulico with Scotia Bank. Please go ahead.
Nicholas Gregory Joseph: Thanks. In terms of the lab leasing that got done and the pipeline activity, I'm just hoping to understand a little bit more about, you know, how much is actually related to, you know, gateway, vantage, and port side of what, you know, was leased in the second quarter of July versus... The Pipeline of Activity is still closed. Yeah, hey Nick, it's Pete.
Speaker Change: Thanks. In terms of the, you know, the lab leasing that got done and the pipeline activity,
Nicholas Gregory Joseph: Just hoping to understand a little bit more about, you know, how much is actually related to, you know, gateway, vantage, and port side of what, you know, was leased in the second quarter in July versus, you know, the pipeline of activities still to close.
Peter A. Scott: So of the 620,000 square feet of LOIs, I would say that about half of that is associated with the three large projects you just mentioned, Vantage, Gateway, as well as Portside. And, you know, a couple of them are pretty large deals as well. Our hope is to convert all of those to leases this upcoming quarter, and as we do, we can provide, you know, more detail. I think the one thing I would add to it is, you know, the phasing in of the upside that will happen over a couple of years.
Nicholas Gregory Joseph: Yeah, hey Nick, it's Pete.
Pete Scott: So of the 620,000 square feet of LOIs, I would say that about half of that is associated with the three large projects you just mentioned. Vantage,
Pete Scott: you know, gateway, as well as port side.
Pete Scott: And, you know, a couple of them are pretty large deals as well. You know, our hope is to convert all of those to leases this upcoming quarter. And as we do, we can provide, you know, more detail. I think the one thing I would add to it is...
Pete Scott: You know the phasing in of the upside
Peter A. Scott: You know, the leases, probably, on average, will commence in the middle of next year, so we'll get an immediate FFO benefit once a lease, you know, commences, and then beyond that, it's probably the year after that where you start to see a really big pickup in AFFO as cash rent starts getting paid. So I think that's probably the best way I can describe the, you know, LOI bucket and the upside opportunity, but we're trending in the right direction, and we feel really good about the foot traffic and all of that.
Pete Scott: You know, that will happen over a couple of years, you know, the leases probably on average will commence middle of next year, so we'll get an immediate FFO benefit once a lease you know commences.
Pete Scott: And then beyond that, it's probably the year after that where you start to see a really big...
Pete Scott: Page PAGE of NUMPAGES www.verbalink.com Page PAGE of NUMPAGES
Peter A. Scott: Okay, great. And then, if I'm doing some math on this, I mean, it seems like if you actually convert those leases you talked about in the pipeline and then based on what you've already done, that you get to almost about 50% of that $60 million NOI upside number that you've spoken about previously. Is that correct? Yeah, I think, directionally, Nick, that is correct.
Speaker Change: Okay, great. And then if I'm doing some math on this, I mean, it seems like if you actually convert those leases you talked about in the pipeline, and then based on what you've already done, that
Speaker Change: You know, you get to almost about 50% of that $60 million NLI upside number that you've spoken about previously. Is that correct?
Nicholas Gregory Joseph: You know, a lot of our lease deals that you've seen have been with existing tenants as well. And, you know, there may be a little bit of give-back space that we'll have to, you know, lease up. But I'd say, just on the gross numbers you mentioned, yes, probably about half of that. Okay, that's helpful.
Speaker Change: Yeah, I think directionally, Nick, that is correct. I would say...
Speaker Change: You know a lot of our lease deals that you've seen have been with existing tenants as well and you know there may be a little bit of give back space that we'll have to you know lease up but I'd say just on the gross numbers you mentioned yeah it's probably about half of that.
Nicholas Gregory Joseph: And then just last question, maybe more broadly in the lab, is if you could talk about, you know, what types of tenant activity you are seeing on the new leasing side, existing tenants, expanding other tenants in the market where you're just capturing some market share. And then from an activity standpoint, how that shakes out between South San Francisco, San Diego, or I think both, I imagine the bulk of the activity. Hey Nick, it's Scott.
Speaker Change: Okay that's helpful and then just last question maybe more broadly in lab is if you could talk about you know what types of tenant activity you are seeing on the new leasing side if it's
Speaker Change: you know, existing tenants, expanding, you know, other tenants in the market where you're, you know, just capturing some market share. And then, you know, from an activity standpoint, you know, how that shakes out between South San Francisco, San Diego, or I think, you know, both, I imagine the bulk of the activity is.
Scott M. Brinker: I'll take that. I think our team is doing a fantastic job capturing market share. We've got a big footprint in all three of the core markets, but I really feel like we are capturing an outsized share of the market right now. So hats off to the team.
Speaker Change: Hey Nick, it's Scott. I'll take that. I think our team is doing a fantastic job capturing market share. We've got the big footprint in all three of the core markets, but I really feel like we are capturing an outsized.
Speaker Change: care of the market right now, so hats off to the team and the footprint that we build, even when the kind of the business was exploding in popularity for the last decade, we were we held true to our strategy.
Speaker Change: stay in the core sub-markets, campus model, and it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator.
Scott M. Brinker: And the footprint that we built, even when the kind of business was exploding in popularity for the last decade, we were we held true to our strategy, staying in the core submarkets, and campus model, and it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator as well. And we like the fact that we have A plus buildings; we have B minus buildings, and everything in between. So when I talk about having a pretty broad base of demand, it's in part because of that footprint that we can cater to all types of tenants. And that's a huge advantage.
Speaker Change: as well. And we like the fact that we have A-plus buildings, we have B-minus buildings and everything in between, so that when I talk about having a pretty broad base of demand, it's in part because of that footprint. We can cater to all types of tenants, and that's a huge
Speaker Change: So, we're working with credit tenants doing big deals, early renewals, we're working with
Scott M. Brinker: So we're working with credit tenants doing big deals, early renewals, we're working with series A, you know, relative startups, and everything in between. But for the most part, the leasing is tied to companies that have successful capital raises, whether it's private or public. In 2Q, it was primarily existing tenants. The pipeline is a combination and more weighted towards new leasing, which is obviously a great thing to see. All right
Speaker Change: Series A, you know, relative startups and everything in between, but for the most part the leasing is tied to companies that have successful capital raises, whether it's private or public.
Speaker Change: In 2Q it was primarily existing tenants, the pipeline is a combination, and more weighted towards new leasing, which is obviously a great thing to see.
Austin Todd Wurschmidt: Thanks, Scott. Yeah. Our next question comes from the line of Austin Wurschmidt with KeyBank Capital Markets. Please go ahead. Hey, good morning, everybody.
Speaker Change: All right, thanks, Scott. Yeah.
Speaker Change: Our next question comes from the line of Austin Wurschmidt with KeyBank Capital Markets. Please go ahead.
