Q4 2024 Healthpeak Properties Inc Earnings Call
Speaker Change: Good morning and welcome to the HealthPeak Properties, Inc. fourth quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star, then 1 on your touchtone phone. To withdraw your question, please press star, then 1. Please note 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 fourth quarter 2024 finance results conference call. Today's conference call contains 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.
Andrew Johns: A discussion of risk and risk factors is included in our press release and detail in our filings of the SEC. We do not undertake a duty to update any forward-looking statements.
Andrew Johns: Certain non-GAAP financial measures will be discussed in this call. In an exhibit to the 8K we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com.
Andrew Johns: I'm now going to call over to our President and Chief Executive Officer, Scott Brinker. Okay, thanks Andrew. Welcome to HealthPeak's fourth quarter and full year 2024 earnings call.
Andrew Johns: Our CFO Pete Scott is here with me for prepared remarks.
Andrew Johns: and the senior team is available for Q&A. I would like to thank our entire team for a year of operational excellence, in particular with merger integration, internalization, leasing, and senior housing operations.
Andrew Johns: I'm confident that in 2024, we built the foundation for future outperformance with our improved capabilities, portfolio, and balance sheet.
Andrew Johns: We also continue to grow earnings. Over the past three years, we've grown FFO per share by 12% and AFFO per share by 19%.
Additional growth is implied in our 2025 guidance.
Andrew Johns: Yesterday we announced an increase to our dividend. The increase was made possible by our earnings growth and is an important part of our total return to shareholders.
Andrew Johns: Beginning in April, we'll pay the dividend on a monthly basis to match the cadence of our monthly rental income.
Andrew Johns: Our FSO payout ratio remains conservative, preserving free cash flow to reinvest into the business.
Andrew Johns: We believe there's significant value and upside in our stock today when we look at our current multiple, overlaid with our earnings growth and 6% dividend yield, not to mention the underlying value of our real estate and our proven competitive advantage in both life science and outpatient medical.
Andrew Johns: The merger with Physicians Realty closed less than a year ago and has already proven to be highly successful.
Andrew Johns: The merger was accretive to our earnings, balance sheet, and platform.
Andrew Johns: It highlighted our ability to execute and to exceed expectations, for example, with merger synergies and a common spirit renewal.
Andrew Johns: We'll build on that momentum in 2025 by continuing to internalize property management across our portfolio, which is both financially and strategically accretive.
Andrew Johns: We also have a significant development pipeline from the health system relationships that came over with JT and his team.
Andrew Johns: In 2024, we closed $1.3 billion of asset sales at a compelling cap rate of 6.4%.
Andrew Johns: primarily stabilized outpatient medical buildings where private market values have remained strong.
Andrew Johns: Particularly in life science, we're overbuilding and a lack of liquidity is creating opportunities for us.
Andrew Johns: For the past several years we had a conservative near-term outlook for the sector and chose not to commence any new development or to make any acquisitions.
Andrew Johns: With new deliveries declining by 75% this year, new starts at nearly zero, and many new entrants and lenders feeling distress, we see this as a great time to put our platform and balance sheet to work.
Speaker Change: Private credit has exploded in popularity but there's a vacuum in my science today and therefore an opportunity for HealthBeat.
Speaker Change: Our focus is loan investments that provide immediate accretion, more seniority in the capital stack, an attractive basis, and future acquisition rights of buildings in our core submarkets.
Speaker Change: The $75 million mortgage loan we announced yesterday is a good example of this targeted approach.
Speaker Change: The building is down the street from our existing 700,000-square-foot campus in Torrey Pines, the premier sub-market in San Diego. Our loan-to-cost is 60%, with an 8% interest rate plus purchase option.
Speaker Change: In our outpatient medical business, our health system driven strategy generates sustainable internal and external growth. Our capabilities and relationships were built over the past two decades and continue to bring us proprietary opportunities.
Speaker Change: In the fourth quarter, we originated a $36 million development loan with purchase option on a development that's 100% pre-leased to McKesson and adjacent to a Baylor, Scott & White hospital in Dallas.
Speaker Change: Our current pipeline of similar, highly pre-leased and accreted development projects exceeds $300 million.
Speaker Change: I'd like to make a few comments about our Senior Housing CCRC portfolio. Over the past several years, we've executed a strategy to structure our entry fees so that less than 20% of those fees are refundable to the resident.
Speaker Change: This is a huge contrast from the typical CCRC, where the entry fee is more than 80% refundable to the resident.
Speaker Change: This strategy around refundability allowed us to keep the entry fee low so that we could target a wider audience.
Speaker Change: The result has been record sales and record net cash collections.
also from an ownership perspective
Speaker Change: From a resident standpoint, the properties remain highly differentiated and attractive.
Speaker Change: with vast indoor and outdoor amenities and large units with full kitchen to attract independent seniors.
Speaker Change: We've periodically received inbound interest from potential buyers for the portfolio, but not at prices we found compelling. Our current expectation is that we'll own the portfolio for the foreseeable future while retaining complete control and flexibility.
Speaker Change: Finally, the leadership changes and promotions announced yesterday. We have thorough succession plans and a deep bench for all senior positions. Kelvin Moses has been promoted to the executive team in recognition of his impact across the company since joining in 2018.
Calvin will be EVP of Investments and Portfolio Management.
Speaker Change: Tracy Porter has been a key member of our legal team since 2013 and will become EVP and general counsel on March 1. She's been well trained by Jeff Miller who I've had the privilege of working with for the past two decades as he set the highest bar for teamwork and mentorship.
Speaker Change: Also March 1, Mark Dine will report to me as leader of our outpatient medical business. Mark was a co-founder of Physicians Realty and has two decades of experience in the outpatient sector.
