Q3 2024 Healthpeak Properties Inc Earnings Call
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Good morning, and welcome did help Big properties, Inc. Third quarter conference call.
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I would now like to turn the conference over to Andrew Johnson Senior Vice President Investor Relations. Please go ahead.
Speaker Change: Welcome to healthy third quarter 2024 financial results Conference call Today's conference call will contain certain forward looking statements. Although we believe expectations reflected in any forward looking statements are based on reasonable assumptions. Our forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.
Speaker Change: Got you have risks and risk factors is included in our press release and detailed in our filings with the FCC.
Speaker Change: Take a duty to update these forward looking statements certain non-GAAP financial measures will be discussed on this call and in the 8-K, we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures most directly comparable GAAP measures and a cornerstone Rajiv inhibitor is also available on our website at <unk> Dot com.
Speaker Change: I will turn the call over to our President and Chief Executive Officer, Scott Brinker.
Scott Brinker: Thanks, Andrew and welcome to Health peaks third quarter earnings call. Joining me today for prepared remarks is our CFO, Pete Scott and the senior team is available for Q&A.
Scott Brinker: Congrats to the entire healthy team for another quarter of excellence in execution, our high quality portfolio and platform continue to drive earnings growth.
Scott Brinker: Last evening, we increased guidance for the third time this year driven by outperformance in leasing same store operations and merger synergies.
We still see significant value and upside in our stock when we look at where our multiple sets versus the earnings growth. We have produced and expect to continue producing.
Scott Brinker: We're also paying a five plus percent dividend with a conservative payout ratio that we used nearly $300 million of annual free cash flow to reinvest in the business.
Scott Brinker: Let me provide some color on the four levers across our platform that should drive future earnings growth.
Scott Brinker: First is the merger we closed on March 1st year, one synergies are now tracking to be $50 million, which is 25% above our initial forecast and we have additional synergies to capture in the next year or two.
Scott Brinker: Most of that outperformance is driven by internalization, which has proven to be a great move both financially and strategically as it's brought us closer to our real estate one of our strategic goals I communicated when I took this position two years ago.
Scott Brinker: Because of the internalization, our 50 million square foot portfolio is increasingly being operated with the same process procedure and technology, allowing us to better capitalize on our scale.
Scott Brinker: Our G&A is now 25% more efficient as a result of the merger.
Scott Brinker: Also our balance sheet improved with the merger and has never been stronger.
Scott Brinker: The second area of earnings growth is leasing momentum in our lab business. Since July one we signed more than 700000 square feet of leases with positive 10% cash re leasing spreads in the third quarter.
Scott Brinker: That activity includes more than 300000 feet of new leasing at our high priority campuses vantage portside and directors gateway.
Scott Brinker: South San Francisco continues to be our strongest market with activity in a range of suite sizes and price points.
Scott Brinker: We're uniquely positioned to capture demand with our market leading footprint and relationships.
Scott Brinker: One example is the life science tenant who signed a lease at Port side last week that same company is now grown with US four times since entering the portfolio six years ago.
Scott Brinker: Each time within walking distance in the same submarket with a gradual improvement in building quality to the class a space they will soon occupy.
Scott Brinker: A couple of broader comments on life science.
Scott Brinker: Seeing gradual but clearly positive momentum on all the key metrics.
Scott Brinker: Climate in this sector increased year over year and is up 4% in the past 18 months.
Scott Brinker: There were seven Ipos in September and 2024 is on pace to be more than 50% above last year's total.
Scott Brinker: R&D spending for big pharma is on pace for another record year as those companies have no choice, but to continually search for innovative new products to backfill their patent expirations.
Scott Brinker: Venture capital fund raising is on pace for an all time high in 2024.
Scott Brinker: Also fund raising is significantly higher than cash deployment, meaning there is a growing stockpile of capital to invest in a new company formation.
Scott Brinker: One of our tenants in South San Francisco recently became the first $1 billion series a capital raise in this sector co founder was recently awarded the Nobel Prize in chemistry, which is one of the few accomplishments more remarkable.
Scott Brinker: Series at the.
Scott Brinker: The third area of earnings growth as our outpatient medical business.
Scott Brinker: Industry fundamentals are favorable as demand exceeds supply our high quality portfolio is capturing record re leasing spreads and we routinely move into rent escalator up to 3% on new leases.
Across the sector demand is growing as health systems, and consumers prioritize cost effective and convenient outpatient care.
Scott Brinker: Important new supply will remain low because of the cost of new construction.
Scott Brinker: And finally, a few comments on capital allocation, which is the fourth driver of future earnings growth.
Scott Brinker: First we like the portfolio, we own today, so any future dispositions would be small numbers or opportunistic.
Scott Brinker: Our balance sheet is currently under Levered. So we can fund our current pipeline with debt.
Scott Brinker: While several companies went big when life Science was at a peak our last development start was three years ago in 2021 and that project is now 70% leased.
Scott Brinker: With the market starting to recover and new starts going to nearly zero, we see a compelling window to begin allocating capital to life Sciences again.
Scott Brinker: Primarily through structured investments that provide immediate accretion and more seniority in the capital stack.
Scott Brinker: We're also building a pipeline of new outpatient development projects highly pre leased to leading health systems with yields that are accretive to earnings.
That opportunity set could easily get to a couple of hundred million dollars per year.
Scott Brinker: Most recently, we commenced at $37 million project, that's 100% pre leased to hei.
Scott Brinker: In summary, we've grown earnings per share by mid double digits. The last three years, and we have four levers to accelerate that growth moving forward.
Speaker Change: And now Pete Scott will cover operating results guidance and the balance sheet.
Pete Scott: Thanks, Scott we had an excellent third quarter, we reported <unk> as adjusted of <unk> 45 per share <unk> 41 per share and total portfolio same store growth of four 1%.
Pete Scott: Let me briefly touch on segment performance starting with lab.
Pete Scott: Our scale portfolio quality depth of tenant relationships competitive positioning.
Pete Scott: And importantly, our best in class team are driving outperformance. This.
Pete Scott: This is clearly evident in our leasing activity as we posted a second straight quarter of elevated lease execution and we have a robust pipeline to back this up.