Scott M. Brinker: I'm just curious what brought on the negotiations for the early renewal with Common Spirit? And is that 13% mark-to-market net effective, including any capital that you provided? Just kind of looking for some color on the overall economics of that deal. Yeah, hey, Austin.
Austin Todd Wurschmidt: Hey, good morning everybody. I'm just curious what brought on the negotiations for the early renewal with Common Spirit and is that 13% mark-to-market net effective, including any capital that you provided? Just kind of looking for some color on overall economics of that deal. Thanks.
Scott M. Brinker: You know, we could have waited, but I think we were able to strike a mutually beneficial outcome. And that's the reason that we went ahead and did the early renewal. There are some TIs, but they're pretty modest. We did an eight plus year extension on average, and the TIs are roughly one year of rent.
Speaker Change: Yeah, hey, Austin. You know, we could have waited, but I think we were able to strike a mutually beneficial outcome. And that's the reason that we went ahead and did the early renewal. There are some TIs, but it's pretty modest. We did an 8 plus.
Scott M. Brinker: So pretty modest, or at market. We're happy with that outcome. But more than anything, it was just a deal that we thought was favorable to the company, and we were happy to move forward with it. Scott, you've spoken a lot about the environment having an impact on how you approach capital allocation. And disposition share buybacks have been the top priorities up until this point. But given where the stock is today, and where interest rates are, is that still the top priority?
Speaker Change: year extension on average, and the TIs are roughly one year of rent. So pretty modest, or at market. So we're happy with that outcome. But more than anything, it was just it was a deal that we thought was favorable to the company, and we're happy to move forward with it.
Speaker Change: That's helpful. And then, Scott, you've spoken a lot about kind of the environment having an impact on how you approach capital allocation and disposition share buybacks have been top priorities up until this point, but given where the stock is today, where interest rates are, is that still the top priority or are you rethinking your approach moving forward?
Scott M. Brinker: Are you rethinking your approach moving forward? Well, I mean, stock buybacks are more of a tactical move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate. We were to sell assets in the match fund to accretively buyback stock. We were clearly trading at a discount to consensus NAV and our internal NAV. So just the dynamics made that a relatively easy decision. However, the profitability from buying back stock today is lower. But we do have a fantastic balance sheet. I mean, we finished the quarter at 5.2 times.
Scott Brinkman: Well, I mean, stock buybacks are more of a tactical...
Speaker Change: move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate. We were to sell assets.
Speaker Change: and Match Fund to accretively buy back stock. We're clearly trading at a discount.
Speaker Change: to consensus.
Speaker Change: NAV and our internal NAV, so just the dynamics made that a relatively easy decision. The profitability from buying back stock today is lower.
Scott M. Brinker: And if you account for the sale proceeds from the unity transaction, we're down near five times leverage, which on a balance sheet our size is pretty substantial dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back. It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets. When I think about an implied seven cap today, plus or minus, and we just sold for us a relatively low quality outpatient medical facility by our standards at a cap rate below that.
Speaker Change: But we do have a fantastic balance sheet. I mean, we finished the quarter at 5.2 times, and if you account for the sale proceeds from the Unity transaction, we're down near five times.
Speaker Change: leverage, which on a balance sheet our size is pretty substantial, dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back.
Speaker Change: It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets when I think about an implied seven cap today, plus or minus, and we just sold
Speaker Change: For us, relatively low-quality outpatient medical by our standards at a cap rate below that. So I think that that's telling in terms of where the stock is.
Scott M. Brinker: So I think that that's telling in terms of where the stock is trading, but I don't expect that to continue. I mean, if we continue to grow earnings, sign leases, and put up excellent results like we just did, our expectation is that we're going to be trading at a premium and issuing stock and growing the company. We do have the big outpatient medical opportunity.
Speaker Change: is trading. But I don't expect that to continue. I mean, if we continue to grow earnings...
Speaker Change: Sign leases and put up excellent results like we just did. I mean, our expectation is that we're going to be trading at a premium.
Speaker Change: and issuing stock and growing the company. We do have the big outpatient medical opportunity. We announced $50 million of new development today with one of our important partners.
Scott M. Brinker: We announced fifty million dollars of new development today with one of our important partners, core market, core system, highly preleased, accretive, seven and a half percent stabilized yield. There's a fairly big pipeline of similar projects behind that that we could execute on and certainly have the dry powder to do so. So, I guess, what would it take or what would you need to see before, you know, maybe some of the deep pipeline you spoke of a few years ago within the lab segment for you to approach, you know, commencing construction on some of that? Thanks.
Speaker Change: core market, core system, highly pre-leased, accretive, seven and a half percent stabilized yield. There's a fairly big pipeline of similar projects behind that that we could execute on and certainly have the dry powder to do so.
Speaker Change: So I guess what would it take or what would you need to see before, you know, maybe some of the the deep pipeline you've spoken a few years ago within the lab segment for you to approach, you know?
Scott M. Brinker: Yeah. So, if you think about our operating portfolio in life science, we're around 95 percent leased. But our development redevelopment portfolio has a lot of opportunities. So when you include the vacancy or availability there, I mean, it's more like 1.5 million feet that we need to lease up first. And that's our priority.
Speaker Change: commencing construction on some of that. Thanks. Yeah, so if you think about our operating portfolio in life science, we're around 95% leased.
Speaker Change: But our redevelopment portfolio has a lot of opportunities, so when you include the vacancy or availability there, I mean, it's more like 1.5 million feet that we need to lease up first, and that's our priority.
Scott M. Brinker: But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to get comfortable with the return on cost relative to our cost of capital. But we're certainly moving closer to making decisions like that. But I wouldn't say that we're there yet, Austin. That's really helpful.
Speaker Change: But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to get comfortable with the return on cost relative to our to our cost of capital, but we're certainly moving closer.
Scott M. Brinker: Thanks, Scott. Yeah. Our next question comes from the line of John Kilikowski with Wells Fargo. Please go ahead.
Speaker Change: to making decisions like that, but I wouldn't say that we're there yet, Austin.
Austin Todd Wurschmidt: That's really helpful. Thanks, Scott.
Austin Warschmidt: Yeah.
Speaker Change: Our next question comes from the line of John Kilikowski with Wells Fargo. Please go ahead.
John T. Thomas: All right, thanks. First, I'd just like to start with a conversation we had with our biotech team recently where they said there's been a push to bring back some work from CDMOs that have been done internationally to return stateside. Have you heard or seen any of that? Hey, John. It's Scott Bone.
John T. Thomas: Hi, thank you. First, I'd just like to start with a conversation we had with our biotech team recently where they said there's been a push to bring back some work from CDMOs that have been done internationally to return stateside. Have you heard or seen any of that?
Scott R. Bohn: Yeah, we've seen some of that come through. I mean, we don't have a lot of biomanufacturing spaces in the portfolio. We've got some small-scale manufacturing within some of our facilities, but not a lot of true CDMOs, you know, a handful of them throughout the portfolio. We actually have a deal that we're working on out in Boston with one, but we are seeing some of that come back to the states.