He takes the reins from Tom Klarich
Speaker Change: who is one of the founding fathers of the outpatient real estate sector. Tom deserves enormous credit for the role he played in building a leading outpatient platform at Healthpeak over the past 25 years.
Speaker Change: Both Tom and Jeff have agreed to transition and consulting roles through year-end to ensure a smooth handoff.
Speaker Change: On behalf of our team and board, I want to sincerely thank Tom and Jeff for their enormous impact and congratulate Tracy, Calvin, and Mark for their increased role at the company. They're committed to our We Care core values and are eager to put in the work to build an industry leader together.
Speaker Change: Now Pete Scott will cover operating results, guidance, and the balance sheet.
Pete Scott: AFFO of 40 cents per share and total portfolio same-store growth of 5.4%. For the full year, we reported FFOs adjusted of $1.81 per share, AFFO of $1.60 per share and total portfolio same-store growth of 5.4%.
Pete Scott: We exceeded the midpoint of our original FFO's adjusted guidance by five pennies.
Pete Scott: Our outperformance was a team effort across the organization and included better results in all three segments, higher merger synergies, accretive share repurchases, and the opportunistic early lease renewal with common spirit.
Pete Scott: Our balance sheet is in rock-solid shape with a net-debt EBITDA of 5.2x, providing us with ample drive powder to go on offense.
Let me provide some highlights for each segment.
Pete Scott: Starting with Outpatient Medical, our year-over-year same-store growth was 3.2 percent, well above the midpoint of our original outlook. We executed 6.2 million square feet of leases with a positive 7 percent rent mark-to-market on renewals.
Pete Scott: We ended the year at 92% occupancy and a tenant retention rate of 88%. Both metrics are well above industry averages.
Turning to lab.
Pete Scott: Our year-over-year same-store growth was 5%, far exceeding the high end of our original outlook.
Pete Scott: We executed 2 million square feet of leases with a positive 11% rent mark-to-market on renewals, highlighted by a positive 30% rent mark-to-market in the fourth quarter.
Pete Scott: We far exceeded expectations in our lab segment, driven by our unique competitive advantages, including our scale, best-in-class team, high-quality portfolio in the right sub-market, and the depth of our industry relationships.
Pete Scott: Finishing with CCRCs, our year-over-year same-score growth was 20.8%, smashing our original outlook driven by better-than-expected occupancy gains and entrance fees.
Pete Scott: Starting in the first quarter of 2025, we will report AFFO in our Supplemental Inclusive of Entrance-Free Cash Collections.
Pete Scott: We believe this change better reflects the cash flow generation of the business.
Pete Scott: Turning now to our 2025 guidance. We are forecasting FFO is adjusted to range from $1.81 to $1.87 per share. Let me touch on some of the major items that underlie our guidance.
Pete Scott: We see total same-store growth of three to four percent. The components of same-store growth are outpatient medical ranging from two and a half to three and a half percent, lab ranging from three to four percent, and CCRCs ranging from four to eight percent.
The weighted average yield of these investments is 8% plus.
Pete Scott: Interest expenses forecast to increase approximately 15 million dollars or two pennies a share as we refinance maturing bonds, fund investments, and capital spent. Our current 10-year new issuance cost is approximately 5.5 percent.
Pete Scott: We have forecast capital spend of $600 million, which is largely focused on development and redevelopment spend.
Pete Scott: One important item before turning to Q&A, we have made significant progress capturing upside from the lease up of our marquee development and redevelopment projects.
Pete Scott: In 2024, and including January 2025, we signed over 370,000 square feet of leases, bringing these projects to over 50% leased, representing approximately half of the $60 million of upside NOI we disclosed.
Pete Scott: However, there is a timing lag between when a tenant signs a lease and when earnings commence.
Pete Scott: Our 2025 guidance excludes four pennies of FFO from signed but not yet occupied leases.
Pete Scott: The benefit from these leases will be a tailwind to earnings beginning in late 2025. With that, let's open it up for Q&A.
Scott Brinker, Peter Scott
Pete Scott: We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchtone phone.
Pete Scott: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 1, so that everyone may have a chance to participate. We ask that participants limit their question to one unrelated follow-up. If you have additional questions, please re-queue. At this time, we will pause momentarily to assemble our roster.
Hi, good morning. Thanks for taking my question.
Speaker Change: Based on last quarter you made comments on sitting on significant dry powder of 500 million to 1 billion to fund a creative acquisitions Curious if you can go through how this ties to your acquisition guidance if anything has changed and how you're viewing the landscape of capital deployment
Speaker Change: Yeah, I can take that. It's Pete here. You know, we typically don't guide to investments within our, you know, pipeline, but I think we're far enough along within that pipeline that we felt like we should include some amount of
Speaker Change: In addition, you know, we did disclose the loan in Torrey Pines we did, and then Scott talked about in the prepared remarks, the loan that we did in in Dallas to the McKesson asset, both, you know, kind of first mortgage or construction loans at eight percent. So we feel pretty darn good about.
Speaker Change: The 500 million, it's got a mid-year time horizon associated with it within guidance as well. And again, we have more dry powder to do more than that to the extent that, you know, our pipeline continues to fill up. And hopefully we have more to disclose over the coming, you know, months. And there's a lot of industry activity. So we'd expect to provide more clarity on that pipeline as we actually get things across the goal line.
Speaker Change: Thank you and also when it comes to increased M&A in the life science area how are you seeing that either impact demand or are you seeing a different type of clientele coming in to look for buildings?
Speaker Change: I mean M&A's been, this is Scott speaking, M&A's been relatively quiet the last four years just because of the difficulty.
Speaker Change: or perceived challenges with getting FTC approval. So there's going to be a significant change. It seems likely. Big M&A has been almost completely off the table. There's been some smaller transactions the past four years, but we would expect that.
to pick up. There's already been a couple of announcements.