Pete Scott: Few important highlights from the third quarter.
Pete Scott: Occupancy increased 30 basis points sequentially to 95, 9% the.
Pete Scott: The cash rent Mark to market was 10%, which is at the high end of the 5% to 10% opportunity we see in our portfolio tenant retention was 83% driven by an increase in early renewals across the portfolio and same store growth was two 8%.
Pete Scott: Year to date, our same store growth is three 1% above the high end of our expectations. When we set guidance earlier in the year.
Pete Scott: Going to outpatient medical our results this quarter once again underscore the strength of the long term demand drivers combined with our unmatched and superior platform.
Pete Scott: We have executed over 5 million square feet of leases year to date and are on pace to have our strongest leasing year in the history of health peak.
Pete Scott: A few important highlights from the third quarter, the cash rent Mark to market was 10%, which is the strongest rent mark to market, we have reported 60 quarters.
Pete Scott: Tenant retention was 89% above our historical average.
Pete Scott: And same store growth was three 4%.
Year to date, our same store growth of three 3%, which is at the high end of expectations. When we set guidance earlier in the year.
Pete Scott: Finishing with <unk>, we reported another strong quarter with same store growth of 14, 2%. This was driven by occupancy and rate growth coupled with moderating expense growth year.
Speaker Change: Year to date, our same store growth as approximately 20%, which is well ahead of the expectations. We set earlier in the year.
Speaker Change: Shifting to the balance sheet, we ended the quarter with a net debt to EBITDA of five one times and $3 billion of liquidity with our revolver being completely undrawn.
Speaker Change: We are sitting on significant dry powder in the range of $500 million.
Speaker Change: To $1 billion.
Speaker Change: Which could fund accretive acquisitions.
Speaker Change: And our recurring Capex needs are modest with over 85% of our <unk> translating to <unk>, which combined with an <unk> dividend payout ratio trending towards 75%.
Provides us with approximately $250 million to $300 million of retained earnings annually.
Speaker Change: Finishing now with guidance, we are revising upwards for the third time. This year, we are increasing our <unk> as adjusted guidance by one penny to a $1 79 to $1 81.
Speaker Change: We are increasing our <unk> guidance by one penny to $1 56 to $1 58, our guidance increase is primarily driven by two items.
Speaker Change: First we increased and tightened same store guidance by 50 basis points to three five to four 5% second we are now trending to $50 million of merger synergies in 2024.
Speaker Change: We continue to execute with excellence, having increased the midpoint of our <unk> and <unk> guidance by four penny each in 2024, and having increased the midpoint of our same store guidance by 100 basis points.
Speaker Change: One last item to note in.
Speaker Change: In advance of upcoming Investor meetings, we plan to publish an investor presentation. In early November the focus of the presentation will be on our competitive positioning and key growth drivers of both lab and outpatient medical.
Speaker Change: The presentation will highlight the strong momentum we see as we finished 2024 and head into 2025 with that operator, let's open the line for Q&A.
Speaker Change: Okay.
Speaker Change: We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Speaker Change: Your first question comes from the line of Nicholas Youll, Nicole with Scotiabank. Your line is open.
Nicholas Youll: Thanks, Good morning, so nice to see your leasing getting done at Gateway vantage Portside <unk>.
Nicholas Youll: Can you quantify a couple of things here first you know.
Nicholas Youll: As we think about the commencement that NOI I know you gave timing but.
Nicholas Youll: And average rent to think about and then also specifying the square footage of the existing tenant base associated with that in the portfolio and how we should think about that as you know.
Nicholas Youll: Some level of offset versus the new leasing.
Pete Scott: Yeah, Hey, Nick it's Pete <unk>.
Speaker Change: Take this one.
Pete Scott: When you aggregate all of the new lease deals at Port side Vantage and gateway. The total square footage is around 340000 square feet.
Pete Scott: Adjusting tenant footprint that underlies that is about 100000 square city. So we're increasing by around 240000 square feet, which is a lot of net absorption within the portfolio and then as you asked your question around the lease Commencements, we did add some com.
Pete Scott: Terry.
The earnings release on it but to give some specifics around that.
The $60 million of NOI upside, we've now executed leases to capture a little more than $30 million.
Pete Scott: That $60 million.
Pete Scott: You won't see all of that.
<unk> into our numbers in 2025, probably about a third of that will hit in 2025.
Pete Scott: A big chunk of the balance hitting in 2026, and then a little bit more than in 2027, but.
Pete Scott: Certainly we're trending in the right direction with regards to development earn in and pretty pleased to get the leases done that we've gotten done.
Speaker Change: Okay. Thanks, Thanks for that and just to be clear that $30 million you talked about is that is that including the negative offset for.
Speaker Change: The existing square footage, which I'm, assuming these tenants are going to be giving up for or how should we think about that.
Speaker Change: No that doesn't include the negative offset on that but those leases will stay in place up and until the commencement to begin.
Speaker Change: On that so I was just speaking to the gross amount that we would expect to get Nick.
Nicholas Youll: Okay. Thanks, and then just second question is on the broader.
Nicholas Youll: Lab market you are seeing I think some examples in your portfolio of funding.
Nicholas Youll: <unk>.
Nicholas Youll: Creating leasing demand.
Nicholas Youll: Perhaps you could just talk a little bit more broadly about.
Nicholas Youll: That that trend and how you think it could.
Impact leasing going forward here.
Nicholas Youll: Hey, Nick its Scott Brun.
Speaker Change: I think we have seen some good funding.
Nicholas Youll: IPO market has been slow.
Speaker Change: Generally what we have seen.
<unk> 26, John this year, which is already.
Speaker Change: More than 2023 in total we just had our south San Francisco tenants go.
Go public today.
So turning.
Speaker Change: And outside of the IPO I think it's $288 million. So those will certainly turn into demand.
Speaker Change: Demand on the IPO side.
Speaker Change: The VC market when you look at fund raising.
Speaker Change: Been a record year.
Speaker Change: And the fund deployment, which has lagged over the past.
Speaker Change: 12 months is continuing to pick up a new company formation.
