Q2 2025 Healthpeak Properties Inc Earnings Call
Good morning, and welcome to the health Peak Properties Inc. Second quarter 2025 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.
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Speaker Change: I would now like to turn the conference over to Andrew John's senior vice president of investor relations. Please go ahead.
Speaker Change: Today's conference call will contain certain for statements. Although we believe that expectations are collected in any forward-looking statements are based on reasonable assumptions. These payments are subject to Richmond. Certainties that may cause actual results early from our expectations,
Speaker Change: Discuss your risk and risk factors is included in our press release and detail on our filings with the SEC. We do not undertake a duty to update any more looking statements. Certain nogap, Financial measures we discussed in this call and your exhibit to the AK reverse the SEC. Yesterday we have reconciled all non-gaap Financial measures to the most directly comparable gaap measures in accordance with regard to your requirements. The exhibit is also available on our website at healthbeat cam.
I'm out in the call over to our President Chief Executive Officer God here. All right, thanks Andrew and welcome to health piece. Second quarter 2025 earnings call.
God here: Our CFO Kelvin Moses is here with me for a prepared remarks and our senior team is available for Q&A.
I want to start by thanking our entire team for another quarter of excellence. In execution, 1 of our Weare core values, in addition to their normal responsibilities and strong financial results. Our team completed an Enterprise Wide Technology upgrade after more than a year of planning and testing, the new platform will improve the integration and availability of data increased productivity and provide a foundation for Rapid deployment of additional AI capabilities.
God here: All right, let me touch on the political and Regulatory environment. The reconciliation Bill signed in early July, should be a first step in reducing the uncertainty that has impacted our sector. As is often the case. The reality was far better than the attention-grabbing headlines earlier this year.
God here: We were pleased to see the changes made to drug pricing for rare diseases and favorable tax treatment for research and Manufacturing.
God here: Both changes help, promote biofarma investment here in the US.
God here: In our outpatient business, the impact of the Medicaid Cuts should be pretty immaterial, given our locations and our tenants payer mix.
God here: More important is a recent proposed rule from CMS to the so-called inpatient only list.
God here: Current policy require surgical procedures to be performed in a hospital and less explicitly approved by CMS for an outpatient setting.
God here: In other words, the default option is the hospital.
God here: The proposed rule would reverse that and the default option would be to allow the outpatient setting.
God here: This would be very positive for our business.
God here: Our decision to internalize Property Management continues to be a strategic and financial success. Next month, will internalize 2 million square feet in Boston and 1 million square feet in Texas.
1 of my strategic goals has been to bring us closer to our real estate. And I love the fact that our own employees are now interacting with our tenants on a daily basis.
God here: We've been able to remove layers of oversight bureaucracy, generate profit and augment relationships with our tenants.
Last week we received our most recent tenant satisfaction scores which showed year-over-year Improvement and are well above industry averages.
God here: Spreads.
I'd like to give some color on second quarter results in each of our business segments, starting with outpatient Medical
God here: Same store growth retention and releasing spreads. We're all near record levels.
God here: The Aging population and consumer preference for convenient lower cost settings is driving demand for our buildings.
God here: Meanwhile new supplies at the lowest levels we've seen in 2 decades. That Dynamic is favorable for health Peak with the largest footprint in the sector and Industry leading tenant relationships.
God here: By Design, we have a significant concentration in markets like Dallas, Houston, Nashville, Atlanta, Phoenix, and Denver.
God here: We'll continue to grow in these core markets. Deepening. Our competitive advantage in geographies with the highest potential for internal and external growth.
God here: to that point, we recently closed at 2, large outpatient, development projects in Atlanta representing 150 million dollars of projected spend
God here: The Atlanta is 1 of our biggest and most important outpatient, markets supported by our relationship with Northside Hospital a fast growing and highly successful Regional Health System.
God here: In new developments are anchored by North Side, outpatient services and Physicians. And our 78% pre-leased before commencement of construction with a strong leasing pipeline behind that
God here: We expect to achieve a mid 7s return on cost. Generating significant shareholder value, relative to acquisition cap rates on such high quality assets,
God here: In our lab R&D business, we're beginning to see at least a few leading indicators turn positive.
God here: Spec new Supply is quickly going to zero and should remain there for quite some time.
God here: A recent broker report showed more than 4 million square feet of inventory being removed from the supply pipeline at certain landlords, who lack scale and expertise pursuing alternative use.
God here: On the regulatory front, new leadership that the FDA are making changes to promote Innovation and modernization.
God here: That amount of change creates a bumpy transition, but the landing point should be positive for the biofarma sector, in particular, the cost and time to bring a drug to Market in the us to come down, improving the return on cost or R&D taking place in our lab buildings.
God here: We've also seen a couple of 10 Billion Dollar m&a Deals recently, which allows Capital to be recycled back into the ecosystem.
God here: Those m&a exits, along with political and Regulatory stability should help jumpstart public and private Capital raising, which is the key to an improvement in new Leasing.
God here: Moving to our CCRC business, which experienced record, leasing volumes last quarter.
God here: our strategic decision to increase affordability with our unique entry fee structure broadened, our demand pool, and differentiated our product,
The CCRC portfolio is residential housing, for independent seniors, with significant amenities and a Continuum of Care available on site.
God here: Our net entry fee is just 60% of the local median. Home value, representing a strong value proposition for our residents,
God here: The portfolio is now generating approximately $200 million of annual noi, including cash entry fees.
God here: Which incredibly is 50% higher than in 2019 before the pandemic?
God here: Our decision to bring in LCS as the operator has been an important part of that spike in performance.
And with current occupancy at 86%.
God here: We have more upside to capture.
Calvin: Okay, let me turn it up to Calvin for financial results and the balance sheet.
Calvin: Thank you, Scott.
I'll begin with a brief update on how we're positioning. The operating platform to lead in this next phase of execution for health piece.
Today, we are very different company than we were 3 years ago with more than 60% of our team. Now, directly engage with our tenants and focus on delivering a differentiated customer experience across our properties.
