Q3 2025 Healthpeak Properties Inc Earnings Call
Speaker #2: Good morning , and welcome to the Hope peak Properties , Inc. . Third quarter 2025 conference Call . All participants will be in listen only mode .
Speaker #2: Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, press star, then one.
Speaker #2: Please press star . Then one . Please note this event is being recorded . I would now like to turn the conference over to Andrew Johns , Senior Vice President , Investor Relations .
Speaker #2: Please go ahead .
Speaker #3: Welcome. Today's conference call is focused on forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, these statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.
Speaker #3: The risks and risk factors are included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.
Speaker #3: Certain non-GAAP financial measures will be discussed on this call in an exhibit to the 8-K we furnished to the SEC yesterday . We have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures , in accordance with requirements .
Speaker #3: The exhibit is also available at our website at HEALTHPEAK PROPERTIES, INC. . I'll now turn the call over to our president . Chief Executive Officer , Scott Brinker .
Speaker #4: Thank you . Andrew , and welcome to Health Peaks third quarter 2020 Earnings Call . Joining me for prepared remarks is our CFO , Kelvin Moses .
Speaker #4: The past 60 days or so signaled a turning point in our business. Leading indicators in life science are turning positive, and private market values for outpatient medical are strengthening. As a premier scaled owner in both businesses, we see significant value and upside when we look at our stock price today.
Speaker #4: Two years ago, against a backdrop of raging inflation, the outpatient sector was out of favor in both the public and private markets.
Speaker #4: We saw a sector with good fundamentals that were getting even better , and seized an opportunity to grow our portfolio by $5 billion in a strategic merger with Physicians Realty Trust .
Speaker #4: In doing so, we established the best portfolio and platform in the outpatient sector. The merger also accelerated the strategic goal I described three years ago to get closer to our real estate and our tenants.
Speaker #4: We've now internalized property management on 39,000,000ft² with line of sight on another 3,000,000ft² . We now own the tenant relationship and the local market knowledge .
Speaker #4: The internalization also allows us to deploy technology at the property level quickly and at scale. With the addition of JT, Mark, and the team, we deepened our relationships across the outpatient ecosystem, creating proprietary growth opportunities, including accretive new development projects.
Speaker #4: Fast forward to today , as inflation has come down , there's a deep pool of buyers for outpatient medical . It's a great time for us to sell less core real estate and to recap , some assets .
Speaker #4: We're in various stages of negotiation and execution on transactions that have the potential to generate proceeds of $1 billion or more . We see an exciting window to recycle outpatient sale proceeds into higher return lab opportunities , where the leading indicators are starting to turn positive .
Speaker #4: Increased M&A less regulatory noise , lower interest rates , positive data readouts , solid FDA approvals , and priority reviews and recent biotech outperformance in the stock market .
Speaker #4: The real estate market will obviously lag , but the building blocks for a recovery in demand are encouraging . Our leasing pipeline today is roughly two times the pipeline at the start of the year .
Speaker #4: We're also seeing some vacant development projects across the sector get absorbed by alternative uses, which will help accelerate a return to more balanced supply and demand.
Speaker #4: Important to note that purpose-built lab buildings are highly flexible and can support many alternative uses. I'll repeat that our occupancy will decline for the next few months due to.
Speaker #4: Expirations and terminations , but we're now gaining more confidence . That will be the bottom on occupancy at that point , we'll have more than 2,000,000ft² of available space in good submarkets to lease up and recapture NOI .
Speaker #4: We recently welcomed Dennis Sullivan to our team . He'll play a pivotal role in our life science , business and investment strategy . Dennis spent 14 years at BioMed , including time as CFO and CIO .
Speaker #4: We have exceptional local market leaders in the Bay Area with Natalia De Michele, with Dennis in San Diego, and with Clare Brown in Boston, all rolling up to Scott Bowen, our segment leader.
Speaker #4: We believe we have the footprint people and balance sheet to capture market share as the sector recovers . Our core business is performing at a high level .
Speaker #4: Six years ago , we bought out the 51% interest in the portfolio held by our joint venture partner , and we installed a new operator .
Speaker #4: Since then , NOI is up more than 50% , including double digit growth this year . We believed then and now that the entry fee product is very attractive to seniors on fixed incomes .
Speaker #4: We're looking for a lower monthly rent payment . The continuum of care we offer is viewed favorably by seniors and their families because it creates peace of mind .
Speaker #4: They won't need to move again in the future, and that's very important at that stage of life. Sequential occupancy in the portfolio was up 70 basis points, and we expect continued growth in the fourth quarter.
Speaker #4: I'll wrap up with our technology initiatives, which are already paying off with efficiency gains. Our DNA this year is projected at $90 million, which is less overhead than we had five years ago.
Speaker #4: Despite significant inflation across the economy and closing a $5 billion merger . But the cost efficiencies are only part of the story . We intend to create a tech enabled platform to streamline our operations , differentiate our property management and leasing platforms , and expand tenant services to drive new revenue opportunities .
Speaker #4: We'll have more details to share in the coming quarters. Let me turn it over to Kelvin.
Speaker #5: Thank you . Scott . I'll expand a little bit on the technology initiatives that Scott just mentioned . We're advancing our strategic plan to strengthen our capabilities as an AI enabled real estate owner with a leading investment management platform designed to meet our clients needs across geographies and asset types .
Speaker #5: Operationally , internalizing property management now gives us end to end control of our workflows and establishes a consistent foundation to deploy technology across the properties .
Speaker #5: Technology adoption and real estate has historically lagged other industries , and we see advantages to moving now . We're focusing our initial efforts where data and automation can offer more time in the field , and that starts with improving property operations , facilities , engineering and accounting .
Speaker #5: We've partnered with leading enterprise technology firm to help us drive this shift . Our automation initiatives are building a stronger foundation for our data architecture that will enhance connectivity across internal systems and reduce manual work .