Speaker Change: And then from pharma you have.
Speaker Change: <unk> got a lot of M&A, they are sitting there with $200 billion of.
Revenues coming off patent between now and 2023.
Excuse me.
Speaker Change: So theyre continuing to funnel money into <unk> into biotech, which will continue to increase the.
Speaker Change: The tenant demand and the leasing demand. So I think we were happy with where the demand is today.
Speaker Change: I think we will continue to grow over the next few quarters.
Speaker Change: Okay. Thanks, Scott.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Joshua <unk> with Bank of America. Your line is open.
Speaker Change: Yes.
Speaker Change: Hey, guys Scot I wanted to.
Joshua: Explore your comments on I guess youre looking at structured investments as a way to.
Joshua: To kind of deploy capital what kind of opportunities are you seeing in.
Joshua: What is it that you like about this first maybe just buy buildings outright.
Joshua: Yes, I mean, there may be situations, where we do buy a build in AR.
Joshua: Outright.
Joshua: At the end of the day, our balance sheets in great shape.
Joshua: We have all the key variables that tenants look to when they are signing leases whether it's the footprint.
Joshua: The credibility the balance sheet the team.
Joshua: We have all of those things so I think we're going to be as successful as anyone.
And getting buildings leased up there are a lot of opportunities right now.
Joshua: The new supply that's not leasing up.
Speaker Change: While Scott and the team do a great job leasing upward limited development, we do have.
Not everyone is so fortunate so we are seeing quite a bit of opportunity some of our key submarkets, where wed like to grow and have a competitive edge.
Speaker Change: Advantage.
Speaker Change: Clearly the sector is improving but it's not doing a hockey stick back up so the structured investments and our view would bias in time.
Completely lease up buildings right, it's not a six month turnaround this could take a couple of years in the structured investments, which is biased more time as well as immediate accretion and our longer term growth pipelines. So.
Speaker Change: Each deal is a little bit different but I think the majority would be structured accretive day, one type investments, but I can't tell you will get home on any of them, but we are looking at a lot of things right now.
Speaker Change: Interesting and then it looks like.
Speaker Change: You increased the synergies post merger is that kind of new synergies, you're finding or maybe just like a pull forward of stuff that would have maybe share in 2025 or beyond.
Speaker Change: Yes.
Speaker Change: Yes, I mean, we'll give the 2025 guidance in early February but across the board. The merger has been a catalyst catalyst and a number of ways culturally and financially.
Speaker Change: Financially I mean, there were some just traditional G&A synergies, but the vast majority of what we accomplished and still have to accomplish our at the property level and the internalization has really been a huge impact on the company and Thats most of the upside that we've seen in 2024 and so the profit margins are a little bit better than we had.
Speaker Change: Under written the Rollouts then.
Speaker Change: More aggressive and successful than we had originally anticipated so.
Speaker Change: That's a big part of the $50 million and $10 million of improvement in 2024 is really property level earnings. So really a great outcome lot of hard work, but a great outcome.
Speaker Change: Thanks, guys.
Speaker Change: Next question comes from the line of Austin, <unk> with Keybanc capital markets. Your line is open.
Speaker Change: Great. Thanks, Good morning, everybody just going back to the lab scene.
Speaker Change: There are various puts and takes I guess in the leasing next year with some of the tenant relocations.
With that it sounds like you've made a lot of progress as well on the 2025 and addressing some of the 2025 lease explorations. So I'm just wondering if at a high level.
Speaker Change: You could provide or characterize kind of how the trend line in lab growth should look from here.
Really just trying to get a sense, if there's any disruption from the tenant relocations or free rent.
Speaker Change: Along with that.
Pete Scott: Hey, Austin, it's Pete here.
Pete Scott: We almost got the highly coveted five green thumbs up we got four out of five but we will keep trying to get that.
Pete Scott: Highly coveted won one of these quarters.
Pete Scott: We did add a.
Additional footnote disclosure on our 2025 lease explorations and that was really put in there to just help with forecasting I think could tell is actually a pretty good story.
Pete Scott: Nearly 40% of the explorations, we have which are quite small.
Pete Scott: A little less than 800000 square feet are either under LOI or we're in advanced discussions.
Pete Scott: We did note that there will be some redevelopment space and actually a big chunk of that is some of the give back space as tenants have grown with us. So just to be clear, it's not tenants vacating the portfolio its tenants upsizing within the portfolio.
And the other thing I just wanted to mention as I focus on that readout amount I think three points that are really important one.
Pete Scott: At least for the majority of 2025. So there is a very very limited near term impact I think the other thing to mention the in place rents are in the high Fifty's. So we actually see a pretty good mark to market on that when we do re let those buildings and then the third thing is it's spread over multi.
Pete Scott: For buildings and.
Pete Scott: And primarily in South San Francisco and in Torrey Pines.
Pete Scott: We actually feel pretty good about our prospects on re leasing those.
Pete Scott: Multiple buildings great locations. They are just a little bit older and need some capital, but again, we wanted to put that information in there to help with that forecasting.
Speaker Change: Yeah. That's that's helpful call. It a green thumb answer so I appreciate the detail there and then maybe Scott Brian going back to the the structured investment opportunities.
Speaker Change: I mean, how much capital are you willing to allocate to these investments what are kind of the returns you would target for these deals and where are you. Most focused on deals that you would ultimately like to own or would you kind of cast a wider net.
Speaker Change: On the structure investment side. Thanks.
Speaker Change: Yes, yes, most if not all would have a pathway to ownership.
Speaker Change: A lot of the projects that got.
Speaker Change: Either built or converted would not be in our sweet spot that we would consider strategic and want to own long term, we like the submarkets that we're in there's a few others that could be interesting, but having scale has proven to be a competitive advantage and we wouldn't change that.
Philosophy in terms of.
Speaker Change: Quantum I mean, Pete talked about $500 million or more of just balance sheet capacity.
Speaker Change: Given we're under Levered today, hopefully the stock continues to perform I think it should I think it will.
Speaker Change: That would obviously give us potential capacity to increase that amount, but we've got a big outpatient development pipeline as well as highly attractive so we'll have to balance that.