Calvin: Our entire company is committed to enhancing our client service model, laying a strong foundation for sustained. Long-term, value creation through. Operational excellence.
Calvin: With the internalization of property management. Largely complete, we've shifted, Focus to scaling our real estate operations capabilities.
Calvin: We are implementing a strategic plan that enhances operating procedures refines lease documents, strengthens training and support programs and elevates brand service standards to deliver best-in-class experience for our clients.
Calvin: This commitment to operational, excellence will further set healthy apart from competitors and positions, the platform to capture investment and leasing opportunities not available to the broader Market.
Calvin: We're also well underway in advancing. A near-term action plan to deploy. Artificial intelligence tools, designed to optimize daily operations and enhance visibility into asset performance.
Calvin: We look forward to sharing relevant updates on progress, on future calls.
Calvin: Now, moving into our second quarter results.
We had another overall strong quarter of Financial and operating results.
Calvin: We reported ffos adjusted of 46 cents per share. ASO of 44 cents per share in total portfolio. Same store growth of 3 and a half percent
Calvin: In our CCRC business, we reported same store. Growth of 8.6% driven by rate growth of 5% in higher entrance, free sales,
Calvin: We continue to be pleased with the execution by our operating Partners, the strength of our team and the performance of our high quality portfolio of assets.
Calvin: Moving to outpatient Medical.
Calvin: Our results. This quarter reflect the focus that our leadership team has placed on positioning our portfolio for Success cultivating. The strongest tenant relationships in the sector and capitalizing on the continued strength and fundamentals, we are seeing across the business.
Calvin: This quarter we achieved 85% tenant retention delivered a positive rent Mark to Market at 6% and reported same store cash on noi growth of 3.9%.
Calvin: During the quarter, we executed over a million square feet of leases, including approximately 200,000 square feet of new leasing that represents 2 million square feet of execution. Through the first half of 2025, and a strong pipeline to follow.
Calvin: Additionally, we executed another 419,000 square feet of leases in July and we have 682,000 square feet under Loi.
Calvin: and finally, last
Calvin: We continue to focus on capturing outside, share of the available demand in the market.
Calvin: When converting our pipeline into executed leases for the second quarter. We reported same store growth of 1.5%, a positive rent Mark to Market of 6% and tenant retention of 87%.
The executed 503,000 square feet of leases in the quarter which included approximately 85% renewal Leasing and brings our total lease execution for the first half of 2025 to approximately 780,000 square feet.
Calvin: Additionally we executed another 55,000 square feet of leases in July and we are under Loi for another 250,000 square feet.
Calvin: Total occupancy declined by 150 basis points. This quarter primarily due to Natural lease expirations, and tenants, departures falling unsuccessful Capital raises earlier in the year.
Calvin: On to the balance sheet.
Calvin: in June, we repeat 450 million of senior notes with proceeds from our commercial paper program,
Calvin: The end of the second quarter with net debt to adjusted e. It's a 5.2 times and nearly 2.3 billion of liquidity.
Calvin: As we look ahead to the remainder of the year, we will opportunistically monitor their bond market.
To refinance our commercial paper balances and further strengthen the balance sheet.
Calvin: Balance sheet, discipline will continue to be a core long-term strategy, and we expect to preserve optionality to invest where we have identified opportunities that will enhance our portfolio quality and generate attractive returns.
Calvin: Before we move into Q&A, we wanted to briefly touch on guidance.
Calvin: Based on our strong overall performance. In the first half, we are reaffirming our ffo as adjusted in same store cash Andy, expectations.
Calvin: Our CCRC portfolio continues to benefit from strong Market fundamentals and with year-to-date same store growth of 12%. We are now on track to exceed the high end of our segments guidance
Calvin: Our patient medical our largest business segment continues to achieve strong tenant retention and releasing spreads, which were up to 6% in the second quarter.
Calvin: That performance is supported by a robust leasing pipeline that positions. This portfolio to the high end of our initial segment guidance.
Calvin: We remain confident in the execution from our team and the balance of our Diversified portfolio, which we expect to deliver results within our overall. Same store growth range. Despite what we are experiencing broadly in the lab sector.
Calvin: Over the coming months. I look forward to continuing to meet and engage with our equity and fixed income investors. And with that, operator, we can move in the questions.
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Speaker Change: Make your legal, which kosher Bank. Please go ahead.
Speaker Change: You can see the coin in the quarter. Um, I was hoping you could just break it out a little bit more between, you know, the impact from as you said expirations where there weren't renewals, I feel like the retention ratio might have been lower than like, your trailing 12 month number. Um, and then versus, uh, the bad debt or tenant default, uh, issue that, uh, seems like it might have happened in the quarter. Thanks.
Speaker Change: Hey Nick. This is uh Kelvin, um so to to give you a little bit of context there, you know, over the quarter we had about uh, 280 basis points, 290 basis points of same store occupancy to decline. Um, if you think about it from a total occupancy perspective, you know, that breaks down to, um,
Space back in that process. And then the kind of remaining component of that would be uh, attributable to tenants that were unsuccessful raising capital in the beginning of the year that ultimately, um, we had to work out of the portfolio. So it's a probably a third or third or third impact with respect to the occupancy.
Speaker Change: Okay, thanks. And then, um, second question maybe for Scott is, uh, you know, we just think about sort of the focus of the company. I mean you you um you know you didn't launch some new developments and outpatients medical. Um, how are you sort of thinking about using the balance sheet right now? Uh, you know, I know you'd put on pause some of the um you know debt Investments or in in lab you were sort of waiting on some better opportunities. Maybe there from a pricing standpoint. Um you know the stock is sweet today you have stock BuyBacks as as an option as well just uh kind of latest thoughts on um Capital allocation thanks.
Scott: Yeah, hey Nick you cut out a little bit. Hopefully I caught the gist of your question. Uh but maintaining a strong balance sheet is priority number 1 uh on Capital allocation and we we have done that we'll continue
Scott: To do that. Um, sometimes that includes opportunistic, asset sales. We did a lot of that last year, we could always consider that this year.