John T. Thomas: Yep.
John T. Thomas: Hey John , it's Scott Bohn. Yeah, we've seen some of that come through. I mean, we don't have a lot of...
Speaker Change: kind of biomanufacturing spaces in the portfolio. We've got some small-scale manufacturing within some of our facilities.
Speaker Change: but not a lot of true CDMOs, you know, a handful of them throughout the portfolio.
John T. Thomas: A lot of that, though, does end up in markets like RTP versus some of the core markets. Okay, thank you. And then
Speaker Change: We actually have a deal that we're working on out in Boston with Juan, but we are seeing some of that come back to the states. A lot of that, though...
Speaker Change: It does end up in markets like RTP versus some of the core markets.
Peter A. Scott: I don't know how much color you could give here, but just as far as your guidance is concerned, what does it imply for lab leasing for the rest of the year or for lab and OM leasing for the rest of the year? Yeah, hey, John, it's Pete here, and welcome to the earnings calls. I think this is your first one.
Speaker Change: Okay, thank you.
Speaker Change: I don't know how much color you could give here, but just as far as your guidance is concerned, what does it imply for lab leasing for the rest of the year, or for lab and OM leasing for the rest of the year?
Pete Scott: Yeah, hey John , it's Pete here and welcome to the
Peter A. Scott: I think, just in the big picture, as we think about all three of our segments. You know, labs, we do think labs should continue to improve through the second half of this year. Certainly, leasing helps, but one of the things I mentioned at the beginning of the year was we did have some free rent on a couple large leases that impacted the first half of the year. As that burns off, we expected to see acceleration in the second half of the year, and we continue to expect that, obviously, with getting a lot of leasing done. You know, our confidence level improves as well.
Pete Scott: Earnings calls. I think this is your first one. I think just big picture, as we think about all three of our segments.
Speaker Change: You know, lab, we do think labs should continue to improve through the second half of this year. Certainly leasing helps, but...
Speaker Change: One of the things I mentioned at the beginning of the year was we did have some
Speaker Change: free rent on a couple of large leases that impacted the first half of the year. As that burns off, we expect to see acceleration in the second half of the year, and we continue to expect that, obviously, with getting a lot of leasing done.
Peter A. Scott: I think on outpatient medical, we did say that we expected the second, third, and fourth quarters to accelerate relative to the first quarter. We got a lot of questions on that, and as you saw, we were above 3% this quarter, and we continue to believe we'll be above 3% for the second half of the year. And then, I know we don't spend a lot of time on CCRCs, but we've had a pretty good first half of the year. You know, our expectation is not to hit, you know, 20% growth. I mean, that's going to normalize.
Speaker Change: you know, our confidence level improves as well. I think on outpatient medical...
Speaker Change: We did say that we expected...
Speaker Change: You know, the second, third, and fourth quarters to accelerate relative to the first quarter. We got a lot of questions on that, and as you saw, we were above 3%.
Speaker Change: this quarter, and we continue to believe we'll be above 3% for the second half.
Speaker Change: of the year. And then, I know we don't spend a lot of time on CCRCs, but we've had a pretty good...
Speaker Change: First half of the year, you know, our expectation is not to hit, you know, 20% growth. I mean, that's going to normalize, everything eventually does normalize, and it will normalize on the CCRC side, but we still feel pretty
Peter A. Scott: Everything eventually does normalize, and it will normalize on the CCRC side, but we still feel pretty confident about our full-year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. So, I know you just asked about the lab, but I figured I'd give you a more fulsome update. I appreciate it. Our next question comes from the line of Juan Zenabria with BMO Capital Markets. Please go ahead. Hi, good morning.
Speaker Change: I'm pretty confident about our full-year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. So I know you just asked about lab, but I figured I'd give you a more fulsome update.
Speaker Change: I appreciate it. Thank you.
Speaker Change: Our next question comes from the line of Juan Cenabria with BMO Capital Markets. Please go ahead.
Juan Carlos Sanabria: Congratulations on all the lap leasing. I was just curious if you could spend a little time talking about the cost to get that TI. Associated with that, seem to go up, so just curious or hoping you could give us some, some color around new and renewable TIs in today's market. Yeah, I mean, the renewal TIs were really low, especially given the length of the term that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point.
Juan Cenabria: Hi, good morning. Congratulations on all the lap leasing. Just curious if you could spend a little time talking about the cost to get that TIs associated with that seem to go up. So, just curious or hoping you could give us some
Speaker Change: Some color around new and renewable TIs in today's market.
Speaker Change: Yeah, I mean the renewal TIs were really low, especially given the length of the term.
Speaker Change: that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point. I would say they were exceptionally low last quarter, and this year they were just a bit higher. I don't think they were outsized.
Juan Carlos Sanabria: I would say they were exceptionally low last quarter, and this year they were just a bit higher. I don't think they were outsized in any way. I mean, what, 20, 25% of the rent is pretty modest.
Scott M. Brinker: But each space is different. I mean, that's the thing that's important to comment on when you're looking quarter to quarter. It all comes down to what leases were signed, which buildings, and how much work that space needed. But we don't see the TIs being outsized in any way, especially considering the improvements that were made to those buildings that should last for the next 10 to 20 years and the length of the leases that we signed. So yeah, we would not characterize it as high TIs to generate the leasing volume, not at all. Thanks for that context. And then maybe a more topical question in the news today.
Speaker Change: in any way. I mean, what, 20-25% of the rent is pretty modest.
Speaker Change: But each space is different. I mean, that's the thing that's important to comment on when you're looking quarter to quarter. It all comes down to what leases were signed, which buildings.
Speaker Change: how much work that space needed, but we don't see the TIs being outsized in any way, especially considering the improvements that were made to those buildings that should last for the next 10 to 20 years and the length of the leases that we signed.
Speaker Change: So, yeah, we would not characterize it as high TIs to generate the leasing volume, not at all.
Speaker Change: Thanks for that context. And then just maybe a more topical question in the news today. Alphabet was moving one of its life science companies from South San Fran to Dallas. You have an Alphabet company.
Scott M. Brinker: Alphabet was moving one of its life science companies from South San Fran to Dallas. You have an Alphabet company in the lab space in your top ten. I'm just curious if there are any conversations going on there, and maybe you could comment on how much time is left for your Calico exposure. Well, we have 10 years left with Calico, but I didn't see that news, but that would be a first. I mean, despite what's happening in other sectors and industries, moving out of higher cost areas to lower cost, lower tax states, it just doesn't happen.
Speaker Change: in the lab space in your top ten. I'm just curious if there's any conversations going there and maybe you could comment on how much term is left with with your calico exposure.