Speaker Change: But it could it could easily be several hundred million dollars based on the things where we're looking at the returns they would all be accretive.
Speaker Change: On day, one, but obviously the risk profile would would impact the rate of return as well so.
Speaker Change: It probably won't say anything more than that at this point.
Speaker Change: No I appreciate the detail thanks, everybody.
Speaker Change: Next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.
Hi, This is George young from Vikram. Thank you for taking my question can you just walk us through how much of the leasing is from existing tenants and can you just talk about the type of tenants that are driving the demand.
Hey, Gerard it's Scott I can take start with that one.
Scott: On the 733000 square feet in the quarter and subsequent it was about 70% 71% existing tenants.
Speaker Change: And the portfolio.
The new demand driver perspective, it really.
Speaker Change: It was a great cross section of the life science industry veteran everything from.
Speaker Change: Series eight tenants that we did deals with this quarter up through.
Mega cap.
Speaker Change: Pharmaceutical companies so is it really.
Speaker Change: Gamut across.
Speaker Change: Vectren, there, yes, and George just to add to your first part of the question I mean from a square footage perspective.
Speaker Change: Tenants are increasing if they had existing footprint within the portfolio over three X. So theyre growing over three times.
Speaker Change: So pretty significant it's.
It's not like we're just trading the same amount of square footage for different square footage in other buildings, we are actually like increasing net absorption pretty significantly in the portfolio.
Speaker Change: Great. That's helpful and just a follow up can you just comment on the Ti packages and you have seen signs of moderation or they continue to remain elevated.
Speaker Change: Yes.
Speaker Change: I would say I mean, we're still looking at Cherokee Etfs.
Speaker Change: These deals.
Speaker Change: On the new developments or some of the major readouts and we talked about that for <unk>.
Speaker Change: Several quarters now and those Ti packages in the $300 foot range, but thats not every deal. If you look at where we've been year to date on new deals we've averaged right around $85 a foot on new deals and sub $40 a foot on renewal deals. So we have talked about those elevated ti which have leveled off.
Speaker Change: But those are not certainly not on every single deal.
Speaker Change: Great. Thank you.
Speaker Change: Next question comes from the line.
Speaker Change: Juan Sanabria BMO capital markets. Your line is open.
Hi, good morning, just hoping it.
Speaker Change: A follow up a little bit on the merger synergies.
Speaker Change: It sounded like.
Speaker Change: We're outperforming on the margins in terms of internalizing some of the property management.
Speaker Change: Does that mean that there could be upside to the $60 million initially targeted.
Speaker Change: Longer term.
Speaker Change: Okay.
Yes, probably wanted Scott, but like I said, we'll give guidance in 2025, we are still working through exactly which markets, we internalize in 2025 and the.
Speaker Change: The timelines so a lot of that is still under discussion but.
Speaker Change: We feel great about the numbers, we put out in March.
Speaker Change: Not last October versus what we're actually executing.
Great and then just.
Speaker Change: On the <unk> just curious on the latest.
Speaker Change: Thoughts about that.
Speaker Change: That business in.
Speaker Change: Wanting to on that longer term, it's been a great performer year to date.
Speaker Change: Outperforming initial expectations. So just curious.
Speaker Change: There is any.
Speaker Change: Opportunities to sell our near term or how youre thinking about that.
Speaker Change: Yes, it's truly been a great performer for 15 years since we bought it it's outperformed rental senior housing in virtually every year.
Speaker Change: And those 15 years.
Speaker Change: Steady growth.
Speaker Change: Even during the overbuilding that occurred kind of 2015 to 2020 time period, we had strong growth and that's continued so we have a really strong portfolio, great operating partner in Lcs and the team that.
Speaker Change: Manages it very very effectively so it performs.
Speaker Change: It's not exactly a strategic to our overall platform.
Speaker Change: Total tonnage synergies with life science in outpatient medical.
Speaker Change: As we said in the past, it's a great business, but it's public investors want access to senior housing that has other great companies. They can turn to so if and when the price makes sense, we would look to recycle capital out of it but we're also in no hurry.
Speaker Change: Dynamic today as the public market investors are a lot more excited about that segment than the private market. So that's not a great time to sell if that dynamic ever reversed we would obviously consider transacting, but for right now we're fully focused on growing NOI, which we have been.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of John Guinee Chokes key with Wells Fargo. Your line is open.
Speaker Change: Alright, thank you.
Speaker Change: Maybe I'll just start on lab another quarter of acceleration here on the rent mark to markets at 10%.
And then also our occupancy picked up in the quarter. After several quarters consecutively of declines just kind of curious about the cadence here moving forward. If you expect this to be a steady climb or do you see volatility over the next 12 months and maybe part two of that if you could just talk about like from a fully diluted.
Speaker Change: Occupancy perspective, where you think you are today, and where you think that number could get over the next 12 months.
Speaker Change: Yeah.
Pete Scott: John It's Pete.
Maybe I'll start with the last question first.
Pete Scott: Heading.
Pete Scott: Into this call we were probably around 85% on a fully diluted basis from an occupancy perspective with some of the new leasing we've gotten done it's probably ticked up couple of hundred basis points.
Pete Scott: As we look at where we'd like to get in the next 12 to 18 months I mean, we don't see any reason why we shouldnt be able to get to a.
Pete Scott: A low 90%.
Pete Scott: Stabilized occupancy level I know, that's a bit lower than where we were a 100% couple of years ago I think a 100% is.
Pete Scott: Probably going to take a really long time to get back to.
And I think we feel really comfortable with stabilized occupancies in the <unk>.
Pete Scott: Call it low 90% area and I think the.
Pete Scott: The pathway is there for us to achieve.
Pete Scott: To achieve that and then on the rent Mark to market question look it'll it'll be lumpy, sometimes and in fact, I think the fourth quarter on what we see in our pipeline could actually be the the best rent mark to market quarter, if we get a.
Pete Scott: Lot of those leases across the goal line that we will put up for 2024 that said, we've been pretty clear that it's basically a 5% to 10% rent mark to market opportunity, it's probably closer to 10 than it is to five based upon leases that were getting done and we see that as a pretty good number.