Speaker Change: here in January, but generally it's a it's a positive thing whether it's direct because of the tenant credit upgrade
Speaker Change: or just capital being recycled in the sector so that investors can monetize an investment in a smaller company and hopefully get a good return and put it back into the sector. So it's been a positive through the years for the sector and we expect that.
to continue here in 2025 moving forward.
Okay, thank you so much.
Scott Brinker, Peter Scott
Niki Liko: Your next question comes from Niki Liko with Deutsche Bank. Please go ahead.
Hi.
Niki Liko: I guess first question is just on lab leasing, you know, I know you got a lot done executing on the LOIs you talked about previously. Can you just talk a little bit about
All right.
Scott Bones: Yeah, I could take that, and Scott Bones here as well.
Scott Bones: If you want to add on, you know, we did have a solid year last year in 2024 for lab leasing. We got over $2 million.
Scott Bones: Square Feet done. We do have over 300,000 square feet under LOI.
proposals and
Scott Bones: other activity that goes beyond that as well. So we feel like we have pretty strong momentum. You know, most of the demand is really a direct result of capital raising, which was up significantly last year for biotech companies. Um, as you think about
Scott Bones: The $60 million of cash upside, Nick, which I think is an important part of your question.
You know at this point
Scott Bones: We've now signed leases for over 50% of that. Again, a lot of that won't actually benefit our earnings until the very end of this year on really be a tailwind as we look towards next year. But there's additional upside for us to capture as we get the balance of, um
Scott Bones: that upside, you know, at least up. And like I said, we've got, you know, strong progress, nothing at this point in time that is at an LOI level where we would disclose it. But again, lots of tours and activity.
Speaker Change: Okay, thanks. And then I guess, you know, second question is just, you know, maybe for Scott Brinker, just, you know, in terms of where...
Scott Brinker: you're at right now on, you know, the merger synergies, you know, and how much are, you know, assumed this year in terms of...
Scott Brinker: you know, internalizing management for assets and, you know, how would you just think about kind of how far along you are on that whole process and whether there's also, you know, some potential upside benefit there that could happen this year similar to, I think, was a, you know, a benefit that helped you beat guidance last year. Thanks.
Yeah, hey, thanks, Nick. Yeah, the merger added.
Scott Brinker: between $0.05 and $0.07 of earnings last year, 2024, and on a run rate basis as well. And we think there is more to capture. We internalized almost 20 million square feet.
Scott Brinker: of real estate. Last year was a big part of the $50 million of synergies. We've got another 8 million or so square feet that we plan to internalize in 2025.
Scott Brinker: And we feel like the run rate total synergies coming out of this year should be more in the 65 million range, so not all of that additional synergy comes through in 2025, but on a run rate basis, it's really strong. I mean, you're talking about 10 cents a share, so it's significant.
Okay, thanks.
Yep.
Speaker Change: Your next question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.
Hi, good morning. Just on the $500 million of
investments anticipated for Plan 4 for 25.
Speaker Change: Could you just give us a sense of what is the breakdown between some of the MLB loans where you announced one with the results as well as kind of the lab more?
Speaker Change: distressed opportunities and for the stuff that you announced, what's the term or duration of those two loans?
Speaker Change: Yeah, they're three to four year loans for the most part one the ones we
Speaker Change: announced. I mean, the mix of sectors is fluid. I mean, there's a big pipeline in both, but as you noted, there's...
Speaker Change: The big difference is that in the outpatient business, there's not distress. These are really development opportunities. Some we'll do on balance sheets, some we'll do through loans with an option to purchase.
Speaker Change: Each project is unique. In life science, they tend to be more the distress.
Speaker Change: category, but again could be acquisition, could be loans. The one we announced in Torrey Pines is at the lower end of the risk spectrum obviously.
with a 60% loan to cost.
Speaker Change: and even bigger discount to replacement costs. Others are higher LTC and therefore higher return in the pipeline. But it's significant. But until something actually closes, obviously we won't disclose the particulars.
Speaker Change: Yeah, hey Juan, it's Peter. I'll give a little color on that. You know, I think the main drivers of Lab Same Store this year will be, call it the rent mark to market in that 5 to 10 percent.
Speaker Change: you know range and then within the same store pool you're going to see
kind of flattish occupancy, and we're at the very...
Speaker Change: high levels of 97 98% within the same score pool, and I'll touch on that in a second. And then, obviously, we also have the escalators and the low threes. So those air really the main drivers to the 3 to 4%.
Speaker Change: You know, but that's just same store. We're focused on total occupancy, and really the upside opportunity for us is taking that total occupancy from
the mid to high 80s.
Speaker Change: back to the, you know, low 90s, right? And if you think about what's it going to take to get there, we've probably got around 1.3 million square feet of available space that we could lease up. If we leased all of it tomorrow and it commenced tomorrow, we'd get back to 100%. That'd be great, but that's not our expectation. I mean, our expectation is to probably lease up about half of that.
Speaker Change: So there's their same store, but then there's really what's going to drive earnings and earnings growth going forward.
I appreciate it. Thank you.
Speaker Change: Your next question comes from the line of Austin Wershmith with KeyBank Capital Markets, please go ahead.
Austin Wershmith: You know, causing that deceleration and were there any sort of one-time benefits in the fourth quarter that we should be aware of?
Speaker Change: Yeah you know obviously looking at it quarter to quarter there's different nuances maybe I'll just look at the full year of.
Speaker Change: We finished at 5.4% last year and we're guiding to 3.5% this year. Obviously, there's a little bit of cushion as you set guidance at the beginning of the year and you hope to exceed it.