Speaker Change: Well, we have 10 years left with Calico, but I didn't see bad news, but that would be a first. I mean, despite what's happening in other sectors and industries, moving out of higher cost areas to lower cost, lower tax states.
Scott M. Brinker: In life science, it's just the reverse. In fact, a lot of times, if a company has some promise, they need to move to one of the three core markets to find the talent, to hook up with the right venture capital firms, and to have the infrastructure. What you just described is one in a million. The vast majority of our tenants are coming into South San Francisco, not out of it. Thanks, Scott. Yeah. Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Speaker Change: It just doesn't happen in life science. It's just the reverse. In fact, a lot of times, if a company has some promise...
Speaker Change: They need to move to one of the three core markets to find the talent to hook up with the right venture capital firms to have the infrastructure What you just described that's one in a million The vast majority of our tenants are coming into South San Francisco not out of it
Michael Albert Carroll: Yeah, thanks. I just wanted to touch on your life science leasing pipeline. I know in the past, you've kind of pegged that around 2 million square feet. And obviously, you got a lot of leasing done in 2Q and so far in July. I know on the call, you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today?
Scott: Thanks, Scott.
Scott: Yeah.
Speaker Change: Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Scott M. Brinker: And have you backfilled some of the, some new tenant interest given the space that you signed? Yeah, we continue to cycle through the pipeline. So obviously, you don't just, you know, do a tour and sign a lease the next day.
Michael Albert Carroll: Thanks. I just wanted to touch on your life science leasing pipeline. I know in the past you've kind of tagged that around 2 million square feet, and obviously you've got a lot of leasing done in 2Q and so far in July . I know in the call you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today and have you backfilled some of that?
Scott M. Brinker: I mean, there's a process involved in terms of inquiry and tours, signing an LOI, and then signing a lease. So you have, you know, pretty good leading indicators, which is why we've been more positive about our pipeline. And sure enough, this quarter, it's turned into reality.
Speaker Change: Some new tenant interest given the space that you signed.
Speaker Change: Yeah, we continue to cycle through the pipeline, so obviously you don't just, you know, do a tour and sign a lease the next day. I mean, there's a process involved in terms of...
Scott M. Brinker: And I think the third quarter will be equally strong, but we continue to see good traffic in our buildings. So including the 600 plus thousand square feet we have under signed LOI, 200,000 square feet of leases signed in July alone, that's awfully strong. Okay, but then the overall volume of the pipeline doesn't stand at that two million square feet anymore since you signed about roughly one million square feet.
Speaker Change: inquiry and tours and sign an LOI and then sign a lease. So you have, you know, pretty good leading indicators, which is why we've been more positive.
Speaker Change: on our pipeline. And sure enough, this quarter it's turned into reality, and I think the third quarter will be equally strong. But we continue to see good traffic.
Speaker Change: in our buildings, including the 600 plus thousand square feet we have under signed LOI and 200,000 square feet of leases signed in July alone, that's awfully strong.
Scott M. Brinker: And then just real quick, too, on the 180,000 square feet that you signed in July, I mean, that was, can we assume that was in the in-place portfolio, not the development projects? That's correct, although last night we did sign a lease at one of our development projects, so yeah, that's always good, I guess, to sign. We thought we had the most up-to-date information, but we did sign and convert one of those LOIs to a lease last night at one of our development projects, so it's great, great progress. Okay, great. Thank you. Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead. Hey, thanks. Good morning.
Speaker Change: Okay, but then the overall volume of the pipeline doesn't stand at that 2 million square feet anymore since you signed about roughly 1 million square feet. And then just real quick too, on the 180,000 square feet that you signed in July , I mean, that was, can we assume that was in the in-place portfolio, not the development projects?
Speaker Change: That's correct. Although last night we did sign a lease at one of our development projects, so yeah, that's always good, I guess, to sign. We thought we had the most up-to-date information, but we did sign, convert one of those LOIs to a lease last night at one of our development projects, so it's great, great progress.
Speaker Change: Okay, great. Thank you.
Richard Charles Anderson: So, what do you think explains this sort of behavioral switch in the life science space with tenants starting to think more constructively about doing deals? At NARI, you talked about some good signs from a capital-raising standpoint in the biopharma sector, but then... You have an Illumis IPO that we, like my own personal EKG right now. So I'm just wondering, you know, where this positive sort of..., you know, mindset is. Yeah. Hey, Rich, it's Pete.
Speaker Change: Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Rich Anderson: Hey, thanks. Good morning.
Rich Anderson: So, what do you think explains this sort of behavioral switch on the life science space with tenants starting to, you know, think more constructively about doing deals? You know, at NARI you talked about...
Speaker Change: You know, some good signs from a capital-raising standpoint in the biopharma sector, but then you have an Illumis IPO that was, you know, looks like my own personal EKG right now. So I'm just wondering, you know, where are this positive sort of...
Peter A. Scott: You know, one of the things that we have been talking a lot about is, you know, just capital raising, generally speaking. If you look at the first half of this year, and we're not talking about R&D capital spend by large cap pharma, M&A, I mean, that's a separate bucket, but the bucket we tend to focus on a lot is on, you know, the IPO market, the secondary equity offerings, pipe deals, venture capital raising.
Speaker Change: you know, mindset is coming from in your mind.
Speaker Change: Yeah, hey Rich, it's Pete. You know, one of the things that we have been talking...
Pete Scott: A lot about is...
Pete Scott: you know, just capital raising generally.
Pete Scott: Speaking, if you look at the
Pete Scott: The first half of this year.
Pete Scott: And we're talking now about R&D capital spend by large-cap pharma, M&A, I mean, that's a separate bucket, but the bucket we tend to focus on.
Pete Scott: A lot is on, you know, you mentioned the IPO market, but secondary equity offerings, pipe deals, venture capital raising, and when you look at the first half of this year, it was the strongest year dating all the way back to, you know, 2021, where
Peter A. Scott: And when you look at the first half of this year, it was the strongest year dating all the way back to 2021, where, you know, at that point, we were in that, you know, virtuous cycle within the lab space.
Peter A. Scott: So that's certainly helping with regard to, you know, tenants looking to lease space. We have seen a correlation between that and our leasing pipeline increasing. You know, on the Illumis IPO. I mean, that's a great company. They are in our portfolio. Martin Babler, the CEO, you know, was previously at Principia. We've had a long-term relationship with them. They grew from 10,000 feet to 50,000 square feet with us.
Speaker Change: You know at that point we were in that, you know, virtuous cycle within the lab space. So that's certainly Helping with regards to you know, tenants looking to lease space We have seen a correlation between that and our leasing pipeline increasing You know on the Illumis
Speaker Change: IPO. I mean, that it's a great company. They are in our portfolio. Martin Babler, the CEO , you know, was previously at Principia. We've had a long-term relationship with them. They grew from 10,000 feet to 50,000 square feet with us and
Peter A. Scott: And I know you like to point to the EKG on the IPO, but they have raised $500 million year to date, which is pretty darn strong. So we feel great about having them in our portfolio. And that's an example of a company as they raise capital. The demand for space has increased.