Pete Scott: You're forecasting going forward.
Speaker Change: Pete I'd add one thing on the occupancy there is there is.
Speaker Change: The operating portfolio and then there's the total portfolio and we've just had a period of time here, where we had some big campuses that needed to be redeveloped and some development projects that we're doing.
Speaker Change: Lease up so although the operating portfolio is at 95% our total portfolio is more like 85%.
Speaker Change: And that's obviously what drives earnings is the total portfolio. So we do see pretty significant upside from where we sit today and I think thats, what <unk>, referring to when you talk about what.
Speaker Change: Go forward occupancy number hopefully that's for the entire portfolio in the actual like stabilized operating portfolio it could be even higher than that in part because we have a lot of single tenant buildings.
Speaker Change: It just the frictional vacancy.
Speaker Change: Agency is lower in life science that it would be in a business like outpatient medical.
Speaker Change: Got it thanks, and then may be just.
Speaker Change: Similar question on outpatient medical.
Speaker Change: You put up a 10% number there as well, but it has the previously communicated common spirit.
Speaker Change: Deal could you maybe parse that apart and give us what the rest of that.
Speaker Change: Are those leases were mark to market at and then kind of the expectation of how you. How you think the next 12 months, we'll look for that space.
Speaker Change: Yes, I can quickly.
Speaker Change: Quickly take that and then if others have some thoughts they can jump in but yes, we were up 10% that's on the 3 million square feet of.
Speaker Change: Lease executions, we got done last quarter, if you back out common spirit, which was $2 million.
Speaker Change: <unk> <unk>.
Speaker Change: 13 ish percent, we were probably up 3% to 4% right, which is still pretty darn strong.
Speaker Change: And I think we've been averaging probably close to that 3% to 5%, maybe a little bit higher and in some quarters and I think that's a trend that's here to stay right between that as well as the lease escalators no longer being two 5%, but really pushing those three as we've been saying we think the fundamentals in our.
Speaker Change: Patient medical are as strong as they've ever been.
Speaker Change: And we think we feel great about maintaining that occupancy in the 90, 293% range.
Speaker Change: I don't know Tom clarify anything you want to add to that.
Tom: I think you covered it thats exactly what were working for them.
Speaker Change: Got it thank you.
Speaker Change: Our next question comes from the line of Rich Anderson with Wedbush. Your line is open.
Rich Anderson: Thanks, Good morning, everybody.
Rich Anderson: So on the internalization.
Rich Anderson: <unk> million now I assume that still means $25 million G&A I think you've said Scott that the incremental has been at the property levels.
Rich Anderson: But beyond that.
Rich Anderson: I know it also applies to your life science portfolio what.
Speaker Change: When you say internalization like what.
Speaker Change: Is not being internalized I just wanted to sort of definition only what you mean by internalization and what if Theres anything you know after all this is said that there is another leg up of synergies that isn't a part of the quote unquote internalization process today that might be in the future.
Speaker Change: Yes Fair question Rich when we talk about internalization, where we're <unk>.
Speaker Change: Speaking to the onsite property manager.
Speaker Change: As well as in most cases, the property level accounting.
Speaker Change: So that's the personnel that we brought in house and for the most part it's simply been a matter of taking the existing third party team and bringing them on to the help peak team so the execution risk.
Speaker Change: It has been really low and we've had near 100% success rate, bringing people over so I think that's one reason, we've been able to roll it out faster than we anticipated without a whole lot of hiccups, but again with a lot of hard work.
By our team.
Speaker Change: The leasing.
Speaker Change: There are times, when we do internal leasing, particularly on big renewals, especially in the outpatient.
Speaker Change: Medical space in.
In life Science, Scott and the team end up doing a lot of the negotiation.
But it's critical to have really strong broker relationships. So that's not a function that we quote unquote internalized, we still utilized third party brokers to help canvas the market and give us the broadest possible exposure for.
For our portfolio.
Does that help.
Speaker Change: What is your niche okay.
Speaker Change: There is no thought about bringing in the brokerage function internal that's something you see you need long term generally.
Speaker Change: Not beyond what I mentioned with outpatient medical where we're doing some big renewals in house, Okay second question.
Speaker Change: Looking at your disclosure of about $900 million of development.
Speaker Change: Underway total cost that's call it 354% of your enterprise value. You mentioned you haven't done a new development starts since 2021.
And sort of your sort of teasing us into thinking that perhaps that day is coming even despite this structured finance structured investments that youre talking about for life science.
Speaker Change: What is your sort of ceiling in terms of size of development relative to the totality of the company. So that you don't kind of get into the situation where you have.
Speaker Change: The market goes against you and Youre, having trouble financing it for some period of time like where are you comfortable allowing development get to in terms of the size of the organization.
Speaker Change: Yeah. Thanks.
Speaker Change: Thanks, Rich I mean, we do have a threshold that we talked about with the board. It's generally done in the 5%.
Total balance sheet, but I'd also point out the outpatient development is vastly different than life science development. They tend to be 18 month type projects there.
Speaker Change: They are often times, 70% or more pre leased so the risk profile. There is obviously different you don't have the lease up risk you just have the timing risk and what happens with cost of capital and cap rates in the interim.
Speaker Change: 18 months, so so that would have an impact as well as we think about our maximum exposure, but as well as our balance sheet, but today, it's never been stronger.
Speaker Change: Used to be that your life science was the overwhelming part of the development pipeline. That's not the case anymore. Do you think that there'll be more of a balance longer term. Despite what you are saying about the risk profile of medical office development.
Speaker Change: Yes, that's probably right.
Speaker Change: But for the next year or two at least I would expect the development pipeline to be focused on on the outpatient business, where there's some really exciting opportunities I mean best in class cell systems highly pre leased beautiful new buildings good yields.
Speaker Change: Really our emphasis for development in the near term okay, great. Thanks.
Okay.
Speaker Change: Next question comes from the line of Michael <unk> with Citigroup. Your line is open.
Speaker Change: Thanks, I wanted to go back to the Port side lease in South San Francisco, and if you can give us a sense if there.