Scott: I think the uh demand for outpatient Medical in particular remains really strong in the private market. So there's always things that we could do there. It's a very high quality portfolio.
Scott: That would be in demand, uh, BuyBacks obviously we've been active, we've done 300 million in the past called 15 months, um, and we do that opportunistically. Uh, if we have the balance sheet capacity, it's something that, uh, we prioritize at a certain stock price, which which you've seen historically and you'll continue to see as an as an option. The 2 outpatient developments were extremely attractive and that's 1 reason we try to maintain such a strong balance sheet is that so that we have the capacity on our balance sheet, uh, to capitalize on those opportunities. And, and there's more of that in our pipeline. So, those are interesting and life science distress at the right time is going to be an enormous opportunity. Uh, we had built up a pretty big pipeline, uh, late in 2024 after a really solid year of Leasing and it looked like fundamentals, were moving in the right direction, obviously, the regulatory environment, the first 6 months of the year or so, um, changed our Outlook, our near-term Outlook. Uh, but if anything, it just makes that opportunity.
Unity set bigger and ultimately more attractive. So at the right time, that's going to be an enormous opportunity for us. Um, but you know, we'll be patient and thoughtful and disciplined. Uh, in terms of when we, uh, uh, turn our attention to the distress that we're seeing,
Scott: Okay, thanks.
Your next question comes from the line of feral Granite with Bank of America, please go ahead.
feral Granite: Thank you so much. Uh so my first question is about you just mentioned the 1, third of unsuccessful Capital raising. Um, for those tenants just trying to think about going forward for the second half of the year. How much foresight, uh, maybe left over, um, impacts from those that specific bucket? Would you expect to um, maybe weigh on the occupancy?
Speaker Change: Yeah, maybe I'll start with um, a little bit of context from Scott's earlier points. I think, we've for the beginning of the year, we saw a little bit of a Slowdown in the capital markets for life science, but there's been a number of positive events, um, that are encouraging that have happened as of late. The m&a activity has been strong, you've seen some great prints there, um, from Merc and Santa Fe, you've also seen the secondary Market open back up for tenants. So we think it's important to highlight those um, kind of positive signs that we're seeing in the capital recycling. Um, but you know,
Speaker Change: No doubt, it's been a a bit challenging for tenants to raise capital, and, you know, we have some tents in our portfolio. Small number of them that are relying upon, uh, raising Capital at any given time. So you know, those tenants could fail, as a result of failed science. It could fail, as a result of inability to access the capital markets and disproportionately. So the capital markets were largely unavailable for a period of time. So we'll have, um, some headwinds for for the balance of the Year from an occupancy perspective. But to, to quantify that at this point would be, uh, challenging. Hey, hey Phil, let me give 1 additional perspective on this topic because the
Speaker Change: Look at uh the the portion of the portfolio that would be more at risk. You have to monitor its small cap biotech in certain of our private tenants. It's 10% of the portfolio. Um the the look at the top 20 in our supplemental. The vast majority of those are credit tenants whether they're health systems or global biopharmaceutical companies. So it's a very well Diversified portfolio. This smaller biotech companies are clearly part of our business. There's a huge list of success stories there. That start out at 10,000 ft.
Speaker Change: 20,000 ft series a type companies that now have 2 3 4 hundred thousand feet in the portfolio. Uh but they're cyclical. They're very dependent on Capital raising and obviously scientific outcomes is been a tough Capital Market, uh, for the last 6 months. And and that's had an impact. Um, we get the benefit of that when the capital markets are strong. And I think you saw that in 2024, the first 6 months of this year were, were, were the opposite? Um, and and obviously that's flowing through. But keep in mind that Diversified portfolio and we just maintain our earnings guidance. Um, so so I think we just want to keep in mind, the, the broader perspective. This is a point in time that same portfolio base of small and private biotech. Tenants could become very valuable uh, to us once the capital markets turn in our favor and that obviously will inevitably happen. The last 30 days have been a lot more positive. You know, we just reported second quarter results, which is a
Speaker Change: April 1st did June 30th. Uh, the month of July has been a lot more favorable, whether it's the reconciliation Bill, the xbi has treated more favorably, the commentary out of the FDA has been more favorable. A couple of very, very large m&a deals.
Speaker Change: It allows Capital to be recycled into the sector, those are all really positive, uh, leading indicators that doesn't translate in second quarter results, obviously. Um, but we feel a lot better about some of the building blocks that we're seeing in the business today than we did 3 months ago.
Definitely and thank you so much for that extra color. Um but I and then I'll
Portfolio of the mops, uh, similar with how you may be broke out, what, what kind of was going on with the life science? Um, occupancy decline, can you just speak a little bit more on the MLS and maybe some of the tenants that chose to not? Um, or at least the type of tenant that chose to not renew.
Mark Steyn: Hey girl, this is Mark Steyn. Um, our occupancy across the outpatient medical portfolio. You know, 9192 percent is a very strong occupancy. We typically have 80% retention.
Mark Steyn: And, uh, you know, the types of types that don't renew, sometimes it's uh, it's sentence that. I mean, we physically can't accommodate their growth because the, the occupancy of the building, um, you know, there's just some some retirements here or there across the building, but there's not any, you know, 1 particular type of uh, of non-renewal T across the portfolio. Our Hospital retention is fantastic and um we're really focused on our leasing results, keeping strong retention lease renewals spreads and um, and continuously great occupancies. We fill up the 4?
Great, thank you so much.
Austin rmid: The next question comes from the line of Austin rmid with Key Bank Capital markets, please go ahead.
Austin rmid: Great, thanks. Just uh, going back to the lab a little bit and Scott Brinker I guess.
Austin rmid: Trying to sum it all up. I mean, how much of these issues that you saw this quarter, the the the credit issues at hand do you view is is backward-looking and kind of will continue to, you know, work its way through the the credit stream if you will versus, you know, there could continue to be challenges for that. 10% of the portfolio that you flagged, if Capital Market volatility picks up again and, and leasing new space, just isn't really, you know, a top priority versus preserving capital.