Speaker Change: I know you like to point to the EKG on the IPO, but they have raised $500 million year-to-date, which is pretty darn strong. So we feel great about having them in our portfolio, and that's an example of a company as they raise capital, the demand for space has increased.
Peter A. Scott: Okay, good. And then a second follow-up on the asset sales out of, you know, the outpatient medical facility. And maybe I should know this, but where is that coming from? Is that legacy doc or not?
Speaker Change: Okay, good. And then a second follow-up on the asset sales out of, you know, the outpatient medical.
Speaker Change: And maybe I should know this, but where is that coming from? Is that legacy doc or legacy doc? Sorry, confused. You know, is it the acquired portfolio or the legacy portfolio? Let's put it that way.
Richard Charles Anderson: Doc, sorry, confused. You know, where is it? Is it the acquired portfolio or the legacy? Yeah, Rich, we did that on purpose so that we don't have those types of conversations. But it was a mix of portfolios, I'd say was weighted towards legacy physicians, probably obvious given a lot of common spirit was in that portfolio. But it was a mix.
Speaker Change: Yeah, Rich, we did that on purpose so that we don't have those types of conversations, but it was a mix of portfolios. I'd say it was weighted towards legacy physicians, probably obvious given a lot of common spirit was in that portfolio, but it was a mix.
Scott M. Brinker: That's all I have. Thanks. Thanks. Our next question comes from the line of Michael Griffin with Citi. Please go ahead. Thanks.
Speaker Change: That's all I got. Thanks.
Speaker Change: Thanks.
Speaker Change: Our next question comes from the line of Michael Griffin with Citi. Please go ahead.
Michael Griffin: I just want to follow up on the optionality with the cash and liquidity after the asset sales. You touched on share buybacks earlier in development, but just from an acquisition standpoint, are you starting to see more interesting opportunities present themselves? And if so, kind of where are you seeing yields and IRRs today? Yeah, I mean, the market's opening up. But I would still say it's pretty slow.
Nicholas Gregory Joseph: Thanks, it's Nick Joseph here with Griff. I just want to follow up on the optionality with the cash and liquidity after the asset sales, you touched on the share buybacks earlier in development, but just from an acquisition standpoint, are you starting to see more interesting opportunities present themselves? And if so, kind of where are you seeing yields and IRs today?
Scott M. Brinker: I mean, volumes are way off their historical norms but starting to pick up, there's still a lot of volatility and interest rates, which is a key driver of transaction volumes, certainly in the private market. You know, we were happy with the pricing that we got in the high six cap for the asset quality that we sold. I think if we were to acquire anything, it would be higher quality assets; our current stock price, although improved, is not yet where we would be out acquiring stabilized products.
Speaker Change: Yeah, I mean, the market's opening up. I would still say it's pretty slow. Volumes are way off their historical norms, but starting to pick up, there's still a lot of volatility in interest rates, which is a key driver of transaction volumes, certainly in the private sector.
Speaker Change: market. You know, we were happy with the pricing that we got, high six-cap for the for the asset quality that we sold. I think if we were to acquire anything it would be higher quality assets.
Speaker Change: And our current stock price, although improved, is not yet where we would be out acquiring.
Scott M. Brinker: But we're getting closer, and certainly, if our cost of capital supported it, there'd be a significant pipeline, just given the depth of relationships that the key people here have across the health system environment. So that's obviously something that we think will happen in time. It's just a matter of when.
Speaker Change: Stabilize product but we're getting closer and certainly if our cost of capital supported it there'd be a significant pipeline just given the depth of
Speaker Change: relationships that the key people here have across the health system.
Speaker Change: environment. So that that's obviously something that we think will happen in time, it's just a matter of when. In terms of life science, very little stabilized product is available, but there's certainly signs of distress. It seems like it always takes longer to play out than you might think.
Scott M. Brinker: In terms of life science, very little stabilized product is available, but there are certainly signs of distress. It seems like it always takes longer to play out than you might think. The vast majority are probably not interesting to us, for the reason I mentioned, that we purposely did not go outside of our core markets or do a bunch of conversions. But there's a handful that we're keeping a close eye on that would be very interesting to us. But there has not been capitulation to date. Remember, as I said, it always takes longer to play out than you think.
Speaker Change: The vast majority is probably not interesting to us for the reason I mentioned, that we purposely did not go outside of our core markets or do a bunch of conversions.
Speaker Change: But there's a handful that we're keeping a close eye on that would be.
Speaker Change: Very interesting.
Speaker Change: to us. But there has not been capitulation to date. But remember, as I said, it always takes longer to play out than you think. So we now have the flexibility to pursue things like that when and if they become available.
Scott M. Brinker: So we now have the flexibility to pursue things like that when and if they become available. Thanks, that's helpful. And then just on asset sales with seller financing, you know, what was the rationale for doing seller financing? And you know, what does the secured lending market look like today? Yeah, it's pretty simple. Just certainty of execution.
Speaker Change: Thanks, that's helpful. And then just on the the asset sales with the seller financing, you know, what was the rationale of doing seller financing and you know, what does the secured lending market look like today?
Scott M. Brinker: It's a transaction that the team's been working on for several months, if not a few quarters, and despite a lot of volatility, the buyer didn't retrade us on price, and we didn't retrade them on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short term.
Speaker Change: Yeah, it's pretty simple. Just certainty of execution. It's a transaction that the team's been working on for several months, if not a few quarters. And despite a lot of volatility, the buyer didn't retrade us on price and we didn't retrade them on
Speaker Change: on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short term.
Scott M. Brinker: So there's clarity and certainty on getting the balance of the proceeds back over the next two to four years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this but to do the financing. Thank you very much.
Speaker Change: clarity, and certainty on getting the balance of the proceeds back over the next two to four years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this but to do the financing.
Wesley Keith Golladay: Our next question comes from the line of Wes Goloday with Baird. Please go ahead. Hey, good morning, everyone.
Speaker Change: Thank you very much. Yeah.
Speaker Change: Our next question comes from the line of Wes Goloday with Baird. Please go ahead.
J.T.: Can you quantify how much you can grow the outpatient medical development pipeline over the next few years? This is J.T. You know, there's a lot of development right now that we've disclosed in our pipeline under construction, and there's a lot of appetite by the health systems as they continue to transform more and more of their inpatient services to the outpatient setting, particularly in the stronger suburban demographics around those cities like Phoenix and Atlanta.
Wes Goloday: Hey, good morning, everyone. Can you quantify how much you can grow the outpatient medical development pipeline over the next few years?
Wes Goloday: This is JT. You know, there's a lot of development right now that we've disclosed in our pipeline under construction, and there's a lot of appetite by the health systems as they continue to transform more and more of their inpatient services to the outpatient setting.