Speaker Change: This deal was more broadly marketed to the brokerage community did you mainly work on it in house. So you kind of have a leg up on the competition and if you have a sense maybe not just in south itself by your other markets. If there have been larger space requirements that have been popping up.
Speaker Change: Yes, I think maybe I'll start.
Pete Scott: Scott Bond can jump in it's Pete.
Pete Scott: I mean that deal was not marketed whatsoever. So I know Scott bond has gotten a lot of.
Pete Scott: Communications and I'm sure. There's other landlords out there trying to figure out why they didn't get a shot at that deal. That's a tenant that's been in the portfolio for <unk>.
Pete Scott: Quite some time and never spoke to another landlord.
Pete Scott: Potentially leaving our portfolio and has actually told us that they will never do a deal with another landlord other than healthy. So I think we feel pretty well positioned with that and I think the other thing you just mentioned.
Pete Scott: With your questions and I know, we've said it a lot the last couple of quarters, but it is a great example of our competitive advantage that we have in labs, we're in the best markets and best Submarkets. Our brand is exceptional we are a best in class team led by.
Pete Scott: Scott Brown.
Pete Scott: And our extensive tenant relationships are going to continue to fuel our leasing pipeline. So I appreciate you, bringing that up because it's actually a great point that I wanted to expand on I don't know Scot if there's time.
Anything else you wanted to yeah, Hey, Chris.
On the demand side part of your question, we've talked for the past.
Speaker Change: Several quarters about kind of the barbell of demand with a lot of the demand leaning towards the smaller kind of sub 30000 square foot range and then some large deals out there so.
Pete Scott: It's still probably skews towards the smaller deals.
Speaker Change: We started to see that.
Speaker Change: Can you talk to handle the barbell start start to fill in there.
Speaker Change:
Speaker Change: Of the deals we did this past quarter eight of them were greater than 35000 square feet.
Speaker Change: So it's really good to see the tenants of that size range coming back into the market and transacting on deals.
And there is there are some larger requirements out market that have been out in the market.
Speaker Change: Let's take a long time to actually transact take place, but there are a few.
Speaker Change: Great appreciate the color there and then just maybe one on mlps it seemed like a strong quarter from a renewal standpoint, but just given the more favorable supply demand backdrop. We've seen this year have you seen a greater ability to push rents either through cash releasing spreads were maybe larger.
Lease escalators and our tenants willing to commit to longer term leases just given kind of the positive backdrop youre seeing in the industry.
Speaker Change: Yes. This is Tom.
Tom: I think when you look at it.
Speaker Change: We've been pretty successful over the past three or four years getting 3% escalators and you can see our average has jumped up to two 7% overall, we actually have been pushing the past couple of quarters three 3.25%. So hopefully we can get more of those push them there in the.
Speaker Change: And the <unk>.
Speaker Change: Mark to market as Pete mentioned, 3% to 5%.
Speaker Change: We've been at.
Speaker Change: The common spirit lease thats kind of where we've been fallen out all year and youll tend to see.
Speaker Change: Leases.
Speaker Change: 80% of them are going to be in that 3% to 4% range and then you get an outlier group on either end of that that drives what the total is but overall the three 3% to four 5% is kind of where we've been running.
Speaker Change: Great. That's it for me thanks, so much for the time.
Next question comes from the line of Michael Carroll with RBC capital markets. Your line is open.
Michael Carroll: Yeah. Thanks, Scott I know Doc announced a few life science leadership changes and specifically I think you added a Boston leader.
Michael Carroll: What should we think about dock positioning itself to be more active on the investment side with these additions or is this just partly driven by winding down some of your external partnerships to kind of manage some of these assets.
Speaker Change: It could be a combination of both part of it is rewarding really strong performance for some of our existing employees, obviously, Scott bonus dramatically increases.
Speaker Change: Seniority at the company and Italia has always been his number two and had tremendous success. So we have to reward our best internal people theres been a real emphasis on that the new hire in Boston, We're Super excited about she is a longtime fixture.
Speaker Change: Fixture in that marketplace, which is important just given the dynamics in Boston we did.
Speaker Change: Buyout, our primary joint venture partner in Boston earlier. This year. So there was a need to staff up so that that certainly.
Speaker Change: Had an impact, but we would like to grow in Boston, It's a hugely important market were up to roughly 3 million square feet, but we see a lot of opportunity.
Speaker Change: And distress in that market in particular that it could be that could be interesting. So it's all of those factors Mike.
Speaker Change: Okay, and then just I know you provided some on the leasing that you completed this quarter and some of the new leasing in the development as you kind of gave us some commencement times and I understand port side, so a little bit more elongated, but the new leases signed this quarter. I mean is there a rough timeline of when you think that those leases commence.
Speaker Change: Is it over the next few quarters or is it longer than that.
Speaker Change: Yeah on the renewals.
Speaker Change: Lot of those would just commence immediately once we sign them and then obviously the port side lease has a longer.
Speaker Change: Lease up time associated with it because it's obviously a much larger lease I'd say the balance of it is probably mid 2025.
Speaker Change: We've got to build out some ti space and I think that the ones that are in.
Speaker Change: San Diego and at <unk>.
Speaker Change: Gateway, we will probably be more mid ish 2025, and then that the lease at vantage will probably be kind of second half of 2025.
Speaker Change: That's probably the best way to characterize that the commencement to those.
Speaker Change: Okay, great. Thank you.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Ronald Camden with Morgan Stanley. Your line is open.
Speaker Change: Hi, Good morning, this is Derek metzler on for Ron.
Speaker Change: So my question is about the lab portfolio development pipeline and given positive leasing trends and is positive absorption trends.
Speaker Change: Are you getting any closer you think to putting the pipeline into play and are the hurdles to starting new projects now more about occupancy in your existing lease up properties or more of our cost of capital and if.
Speaker Change: If there are not starts in the near future then is there.
Speaker Change: Other optionality or alternative uses that you would consider for that land bank.
Speaker Change: Yes happy.
Speaker Change: Happy to take that one we do control.
Speaker Change: Upon full entitlement, almost 5 million square feet.