Speaker #5: Our approach allows us to make measured investments and preserve long-term flexibility as commercial tools evolve. These fresh perspectives from outside of traditional real estate will also help us innovate faster.
Speaker #5: We see every part of our business as an opportunity . Now , moving into the third quarter , results , financial and operating performance was in line with our forecast .
Speaker #5: We reported foes adjusted of $0.46 per share . AFFO of $0.42 per share , and year to date portfolio . Same store growth of 3.8% .
Speaker #5: Starting with key metrics, our portfolio delivered another strong quarter driven by continued pricing power, modest expense growth, and a 150 basis point year-over-year increase.
Speaker #5: Occupancy gain . Cash NOI increased by 9.4% for the quarter . We remain focused on these key indicators of performance as each flow through to NOI and ultimately earnings growth for the platform .
Speaker #5: Our product offering and value proposition continue to resonate with consumers, and we remain well positioned to benefit from healthy demographic trends that support long-term growth.
Speaker #5: Moving to outpatient medical fundamentals , supporting leasing demand for outpatient continues to be favorable . During the quarter , we executed one point 2,000,000ft² of leases , achieved 3% escalators or above on executions and positive cash releasing spreads of 5.4% , with also below historical averages .
Speaker #5: Year-to-date leasing volumes totaled 3,200,000 sq. ft., and we ended the quarter with total occupancy up ten basis points at 91%.
Speaker #5: New leasing comprised of 270,000ft² with Q3 representing the highest quarter of new leasing starts in the combined company's history . Pies on renewals were only $1.41 per square foot per year , and year to date , leasing commissions were approximately $0.87 per square foot per year .
Speaker #5: Additionally, we executed another 123,000 ft² of leases in October, and we have another 895,000 ft² under LOI. We are pleased to recognize our property management team, whose sector-leading Kingsley client satisfaction results reinforce the consistent strength of our tenant retention and help ensure efficient operations for our clients.
Speaker #5: Thank you to the entire property management team across the organization for their collective effort . The combination of consistent operating performance , favorable sector fundamentals , and deep tenant relationships positions the portfolio for sustained growth and continued excellence in execution .
Speaker #5: And turning to lab . During the quarter , we executed 339,000ft² of leases , of which 45% were new . And on renewals , we achieved a positive 5% , releasing spread year to date .
Speaker #5: Leasing volumes totaled one point 1,000,000ft² , and we ended the quarter with total occupancy of 81% . We continue to see escalators on executed leases between 3% and 3.5% , which supports sustainable long term growth .
Speaker #5: Tenant improvement allowances on renewals declined to $1.30 per square foot per year , while corresponding rents rose to $65 per square foot . Given space conditions for new leases , PiS averaged approximately $15.73 per square foot per year , which , when excluding two development leases , was approximately $5.50 per square foot per year .
Speaker #5: In October . Month to date , we executed 22,000ft² of leases and have an additional 291,000ft² under Loi . Forward looking indicators of demand continue to improve since Q1 .
Speaker #5: The pipeline has doubled to 1,800,000 ft² in about half an hour. We are evaluating our current unleased availabilities. Each of our core markets is experiencing a similar uptick in demand.
Speaker #5: We have a healthy mix of discovery stage , clinical stage , and commercial stage tenants and some incremental demand from tech and AI based companies .
Speaker #5: We are encouraged by the strengthening demand profile as we move toward an occupancy bottom and ultimate recovery. The decline in occupancy we experienced in 2025 will flow through to earnings in 2026.
Speaker #5: Recent leasing , together with the conversion of our active pipeline , is expected to contribute to occupancy and earnings starting in late 2026 and thereafter .
Speaker #5: Moving on to the balance sheet in August, we issued $500 million of senior unsecured notes at 4.75%. We achieved the spread of 92 basis points with no new issue concessions.
Speaker #5: This execution represents one of the tightest investment grade REIT's seven year spreads year to date . We ended the third quarter at 5.3 times net debt to adjusted EBITDA and $2.7 billion of liquidity .
Speaker #5: We continue to prioritize balance sheet management and disciplined capital allocation to maintain maximum flexibility to pursue strategic investments and fund portfolio growth . Now , turning to guidance .
Speaker #5: We are reaffirming our FFO as adjusted and same store expectations within our original guidance range . We continue to outperform in CCRC and outpatient medical at or above the high end of our initial segment guidance .
Speaker #5: In addition, we reduced our interest expense and guidance by a total of $10 million. This reflects better than anticipated pricing on our Senior Notes issuances.
Speaker #5: Technology enabled productivity gains and additional synergies related to the merger , as well as timing of certain investments in higher dispositions . Moving to sources and uses .
Speaker #5: Year to date, we've completed $158 million of asset sales and loan repayments. We have an additional $204 million of dispositions under a purchase and sale agreement.
Speaker #5: As we take advantage of a strong private market in outpatient . These transactions could close in the fourth quarter or early 2026 , and with that operator , we can move into questions .
Speaker #2: We will now begin the question and answer session . To ask a question , you may press star then one on your touch tone phone .
Speaker #2: If you are using a speakerphone, please pick up your handset before pressing the keys to withdraw your question. Please press star, then one.
Speaker #2: So that everyone may have a chance to participate, we ask that participants limit their questions to one and a related follow-up.
Speaker #2: If you have additional questions , please Requeue . At this time , we will pause momentarily to assemble our roster . Your first question comes from Ronald Kamdem with Morgan Stanley .
Speaker #6: Hey . Great . Just going to the lab leasing pipeline . You know , it sounds like , you know , you said it's doubled since the beginning of the year .
Speaker #6: It just hoping we could just double click sort of . What's changed ? What's what's the mix of those tenants and any sort of qualitative trends that you can highlight .
Speaker #6: Thanks .