Speaker Change: as the year progresses. But remember, last year we did get pretty significant benefits from internalization and then also on CCRCs.
Speaker Change: you know, we finished the year north of 20%. So right now we're guiding 4 to 8% within C. C. R. C. S. I'd love to do better than that, right? But I think we're gonna come out the gates at that 4 to 8% what we came out of the gates with last year and
Speaker Change: significantly exceeded it. And then when you back out the internalization, you know, benefit we got through the course of last year with a decent amount of that lab.
Speaker Change: You know, we're guiding 3-4% in lab this year and 2.5-3.5% in outpatient medical, which is pretty consistent growth with what we achieved when you back out some of those one-time benefits that we mentioned and then the CCRCs.
Understood. And then just sticking a little bit with lab.
Speaker Change: You know, TI's and LC's were up relative to prior quarters. Can you just talk about how you're kind of expecting, you know, that to trend to achieve that 5 to 10% mark to market that you highlighted is assumed in guidance? Thanks.
Speaker Change: Yeah, sure. It's Scott Bowen. I think that's five to ten percent.
Speaker Change: So how we view the portfolio, you know, this quarter was a little bit higher at 30%, but it's going to jump around from quarter to quarter.
I think over the course of the year we
Speaker Change: were at 3% in the first quarter, up all the way to 30% this quarter. There was one lease in San Diego that drove it a little bit higher, but even if you strip out that lease, we were in the mid-teens in the mark-to-market, so right in line with where we expected to be this year as well as in 2025.
Speaker Change: Oh, and the TIs. There was one lease in San Francisco on a renewal that
Speaker Change: that drove that a little bit higher, and that was a tenant that's...
Speaker Change: have been in the portfolio in this space for 10 years. They're a $3 billion market cap company.
as their global headquarter building.
Speaker Change: They had a shift in their business, their existing space was heavily skewed towards office, a pretty light lab, and in this renewal they needed significantly more lab in that space. And so we were able to put that in for them, do a long-term renewal both in San Francisco and San Diego with that tenant, you know, so that's capital that
Speaker Change: We would spend if you know if they were to vacate and go somewhere else We'd be spending that capital get to get that space to you know more of a 50-50 office lab anyway So it's great to do with a high quality tenant in tow And we're also to drive a 20 27 percent mark to market on that lease in San Francisco as well
And very helpful. Thanks for the time.
Thanks, Austin.
Speaker Change: Your next question comes from Michael Griffin with Citigroup. Please go ahead.
Speaker Change: Yeah, I would say there's certainly some larger requirements out in the market in each of the three core markets. Those deals tend to take a lot longer to actually execute. But we have seen, as I mentioned in the last quarter, that kind of barbell of demand that we spoke about for the past, you know,
four or five quarters.
Speaker Change: start to fill in significantly if you look at our leasing for the
Speaker Change: Fourth quarter, our average lease was in the low 40,000 square feet, versus in the low 30s for the first three quarters of the year. So we're starting to see those.
you know, the two large leases we did last quarter.
Speaker Change: Not, not much. You know, I think if you look at the, you know, there's, there's a start of a lot today with the office user looking at assemblies in the seaport in Boston, but typically our pipeline is more full with lab users versus office.
Thank you very much.
Speaker Change: Your next question comes from the line of Richard Anderson with Redbush. Please go ahead. Hey, thanks. Good morning. So, I want to ask a question about the guidance range 181 to 187. You know, how much of the 181
Speaker Change: You know associated with you know sort of existing leverage ratios, and how much is the 187 associated with?
Speaker Change: You know higher leverage ratios on the view that you're talking about going more on offense with your balance sheet I'm just wondering what you're
Speaker Change: sort of giving up at the higher end of that guidance when you think about, you know, specifically the balance sheet and And and whatever else might go into that, you know, the difference between the two ends of those of the guidance range. Thanks
Thanks. Yeah.
Rich: So Rich, it's a really good question. I would say, you know, the midpoint of our guidance. Yeah, yeah, no, I appreciate it. By the way, I thought your note was great that you put out short and sweet, but
Rich: You know, if you look at the midpoint of our guidance...
Rich: the 500 million of capital to work. Now, some of it is dependent upon the yield that you get right with regards to how you think about net debt. But that would not get us back to, you know, 5.5 times from we're at 5.2 right now. So it's probably somewhere in between. I think if we got
Rich: Any, you know investments done and I'm not saying investments is driving all of that I'm just you know Kind of giving you some directional thoughts on it because there's other things that would drive whether you hit the high or the low but You know leverage at the high end would be kind of getting back to you know that mid 5.5 times. Okay, perfect
Rich: and then second question on the commentary around CCRCs and you know you've received some inbound interest but it didn't you know didn't pan wondering
Are we getting any closer to a BID-ASK?
Rich: spread that's, you know, at least in the conversation or is it still way off in terms of the offers you're getting? I'm wondering if there, you know, you mentioned about the low refundable component of your entrance fees. I'm wondering if we're getting, if you feel a trend approaching that you may actually someday...
see if they all make sense.
Rich: based on some of the offers that you've heard of in the past? That's the basic question. Thanks.
Rich: Hey Rich, it's performing really well and our expectation is that we're going to hold it for the foreseeable future.
Speaker Change: But you can't comment about how the quality of the offers have been coming in, if they've been...
sort of associating it with a higher, higher, you know.
value of the business, it's sort of staying the same.
Yeah there's been no conversations recently, Rich. Okay, fair enough.
Thank you.
Speaker Change: Your next question comes from the line of Michael Cairo with RBC Capital Markets. Please go ahead.
Michael Cairo: Yeah, thanks. I wanted to touch on your structured life science investments that you've been pursuing. And I know with life science, the sponsor is pretty important to prospective tenants. So how active, I guess, does DOC plan on being managing these properties where you make loans on? Will the new prospective tenant view DOC as an owner and kind of give that building credit for the scale that DOC has to lease out that property?