Speaker Change: <unk> life Science development.
Speaker Change: Core Submarkets, where we are already have a presence and a competitive advantage in a tenant base. So from that standpoint, we feel great about the land bank. The economics today. When you look at construction cost, which is up very dramatically in the past couple of years, including the turnkey Ti.
Speaker Change: As well as where rents are relative to cost of capital, it's going to be difficult for life science landlords to start anything new.
Speaker Change: In the foreseeable future. The economics are just tight that won't last forever.
That will obviously benefit our.
Speaker Change: Our existing portfolio.
Speaker Change: So we feel good from that standpoint, but I don't expect us to start new life science development in the foreseeable future, we would need cost to come down maybe it would be stabilized, but we need them to start coming down.
Speaker Change: Cost of capital improve and obviously retro rates start to move higher all of those things or a combination would allow us to consider.
Speaker Change: Activating the land bank in the interim we're going through the entitlement process in some cases doing construction drawing so that we're ready to proceed because part of our business plan is obviously catering to growth tenants and some prefer to have class b space, but others prefer to have class a space.
Speaker Change: You need to have both available so a development pipeline becomes an important part of our marketing pitch to all of our tenants.
Speaker Change: One reason, we're also looking at some of the distress in the marketplace and whether that could be an outlet at a much lower cost basis to provide a growth Avenue for our tenants.
Speaker Change: No. That's helpful. Appreciate the color and I guess as a follow up just in terms of the.
Speaker Change: The lab market conditions, it's easy for us to point to new supply as a potential headwind, but youre portfolios performed really well. So I guess in terms of competitive supply that you see.
Speaker Change: Conditions are improving over the next year or moving sideways or are there markets that could be potentially more challenging over the next year.
Speaker Change: I mean, the overall market is clearly improving it might be a little bit slower than we'd like how do you think we're capturing outsized market share, but the trajectory is obviously positive.
Speaker Change: Mount of supply that's underway today is 50% of what it was a year ago and it will be counted another 70% to 80% a year from now and then it will go to zero and I think that will last for quite a while and liquidity of the fund raising environment is starting to improve as interest rates declined in particular.
Speaker Change: Venture capital fund raising has never been stronger they obviously didn't raise that money to sit on it.
Speaker Change: Theyre going to deploy that into new companies.
Going forward. So we do feel good about.
Speaker Change #100: Big picture market backdrop, and what it should be too for landlords like health peak over the next three to five years and even bigger picture just the way the industry works with Big Pharma I mean, they have a seven to 10 year time horizon two to make a profit on a drug.
Speaker Change: When that window expires.
Speaker Change: To replace it right, they're not shutting down I don't think BMS or J J I don't have a business plan that entails just say, let's run out our patents in close up shop or they are redeploying those profits into new innovative drugs already today. The majority of that revenue comes from drugs developed by biotechs and it feels like the.
Speaker Change: Momentum is only positive in terms of most of the innovation happening at the biotech level.
Speaker Change: So we remain incredibly confident about the longer term outlooks for the for the for the industry.
Speaker Change: And the next three to five years, we've clearly seen improving backdrop.
Speaker Change #101: That's great helpful. Thanks for the questions.
Speaker Change #102: Our next question comes from the line of less colony with Baird. Your line is open.
Speaker Change #103: Everyone I just want to go back to the supply question.
How much or how how early will you lead the recovery I imagine there's a subset of landlords that have the money there that can do the ti and as the other subset of the people that are delivering zero percent occupied projects and made major struggle and so im just trying to get a sense of will you be.
Speaker Change #103: <unk> step in a year or two and then everyone else may take another three or four years, what kind of landscape, where we're looking at.
Speaker Change #103: Okay.
Speaker Change #104: Yes, I mean.
Speaker Change #105: Good question.
Speaker Change #106: In the core Submarkets stuff is going to lease up active a lot faster and I think for those large incumbent landlords youre going to see us continue to gain market share for those that.
Speaker Change #106: Developed in new Submarkets and don't have existing tenant relationships there they're going to struggle. They are struggling they will struggle hard for us to tell you how that product leases op or if it ever does lease up but if noncompetitive for us.
Speaker Change #106: Okay, and then just one already.
Speaker Change #106: Plan.
Speaker Change #107: Hey, Wes I was just going to say you've already seen projects that were planned for life science that have gone the other direction either plant conversions that never went anywhere or potential developments that is that installed and are basically basically mothballed. So.
Speaker Change #106: That's happening as well as projects just sitting vacant in some cases located for capital so.
Speaker Change #108: The market, it's not a criticism, it's just a reality that they tend to overshoot in both directions. They got overly excited about life science.
Speaker Change #108: There was a period of time really hit they probably under appreciated the strength of the business. So we're clearly in that.
Speaker Change #108: Phase and we're trying to take advantage of it.
Speaker Change #109: Okay and then one final one maybe you can comment on how your tenant watch list is looking since the start of the year anything adding or may be even falling off.
For both the outpatient medical and the lab.
Speaker Change #110: Yeah, I think we've had within our portfolio tenants have raised $7 billion year to date and as a result of that you've seen our monitoring list come down to what we consider just normal course at this point in time.
Speaker Change #110: And a lot of that is just a function of capital markets opening up which is certainly leading to better credit for our tenants as well as additional leasing.
Speaker Change #111: Thanks for the time.
Speaker Change #111: Okay.
Next question comes from the line of John Pawlowski with Green Street. Your line is open.
John Pawlowski: Hey, Thanks for the time curious if you can give us a sense what the typical amount of free rent concessions on new leases executed in the third quarter and then the batch of leases and LOI for fourth quarter or.
Speaker Change #113: Yeah, as we've been saying.
Speaker Change #114: It's probably for every year of lease term.
Speaker Change #115: It's about a month of free rent.
Speaker Change #115: And that's actually consistent with what we've achieved with all of our leases, especially those that are.
Speaker Change #115: These larger.
Speaker Change #115: New developments.
Speaker Change #115: So it's in line with what we've been saying to the street and by the way John that hasn't really changed all that much over the last year. It certainly has gone up.