Speaker #4: Yeah, it's a broad mix of tenants. Good morning, Ron. It's Scott, from early stage to clinical stage to commercial stage.
Speaker #4: So the quantum is doubled . But equally important , the the the mix of new and renewal is much more favorable year to date .
Speaker #4: It's been a lot of renewals, which is great. But obviously, it takes new leasing to drive occupancy, and a good portion of that pipeline now is new leasing.
Speaker #4: And that's clearly being driven by the improved sentiment in the sector, improved capital raising. There's been a lot of good data in the sector, and that's being rewarded in the capital markets by the FDA.
Speaker #4: And that virtuous cycle is starting to build. But it all starts with great data as the science proves out. So we're encouraged.
Speaker #4: It's roughly 60 days of activity . Obviously , that needs to continue for that pipeline to turn into executions and then to refill the pipeline .
Speaker #4: But the trajectory , the momentum is very positive .
Speaker #6: Great . And then my follow up is just on , you know , thinking about the capital recycling billion out of potentially outpatient medical , just maybe .
Speaker #6: Can you talk a little bit more about the buy side in terms of what potential opportunities you think are out there, along with any financial metrics?
Speaker #6: We should be thinking about in terms of what you're going to be going into . Thanks so much .
Speaker #4: Yeah. You know, our patient's been a great business for 20 years. It's one of the few subsectors in all of real estate that's had positive NOI growth every year for two decades.
Speaker #4: Great financial crisis. Whatever's happening in the economy, it doesn't matter; that sector still has positive growth because it's a need-driven business.
Speaker #4: And there's a tremendous push to move things to an outpatient setting that isn't changing . So we love the business . We think we have the not only the biggest but the best platform in the sector , the deepest relationships , which is key given most of the tenants are health system's .
Speaker #4: So that was one reason we did the merger two years ago . We loved the the outlook for the business . Scale does matter , especially in local markets , which we have .
Speaker #4: But not all of our portfolio is in concentrated core markets . We still have a few geographic outliers , and this is a great time in the cycle to take advantage of strong demand for the for the assets and sell some of those assets that are not as strategic for us , but can still draw great pricing from a pretty deep pool of buyers .
Speaker #4: It's mostly institutional for the types of assets we own , but it's broad based and it's a deep pool . And I think they're attracted to the strong fundamentals .
Speaker #4: And obviously as inflation and interest rates have come down , that sector looks a lot more attractive . Maybe the the growth of the economy is a little bit more questionable today .
Speaker #4: And outpatient starts to look a lot more attractive in that environment. So I think all of those things are driving the demand.
Speaker #4: We have roughly $130 million under signed contract , and a really strong cap rate . We're working on a lot . We feel like it's an opportune time to take advantage of that buyer interest , especially in light of where the stock is trading in light of the outpatient development opportunities .
Speaker #4: We have through our relationships . And then the potential for opportunities in the life science business . But we have a great balance sheet already .
Speaker #4: We see a lot of advantages to having even more liquidity as we head into 2026 , especially if we can get great pricing .
Speaker #6: Thanks so much .
Speaker #2: Your next question comes from Nick Yulico , Scotiabank .
Speaker #7: Thanks . Good morning . In terms of , you know , the lab portfolio , I wanted to see if there was any way to get a feel for , you know , like where you're if your leased rate is higher than your occupied rates .
Speaker #7: I know you guys quote that 81% occupancy in labs in the sub. You talked about some of the, sort of, leasing that happened.
Speaker #7: And even in the works is addressing vacancies. So, any feel for just like where the leased rate on assets would be versus in-place occupancy?
Speaker #5: Yeah, Nick. This is Kelvin. I would say that our total occupancy today in the lab at 81% is largely in line with the occupied rate.
Speaker #5: We have certain instances where there are tenants that are probably in more space than they need . So the occupancy is a little bit lower physically , but generally speaking , the total occupancy is in line with the physical occupancy .
Speaker #7: Okay . Thank you . And then just second question is on the impairment for the lab JV was that was that what triggered that this quarter .
Speaker #7: And then it was it also some sort of decision or functioning of how leasing is actually going for those assets ? Thanks .
Speaker #5: Hey , Nick , it's Kevin again . So typically you'll see companies take impairments like this when they sell assets . These are assets that we have high confidence in .
Speaker #5: We'll continue to own long-term. But specifically for the unconsolidated JV accounting rules, there are rather specific requirements that you have to evaluate on a quarterly basis.
Speaker #5: Simplistically , if you have carrying values that fall below fair values for more than temporary period of time , you're required to take the charge .
Speaker #5: And this quarter , we determined that that was the case . Specifically , the impairments , not cash . It doesn't impact FFO , but we thought it was prudent to do so this quarter given all the facts and circumstances around these ventures .
Speaker #8: Capital .
Speaker #4: Nick, I would just add that Scott and the team have done a great job leasing up the campus. We're at roughly 60% leased.
Speaker #4: It's 400 zero zero zero feet across seven buildings . The buildings that have been redeveloped are , for the most part leased . And there's a couple of buildings that are yet to be redeveloped .
Speaker #4: We're waiting for leases to burn off and in that work is is now underway and we're confident we'll be able to lease them up open .
Speaker #4: So it's not a matter of leasing , it's a matter of where the rents , where are the cap rates versus when we did that deal .
Speaker #4: Three and a half years ago, we obviously marked up the portfolio to the price that we got when we sold it.
Speaker #7: Okay . Got it . Thanks , guys . Very helpful .
Speaker #2: Your next question comes from Farrell Granat with Bank of America .
Speaker #9: Hi . Good morning . Thank you . I was curious if you could outline your tenant risk list and how that compares to the beginning of the year , and specifically , if you can touch on if tenants have been adding in or are names .
Speaker #9: Finally dropping off as you've been seeing a shift in sentiment ?