Michael Cairo: Mike, each one is a little unique. The loan we announced in Torrey Pines were completely passive.
Michael Cairo: So, I don't know that our involvement brings any credibility or anything else to the table or tenants. It obviously brings capital, 60%, but the owner is the one.
at risk. Their name is on the building.
Michael Cairo: But our basis is less than $800 a foot in Torrey Pines when rents are, I don't know, $75, $80. So we feel like our...
Michael Cairo: Our downside is pretty attractive, but our expectation is that over time the building gets leased up and we have a chance to buy it at a point in the cycle where a cost of capital is a lot more attractive. In the interim, it's highly accretive, even for that really low-risk investment.
Michael Cairo: But like I said, a number of the things we're looking at are a little bit higher on the loan-to-cost or loan-to-value scale and therefore a much higher return.
Speaker Change: Okay, great Scott. And then can you give us some details on that purchase option that you guys keep on referring to? Is it, I guess, when does it become exercisable and is there a set price or cap rate that you could acquire it at?
Speaker Change: and would want to own the asset. So that's been a fundamental part of all these discussions is that we'd have purchase options. In some cases they're market, in some cases they're promotes or warrants. They're all different, Mike, depending on the circumstances.
Okay, great. Thank you.
Yeah.
Speaker Change: Your next question comes from the line of Mike Muller with J.B. Morgan. Please go ahead.
Speaker Change: Yeah, hi, I guess first, I apologize if I missed this, but what sort of development starts are you expecting for this year out of outpatient medical?
Speaker Change: Yeah, hey Mike, we have a significant pipeline. I mean, we could easily start two to three hundred million dollars of projects this year, all highly pre-leased core markets.
Speaker Change: strong health systems. So this is a really attractive way to grow our business, brand new assets, long-term leases.
Speaker Change: We view it as highly strategic and accretive, so we are prioritizing having capital available to do these investments. We announced one here in the first quarter, or in the fourth quarter, I apologize, with McKesson and Dallas, and I would expect to have more to announce.
Speaker Change: as the year progresses. Could easily be five, six, seven projects this year that we would break ground on.
Speaker Change: Got it. Okay. And then I guess for an investment follow-up here, what sort of guidelines or how are you thinking about what the mix of incremental debt investments could be or should be relative to just kind of outright acquisitions?
Speaker Change: Yeah, we're looking at both. I think there will be some acquisitions.
Speaker Change: this year. In life science, it probably skews more towards loans with an option to purchase just given
Speaker Change: I'm not sure that sellers have completely capitulated on price and when we look at the
Speaker Change: Timeline and risk to stabilize some of these developments and the returns that would come with it at the required price In many cases the loans look awfully compelling just from a risk adjusted standpoint
Okay, thank you.
Yeah.
Speaker Change: Your next question comes from the line of Jim Cammert with Evercore. Please go ahead.
Jim Cammert: Thank you. Good morning. Could you just share maybe a little of the rationale regarding a little less granular information on the AFFO guide? Because I think sometimes, you know, the straight line and TI and CAPEX components of that are kind of helpful. So if you could provide any context of why that may have shifted.
Jim Cammert: Yeah, hey Jim, it's Pete and I'm glad you brought it up. You know, one, we think it's a simpler story now than it was a few years ago at HealthPeak.
Jim Cammert: And we feel like we put out a pretty clean guide, so perhaps there's a little less information on.
Jim Cammert: our guidance page within the SOP but we do include the
components in a footnote.
Jim Cammert: on the sources and uses table. It's one number as opposed to a range. I mean, frankly, I just think that's simpler to look at versus arrange. But to your FFO questions specifically,
Jim Cammert: You know, look, we did include it in guidance last year, and the rationale for that was we had so many gap merger adjustments that...
Jim Cammert: You lost track of the synergies within FFO, but you could see it within FFO. So we did include it, you know, last year. We did decide not to include it this year as we weren't outlier. And I think if you do a little bit of.
Jim Cammert: research around other reach, you'd see that we were a significant outlier from that perspective. We did also modify, you know, the definition. We're including cash and refs as well, but just to demystify the whole thing, you know, under the new definition,
Jim Cammert: And under the old definition, a FFO would be called $1.60 within 2025. You know, a FFO growth does differ from FFO growth. Scott mentioned some of the numbers in his prepared remarks, you know, you got lumpier items like recurring capex free rent.
Jim Cammert: Now we've got cash and refs which we think will be strong But we are forecasting it to decelerate a little bit just because it was so strong
Jim Cammert: you know, last year. Um, so I just wanted to give you some of the rationale why we did not include it. But like I said, I was happy to give all the numbers and I just gave them eso. Hopefully that that helps demystify it a little bit.
Jim Cammert: That's great. Thank you. And then just maybe housekeeping, obviously you had the Milton-related charges for the fourth quarter. Is it safe to assume that your insurance policies and whatnot, you'll feel pretty good that you won't be out of pocket, you'll get that $25 million in change back or recover in some fashion?
Jim Cammert: Yeah I mean unfortunately that's actually the portion that we are going to have to incur the cost on.
Jim Cammert: You know, the insurance market's tough, right? If you ask any other REIT management team out there, they'll tell you it's pretty darn tough.
Jim Cammert: States like Florida and California. It's even tougher. Um, you've got pretty high deductibles for these name windstorms. So that that's a cost. We will eat now. We did go above the deductible and
Speaker Change: Well, I appreciate the clarification. I missed that, but then that would be part of your, you know, embedded in the whole 600 million of development, redevelopment, and CapEx spend. You've kind of got that for the year. Yes. Okay. Yes, it would be within that as well. Appreciate your time. Thanks.
yeah
Speaker Change: Your next question comes from the line of Vekra Malhotra with Mizuho. Please go ahead.