Wes Goloday: particularly in the stronger suburban demographics around those cities like Phoenix and Atlanta. Two good examples.
J.T.: Two good examples, but, you know. It could be substantial; 500 to a billion over the next few years is probably a pretty conservative guess. Thanks for that. And then you did call out the free rent to be aware of as a potential mover in earnings going forward. Are there any other moving parts to be aware of?
Wes Goloday: It could be substantial, $500 to a billion over the next few years is probably a pretty conservative guesstimate.
Speaker Change: All right, thanks for that. And then you did call out the free rent to be aware of as a potential mover in earnings going forward. Is there any other moving parts to be aware of?
Wesley Keith Golladay: No, I think, you know, Wes, it's when the lease commences, right? Because, when you sign a new lease, it doesn't typically commence the next day, right? It commences once you finish the completion of the work.
Speaker Change: No, I think, you know, Wes, it's when the leash commences, right? Because...
Wes Goloday: When you sign a new lease, it doesn't typically commence the next day, right? It commences once you finish.
Peter A. Scott: So I think that's kind of hurdle number one to getting to FFO recognition. And then hurdle number two is, you know, the free rent burn off to get to AFFO recognition or cash NOI recognition. I'd say on average, it's probably for every year of the lease term, it's probably around a month of free rent on a new lease deal to the extent that, you know, we're pushing pretty darn hard for seven to 10 year terms on our new lease deals.
Speaker Change: completion of the work. So I think that's kind of hurdle number one to getting to FFO recognition, and then hurdle number two is, you know, the free rent burn-off to getting to AFFO recognition or cash NOI recognition. I'd say on average it's probably
Speaker Change: For every year of lease term, it's probably around a month of free rent on a new lease deal, to the extent that, you know, we're pushing pretty darn hard for
Peter A. Scott: And as you saw on the table, we disclosed that we're having success achieving. You know, I got that. I'd just, you know, maybe clarification on the question, like, there's no, no, no move that you know of, or anything in the portfolio that would, you know, cause anything that we need to model as we look at the next year. No, I think it's, as Scott mentioned, you know, in our operating portfolio, we're kind of in that, you know, mid 90s occupancy perspective.
Speaker Change: in our seven to ten year terms on our new lease deals and as you saw on the table we disclosed we're having success achieving that.
Speaker Change: You know, I got that. I'm just, you know, maybe a clarification on the question, like, there's no move that you know of or anything in the portfolio that would, you know, cause anything that we need to model as we look at the next year.
Peter A. Scott: And, you know, we tend to be able to, you know, feel like we can hold firm at that really, the upside for us is leasing up the vacancy outside of the operating portfolio. And as we think about next year, in the lab, we have about 800,000 square feet of expirations.
Speaker Change: No, I think as Scott mentioned, you know, in our operating portfolio, we're kind of in that, you know, mid-90s.
Speaker Change: occupancy perspective and you know we tend to be able to you know feel like we can hold firm at that really the upside for us is leasing up the vacancy outside of the operating portfolio and as we think about next year
Speaker Change: in lab.
Peter A. Scott: A lot of that is back-of-the-year weighted. And at this point in our pipeline, I think we feel like close to half of that is, you know, under discussion at this point in time. So more to come.
Speaker Change: We have about 800,000 square feet of expirations. A lot of that is...
Speaker Change: back-of-the-year weighted
Speaker Change: And at this point, within our pipeline, I think we feel like close to half of that is
Peter A. Scott: And we're just entering that 12-month period before expiration, so on the balance of it, we're starting to have conversations right now. But it's a pretty manageable number. And within our pipeline, a lot of it is actually spoken for already. Thanks for the time, everyone.
Speaker Change: You know, under discussions at this point in time, so more to come, and we're just entering that 12-month period before expiration, so on the balance of it, we're starting to have conversations right now, but it's a pretty manageable number, and within our pipeline, a lot of it is actually spoken for already.
Speaker Change: Thanks for the time, everyone. Yep.
Speaker Change: Our next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Vikram L. Malhotra: Please go ahead. Morning, thanks for the question. Just, I guess, first, on the life sciences side, could you just maybe help us clarify on the LOIs, just so we know, sort of, for modeling what percent, roughly, or what proportion is sort of existing tenants in your, maybe, core portfolio relocating, just so we can, we know sort of what's move in, move out, and then versus new. And if you can maybe just expand upon your comments and talk about reaching that 60 million NOI, like, is that, is that sort of, should we expect that sort of a second half, 24, or could some of this spill over into 25?
Vickra Malhotra: Morning, thanks for the question. Just, I guess, first on the life sciences side, could you just maybe help us help clarify on the LOIs?
Speaker Change: just so we know sort of for modeling what what percent roughly or what proportion is sort of existing tenants in your maybe core portfolio relocating just so we can we know sort of what's moving move out and then versus new and if you can maybe just expand upon your comments and talk about
Speaker Change: the reaching that 60 million NOI like is that is that sort of should we expect that sort of a second half 24 or could some of the spill over into 25?
Vikram L. Malhotra: Yeah, on the first question, I mean, more than half of the LOI pipeline is new, new leasing on currently vacant space. So there's a lot of upside in that pipeline. But just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid. But obviously, great progress on that. And Pete, do you want to take the second one?
Speaker Change: Yeah, on the first question, I mean more than half of the of the LOI pipeline is new leasing on currently vacant space, so there's a lot of upside.
Speaker Change: in that in that pipeline, but just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid, but obviously great progress on that, and Pete, do you want to take the second? Yeah, I think you said...
Peter A. Scott: Yeah, I think you said second half 24 and into 25, maybe you meant second half 25 and into 20, Dex, Juan, excuse me, not Juan, Vikram, you know. Our thought on the phasing in of the full $60 million is that it would take a couple of years to get to that stabilized $60 million of cash NOI. We still feel good about that, but the phased in would start next year and would be spread out probably over a couple of years.
Speaker Change: second half 24 and into 25 maybe you meant second half 25 and into 20 decks Juan, excuse me not Juan, Vikram
Speaker Change: You know our.
Vikram: Our thought on the phasing in of the full $60 million is that it would take a couple of years.
Speaker Change: to get to that stabilized $60 million of cash NOI. We still feel good about that, but that phasing in would start next year.
Peter A. Scott: Hard to get into more specifics. As we've said, as these LOIs convert into leases, we will certainly provide more information on them for modeling purposes, but I'd say it's just my best guess today, spread out over a couple of years, starting kind of in the middle of next year.
Speaker Change: and would be spread out probably over a couple of years.
Speaker Change: Hard to get into more specifics, as we've said, as these LOIs convert into leases, we will provide, you know, certainly more information on it for modeling, you know, purposes, but I'd say it's best guess today, spread out over a couple of years, starting kind of middle of next year.