Speaker #5: Hey Farrell , this is Kevin . I'll start maybe just to give context to our earlier points . You know , we're continue to be encouraged by the pipeline that's been building over the course of the last 60 plus days .
Speaker #5: And our existing tenant base continues to access the capital markets as it's opened back up. We're seeing a number of folks that perhaps were a little bit more in focus before that are out of focus today, given they're extending their cash runways and they're working towards their next clinical milestone.
Speaker #5: So the exposure in our portfolio has come down , I would say pretty meaningfully over the last 60 days , but we still have tenants that we are actively monitoring .
Speaker #5: The quantum of that I don't have an accurate number to give you , but , you know , I think again , it's directionally has come down since the start of the year .
Speaker #4: Let me let me add , there's really two parts to to your question that are relevant . There's the size of the of the watch list .
Speaker #4: That's part one. Kelvin just addressed that. But the equally important part, in our view, is do those companies have a good chance of raising money? Because there's always going to be tenants in the portfolio that have less than 12 months of cash that we're keeping a close eye on, and today we feel a lot more confident that those companies can raise money.
Speaker #4: The challenge the first nine months of the year had been we have this group of companies that needs to raise capital. It's normal, normal course business.
Speaker #4: And it was just a very , very difficult environment for them to raise it so that that second half of the question , I think , is equally important , and that is improved pretty dramatically in the last 60 days .
Speaker #4: And obviously we hope that continues.
Speaker #9: Great . Thank you . And I also just wanted to touch on I've seen some recent headlines about the influx of demand for the AI companies , especially when it comes to lab spaces and those even converting back to an office .
Speaker #9: I was curious if you could just add a few comments on how that may impact the supply picture , and do you see doc participating in in any of that conversion ?
Speaker #4: Yeah , well , there's just pure AI tech companies , and certainly that's helping the supply demand dynamic in the Bay area in particular .
Speaker #4: But there's also AI and native biotech research, and that's been very much a positive for our portfolio. We've done a fair amount of leasing with companies that would fit that description, particularly in the Bay Area.
Speaker #4: In the last year, the pipeline includes them as well, and the notion that they only need office space is just not correct.
Speaker #4: Generally speaking, the 50/50 type mix of wet lab and office continues to hold for those companies as well. So we view it very positively.
Speaker #4: There more likely to raise money . The companies that can attach that to their business profile right now . So we're taking advantage of that .
Speaker #4: But but more generally in longer term , the ability of AI to improve the speed , efficiency , accuracy of drug research is is pretty exciting in taking drugs from discovery to IND , meaning clinical stage trials in one year instead of 5 to 7 years .
Speaker #4: I mean, that has the potential to have an enormous positive impact on the business.
Speaker #9: Thank you so much .
Speaker #2: Your next question comes from Austin Wurschmidt, KeyBanc Capital Markets.
Speaker #10: Hey , good morning , everybody . Scott , I'm just curious , how should we think about the near-term earnings impact from recycling the outpatient medical proceeds from the strategic initiatives ?
Speaker #10: And then just , you know , that timeline around the earnings ramp ? You know , from from reinvesting those proceeds given , you know , development does have kind of a little bit of a longer , longer timeline to it .
Speaker #10: And then maybe a sense of what the opportunistic lab investments you're considering today , you know , is it development ? Is it sort of lease up opportunities versus more stabilized deals ?
Speaker #4: Yeah. And the billion dollars that we've referred to, you know, keep in mind only $200 million of that is under contract.
Speaker #4: So hopefully we move forward with the balance . It's really strong pricing . If that proceeds , keep in mind the pricing is going to be significantly better than our implied stock price .
Speaker #4: So, I mean, it has the potential, depending on the use of proceeds, to be immediately accretive. We're also looking at opportunities in outpatient development, as well as life science, and opportunistic investments that we think have the potential to yield returns far in excess of the returns.
Speaker #4: We'd be selling at in terms of those outpatient sales . So one way or another , we're doing this with an expectation that it's going to create pretty meaningful accretion , whether it's day one or day one , in a combination of , you know , year two , three , but obviously that is the expectation .
Speaker #4: And intention here .
Speaker #10: That's helpful . And then can you just give a little bit more detail around the average size of tenants in the pipeline for for lab , the lab leasing pipeline and whether you're seeing sort of any larger space requirements in the market today , I know previously you had talked about kind of 3030 plus thousand square feet .
Speaker #10: Was the sweet spot. But is there anything larger out there today? Thanks.
Speaker #5: Yeah . Hey , Austin , it's Kelvin . I think that 30,000 square foot marker is still accurate in terms of the pipeline and the opportunities we're seeing .
Speaker #5: So with the 1.8 million square foot pipeline, there's a lot more activity from new potential clients that are exploring our assets.
Speaker #5: Yeah .
Speaker #4: Hey , Austin , let me give you one additional piece of color on on the acquisitions that we're looking at in life science , as well as outpatient development , you can't really look at those just in isolation , either .
Speaker #4: When you think about our investment model , that's very much focused in both businesses on doing things in scale , in local markets .
Speaker #4: There's really an ecosystem benefit as well , like when we do a new development with a health system . That project is accretive , but it also deepens the relationship with that health system and draws or drives additional leasing with that tenant over time .
Speaker #4: And that's an important part of the consideration for us . That's obviously true in life science , where we've built a 12,000,000 square foot portfolio that's essentially in five submarkets , and we want to continue to go deeper in those markets because we think there's great demand in tenant desire to be in those locations .
Speaker #4: And the more scale we have there , it's proven to have material advantages in terms of winning leasing deals .
Speaker #10: What sort of average yield are you evaluating today on the outpatient medical developments?
Speaker #4: Seven plus percent . Mostly , you know , highly pre-leased and compare and contrast that with selling assets that are 20 , 25 years old , that 100 basis points or more inside of that .