Speaker Change: Yeah, the interesting thing about the, the tenants that didn't make it is that they weren't new companies.
Speaker Change: The average age of the companies that had early terminations was 15 years.
Speaker Change: Lower cost basis. So you know when when companies fail it's either the science fails and that does happen. No matter what the capital markets are or they can't raise the money and across the board. What we saw year-to date is that the companies just couldn't raise the money. Um, so you can point directly to the capital, raising the environment and obviously, that could change. Quickly. There's still companies that are monitoring. It's not going to go to zero overnight. Uh, but if the last 30 days, uh, that we've seen the sentiment turning more positive, that, that continues, that would be obviously a hugely important to reducing, uh, the amount of bad debt in the portfolio, but more importantly to turn the
Turn the direction on new leasing um uh, that will happen. It, it's a matter of time but the last 30 days if I'm a lot more uh, favorable and optimistic
Speaker Change: That that makes sense. I guess it's just trying to kind of ring fence the companies that have maybe yet to see a credit issue pop up. But like you said, you're still monitoring how significant of that 10% is that figure and, and kind of the timeline that they have 3, 6 months until they, you know, need to be able to raise capital and then separately, I'm just, you know, focusing on that new leasing within lab, the 503,000 square feet. I think you said 85% was renewal activity, which implies about 75,000 square feet of new leasing. So for the, you know, the bucket of renewals, which, which I think is about 425,000,
Speaker Change: Square feet or so? How how much of that was early renewal activity and and are those, you know, full or partial, you know, lease renewals for the out Years? Thank you.
Speaker Change: Scott Bowen. Um you know on the on the renewals, you know, they're probably like
A little more more heavily weighted to, you know, in place renewals that are happening, you know, near the end of the expiration, we did do some, um, you know, a little bit further out where we had tenants, who were who were looking to grow, um, we were able to expand them within within campuses in the portfolio. Take additional space, um, and extend their existing lease term
Speaker Change: Yeah, probably depends. How you define early. I mean, I think you see in our supplemental, we we get a lot of information on the maturity profile for each business segments by year and, and the 26th 2728 maturity is all
Speaker Change: Came down this quarter in life science because we we addressed the number of those early, which is um, you know, good portfolio management. Obviously, we get better terms.
Speaker Change: On a renewal, um, so it's just, I think good proactive, Asset Management, portfolio Management on those early, renewals. Yeah, those are the renewals tend to come with with very low Capital as well.
How significant was the expansion that you saw and and I guess were there any you know, space givebacks, what's kind of the net impact of that? I'm just trying to understand. You know, does that show up in the new leasing that 75,000 square feet because it you know it is an expansion. Or do you bucket that within the 85%?
Speaker Change: The expansion of space would show up in in the new lead.
Speaker Change: Correct.
Understood, thank you.
Speaker Change: The next question comes from the line of set by with City. Please go ahead.
Thanks so much. Um, Scott you mentioned, a few leading, indicators turning positive to life science 1 of those was Supply coming offline. Did you deem that space, uh, as competitive or was this more space that maybe was being marketed towards life science? That that your leasing team wouldn't have considered competitive for for tenants that you're going after
Speaker Change: Uh, mostly space. That was less competitive. Um, uh, we haven't seen any directly competitive space, go offline. But we, we have seen some directly competitive space start to Market towards alternative uses whether they ultimately go in that direction, we'll see. Uh, but there's a much larger number than 4 million. That could ultimately Go a different direction than lap.
Speaker Change: Thanks. And then just on mobs, you mentioned the strong interest in the private market and you talked about the uh stabilized yields that you're expected. But where are you seeing cap rates? Um, kind of across different. Um,
Quality levels within mobs today.
Speaker Change: Credit tenants in a locations are still in demand and there's a, a buyer for that. Um, and there's a buyer for
Upside opportunities, uh, empty buildings. Um, someone willing to take some risk and pursue a higher return, everything else in between, they're, they're just haven't been nearly, as many trades. It's a lot harder to, uh, specify a cap rate for something like that.
Speaker Change: Thank you.
Speaker Change: The next question comes from the line of once in abria with BMO Capital markets, please go ahead.
Speaker Change: Hi. Uh, good morning. I just hoping you could talk a little bit about the uh the development pipeline. It looks like you lost a couple of previous visit directors Science Park and Park Grand just
Speaker Change: Are looking for a little bit of color there. And and as part of that, if you could talk about how we should think about,
Speaker Change: Uh, capitalized interest, uh, going into next year.
Yeah, on the um, director's Place project. We've been working with a tenant that had been in our portfolio for about 15 plus years. That was in the process of raising capital. And we were planning alongside of that Capital raise to relocate them to, um, directors, which was a lower cost space for them supporting their business. And they ultimately were unsuccessful raising capital for, uh, reasons that we described earlier. So that, um, resulted in the pre-leasing come down for that.
Speaker Change: That project.
Speaker Change: Um and it's my grand. I mean the the tick down there is we deliver 2 assets um, out of Redevelopment there that were 100% lease.
Speaker Change: And any comment on capitalized interest and how that should Trend going forward, just, uh, giving the the moving pieces. I think it's fairly substantial this year.
Speaker Change: Yeah. As a as the projects come online it'll Trend down and some of that's going to be offset by the leasing activity that we've we've had in the portfolio. Um, but it will certainly start to Trend down as some of these projects get started until I'm online. We're in the process of entitling Vantage and um, Cambridge Pointe in Al life and those are obviously large projects that are are in the earliest stages of entitlement and design. So, um, you know, as those commence over time specifically as we get Hinds, um, to start working through the residential component of the Cambridge Pointe development that will help us start to reduce the capitalized interest
And then just 1 other quick question on CCRC. Does it look like the occupancy on the same store? Basis? Dip sequentially. Was there. Anything, uh, to call out there is a bit behind some of the, the broader Nick data. So just curious on um, the driver of that.