Speaker Change: Thanks for the questions. Maybe just first one, if you can just expand, give us a little bit more color about how you're thinking about these.
Speaker Change: structured investments, either whether they're preferred or more debt. But given sort of where the stock is trading close to a 7.5-8 cap versus this deal, can you just give us more flavor on the range or the type of deals and cap rates and then just stepping back on that.
Speaker Change: the funnel, like how big is this opportunity if we look in terms of what you're initially looking at to then whittling down to your 500 million?
Speaker Change: Yeah, Vikram, in all cases, we want to make investments where the asset is attractive to us from an ownership standpoint long term.
Speaker Change: A lot of what's been built would not make it into our pipeline, so it has to be in a core sub-market. But the opportunity set is significant. I mean, Pete set up to a billion dollars. This year, a fair amount of that could be.
Speaker Change: in my science. So the stock obviously has bounced around. It's been a volatile environment for everybody over the past three months. I mean, the stock is at $22.23 and then it's at
Speaker Change: if it reaches a certain price, and we would not hesitate to do that. We have authorization from the board if the volatility works against us. But obviously, we're working hard to continue to grow earnings and build a compelling pipeline that we think is strategic and accretive.
Speaker Change: Okay, and then just on that topic of just earnings, I think...
Speaker Change: There's perhaps, you know, I guess questions or confusion around like the earnings power of DOC here. And I'm not asking for 26 guidance, but just based on what you know, what's leased up, the deals you have in the pipeline that are very sure, like, how should we think about the cash flow AFFA growth trajectory?
Speaker Change: Is it like over time, over the next 2-3 years, is it a low single-digit AFFO, is it a mid-single? How do we think about what all you're doing today to benefit 26 and 27?
I mean, the last three years have been...
Speaker Change: pretty challenging for us given interest rates and life science fundamentals, and we grew FFO 12% and AFFO 19%. So when the...
Speaker Change: Macro works in our favor. I would expect the growth rate to be even even stronger And we've continued to grow earnings this year, and I think a pretty good track record is
Speaker Change: not just meeting but exceeding initial expectations. So that is our expectation. The investments obviously are just additional return on top of the same store growth and we talked about leasing up the development redevelopment portfolio.
Speaker Change: is probably the most significant source of internal growth that we have outside of SameStore.
Speaker Change: Okay, so our next question comes from the line of Michael Stroyak with Green Street. Michael, please go ahead.
Michael Stroyak: Thanks and good morning. Could you maybe just provide some additional color on the sizeable lease that saw that 45% mark-to-market? Was that in line with the company's expectations when setting guidance earlier in the year? And if not, what's changed in recent months that allowed for such a healthy mark-to-market?
Michael Stroyak: Yeah, I, you know, to answer it directly, yes, it was in line with it, if you actually heard me.
Michael Stroyak: Last quarter, I said we're expecting the fourth quarter to be our strongest run mark to market quarter and we have a pretty good line of sight that
Michael Stroyak: this renewal was going to get done. Uh, that said, you know, for the full year, we were a little bit above, you know, 10%. And we've been trying to say, be careful not to draw too many conclusions over a quarterly number. You know, I think the full year numbers are
Michael Stroyak: a better way to look at what we think the true mark-to-market is because it can ebb and flow depending upon the size of the lease. But nevertheless, we're happy we got, you know, that big mark-to-market. And as Scott said, we also got a pretty big one.
Michael Stroyak: in South San Francisco as well with a really high quality tenant. Yes, it came with more TIs, but as Scott said, we'd have to spend those TIs if the tenant vacated and it's great, we got a renewal out of it. So no downtime.
Michael Stroyak: Got it. That's helpful. And then one other. It looks like seven properties rolled out of the operating portfolio into the redef bucket this past quarter. Can you just help frame the expected year-over-year earnings dilution in 2025 from redevelopment activity?
Yeah.
Michael Stroyak: I mean, look, redevelopment and development spend certainly is a little bit of a drag on our earnings this year. I think the two biggest drags we have, if you're looking at what's working in our favor versus what is a headwind, one is interest expense, right? And the second is.
Michael Stroyak: the development and redevelopment drive, but we did foreshadow that redevelopments were going to go up this year as we put out some disclosures in our investor deck.
Michael Stroyak: You know, late last year, you know, we've had a lot of success on redevelopment and
Michael Stroyak: I would just point out as well that it's not like all these redevelopments are 0% leased. Some of them are 100% pre-leased at this point in time. And we did add the percent pre-leased within those redevs.
Michael Stroyak: which is new disclosure this quarter. I know there's a lot of focus on not including AFFL. We did also add some disclosures as well to sort of counterbalance that and we'll continue to update that as as we get leases across the goal line.
Michael Stroyak: I just want to point out that we've had great success leasing up the redevelopments, whether to Portside or Point Grand or in our outpatient business where we've been doing redevelopments for 10 years. I mean, the financial returns over time have been very compelling. Expect the same out of these.
All right. Thank you.
Speaker Change: Your next question comes from the line of Omotayo Kozanya with Doja Bank. Please go ahead.
Speaker Change: Yes, good morning everyone. In the 2025 guidance, are there any additional merger-related synergies beyond the $50 million that's in that number or not?
Speaker Change: Yeah, there are some, you know, Scott mentioned it before, there's some additional.
internalizations we expect to get done.
Speaker Change: through the course of this year. They're not all going to get done the beginning of the year, which is why the run rate at the end of the year is more like 60 to 65 million versus we finished last year at a run rate of around 50. I wouldn't expect to pick up all of that in earnings this year, but there certainly is a little bit of a benefit.