Speaker #4: So , you know , pretty compelling . Yeah .
Speaker #10: That's helpful . Thank you .
Speaker #2: Your next question comes from Seth Bergey with Citigroup.
Speaker #11: Hi . Six , for taking my question . I guess my first question is kind of of the billion dollars , you know , how do you view that in terms of how much of that should we expect to be life science versus outpatient medical versus share repurchases ?
Speaker #11: And then , you know , I guess , you know , on top of that , do you have like a target percentage of how much of the business you would like to be outpatient medical life science and the CCRC .
Speaker #4: We do not have fixed allocations , and we're going to be opportunistic . So we're going to protect our balance sheet . Number one , it's a competitive advantage , gives us a lot of flexibility .
Speaker #4: And these sales will give us even more flexibility. But it could be any of those three that you mentioned and any combination.
Speaker #4: So no we're not going to have a fixed allocation of what we're looking at . We'll be opportunistic .
Speaker #11: Okay . And then just my second one , you know , you talked about the strength of the outpatient medical business . What type of spread are you kind of looking for to compensate you just given you touched on the early shoots of the life science recovery , but mentioned a real estate is still expected to lag for a little bit .
Speaker #11: So just any color you can provide on what kind of accretion spread you're looking for there.
Speaker #4: Yeah . Thanks , Jeff . The underwritten returns on any life science distress . Obviously each project is going to be unique in terms of size as well as the lease up that needs to occur .
Speaker #4: But we'd be looking for certainly double digit unlevered IRR for those types of projects . So that would be the criteria there for outpatient .
Speaker #4: I think I already covered it at seven plus percent . So a nice spread to not only disposition cap rates , but also .
Speaker #4: Acquisition cap rates . So yeah , that's that's how we're thinking about spreads or relative returns . And obviously we have to keep in mind the implied cap rate of our stock prices .
Speaker #4: We think about the assets that we're selling relative to buying back stock in an accretive way . So we're really looking at all three of those alternatives .
Speaker #4: And all three of those metrics in terms of relative returns .
Speaker #11: Great . Thanks .
Speaker #8: Got it . Your next .
Speaker #2: Question comes from John Kruth with Wells Fargo.
Speaker #12: Hi . Good morning . Maybe if we could start just talking about the the Trump administration . We've had , you know , there's been tariffs on branded therapies , but there's also been a , you know , a major surge in commitments by multinational pharma companies back in the US , especially as it relates to R&D .
Speaker #12: Could you talk to , you know , a lot of that's on the manufacturing side , but are you seeing some of that , you know , translate into lab space and into leasing ?
Speaker #4: Well , certainly the the regulatory chaos and uncertainty that existed in the first 6 to 8 months of 2025 had a big impact on sentiment in the sector .
Speaker #4: Obviously , investors making capital commitments are looking for certainty in terms of the environment that they're investing into , and we just didn't have that for the first half of the year .
Speaker #4: There's been a lot of positive news coming out of Washington and the FDA in terms of making that process more efficient. Our tenants are taking advantage of that.
Speaker #4: We've had ten tenants in the portfolio that have received various forms of fast track or regulatory priority reviews, which is a huge positive coming out of this administration.
Speaker #4: But overall , I think you've seen a lot less negative headlines coming from DC on the biopharma sector , including some positives like the agreements with Pfizer and AstraZeneca .
Speaker #4: And that's been a big part of the change in sentiment. So yeah, it's been very positive.
Speaker #12: Got it. Thank you. And then, I know this may be a little early to ask, but I'll give it a shot.
Speaker #12: I don't know if we can discuss maybe the building blocks for 26 earnings here, especially as you have talked about a potential near-term bottoming and occupancy.
Speaker #12: Maybe what's realistic for occupancy gains next year , how you're thinking about pricing power , and then maybe on top of that , the addition of , you know , we've seen some savings this year with your , you know , your AI platform .
Speaker #12: You know, what's the opportunity to generate even further savings in the next year?
Speaker #4: Yeah , I mean , obviously we'll wait to February to give guidance . But I mean , the basic building blocks are two thirds of the portfolio are doing really well with outpatient and life science .
Speaker #4: Obviously, the occupancy loss—there's a bit more to come, as we've described. We'll bleed into 2026, and that will have an impact.
Speaker #4: We've disclosed some purchase options and seller financing that will have an impact . Refinancing . I mean , those are the basic building blocks .
Speaker #4: There's no new surprises there , but I'll just reiterate the obvious . But obviously we'll give full guidance in February of 26 .
Speaker #12: Very helpful . Thanks , Scott .
Speaker #4: Yep .
Speaker #2: Your next question comes from Juan Sanabria with BMO Capital Markets.
Speaker #13: Hi. Thanks for your time. I just wanted to see if you could maybe help investors understand how you're thinking about the amount of dilution you're willing to take and how you're going to try to manage that.
Speaker #13: I mean , I think maybe there's a little bit of a concern that the mobs , the billion dollars of dispositions will be plowed largely into other lab opportunities that may have great growth long term , but maybe weigh on growth near term .
Speaker #13: So I guess , how are you thinking about balancing some of that potential dilution with buybacks and or other opportunities ? Is it the intention that you're going to try to manage earnings somewhat , so to speak , as a result of that or , or how are you thinking about weighing those pros and cons ?
Speaker #4: Yeah , well , we're not looking to manage earnings . I heard you say that . That's certainly isn't anywhere on the priority list .
Speaker #4: We’re looking to create value. I think when we did the merger two years ago, there were concerns. It’s turned out to be a huge value creator for the company.
Speaker #4: Not only the synergies, but also the recognition of the strength of the outpatient business and the flexibility that it's providing us right now.
Speaker #4: So that has turned out to be a huge positive in terms of the capital allocation around that transaction . At a time when that sector was pretty out of favor in the public and private markets , obviously , that dynamic has flipped very much in our favor .