Uh, nothing unusual, just typical seasonality. I mean, all the profits from that business come from the independent assisted Memory Care components. But the Continuum of Care that we offer does include a a skilled nursing component. It's a small number of units, um, but it is seasonal and we really don't do Medicaid. It's almost exclusively private pay in Medicare about half and half. And the Medicare business is seasonal and short-term in nature for for the patients in terms of how long they stay. And every second quarter we have a sequential decline. So there's nothing unusual there that business just continues to perform exceptionally well and our independent
Speaker Change: Uh, census was actually up order over a quarter. It was up year-over-year. So the the leasing momentum there is still really strong. Good pricing power, good expense control. So, I wouldn't read anything into the occupancy quarter over a quarter other than typical seasonality and
Speaker Change: Uh, great performance with a lot more upside to capture in that business.
Speaker Change: Perfect, thank you very much.
Speaker Change: Yeah.
Speaker Change: The next question comes from the line of victim mutra with Mizzou. Please go ahead.
A morning. Thanks in the questions. Um, I guess just bigger picture. You know, you mentioned the 10% of uh of of at risk. I'm not sure if that's after the the you know kind of 130 volt he's seen impacted. But I guess the question is like if you if you assume you see another quarter of a similar amount of credit risk, uh, you know what, what do you need to see in the mob side to keep, sort of the overall guide intact for this year?
Speaker Change: Some some downside risk but it also has upside opportunity. We've got uh, a fair amount of space that's ready for occupancy. That could commence fairly quickly if the capital markets turn around and there's some tenants that we're still watching carefully that could go the wrong direction if they don't raise the capital, but the the guidance range we reaffirm does include the 2 book ends for the potential outcomes. We see
Speaker Change: Go to that, that's helpful. Um, just on the the the, you know, 500,000 plus leasing, uh, you know, that on the light science side, I guess like, how much
Speaker Change: How much is new leasing versus sort of renewal and, and early or, or, or future renewals, uh, or early renewals, and do you mind, like, is there a way you can give us some sense of how the pipeline looks?
Speaker Change: Yeah, I'll take this 1. I think in in the prepared remarks, you may have missed that, you know, 85% of that 503,000 square feet of leasing was actually renewal Leasing and it's followed up by a very strong leasing Pipeline. And it's got, you're welcome to give some color on that pipeline. But you know, we have 55,000 square feet of leases that we executed, um, to start the month of July and another 25300 square feet under Loi, and a pipeline of activity to follow that. So we think, you know, given the number of green shoots that we've seen that continues to be promising this guy. Anything that ya know, on the, on the LOI side, I mean, the the
Speaker Change: Probably favors. Um New Deals over renewals um in contrast kind of what we did this quarter.
Speaker Change: Okay, great and sorry, just 1 clarification if you, I don't know if you can give us some, uh, you mentioned the book ends of the guy, you know, I create kind of the, the I have the upside down side just on the on the lower end. Are you able to sort of give us a rough sense of how much more occupancy loss would have to happen to hit that low end?
Speaker Change: In the life science segment.
Speaker Change: Uh,
Speaker Change: Well, let me just say, first on occupancy. We we have started giving a total occupancy number because that's the number that we spend the most time on same store as a kind of an industry requirement in standard. But in our life science portfolio we have a fairly large development Redevelopment portfolio as a percentage and that's uh really what moves the needle.
for earnings, uh,
Speaker Change: We could see some additional deterioration through your end, if you just look at, uh, the disclosure. We've got 500,000 feet left in the year for 2025 expirations and roughly 100 thousand of that is either under Loi or a negotiation. So there's 400,000 that probably comes out. We do have some sign but not yet occupied leases, um, that will get the benefit of through the balance of the year and then the, the the tenants that were monitoring and how many of those make it versus don't? Uh, will depend on, uh,
Speaker Change: Uh, the next, uh, 6 months in the Capital Market environment. So those have been moving pieces, um, but we probably will see a bit more occupancy deterioration through year end big room.
Speaker Change: Okay, thank you.
Speaker Change: Yeah.
Speaker Change: The next question comes from the line of James Feldman with Wells, Fargo, please go ahead.
Speaker Change: Great. Thanks for taking my question. Uh, filling in for John here. So I guess just to start, you know, going back to some of your comments at the outset of the call, you talked about a software upgrade and uh, improving your AI capabilities. Can you talk more about how you think AI can?
Speaker Change: You know what the impact of AI could be on your business, you know, over the years that come, you know, what will change as a result?
Speaker Change: Across your business lines.
Speaker Change: Yeah, I'll I'll start on this 1. Um no surprise that we're all experiencing the evolution of AI real time and it's evolving very quickly every day. Um, what we're seeking to do as a company, is to ensure that we are building our business, alongside of that evolution of AI. And we we think about it in 2 ways 1. How do we create practical efficiencies for the team and empower? The team through, uh, more approximate access to data and enhanced decision-making through data analysis and where we are. Today, I'd say relative to many other of our peers. We've invested
Speaker Change: Structured data and accelerate the our platform with access to that data. So we're building upon what's commercially available and we think that's going to allow us as a company, um, to get closer to our tenants to be more efficient, um, uh, team by team but also to enhance, um, our capabilities. Um, so there's more to come on that as we make progress, but we're very early on, in the, the kind of execution of that plan.
Jamie: Jamie, if you quantify the life cycle. Sorry, go ahead Jamie.
No you say is there a way to quantify? You know, operating margins or you know, Revenue opportunities
Jamie: But it sounds like you're there. Certainly could be some Revenue opportunities. Yeah, I think it's a little bit too soon to to quantify those on this call, but certainly something that we'll follow back up on, we think there's tremendous opportunity to leverage AI throughout our business.
Jamie: Okay.