Speaker Change: within our guidance this year may be up to a penny benefit for additional, you know, merger synergies. But I'd expect as we get to the end of this year that we will have achieved, you know, all the direct merger synergies. Obviously there's more indirect merger synergies that we could benefit from, but we've never really, like, focused on. That could be increased front mark to market, you know, increased retention, all the things you would hope to achieve as you're out leasing.
Speaker Change: And then also as we think about 2025, I think in January you guys talked about the loan repayment that was happening. Anything else, like any more loan repayments as we kind of think about the rest of the year that may be a drag on earnings?
Speaker Change: If you're just kind of given some of the high interest rates on some of those loans.
You know, the biggest
Speaker Change: Loan we have outstanding right now. Obviously that bucket could increase with some of the the pipeline.
Speaker Change: of activity that we're looking at, but is the seller financing we did on the large outpatient medical deal. I don't expect that to get repaid. You know, this year, at some point we hope to get repaid. These were legacy senior housing loans that we put in place when we did seller financing years ago when we
Speaker Change: sold out of most of our, you know, shop assets. You know, there were some tougher assets within that collateral, so...
Speaker Change: I would say, even though there was some dilution associated with getting repaid those loans, I can tell you we were all high-fiving each other when we finally got that loan repaid. Yes, it came with dilution, but there were certainly some questions through the years as to whether we get repaid at par, so we're quite happy we got that loan repaid at par.
I wouldn't expect really any others of significance this year.
Thank you.
Speaker Change: Your next question comes from the line of John Kilikowski with Wells Fargo. John, please go ahead.
Good morning. Thank you
John Kilikowski: Maybe if we could start high level. This administration has made a lot of moves in the first few weeks, so it'd be helpful if you could remind us of what kind of exposure you have to NIH funding, given there was just a temporary hold put on the funding block. And then maybe beyond that, touch on how you're preparing for a potential RFK confirmation today and what he means for your business.
Yeah, sounds good. I mean, NIH funding is up.
decade, funding in 2024 was around $50 billion.
John Kilikowski: which underscores the importance of the sector to the U.S., whether it's health, national security, etc. So I wouldn't expect a significant change. Obviously, there's day-to-day headlines, but this administration has made it clear they want to focus on innovation. You haven't heard that word out of D.C. much in the last four years, so that's a positive.
for our business and they want to focus on deregulation.
John Kilikowski: There aren't too many sectors more regulated than health care and biotech.
So any changes there would certainly be a positive.
shorten that timeline would be a massive win.
John Kilikowski: for the sector. So those are all positives in terms of the potential impact.
John Kilikowski: of RFK. I think we're more focused on, you know, who's in charge of CMS, NIH, CDC, FTC, FDA. I mean, the list goes on and on. And a lot of the appointments for those positions are more traditional candidates that I think are quite favorable.
Speaker Change: to the business. So there's plenty of headline risk around RFK Jr. Hopefully that, we think it ends up being an upside opportunity for us because I think the reality is that this administration will be positive for our business.
Speaker Change: Got it. And then maybe if we could kind of jump back to your guidance on lab, it sounds like you've seen some stability in street rates here. I'm just curious at what availability rates do you expect to start getting pricing power back, even if you kind of adjust for maybe some of that non-competitive supply?
Speaker Change: Yeah and maybe I'll take a quick stab at it and Scott Funk can jump in as well but but I think with our portfolio
Speaker Change: you know, being in the mid to high 80 percent, you know, occupied or leased, I should say, at this point in time, not necessarily occupied because some of these leases haven't commenced.
Speaker Change: We feel like we're starting to gain some more pricing power within the market. Remember, a lot of our deals are done with existing tenants as well, tenants that typically have existing lease term, which gives us some additional pricing power as well.
Speaker Change: We've laid out all the competitive advantages that we see in our portfolio and with our platform versus peers out there. Some of the peers compete a lot more with us, and some just don't compete and will never compete with us. But we feel like we've got...
opportunity.
Scott Bones: to start, you know, maybe pushing rates a little bit more within our portfolio. But, obviously, we recognize that there's, you know, a lot of availability out there. I don't know, Scott, if you want to add anything to that. Yeah, I think the availability and the new supplies out there is the same new supply we've competed against for the past...
Scott Bones: 18 to 24 months and we competed very well. I think we've been able to drive economic space.
Scott Bones: What Pete said is our portfolio scale and you know a lot of our leasing comes from within our own campuses you know 83% of our ABR comes from campuses that are 400,000 square feet or greater right so we're oftentimes
Scott Bones: Rowing those tenants within those campuses which gives us the ability to to push economics Higher than it would be in an otherwise, you know, probably market a deal
Speaker Change: I have one follow-up on your NIH question. We do not lease any space directly to the NIH. A lot of that funding goes to university-based research, which is not really
Speaker Change: not really our portfolio. They tend to be early stage basic science that hopefully is successful and gets commercialized five, ten years down the line, and those tend to be the tenants that we target and that enter our portfolio.
Mason Guell: Alright, our next question comes from the line of Mason Guell with Baird. Please go ahead.
Mason Guell: Thanks and good morning everyone. Have you seen any difference in mission demand pre and post-election and which markets are standing out either positively or negatively?
Scott: Yeah, this is Scott. I wouldn't say there's a difference pre and post election. I think that the, you know, overall sentiment will improve. A lot of people were kind of kicking the can a little bit to see how the election turned out, you know, and I think now that you've got that, you've got the appointments taking place.
Scott: is just going to continue to allow people kind of light a sight into where we're going here. Your second question was?
Scott: I would say by market, you know, Boston, in my view, is probably the slowest today. And, you know, thankfully, we don't have a lot of.