Speaker #4: Two years later , and we at least see the building blocks of that dynamic changing for the life science business . You know , it wasn't that long ago when when certain investors couldn't get enough of the sectors , one of the best performing subsectors in all of real estate for ten years .
Speaker #4: Obviously , there's been too much supply . We've had some demand issues because of the regulatory environment . We , as we've described , see a lot of that starting to flip in our favor .
Speaker #4: It's not going to happen overnight , but we do see a window here to come in at a time when nobody else wants to invest .
Speaker #4: That's usually a pretty good time to do it . We have the balance sheet to do it . The platform to create value , but it might end up being zero .
Speaker #4: We're very focused on basis and submarket and price and return opportunity , and I can't guarantee that we're going to find anything that meets our thresholds .
Speaker #4: But I'm optimistic that we will . There's a big opportunity set there , and it's an awfully good time to invest in our view .
Speaker #4: But again, at the right price and the right submarket in terms of dilution, you know, it's a $25 billion denominator.
Speaker #4: So even $1 billion is not a significant number in comparison to the entire company, so I don't expect there to be meaningful dilution.
Speaker #4: In any event , even if we plowed the entire thing into vacant lab buildings , which is not our plan , by the way .
Speaker #13: Got it . Thank you . And then just the second question for the balance of the year , and maybe into the first quarter , you talked about maybe some celebrities and occupancy from some known move outs and maybe some of the tenants .
Speaker #13: Is there is there a way to put any brackets around how big the further slippage could be before that starts to recover ? I think you mentioned the second half of 26 before the earnings start to benefit from some of that occupancy coming back , but just like what's the risk from here to the trough ?
Speaker #13: I guess. And the components therein.
Speaker #5: Yeah . No , this is Calvin . I'll start . But you know , again , we continue to be encouraged by the pipeline and the activity that we're seeing .
Speaker #5: But we recognize that there are still some headwinds within the portfolio that we have to work through . We're gaining confidence with these leading indicators and the expirations and non-renewals that we have for the balance of the year .
Speaker #5: And going into 2026, with our general kind of 75% to 85% retention, we will likely have some occupancy slowdown over the next couple of quarters.
Speaker #5: And then from there , we'll be able to pick back up again . Occupancy could trend down somewhere in the high 70s before it starts to pick back up again .
Speaker #5: So I think we're we're going to be very mindful of the next few quarters in terms of where that goes . But that'll be , you know , the inflection point that we believe we can start to grow back from .
Speaker #13: Thank you .
Speaker #2: Your next question comes from the line of Richard Anderson with Cantor Fitzgerald.
Speaker #10: Hey, good morning everyone.
Speaker #14: So if I could just sort of get a pacing or cadence of what you're seeing out of life science , you talked about occupancy bottoming , turning on the distress purchasing engine , and then ultimately pricing power .
Speaker #14: When do you if you had to hazard a guess , when do you think those three important points in the in the life cycle going forward in life science are going to happen ?
Speaker #14: Is the bottoming an early 26 event? Is the distress purchasing sort of on top of that and pricing power, maybe 2027 time frame?
Speaker #14: Is that the way we should all be thinking about it?
Speaker #4: Hey , Rich , it's Scott here , and some of it is . I'd call opportunistic . It's not all distress , which is , you know .
Speaker #14: Vacant .
Speaker #4: , empty building . There may be some of that . So that's an important distinction , though . Some of it is just opportunistic .
Speaker #4: And therefore, it's a different profile than true distress. But it's not going to play out over a three-month window. I think this is a 12 to 24-month window as the sector finds a bottom and truly starts the recovery.
Speaker #4: So it's not like this window is going away . If we do this earnings call in February and we haven't purchased anything yet , that's okay .
Speaker #4: It's not like the window is going to close next February. It's going to take a little time for the sector to fully recover.
Speaker #4: I do think the core submarkets are going to come first . I think the big incumbent landlords , and there's only a couple are going to recover faster .
Speaker #4: Those things I'm quite confident in , but maybe just to underscore the point that that we made here , that the sentiment that the fundamentals are starting to turn in our favor during this conference call alone , we've had one tenant get acquired by Eli Lilly .
Speaker #4: That's now public. We had another tenant report very favorable phase three data, and I think their stock is up 60% or something.
Speaker #4: So you know , to have the point is we continue to get positive surprises after a couple of years of a lot of negative surprises .
Speaker #4: We've had a very different change in , in , in tone over the last 60 days . And that's continued here into the first 30 minutes of our earnings call .
Speaker #4: So that's great to see .
Speaker #14: Excellent . I love real time stuff . And in terms of selling outpatient medical , I still call it mobs . But that's me .
Speaker #14: You're not alone in this movement . We're hearing about others that are potentially going to be selling big chunks of mobs . What would you call how would you characterize the buyer pool in terms of , you know , we're all this might go , is it going back in the hands of the systems or private equity ?
Speaker #14: You know, how would you describe your audience there? Thanks.
Speaker #4: All the above . There are some health systems looking to buy back certain assets . Private equity for sure . It's institutional , high quality buyers , big sophisticated that are the counterparties at least on the projects we're working on .
Speaker #4: I can't comment on the others.
Speaker #14: Okay , great . Thanks everyone .
Speaker #2: Your next question comes from Michael Carroll with RBC Capital Markets.
Speaker #15: Yeah . Thanks . I want to circle back on the life Science leasing pipeline , the one point 8,000,000ft² . I mean , can you talk about the timing of of where those transactions are within that pipeline ?
Speaker #15: I mean, how close are they to being signed, and when they sign, how long does it take for them to actually commence?
Speaker #4: Yeah. Well, the LOI is obviously closest to assigned lease execution, and that's approaching 300,000 sq. ft. So the odds of those getting done are obviously pretty high.