And then you kind of rattled off a, a laundry list of, you know, regulatory updates, uh, you know, some, you know, mostly positive. So can you just talk about, you know, if, if there's any way to quantify, what you think the opportunity could be, uh, whether it's a, you know, a shift in in the business, you focus on or just, you know, better Revenue, I think you sounded most upbeat about the inpatient only list from CMS if you could talk about that and then the changes uh, drug pricing for rare diseases.
Jamie: And the favorable track uh, tax treatment for research and Manufacturing.
and then also we know that um,
We're still waiting on Trump to announce the most Favored Nations list for prescription prescription drug pricing. So how do you think about the potential pressure from that on your business and life science? Investing
Speaker Change: Yeah, that that was that was a long. She was as well. Let me try to remember those Jamie, those are good questions. They're all very, uh, important on, on most Favored Nations. Uh, you know, we'll see that's a complex topic. Um, we have the, uh, benefit in the curse here of a, a Healthcare System. That's more. Uh, uh, capitalism based model. That's not the case necessarily overseas. Um, that has pluses and minuses. But the reality is Americans, do pay more for their Healthcare uh including drugs and Therapeutics than overseas countries. Um, even though most of the Innovation is happening here, that probably isn't completely fair. And if there's a better allocation of uh, the profits moving forward that should be, uh, beneficial to us consumers and and perhaps even for uh for the biofarma companies, but the the the uh, details of ultimately, where that land, that's a very complicated Dynamic. Um, that it it's too early to
Speaker Change: Calculate, uh, but but some some better cost sharing, uh, of the revenue and the profit generation, uh, between the US and overseas. I think would be healthy, uh, for the us and for the, for the ecosystem. So that that feels like there's some upside there, but highly complicated and would take some time, uh, the R&D expenses. Uh, I mean, think about the $400 billion dollars a year of capital that is invested into research and development. That's a rough number. Um, there's a pretty big impact between a 1 year, depreciation schedule, on a 5 year depreciation schedule, uh, for cash flow based investors. Um, so that that's huge and the same is true of manufacturing, you've seen hundreds of billions of dollars of announcements from numerous companies announcing uh plans to build manufacturing here in the US. And obviously those tax incentives are an important part of those plans. So that all feels positive and and um, the growth
Speaker Change: Uh, and, and stability of the biofarma business here in the US. All that should be beneficial.
Speaker Change: For us on the inpatient Only Rule, um, you know, when you when you change the default option that does make a difference, um, that does have an impact and that's exactly what our portfolio is built for. You know, we we don't invest in, um, strip strip centers with uh, uh, primary care physicians, uh, or dentist's office is. I mean, no. No offense to those businesses. Those are necessary parts of our health system.
Speaker Change: Um, uh, accommodates all the orthopedic procedures and there will be additional items added to that list. Cardiology is probably, um, the next, um, major category that moves into an outpatient setting, which uh, is perfect for us.
Speaker Change: All right, great. That was super helpful.
Speaker Change: Um, and so that's the follow up on the R&D piece. Are you like, I know there's a bunch of projects but regionally Market wise, like, where do you think this? Where do you think the puck is going? If you had to make like, Regional or even MSA bets and where you'll see the most R&D Construction?
Speaker Change: R&D or manufacturing. Just just to be fair on your questions. Yeah. Manufacturing most of that probably goes to lower cost geography, uh, those tend to be highly specialized build out. So I'm not sure how much that construction really matches up with our business but that's commercial scale. Manufacturing, you also have clinical scale manufacturing and that could be an important part of our business. That's more likely to reside within or near the R&D headquarters, which is the 3 core markets. Um, we've already seen a pickup in activity there. Um so that does feel like an opportunity where there's manufacturing, but it's not clinical, but it's clinical scale. It's much smaller, uh, versus the, you know, millions of square feet of commercial scale manufacturing. We have a
Speaker Change: Few of those. But I, I wouldn't say that our business plan is to start developing highly specialized commercial scale Manufacturing in the, you know, the middle of Indiana. I mean, no offense to Indiana. I love the Midwest, but that's just not probably where we're taking our business, in, in, in life science. Uh, the R&D, um, we love our, our Market position in the 3 car markets, given the increasing, uh, interconnection between technology, including Ai and Science, and, and biology, um, most of that Talent is happens to be in the 3 core markets. The the bay area in particular, but Boston, secondarily and probably San Diego, um, uh, as well, uh, those become Inseparable as the business moves forward in the amount of talent, in the Bay area, in particular, to help accelerate the biotech business, I think will prove to be a huge uh, strategic advantage.
Speaker Change: Okay, thank you so much for all your answers.
The next question comes from the line of Michael Carl, with RBC Capital markets, please go ahead.
Michael Carl: Yeah, thanks. Uh, Scott. I wanted to touch on your comments that uh, many of your tenants in the life science space that that defaulted during the quarter. They had their technology bought, I guess if this was the case, how did they get out of out of your lease? I mean, did this happen in a bankruptcy scenario? So they could reject at least, or just did it coincide with the, with the lease expiration?
Michael Carl: No, they they either went through the bankruptcy process or the ABC process. So I mean, it it there's not much explanation. Other than that uh that's just the way our system works. You can essentially start over as a company from a liability standpoint and even asset standpoint. They're just buying specific assets out of the bankruptcy process.
Michael Carl: No more complicated than that.
Speaker Change: Okay. Um and I know it's hard to quantify the potential credit headwinds that you guys might have in the second half of this year. Um but can you help us understand? I guess what are the gives or takes here? I mean, how long have the tenants that you're watching been trying to to raise capital and and I guess what's the reasons that they will or won't be able to do it? I mean is it really driven by and improving macro backdrop and and things loosening up? Or is it more companies specific that they need to hit certain milestones and have certain data for people wanting to give the money?
Um I I would say it probably has more to do with the macro backdrop.
Um, these companies are, uh, out there currently in the process of seeking, to raise the capital and if, you know, interest rates move in favor, um, of the market, and we continue to see, um, the public Equity Market respond, the way that it has over the last couple weeks that could create opportunity for folks, um, to raise Capital. But I, I think it's more of a, a market driven exercise than it is specific milestones in their business.