Peter A. Scott: No, that's great. A lot of good progress on the life science side. Maybe just to clarify, you mentioned accelerating growth in MOBs, I think on the same store portfolio, and life science as well in the second half. I just want to tie that back to the guide for same store. You moved it up by 25 bps. Just wondering if you can connect the two.
Speaker Change: I just want to tie that back to sort of the guide on same story, moved it up by 25 bips, but just trying to, if you can tie the two, if you're having accelerating growth, it would seem like there's, you know, perhaps more upside. So I'm wondering if there's a, something, maybe the CCRCs or something else is pulling that back.
Peter A. Scott: If you're having accelerating growth, it would seem like there's perhaps more upside. I'm wondering if there's something, and maybe the CCRCs or something else is pulling that back. Yeah, we do see deceleration of CCRCs in the second half of the year, just because you're not going to continue at a 20% plus clip. So if there's any deceleration, it's just within CCRCs, and we're seeing, you know, acceleration in the other two segments. I would say that, year to date, we're right around four and a half percent.
Speaker Change: Yeah, we do see deceleration of CCRCs in the second half of the year just because you're not going to continue at a 20% plus clip. So if there's any deceleration it's just within CCRCs and we're seeing...
Speaker Change: Acceleration in the other two segments, I would say that a year to date, we're right around four and a half percent. The upside of our guidance is four and a quarter percent from a same-store perspective.
Peter A. Scott: The upside of our guidance is, you know, four and a quarter percent from a same store perspective. And if I were just to focus on FFO, I think year to date, we're right around 90 cents. That annualizes to a buck 80, right? So you're sort of trending towards the higher end of our, you know, guidance ranges. We still have two more quarters to go. So, you know, we're not going to take it all the way to the max in the middle of the year. There is maybe a little bit of conservatism in that.
Speaker Change: And if I were just to focus on FFL, I think year-to-date we're right around $0.90, that annualizes to $1.80, right, so you're sort of trending towards the higher end of our, you know, guidance ranges. We still have two more.
Speaker Change: quarters to go. So, um, you know, we're not going to take it all the way to the max.
Peter A. Scott: But again, we feel great about what we've done year to date. Remember, we did raise our guidance by two pennies each in the first quarter, FFO and AFFO, by one penny each again this quarter and the second quarter. So we're off to a great start.
Speaker Change: the middle of the year. There is maybe a little bit of conservatism in that, but again, we feel great about what we've done year to date.
Speaker Change: Remember, we did raise our guidance two pennies each in the first quarter, FFO and AFFO, one penny each again.
Peter A. Scott: We had a great quarter and, you know, for trending to the high end, that's great. Thanks. Our next question comes from the line of Jim Cameron with Evercore. Please go ahead. Good morning.
Speaker Change: This quarter and the second quarter, so we're off to a great start, we had a great quarter and, you know, for trending to the high end, that's great.
Speaker Change: Great, congrats on the strong quarter, thanks.
Speaker Change: Our next question comes from the line of Jim Cameron with Evercore. Please go ahead.
James Hall Kammert: Thank you. Obviously, you've done a lot of portfolio curation to date, but theoretically, how much more of the lab or OM portfolio would you sell if the price was right? Just trying to understand, you know, what's really sort of non-core remaining. Yeah, I mean, even the $850 that we just did, I would characterize as mostly just opportunistic. They're perfectly fine assets. They were
Jim Cameron: Good morning. Thank you. Obviously, you've done a lot of portfolio curation to date, but theoretically, how much more of the lab or OM portfolio would you sell if the price was right? Just trying to understand what's really non-core remaining, if you will.
Speaker Change: Yeah, I mean, even the $850 that we just did, I would characterize as mostly just opportunistic. They're perfectly fine assets, they were performing, we're managing them well.
Scott M. Brinker: We're managing them well, but they were, by our standards, relatively low quality, and to my point earlier, usually when you fine-tune a portfolio, it's dilutive. This environment just gave us a unique opportunity to fine-tune the portfolio in an accretive way and increase the growth profile of what's remaining. So how much of that is left?
Speaker Change: But they were, by our standards, relatively low quality, and to my point earlier, usually when you fine-tune the portfolio, it's dilutive.
Speaker Change: This environment just gave us a unique opportunity to fine-tune the portfolio in an accretive way.
Scott M. Brinker: It's pretty modest, but a lot of it depends on where we're trading. So I mean, we could sell, there's a lot, there'd be a lot of interest in our remaining assets, but hopefully that's not the environment that we're in. I think we have a very high-quality portfolio across the three segments that should produce stable, strong growth at the high end of the peer group for years to come. And just a quick housekeeping.
Speaker Change: and increase the growth profile of what's remaining.
Speaker Change: How much of that is left? It's pretty modest, but a lot of it depends on where we're trading. So, I mean, we could sell. There'd be a lot of interest in our remaining assets, but hopefully that's not the environment.
Speaker Change: that we're in. I think we have a very high-quality portfolio across the three segments that should produce stable, strong growth at the high end of the peer group for years to come.
James Hall Kammert: In an earlier question response, you noted that you thought it was pretty likely that the buyer of the OM portfolio here in July would, you know, you're assuming they have other existing proceeds, or you're just expecting them to refinance for the next two years or so, and that's going to be your source of... Yeah, refinance. I mean, there's a maturity date on these loans that they will have to repay or refinance the loans by that date, if not sooner. All right, thank you. Our next question comes from the line of Mike Mueller with J.P. Morgan. Please go ahead.
Speaker Change #101: That's great. And just a quick housekeeping. In an earlier question response, you noted that you thought it was pretty likely that the buyer of the OM portfolio here in July would, you know, you're assuming they have other existing proceeds or you're just expecting them to refinance kind of the next two years or so, and that's going to be your source of repayment.
Speaker Change #102: Yeah, refinance. I mean, there's a maturity date on these loans that they will have to repay, refinance the loans by that date, if not sooner.
Speaker Change #103: Got it. All right. Thank you.
Speaker Change #103: Our next question comes from the line of Mike Mueller with J.P. Morgan. Please go ahead.
Michael William Mueller: Yeah, hi. I know you quote renewal spreads for lab and outpatient leasing, but how similar or different would the lab spreads be if you included comparable new leasing spreads as well? It just would be misleading. I mean, we could give you that information. But sometimes you're doing, you know, pretty significant TIs or changing the use of the buildings so that I think it would be misleading. I don't think there'd be a material difference.
Michael William Mueller: Yeah, hi. I know you quote renewal spreads for lab and outpatient leasing, but how similar or different would the lab spreads be if you included comparable new leasing spreads as well?
Speaker Change #105: It just would be misleading. I mean, we could give you that information, but sometimes you're doing, you know, pretty significant TIs or changing the use of the buildings that I think it would be misleading. I don't think there'd be a material difference.