Speaker #4: The phase behind that are what we call proposals. So, where you're actively negotiating terms, that's roughly half of the pipeline. So, you know, those are pretty far along.
Speaker #4: And then there's tours . Where you know you're starting to talk deal terms . They're looking at the space and space planning and all those things .
Speaker #4: And that's a pretty material part of the balance. And then there's just the inquiries, kind of the early stage stuff. So, I'd say it's weighted towards kind of the second half of the process between an inquiry and a signed lease.
Speaker #15: And then once they get signed , like how should we think about the commencement timing ? I'm assuming obviously if it's a new lease or on a development or redevelopment , that commencements probably , what , 12 months out and the renewals is pretty immediate .
Speaker #15: So maybe can you talk about what is the split between new and renewals and the timing of those potential commencements ? If they do sign ?
Speaker #5: Yeah . Hey , Michael , it's Kelvin , the I'll start with the last question , but the split between new and renewals roughly 5050 , I would say we actually are seeing an uptick in .
Speaker #5: New potential clients that are entering our pipeline as well as a good positive , generally speaking , from a timing standpoint , the second generation spaces that we have available to lease are actually quite good condition .
Speaker #5: So it's really dependent on the space in terms of how long it will take to get a tenant in there and to commence the lease .
Speaker #5: You'll see in our executions from this quarter that we had limited teas and continued strength in our leasing volumes. A lot of that had to do with the quality of the space that we had available to lease.
Speaker #5: So , you know , it's really dependent on the space . We have some spaces that we're getting back that we'll invest capital into and reposition .
Speaker #5: So, some of those could be on that longer 12-month timeline that you highlighted. But we could see some commencements happen sooner than that.
Speaker #15: Okay . Great . Thank you .
Speaker #2: Your next question comes from Vikram Malhotra with Mizuho .
Speaker #16: Morning . Thanks for the question . I guess you know , I guess Kelvin or Scott , you might just sort of stepping back and giving us a little bit more detail or clarity on sort of this whole occupancy bottoming .
Speaker #16: The risk near term into four . Q but then really , how much , how much of the , you know , sign , but not commence leases , you have to offset some of this because I was just really confused .
Speaker #16: It sounded like you said occupancy and lease are the same. But maybe, if you can just break it up, leaving aside the development leads, just the core portfolio.
Speaker #16: How much of a benefit is there from the losses? You see versus the sign, but not commence leases?
Speaker #5: Yeah, and maybe Vic, just to kind of keep it at the higher level at this point. You know, we do see these leading indicators as favorable signs of the execution opportunities that we have within our portfolio.
Speaker #5: And our occupancy is trending over the next few months or a couple of quarters is somewhere in the high 70s. And that will give us a base to build back from.
Speaker #5: I think that's important to note . And as we talked about with respect to the pipeline , depending on the quality of the space and the execution timeline of the team , we might be able to offset some of those near-term headwinds that we know are coming with some execution .
Speaker #5: So, there's a lot of moving parts there. But I think that's generally good guidance.
Speaker #16: So I just to clarify on that , I believe , like if you just look at the core , the 93.2 , there's some slippage from non-renewal , you know , potential tenant , etc.
Speaker #16: , based on kind of our conversation . But then , you know , there's a benefit from sign but not commence . So can we are you able to just give us a little bit more color on how those two things interact ?
Speaker #16: Just for the same store pool ?
Speaker #5: Yeah. So maybe just for the fourth quarter, we have about 300,000 ft² of expirations. And you'll notice in the footnote in the supplemental, we're putting 186,000 ft² of that into redevelopment.
Speaker #5: You know , we'll largely offset the redemption component of that with new commencements . And then we'll have , you know , a portion of the expirations that will vacate .
Speaker #5: So that's kind of the Q4 component. Within that, there could be some additional reduction in occupancy as a result of early terminations or proactive downsizing of tenants, as we're negotiating space needs and space planning.
Speaker #5: So, hopefully, that gives you a little bit more context.
Speaker #16: Yeah , thanks . I just the if you could expand I mean , I guess Scott , you mentioned a lot of interesting events during the call in terms of , you know , Eli Lilly and fundraising and stuff and just in the in the process of bottoming , assuming we have more M&A , maybe using the Eli Lilly as an example , like , what does that mean for base needs in your mind ?
Speaker #16: Like is the is the company that's being acquired , your tenant ? Do they keep the space ? Is there risk of them downsizing or maybe even expanding ?
Speaker #16: Maybe just give us a sense of like what the M&A piece means for the for the tenant , for your portfolio ?
Speaker #4: Yeah , I just saw the headline . So it we haven't talked to the company yet . Each situation is is different . There are times when the big Pharma is buying a platform and they're looking to use that team in science to , to build a new business opportunity .
Speaker #4: And that tends to lead to demand for real space or more space. And there are times when they’re just buying a drug, in which case they probably don’t need the space anymore.
Speaker #4: And we've had , I don't know , 100 . In the course of the company's history . And it's about half and half in terms of the impact .
Speaker #4: Obviously , it's a credit upgrade . Either way , that's a fairly long term lease . If I remember correctly , on a campus that's really full and we've got some growing tenants , who knows , it may end up being a positive in a lot of ways , but I think the important point is the M&A is just such a huge impact on the ecosystem and recycling capital , creating great exits for those existing investors to plow back into new companies .
Speaker #4: And the M&A year to date is something like three times 2024, and it continues to grow. So that's just a huge benefit to the entire ecosystem.
Speaker #4: That should drive more demand.
Speaker #16: Thank you .
Speaker #2: Your next question comes from Wes Golladay with Baird.
Speaker #17: Hey, good morning, everyone. For the potential acquisition opportunities, do you see a bigger opportunity set for the outpatient medical developments or the opportunistic lab properties?