Scott: virtually no rollover there in the next 18 to 24 months and very little vacant space. San Diego has been pretty consistent. We've done some nice leasing down there, bringing our gateway development up to 44 percent, had some large renewals.
Scott: More renewals in the pipeline down there as well as some new deals we're working on so feel good about the activity in San Diego
Scott: In San Francisco, again, you know, our portfolio scale allows us to do a lot of deals there that never hit the broader market or the broker sheets, so we're very happy with the demand and our pipeline in South San Francisco as well.
Speaker Change: Great. And then on the lab demand, how much of this is being driven by the new tenant versus the expansion of existing tenants?
Speaker Change: Yeah, so I mean, it's a mix, right? If you look at the leasing we did over the course of the year, about 1.1 million square feet of that was with tenants who were expanding, you know, and of that...
Speaker Change: 1.1 million square feet about 400,000 square feet of it was expansion space you know so when you're looking at tenants expanding in the portfolio you know the average for the year right was 60% growth of those tenants.
Great, thank you.
Ronald Comden: And our final question comes from Ronald Comden with Morgan Stanley. Please go ahead.
Ronald Comden: Hey a couple quick ones just looking at sort of the development I see some of the initial occupancy dates have been pushed back a little bit and and also that place on the redevelopment projects doesn't look like the CapEx or the leasing is included for unleased space maybe can you just
Ronald Comden: Talk a little bit more about that just just on the development and the redevelopment front Sort of what what's happening on the ground and and and thoughts on sort of cat backs on the unleashed space Not being included. Thanks
Ronald Comden: Yeah, I'll take the CapEx one, the timing, maybe just quickly too. You know, it's really TI related as we price out the TI packages and start to understand the various, you know, timelines and that's associated.
Ronald Comden: Large lease that we did at Portside is one of the ones that you are you know referencing and it got pushed back just a Little bit, but it's you know 100% you know pre leased at this point in time and it's just a matter of how quickly we think we can actually get the
you know, capital spend. I will say with
Ronald Comden: That tenant they have an existing lease in place that will you know offset any of that, you know pushback they're going to continue to pay us rent on the existing space that they have so
Ronald Comden: That lease expiration would get pushed out as well. So there's a little bit of a buffer on that, you know, I think on the the TI
side.
Ronald Comden: You know, not all the projects are the same, so I'd say on the extreme case from a TI perspective...
Ronald Comden: You could be $300 to $350 a foot, right, but in other cases, it could be significantly less and, you know, call it $100 to $200 a foot. You know, and it's hard to know until you dig in and understand what each individual, you know, lease is or the tenant is seeking.
Ronald Comden: So that's why we don't include the TIs necessarily up front, but I've given you the range of what we think it would be. But in addition, and most importantly,
Any T.I. we give.
Ronald Comden: We're expecting to get a return on top of that as well. And as we've talked about, you know, the 9 to 12% cash on cash returns.
Ronald Comden: You know, we feel like we've done quite well relative to that. In fact, we think we could do, you know, closer to the high end on some of these, just given the fact that, you know, we haven't invested capital in a while, but we feel like we can get a nice rate on that product.
Ronald Comden: and the pushback on the on the one of the development deals that's really just related to a delay in the tenants on the TI side you know we're not we're completing the core and shell on time and we'll collect cash rents based on based on that when the rent starts so it's more of a timing from an FFO gap perspective there
great
Ronald Comden: and then just my last one was just coming back to sort of...
and Pat McEwins.
Ronald Comden: For you guys to be opportunistic. I just I can't tell if you're just more bullish on lab or it's just this is just more opportunistic Things are coming in here in your purview
Speaker Change: Well, we signed more than 2 million square feet of leasing in life science in 2024. It's one of the best years we've ever had. It was a mix of new...
Speaker Change: and Renewal. So clearly we're capturing market share but we're also seeing significant distress and we're picking and choosing which projects are most compelling and there's a lot that will not
Speaker Change: fit our criteria, but we feel like the loans that we're making...
Speaker Change: are compelling in that we have very little downside risk given the seniority in the loan-to-cost versus replacement cost, etc.
in compelling returns on day one.
with the right to buy in the future.
Speaker Change: We do think fundamentals will start to get better. I said in the prepared remarks that new deliveries in 2025 are going to be down 75%.
Speaker Change: there's essentially no new starts. So we do see the supply picture improving dramatically this year as we look into 26 and 27 as well and we think demand will improve alongside of that.
Great. Thanks so much.
Jamie Foldman: And we have another question from Jamie Foldman with Wells Fargo. Please go ahead.
Jamie Foldman: Great, thanks for taking the follow-up from our team. So I just, you know, think in big picture, markets seem to be stabilizing. The debt market seems to be in a much better place than it's been. Blackstone's, you know, poking around in office.
Jamie Foldman: You know, what's your and and well tower has just started their fun business So, you know, what's your appetite or as you guys think about it amongst yourselves? What's your appetite to do something much bigger? Maybe with third-party capital, you know given where we are in the cycle and you know What could be coming the next you know, five ten years in your businesses?
Yeah, we have a couple of important.
Speaker Change: limited partners in the portfolio today that are big institutions that have appetite to do more so that's certainly on the table there's pluses and minuses.
Speaker Change: to joint ventures and LPs. Obviously, it can be a compelling additional source of capital for the right opportunities.
Speaker Change: but it also comes with loss of complete control and flexibility, so you just have to weigh that trade-off. But we've used it historically with success for the right circumstances and have those conversations all the time, Jamie. Most of what we're looking at today is more on balance sheet.
Okay, thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks.
Speaker Change: Okay, well thanks for your time today and congrats to our team on another strong quarter driving earnings growth. Take care.
The conference is now concluded. Thank you for attending today.