Speaker Change #115: <unk> from the.
Speaker Change #115: <unk> is a couple of years ago, but it's stabilized as well as the rental rates stabilizing in the last couple of really the last year.
Speaker Change #116: Okay understood and then maybe if you could just expand on that Pete I think maybe a quarter or two ago. The expectation was for lab NOI growth to accelerate throughout the year and there was a <unk>.
<unk> declined this quarter sensitivity because of free rent. So what I guess, what has surprised to the downside on the trajectory of occupancy or trajectory for Iran.
Speaker Change #116: Any more color on the.
Speaker Change #116: Sluggish sluggish rebound in NOI growth in the second half of this year would be helpful.
Speaker Change #116: Yeah.
Speaker Change #116: On that in particular, that's a good question.
Speaker Change #116: Free ran as you point out can have.
Speaker Change #116: Any impact from one quarter to another I step back and just look at the fact that at the beginning of the year, we thought we'd be at 1.5% to 3% same store growth and lab year to date, we're at 3.1%. So we're actually exceeding.
The upside of what our original expectations are so I'd say, we feel like Theres been modest improvement there is a lumpiness to that free rent that could have an impact one quarter to the next but it is important to step back and look at it not Justin.
Speaker Change #116: One quarter increments, but to look at it over a longer period of time, so we feel like year to date, we're doing quite well.
Same store NOI is just a lagging indicator. It's also a bit misleading I mean, the fact is all of the key metrics are moving in a positive direction releasing spreads now occupancy the watch list. The leasing those are the things that drive earnings Yeah, Yeah, obviously.
Speaker Change #116: It goes without mentioning as well occupancy did tick up.
Speaker Change #116: Sequentially from <unk> to <unk> and so the free rent had a little bit of an impact on the same store NOI, but certainly with occupancy increasing that's a pretty good trend line.
Speaker Change #117: Okay. Thanks for the time.
Speaker Change #117: Yes.
Speaker Change #118: Next question comes from the line of Zoom cameras with Evercore. Your line is open.
Speaker Change #119: Good morning. Thank you figure back maybe just to the leasing you called out for 2025 to 320000 square feet.
Speaker Change #120: Is it too early to know what sort of the dollar magnitude will be extended on that redevelopment in particular yields you expect on that incremental capital.
Speaker Change #121: Yeah, I mean, I don't know that were going to get into all the specifics because every building is a little bit different with regards to the amount of capital depending upon.
Speaker Change #121: The age of the building, but I do want to just mention that those buildings are leased for the majority of 2025. So I just wanted to allay any concerns that people think those buildings Youre just going dark on January 1st and as I said a lot of those are <unk>.
Speaker Change #121: Buildings, where tenants are upsizing and we've had a lot of success leasing those buildings up to.
Earlier stage biotech tenants and having them grow in the portfolio. So we don't look at it as a headwind we look at it as an opportunity, but as we've said.
Speaker Change #121: If you had to put first Gen type Ti then, it's probably 300 Bucks a foot I am not sure that we'd have to do that across the entirety of that portfolio, but it will require a little bit of an investment because the average age is around 25 years and we are moving tenants out of those buildings into really high quality buildings, but again, we look at that.
Speaker Change #121: As an opportunity not as a headwind yes.
Speaker Change #121: Yes, they are in core submarkets to it's not like they're just random buildings. So I think the execution risk is a lot lower we just need to put some capital in and confident that we'll get them.
Speaker Change #121: Released we really do like the portfolio that we own I think it's unique position to be in.
Speaker Change #122: Alright, that's fair and then Scott on your earlier comments that Greenfield development. Obviously, we know doesn't really make a lot of sense in most markets. So when you think about these redevelopment opportunities you've got some coming up in 'twenty five if you look at your land portfolio, what order of magnitude either maybe square footage or just give us a guidance, perhaps what is still not in state of yard where you.
Speaker Change #122: Continuing to kind of harvest and increase the returns.
Annual basis.
Speaker Change #123: A million square feet or what else might want.
Speaker Change #122: Want to redevelop in the land portfolio as it sits today.
Speaker Change #124: Thank you operator.
Speaker Change #125: We do a pretty fair, we do a pretty thorough across the 50 million square foot portfolio ongoing assessment of redevelopment candidates kind of prioritizing them out 123 years. So I think the disclosure we gave as part of this earnings release was incremental and hopefully positive we.
Speaker Change #125: We could consider providing something additional but it is a pretty intense portfolio management effort that we have just to prioritize those readouts, but $100 million a year in the aggregate still feels like the right benchmark.
Speaker Change #125: Given the strength of the portfolio of the age of the portfolio.
Speaker Change #126: Okay I appreciate it thank you.
Speaker Change #126: Okay.
Speaker Change #126: Okay.
Speaker Change #127: And our last question comes from the line of Mike Mueller with Jpmorgan. Your line is open.
Mike Mueller: Yes, Hi, just a quick one on outpatient medical development are you seeing more pre lease build to suit type or spec opportunities for the next few years and when you think about your yield requirements how different are those two.
Speaker Change #129: Well Theres nothing spec.
Speaker Change #130: Everything is 70% or more pre leased in some cases, they are completed build to suits at 100% like the one we announced yesterday with with HCA.
Speaker Change #130: The yields continue to be 7% at least in today's cost of capital environment and Thats been our.
Speaker Change #130: Our target.
Speaker Change #130: The pipeline could be even bigger.
Speaker Change #130: If the return thresholds were lower there's no shortage of health systems.
Speaker Change #130: They would like to expand their outpatient footprint, it's just a matter of which projects get the green light given the rental rates that need to be paid that's really the governor on our opportunity set right now.
Speaker Change #130: Okay.
Speaker Change #130: Okay. Thank you.
Speaker Change #131: Yes, Thanks, Matt.
Speaker Change #130: This concludes our question and answer session.
Speaker Change #132: I'd like to turn the conference back over to Scott Brinker for any closing remarks.
Yeah, well, thanks for your time and attention today and congrats again to our team on a really excellent quarter.
Speaker Change #132: We can.
Speaker Change #133: Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Yeah.
Speaker Change #133: [music].