Scott M. Brinker: But you have even more volatility quarter to quarter, depending upon which space you're in, meaning somebody could be paying five bucks for a 25-year-old space, and you put a bunch of money into it, and it's almost brand new, and now they're paying seven bucks. Well, is that really a 30% mark to market wherever the number is? It's kind of misleading. So we chose to just go with the releasing spread on renewals. Okay, and then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expiration? for the lab business?
Speaker Change #106: But you have even more volatility quarter-to-quarter depending upon which space meaning
Speaker Change #106: Somebody could be paying five bucks in a 25-year-old space, and you put a bunch of money into it, and it's almost brand new, and now they're paying seven bucks. Well, is that really a 30% mark to market, whatever the number is? It's kind of misleading. So we choose to just go with the releasing spread on renewals.
Speaker Change #107: Got it. Okay, and then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expirations?
Scott M. Brinker: Yeah, if anything. Yeah, it should be. I mean, our mark to market across the portfolios in the high single digits, you know, that's not hard to do that number with precision. But that's where we're at best estimate across the entire portfolio, just acknowledging that it bounces around, quarter to quarter, but the 6% is good, but it's below the average throughout the portfolio. Got it. Okay. Thank you. Yeah Our next question comes from the line of Michael Stroyeck with Green Street. Please go ahead. Thanks. Good morning.
Speaker Change #108: or the lab business. Yeah, if anything. Yeah.
Speaker Change #109: Yeah, it should be. I mean, our mark-to-market across the portfolios in the high single digits, you know, that's not a hard to do that number with precision. But that's where we're at, best estimate across the entire portfolio, just acknowledging that it bounces around.
Speaker Change #109: It's quarter to quarter, but the 6% is good, but it's below the average throughout the portfolio.
Speaker Change #110: Got it. Okay. Thank you.
Speaker Change #110: Yeah.
Speaker Change #111: Our next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Michael Stroyeck: I know you already touched on the rationale behind seller financing. Were there any bids that didn't require seller financing? And if so, are you able to share where those cap rates were shaking out? I'm just trying to understand if that seller financing may have ultimately impacted pricing on the deal or if it was a fairly clean comp and it was just needed to get the deal done. Yeah, I mean, we didn't shop around for the deal.
Michael Stroyeck: Thanks. Good morning. I know you already touched on the rationale behind the seller financing.
Michael Stroyeck: Were there any bids that didn't require seller financing, and if so, are you able to share where those cap rates were shaking out? I'm just trying to understand if seller financing may have ultimately impacted pricing on the deal, or if it is a fairly clean comp and it was just needed to get the deal done.
Michael Stroyeck: This was a direct negotiation, so there really isn't even an answer to that question. These are just the terms that were discussed from day one. There's not exactly a deep market for loans of this size in the outpatient medical business in recent years. So, yeah, not a great comp.
Michael Stroyeck: Yeah, I mean, we didn't shop the deal. This was a direct...
Michael Stroyeck: negotiations, so there really isn't even an answer to that question. These are just the terms that were discussed.
Speaker Change #113: from day one. Um, there's not exactly a
Speaker Change #114: a deep market of loans of this size in the outpatient medical business in recent
Scott M. Brinker: Yeah. The other thing to add to that is that not all the sales had seller financing. Obviously, smaller portfolios or smaller asset deals, you know, you don't necessarily need financing to get those done.
Speaker Change #115: years, so yeah, not a great comp. Yeah, the other thing to just add to that, not all the sales had seller financing, obviously smaller portfolios or smaller asset deals.
Scott M. Brinker: And I'd say the cap rates ranged pretty much on average in the high sixes on those as well, relative to the high sixes we got on the portfolio we provided seller financing on. So just to go back to what Scott said earlier, it was really more just about certainty of close on a portfolio that large. And we've had success providing seller financing on asset sales in the past. We did a pretty large amount on our senior housing sales years ago, and we have very little left within that, you know, seller financing bucket.
Speaker Change #116: You know, you don't necessarily need financing to get those done, and I'd say the cap rates
Speaker Change #115: ranged pretty much on average in the high sixes on those as well, relative to the, you know, high sixes we got on the portfolio we provided seller financing on. So just to go back to what
Speaker Change #115: Scott said earlier, it was really more just about certainty of close on a portfolio that large, and we've had success providing seller financing on asset sales in the past. We did.
Speaker Change #115: pretty large amount on our senior housing sales years ago and we have very little left within that, you know, seller financing bucket. In fact, you know, the vast vast majority has been paid off and we feel confident the same thing will happen here.
Scott M. Brinker: In fact, you know, the vast, vast majority has been paid off, and we feel confident the same thing will happen again. That's helpful. And then maybe one just on the mark to market on renewals. I saw a nice step up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power? I think, you know, if you look at our tenancy, about 69% is really the hospitals.
Speaker Change #117: Got it. That's helpful. And then maybe one just on the market on renewals. Saw a nice step up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power?
Speaker Change #118: And I think, you know, if you look at our tenancy, about 69% is...
Scott M. Brinker: So we don't see a lot of difference there. I mean, it's basically where we are in the market, how much demand there is. A lot of times, what's interesting is if we've got a new MLB on a campus, that helps drive rents a little higher. Most of the mark to market increases we saw this quarter were in Nashville; we do have a couple of new buildings in Nashville, so that's been driving things.
Speaker Change #121: really the hospitals so we we don't see a lot of difference there I mean it's basically you know where are we at in the market how much demand is a lot of times what's interesting is if we've got a new MLB on a campus that helps drive rents a little higher most of
Speaker Change #119: The mark-to-market increases we saw this quarter were in Nashville. We do have a couple of new buildings in Nashville, so that's been driving things. We had 13 leases that had anywhere from 11% to 32% mark-to-markets.
Scott M. Brinker: But, you know, we had 13 leases that had anywhere from 11% to 32% mark to market, so this quarter, and that drove the overall average up. Absent that, we'd probably still be at the upper range of our three to four percent number, but in the, you know, upper threes.
Speaker Change #119: this quarter, and that drove the overall average up. Absent that, we'd probably be still at the upper range of our 3% to 4% number, but in the upper threes.
Michael Stroyeck: Great. Thanks for the time. This concludes our question and answer session. I'd like to turn the conference back over to Scott Brinker for any closing remarks.
Speaker Change #119: Great. Thanks for the time.
Speaker Change #119: This concludes our question and answer session. I'd like to turn the conference back over to Scott Brinker for any closing remarks.
Scott M. Brinker: Thank you for joining us today, everyone. And thanks again to our team for an incredible quarter. So enjoy the weekend. Take care. The conference has now concluded. Thank you for attending today's presentation. You may now go.
Scott Brinker: Yeah, thank you for joining today, everyone, and thanks again to our team for an incredible quarter. So enjoy the weekend. Take care.