Included in the 489,000 of expirations, you have left in 2025.
Michael Carl: Um, not specifically sure, which space you're referring to, but maybe to hit on your first question, it's really a mix, um, of spaces where we have space, that's ready to be released when we get it back in great condition, and there's others. That tenants have been in for 10, 15, 20 years, that's going to require some capital investment, so it's really a mix on on that front.
Michael Carl: Almost exclusively cour stock markets, mostly on campuses. Um, so it, it it
I think the, the comment Kelvin makes that would apply to the interior buildout but the submarket itself. Um, these are high quality assets. I mean, I think you all know we didn't stray out into the tertiary areas. Um, I do a bunch of conversions, even if the market Peak. Um, so it's a high quality portfolio, it will release, um, some will require some Capital but, you know, it's not 2 million square feet of availability that we can go lease up.
Speaker Change: Hey, Michael great. I want to go back to your your second question. On the, on the
Speaker Change: Tenant funding is in the Milestones. I mean, 1 thing that's important to remember, too, is we, we have a lot of tenants who have
Been able to raise capital and we had 2 great fundraisers or 1 fund raise in a partnership that were announced yesterday within the portfolio. So a lot of these tenants are, you know, whether it be Milestone based or um you know, Partnerships with with Pharma are actually are raising the capital. They need to continue their run their business as well.
Speaker Change: Okay, great. Thanks.
The next question comes from the line of West Gate with beard. Please go ahead.
Hey, good morning guys. Are you seeing much in the way of AI leasing demand in your submarkets? That's taken out competitive Supply.
Speaker Change: Yeah I can take that. Hey West Scott bone. Um you know obviously this is our number 1 Focus you know our our focus is
Speaker Change: Leasing our buildings to to lab tenants that are going to utilize the robust infrastructure. Uh, you know that said we passed a wide net, um, you know, so if there was an office user, whether it be AI or traditional office, and
They have the appropriate credit and we can, um, you know, the economists are creative, it's a deal. We'll certainly look at I think as a
As a percentage of the total demand in in our core markets. Um, you know, the material, the amount of material amount of demand coming from AI or or traditional offices is is pretty low. Um, I would say our buildings,
Speaker Change: In the building infrastructure. We have also works very well for for other R&D uses, you know, with less traditional lab or or R&D used in in our in R&D and we're actively in discussions with with users and those categories as well where it's you know, more dry, dry lab robotics um type of uses but you know less AI within our, our core markets. It is it is sucking up some of the vacant space in the variant particular though. I mean, we our South City portfolio would have competed with Mission Bay. Historically, a lot of that quote, unquote lab availability is being sucked up by AI demand so that that should be a net positive for our South San Francisco portfolio in particular.
Okay, and then I want to go back to that comment about the potential enormous opportunity in lab Acquisitions. Would there be any Market that you're looking to add scale, to gain better efficiency, and would you lift the target recent developments or older assets?
Speaker Change: Um, a bias towards newer Assets in a biased towards your course sub markets. Uh, we have a very concentrated portfolio that's allowed us to uh, gain a competitive Advantage versus competition over the years. Uh, we'd like to deepen that Advantage the, the local scale has enormous benefits in the business as long as you're in the right sub Market, obviously, which we think we are. Um, so they would likely, um, if not exclusively be in markets that were already in
Speaker Change: Yeah, just a quick follow up on that. Would it be more like leaning more on Tori East Cambridge or anything more specific?
Speaker Change: Well, we're we're pretty concentrated in the markets that we're in. I mean, I think we're in 6 sub markets essentially, um, even within uh, the, the 3 core markets. Uh, so I mean those are the submarkets where we're going to spend most of our time.
Speaker Change: Okay, thanks.
Speaker Change: The next question comes from the line of Ronald Camden with Morgan Stanley. Please go ahead.
First and which potentially has the biggest upside from sort of like the commentary you mentioned earlier.
Sure, I, I can I can talk a little bit about kind of how we view each of the sub markets in general. Um, you know, in the Bay Area we've seen generally stable demand and I think, you know, they're obviously we we have the most, uh, the biggest magnitude of portfolio. Um, and we continue to capitalize on that which brings us deals that we, you know, aren't otherwise marketed. Um, you know, so the area in South San Francisco, especially with our portfolio is, is has been pretty healthy and continues to be, um, you know, San Diego. We've seen an uptick in the past 30 days. Certainly, in tour activity,
Speaker Change: The majority, you know, the bulk of that has been sub 255,000 ft or, you know, roughly. Um, I think that, you know, we talked about the barbell demands going back, you know, the past several quarters. Uh, I think San Diego, has, you know, the biggest barbell of demand. Um, there's been several large deals in that market, um, you know, that,
1 obviously got executed recently, um, but I think
Speaker Change: our vacancy in that for, in that portfolio, in that market tends to be in the sub, 255,000 worth of range from a sweet perspective. So I think we're, we're in a good spot there. Um and then Boston generally continues to be slow overall, uh, but the top tier submarkets, the Cambridge and Lexington, you know, where our portfolio, this certainly seems to be the greatest, uh, demand. Um, you know, so what's going to recover, you know,
Speaker Change: First and fastest hard to tell. Um, but I think, you know, the sub-markets that we're in and the core submarkets are going to certainly recover faster and see more demand than the kind of secondary and tertiary submarkets within those broader regions.
Speaker Change: Super helpful. Um, my second 1 was just going back that you provide some really helpful commentary on the 489, uh, thousand square feet coming to you this year. I, I guess I was just curious about the 413 coming due next year. Is there any early? Is there any known vacates or any Market skew like any color on that 413 coming to you next year? That, you know, now that could be helpful. Yeah, sure. Yeah. I think on that, you know, it's we're certainly working on, you know, the ones that are coming in the earlier half of the year, uh, the bulk of that, tends to it, falls in the back half of the year. So it's a little bit early on that so, you know, working on it probably a little too early, um, to get real great guidance on it, though.