Speaker #4: Yeah , opportunistic lab is exactly that opportunistic . And those tend to be big projects . So they're chunky . So they can be big numbers .
Speaker #4: Or they could be zero. Our outpatient development is pretty normal course business. There are a number of health systems that we're quite close with.
Speaker #4: And development partners that we work with . I'd say that's more of a normal course , steady state business . A couple hundred million dollars a year that fit our criteria , which basically means pre-leased with good yields and good health systems in in core markets .
Speaker #4: That's going to be less chunky and more just recurring. Normal course business.
Speaker #17: Okay . And then on the last quarter , you talked about the potential change for the inpatient . Only rule . Are you seeing any uptick in leasing demand or development opportunities from this ?
Speaker #4: Yeah . The comment period closed . We haven't seen the final rule yet . So so nothing has happened there in terms of the inpatient only rule .
Speaker #4: But I also said at the time that the market forces are moving more of those services to an outpatient setting, regardless of what CMS does.
Speaker #4: The CMS rule would just accelerate that process . But it's happening either way . The payers prefer it . The health system usually prefer it , and certainly the patients prefer it , which is a pretty important voter in the process .
Speaker #4: So it's happening either way . It's just a matter of how quickly . .
Speaker #17: Okay . Thank you .
Speaker #2: Your next question comes from Mike Mueller with J.P. Morgan.
Speaker #18: Yeah . Hi . I guess this kind of a hypothetical question , but if your implied cap was 100 , 125 , hundred and 50 basis points lower , do you think you'd still be looking to monetize parts of the outpatient medical portfolio today ?
Speaker #4: The the asset sales ? We were getting out of non-core markets or non health system relationships at great pricing ? Yes . We're also looking at some recaps today of core real estate where we're going to retain a meaningful economic interest , maintain the relationship , maintain the footprint , those we would not do if if the stock price was more favorable .
Speaker #18: Got it. And I guess my second question, I think you answered part of it. It's going to ask the specific attributes of what you're specifically looking to sell.
Speaker #18: It sounds like it’s about age and secondary markets, or non-core markets.
Speaker #4: It's mostly market profile . When you look at our our outpatient footprint , although it's a national portfolio , we've got 10 to 12 markets that comprise two thirds or more of our footprint .
Speaker #4: We love those markets. We have great health system relationships, critical mass in a growing demographic market that we find attractive. We're looking to do more in those areas.
Speaker #4: Dallas is an example . Denver , Nashville , other examples . You see us do development . There as well . So the profile of what we're selling tends to be in markets where we don't have that big critical mass , or maybe we don't have the strongest health system relationship .
Speaker #4: Those tend to be the assets that we're looking to monetize, and it's a good time in the cycle to do that.
Speaker #18: Got it. Okay. Thank you.
Speaker #2: Your next question comes from Michael Stroik with Green Street.
Speaker #19: Thanks and good morning . I appreciate that the step down and retention and outpatient was largely due to the common spirit leases no longer being included .
Speaker #19: What have retention rates in recent quarters then ? If you do back out common spirit , and has there been any sort of decline in retention as the company has pushed pricing maybe a bit harder relative to the sector's history ?
Speaker #4: Hey , Michael , no , we've been in the 75 to 85% range across the portfolio . We did have a couple of big non-renewals this quarter that we've known were coming for a long time , just legacy health peak assets that we've owned for years and years and years .
Speaker #4: But the leasing has been really phenomenal. So, like, step back for a minute and look at the actual leasing volume we’ve had among our highest quarters in the history of the combined companies.
Speaker #4: And the economics on leasing are extremely attractive. We're getting better escalators and renewal spreads that are as strong as we've ever had.
Speaker #4: Very little tie . That term of the leases is long , so , you know , same store , you know , investors like it .
Speaker #4: It's an easy number. It's one number. It's not the most important number. The economics and the cash flow are really driven by the things I just mentioned.
Speaker #4: And those numbers continue to be very , very favorable . So marking the team are really doing a great job on on leasing .
Speaker #4: And we expect that to continue given the fundamentals.
Speaker #19: Got it. Understood. Has there been any sort of spread in pricing power between, call it, your health system and non-health system?
Speaker #19: Tenants ?
Speaker #4: There's definitely a distribution in terms of releasing spreads . And , you know , some are ten plus percent , others are slightly negative .
Speaker #4: I'd say it's less focused on whether it's a health system or not , and more focused on the quality of the building . The uses that are inside that space .
Speaker #4: That tends to drive that dynamic more than whether it's a health system tenant or not.
Speaker #19: Got it . Thanks for the time .
Speaker #2: Your next question comes from John Peterson with Jefferies.
Speaker #17: Oh, great. Thanks.
Speaker #20: Maybe just one for the sake of time here. So, since we're talking about selling properties, I know at times in the past you suggested that the portfolio might be something that could be sold at some point.
Speaker #20: So, I'm just curious for an update on how you're thinking about that portfolio as a long-term hold on your balance sheet.
Speaker #4: Yeah , we're happy . We own it . We're happy . We own 100% of it rather than 49% of it . LCS is done .
Speaker #4: Incredible job. We've got a dedicated team that's worked side by side with them to drive value. They're doing an incredible job.
Speaker #4: Obviously, the fundamentals are good. We have put some money into the buildings that should pay dividends for years to come. Those buildings look great.
Speaker #4: Residents demand them, so we've never seen growth out of that business like we have over the last six years. Even including the downturn, our compounded growth rates are around 9%, including the downturn.
Speaker #4: I'll just repeat that . It's an incredible performance . By that portfolio that we think will continue . So yeah , we're happy to hold it for the foreseeable future .
Speaker #20: Okay. All right. That's all for me. Thank you.
Speaker #2: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks.
Speaker #4: Thanks for your time today, everybody. Hope you have a great earnings season and hope to see you soon. Take care.