Speaker Change: Great. Thanks so much.
Speaker Change: The next question comes from the line of Michael strike with Green Street. Please go ahead.
Michael: Thanks and good morning. Um, maybe going back to
Tenants Capital raising. Uh, so I understand like, 10% of your portfolio is where tenants may be having trouble raising Capital, but what percentage of that tenant base would you characterize is actually needing capital. And in the very near term call it, maybe 3 to 6 months or so.
Michael: Yeah. Uh, good question. Yeah that
Michael: 10% plus, or minus that that that's the percentage of small cap and private biotech. That that's not our watch list. I mean, there's a number of companies within that 10% that have a huge amount of cash on their balance sheet. Um, so those are 2 very different things. So don't misinterpret when I say 10% is, is roughly in small cap. And in private, that doesn't mean they're all at risk, uh, far from it. Um, uh, so that that, that's an important, uh, distinction. So I'm glad you asked the question. Um, there's a handful within those 2 buckets, that, that were monitored and more carefully. Um, just given the amount of cash that they have on hand.
Michael: Got it. Okay. Um,
Michael: and and then just 1 question on rents. Uh, new lease signings in the quarter rent for decently below the last quarter. And last year's average, I guess how much of that is just a mix issue versus any real pressure on asking rents.
Michael: Yeah, I think the new rents, you know, that we in in the south of this quarter, the commencements were they were slated over the prior quarters, you know, that's largely attributed to, you know, a larger deal. We did with a robotics R&D tenant, um, you know, so not not necessarily wet lab space. Um, that that comes a little bit lower rent on that. But, you know, that rents with a space where we, you know, did a proactive termination of of another tenant to allow the expansion. Um and the rent we got on on the new deal was a 15% increase over the in place rent of the previous tenant.
Michael: Got it. Thanks for the time.
Amato: The next question comes from the line of Amato with Deutsche Bank. Please go ahead.
Speaker Change: For me, uh, just sticking with the question around. Uh the tenant base uh that uh maybe having some cash flow problems. Um could you just talk a little bit about you know, when you're kind of assessing against some of these smaller private companies again, how you kind of take a look at, you know, cash burn percentage of cash, they have on their books, whether it's a cash burn and how many of those tenants today if if quantifiable actually have less than 1 year of cash burn out of their cash balance,
Speaker Change: Um, this is Kelvin um the way that we tend to analyze cash.
Speaker Change: For our tenants is, is based on data that we received directly from the tenant. Um, we have a historical look but we also communicate with them about a forward-looking estimates, so it's it's relatively granular. Um, and then with respect to the component of the portfolio. There's not a specific number that could give you. I think Scott kind of addressed it earlier. It's really a small subset of handful of folks that we are focused on monitoring very closely at the moment. Um but we continue to to be hopeful around the capital markets environment and and these tenants ability to raise capital for the balance of the year.
Speaker Change: Gotcha. Okay uh and then uh turn into the CCRC front. Again, I'm trying to still understand the the slowdown in cash. Things still analyze growth. There's cooler at least on the sequence on a quarter of a quarter basis. Again when I take a look at year-over-year occupancy, was actually is actually up. Restore growth, was still pretty good at 5.2. So it sounds like maybe there was a big jump in operating expenses or just trying to understand that a little bit more about why the Slowdown to 86 versus 15 plus last quarter.
Speaker Change: Uh 8 866 is pretty good. Uh, nothing grows at 15%.
Speaker Change: Forever. Uh, we also have uh the burden of how we account for the the attributes for purposes of ffo, and
Speaker Change: And same store. Uh, it's it's based on Advertising of the entry fees on a true Cash basis. Um, the growth rate was something like 20 25%. Um, we're having outstanding missing results in cash flow generation that this
Speaker Change: okay, so I guess it's that piece of the map that kind of grew. Uh, the amortization piece that grew up meaning to be on a year-over-year basis. Okay, uh, that's helpful. But last 1 for me kind of post too, few leasing both for the life sciences portfolio and the M will be put for you. Could you give us a better sense of how much of that is really seeing this renewal
so on the, the lab portfolio, um,
Our leasing activity. For the quarter was about uh 85% renewal and our pipeline continues to be strong with uh disproportionate number of those leases on new space.
So that mixes is very good and it's arguably, probably comparable our 85% retention on the outpatient. Medical business is consistent. 80 85% has been kind of our normal average. So we have a heavier percentage of renewals, um, on the outpatient side, but some great new leasing activities as well in the pipeline.
Speaker Change: Okay, so if I could so for the lab space in particular, the post, 222 leasing a lot of that is Ari is um, new leasing rather than renewal.
Speaker Change: The pipeline skews more towards the new side.
Speaker Change: Yep. Okay, perfect. Okay. Thank you.
Thank you. The next question comes from the line of Michael Miller.
Speaker Change: The JP Morgan, please go ahead.
Yeah. Hi uh just a quick 1. Um, that back. Back at N. I think you talked about sitting on the sidelines with Acquisitions because yet of you that, you know, 6 months, 12 months, or whatever it would be values are going to be falling and a lot more attractive, I guess based on what you're seeing, do you think that's been playing out and do you think you're any closer to hitting the pivot point to really getting?
Speaker Change: Associated deployment again.
Speaker Change: Yeah, I mean, that was, uh, 2 months ago, so I think we're 2 months closer for sure. Um, I mean the the
Speaker Change: Thesis and stepping back. Uh, I think it will prove to be the right thesis. Um, it there aren't too many days or weeks that go by that, that we don't get uh uh Outreach from lenders, Equity, investors, Etc. Um, asking us to step into situations. So, um, the opportunity set is there,
Speaker Change: Okay, appreciate it. Thanks.
Speaker Change: and that concludes your question and answer session, I would like to start it back to Scott Brinker for any closing remarks
Speaker Change: Uh, thanks for your time, everyone. Hope you enjoy the last few weeks of the summer uh reach out to call and Andrew and I with any follow-up questions. Take care.
And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect