Healthpeak Properties, Inc. (NYSE:DOC) Q1 2024 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:DOC) Q1 2024 Earnings Call Transcript April 26, 2024

Healthpeak Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthpeak Properties to report First Quarter 2024 Financial Results and Host Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Andrew Johns: Welcome to Healthpeak’s first quarter 2024 financial results conference call. Today’s conference call contains certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions. Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is 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. Certain non-GAAP financial measures will be discussed on this call. In an exhibit of the 8-K we furnished with the SEC yesterday, we have reconciled our non-GAAP financial measures to most directly comparable GAAP measures in accordance with Reg G requirements.

The exhibit is also available on our website at healthpeak.com. I’ll now turn the call over to our President and Chief Executive Officer, Scott Brinker?

Scott Brinker: Okay. Thanks, Andrew. Good morning, and welcome to Healthpeak’s first quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO; and the senior team is available for Q&A. We are extremely pleased with our first quarter results and our momentum is positive on every key metric. We increased our 2024 earnings guidance by $0.02 at the midpoint, driven by same-store results, outperformance on merger synergies and accretive stock buybacks. The merger has proven to be a meaningful positive catalyst for the company and the integration is exceeding our expectations. Many public company mergers are done through auctions, which delays the ability to integrate the two companies. Our transaction was completely different.

Neither company would have proceeded with the merger without high confidence in our ability to put the teams and platforms together in a way that one plus one can equal three. That meant having extensive conversations on people, process, systems and capabilities before we agree to proceed. Our integration planning was underway before we even announced the transaction. In the six months since that announcement, our combined team has done an exceptional job integrating every aspect of our business. The continuity and buy-in from JT and the senior team who joined Healthpeak has been critical to the integration, including key health system relationships. Property management internalization has been a huge success to date and is a good example of the merger augmenting our platform.

Strategically, it was important to me that our own employees are interacting with our tenants every day. And financially, we’re now capturing additional profit that flows through property level NOI. To date, we’ve internalized 10 markets, covering 17 million square feet. We chose to accelerate the rollout given our success to date, and we expect to internalize an additional 4 million square feet by year-end. Significant upside remains to be captured. We’re evaluating 10-plus million square feet for internalization in 2025 and ’26, which in aggregate will allow us to internalize more than 70% of our total footprint. The positive feedback from the property managers on the ground and our tenants further validates the strategic decision to internalize.

Let me take a minute on the value proposition in our stock today, which we think is compelling. The baseline is a strong balance sheet, a high-quality portfolio with 3% to 5% same-store growth and a mid-6% dividend yield with a conservative payout ratio. Beyond that baseline, we’ve identified $80 million of NOI upside potential none of which is included in our 2024 guidance from additional merger synergies and leasing up our active life science dev readout pipeline. We also see 30% upside by recapturing our discount to consensus NAV, which we expect to do through consistent earnings growth and smart capital allocation. Industry headlines notwithstanding. Over the past two years, we grew FFO per share by 13% and we expect to continue growing earnings moving forward.

Moving to our outpatient business. The fundamentals have never been stronger. Patient volumes are increasing, absorption is accelerated and new development remains low. That’s driving strong re-leasing spreads, retention and NOI growth. In addition, progressive health systems have a strategic focus to grow their outpatient revenue. It’s less expensive for payers, more convenient for consumers and more profitable for the providers. We have the premier platform and relationships to capture this outpatient growth, whether on-campus or off-campus at both locations are necessary to capture demand. We expect new supply to remain low given the cost of construction. Today, our triple net equivalent rents are in the low 20s while most new developments are $35 to $40 per foot.

Turning to our Life Science business. IPO and venture capital funding have improved recently, which is driving demand for space. Our leasing pipeline today is up 80% from last quarter, we’re increasingly optimistic that pipeline will generate lease executions for the balance of 2024 and into 2025. Roughly 70% of our pipeline is existing tenants many of which are deals that don’t come to the broader market, again, providing us a big advantage versus the new entrants who can’t tap into an existing portfolio of recurring tenants. We’re also seeing a massive reduction in new construction starts that should extend for multiple years, creating a far more favorable leasing environment for landlords. Let me close with capital allocation. The strategic merger with Physicians Realty closed on March 1 and is accretive to our earnings, balance sheet, and platform.

Year-to-date, we sold $363 million of fully stabilized assets at a 5.8% cap rate, plus $69 million of loan repayments. The most recent sale was an R&D flex office portfolio in Powai, East of San Diego that we sold to an affiliate of the tenant in an all-cash deal for $180 million, which was a 6% cap rate. We have additional asset sales in various stages of negotiation and execution, but given the environment, we’ll provide details if and when they close. We took advantage of the disconnect in our stock price and repurchased $100 million of stocks at average price just above $17 per share, which represents an implied cap rate of 8%. The year-to-date asset sales are more than 200 basis points inside that level, delivering immediate value to shareholders.

Our remaining authorization today is roughly $350 million, and we’ll continue to pursue buybacks as priority number one on capital allocation, obviously, depending on our stock price and the arbitrage opportunity from asset sales. Priority two for capital is new outpatient medical development with key health system partners, provided their strong pre-leasing and a positive spread to our asset sales. This capital recycling would be accretive to asset quality and stabilized earnings. We do have an attractive pipeline of such projects today in the $200-plus million range. Priority three is distressed opportunities in life science, which we are starting to see, especially development projects, lacking capital and/or leasing traction. These would be purely opportunistic and could be done on balance sheet or via joint ventures.

Most of the distress won’t be interesting to us, as we’ll focus on our own core submarkets where we can use our scale and relationships to drive outperformance. I’ll turn it to Pete for financial results and guidance.

Peter Scott: Thanks, Scott. 2024 is off to a great start. For the first quarter, we reported FFO as adjusted of $0.45 per share, AFFO of $0.41 per share and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance. Starting with outpatient medical. We reported same-store growth of 2.6%, driven by a positive 3.4% rent mark-to-market and an 84% retention rate. Our strong leasing activity continues. During the quarter, we signed nearly 1.5 million square feet of leases, and we have a backlog of 2.5 million square feet in active discussions, including 700,000 square feet under LOI. Importantly, we expect outpatient medical same-store growth to increase as the year progresses due to accelerating internalization and an increase in occupancy from continued leasing.

Turning to lab. We reported same-store growth of 2.7%, driven by 3% plus contractual rent escalators and a 2.6% positive rent mark-to-market partially offset by an anticipated tick down in occupancy. During the quarter, we signed approximately 150,000 square feet of leases and we have a robust leasing pipeline of nearly 2 million square feet. We have 455,000 square feet under LOI positioning the second quarter to be one of our best lab leasing quarters in recent years. In addition, we also expect lab same-store growth to accelerate for the balance of the year as free rent from some large lease commencements earns off. Finishing with CCRCs, we’ve reported same-store growth of positive 27%, driven by increased occupancy and rate growth. Occupancy in our CCRC portfolio ended the quarter at 85.2%, and we expect continued positive performance.

Shifting to the balance sheet. We had a very active quarter. We successfully completed the assumption of $1.9 billion of debt with a weighted average interest rate of 4%. We closed on our newly originated five year $750 million term loan, which we swapped to a fixed rate of 4.5% prior to the recent spike in interest rates. And as Scott mentioned, we opportunistically repurchased a $100 million of stock. Subsequent to quarter end, we fully repaid our commercial paper with proceeds from the [indiscernible] sale. Pro forma this transaction, our net debt to EBITDA is 5.2x. We have $3.1 billion of liquidity, no floating rate debt, an AFFO payout ratio of approximately 75% and nearly $350 million of authorization left on our stock buyback program.

Finishing now with guidance. We are increasing our FFO as adjusted guidance range by $0.02 and tightening the range to $1.76 to $1.80. We are increasing our AFFO guidance range by $0.02 and tightening the range to $1.53 to $1.57. Our increase in earnings guidance is driven by three items. First, we increased same-store guidance by 25 basis points to 2.5% to 4%. Second, merger synergies continue to exceed expectations and are now forecast to be $45 million in 2024. Third, we have bought back $100 million worth of stock at an FFO yield in excess of 10%. One last note before Q&A. We published a revamped supplemental alongside our earnings release. You may have noticed that we streamlined the document and modified it to more closely align with how we view the business.

We also added an NAV input page to assist with modeling, which we felt was important for our stakeholders. With that, operator, let’s open the line for Q&A.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Josh Dennerlein with Bank of America. Please go ahead.

Joshua Dennerlein: Hey, I just wanted to follow-up on your comment that 2Q should be one of the best quarters for lab leasing. Just — I guess my first question on that is just how are rents trending and what you’re signing versus maybe a few quarters ago? And then just what about TIs and concessions?

Peter Scott: Yes. Josh, I can start with that. I think rent and TIs as we look across our portfolio, it’s been pretty steady for the last six months or so. As we look at market rents today, it’s probably in that 5% to 10% premium when you compare it to our in-place rents across the portfolio, which is around $60 per square foot. On new lease deals, tenants are certainly seeking more turnkey space, which has increased the overall TI packages. But as I said, that’s been much more steady the last six months or so. And I think from a lease term perspective, on renewal deals, we’re probably seeing more three to five year in term. And then on new leasing deals, we’re seeing more seven to 10 years there. And then obviously, the last piece I’ll just say fundamentally is lease deals just take a little bit longer, especially as you price out the TI packages.

So if a lease deals feel two to three months to get done, couple of years ago, it’s probably closer to six months today, but we’re certainly highly motivated to get our lab leasing pipeline, which has increased a lot over the last year or so converted from a pipeline into a lease transaction.

Scott Brinker: Yes, Josh, I’d just add our leasing costs have been really pretty modest. If you just look in the supplemental for renewal leases, RTI NLC has been 5% or less of the rental rate and even for new leases, it’s in the 10% range. I mean, it’s really pretty modest and very low free rent as well. So I think we held in exceptionally well, just given the quality of the portfolio and the submarkets and the relationships.

Joshua Dennerlein: Thanks. I appreciate that color. And Scott, one follow-up for you. You mentioned you expect about 70% of the MOBs will eventually be internalized. How do you think about that 30% that you won’t be able to internalize? Is that stuff you would eventually want to sell or maybe at scale in the market to get to a point where internalization makes sense?

Scott Brinker: Yes. I wouldn’t say it’s assets we want to sell. It’s more markets where we don’t have significant scale. And then there are some markets where we have a big health system relationship where they prefer to use their own in-house property management firm, and Atlanta is a good example of that that we still have that market. The fact that health system wants to use their own people, we can live with that.

Joshua Dennerlein: Okay. Thanks.

Operator: Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Austin Wurschmidt: Thanks. Good morning everybody. Can you guys provide a breakdown of what’s driving the increase to same-store cash NOI growth by segment?

Scott Brinker: We didn’t provide a breakdown, but I can tell you that all three segments are trending at or above the midpoint of the initial guidance. So we’ve got good traction across the Board. Obviously, this particular quarter, DCRC was above. I expect that growth rate to normalize for the balance of the year. And then in lab and outpatient medical, I think all three quarters from here should be above what we reported in 1Q, but there’s volatility quarter-to-quarter.

Austin Wurschmidt: Yes. I mean, I guess, just specific to the cash same-store NOI lab guidance, I think it was 1.5% to 3%. Pete, you referenced there’s acceleration through the balance of the year is through rent burns off, I think related to the RevMed and Voyager deals you’ve highlighted. So I guess, can you give us a sense of what the magnitude of upside is there? And then also just maybe what the risks are that’s holding you back from going ahead and raising that at this point in the year?

Peter Scott: Yes. Well, I would say that the 25 basis point raise that we did this quarter on the aggregate same-store guidance certainly reflects the improved performance in lab. On the lab side, in particular, we’ve been pretty consistent in saying this that at the beginning of the year, we will have a little bit of bad debt cushion incorporated into the guide that we put out. And as we look at where we are today and look at all the capital raising that’s gotten done, we feel like we probably had too much of a cushion at the beginning of the year. So we’ve released a little bit of that. And then we are getting internalization benefit as well. So we’re probably trending towards the higher end of that initial 1.5% to 3% guide number.

The biggest headwind, and this is something that we’ve talked about is just the fact that we did have an occupancy decline as we look towards full-year 2023 compared to where we expect that to be in full-year 2024. We do think we’ll see a occupancy increase as the year progresses in our operating portfolio, but we’re comparing that to the full-year number last year.

Austin Wurschmidt: Okay. Got it. That’s helpful. And then I’m just curious, certainly, some of the VC funding and capital raising, you highlighted have been positive, presumably for some of the leasing discussions and pipeline. I’m just wondering if there’s been any change in those discussions or the pace with which things are moving forward on the leasing front and lab, just given some of the added economic uncertainty and volatility we’ve seen in the capital markets. And then just maybe even as you think forward from here, I know it’s been sort of the last 30 days or so, but any impact you see that having on sort of the future pipeline and decision-making.

Peter Scott: I mean if you look, Austin, the capital raising has been at least year-to-date in ’24 relative to year-to-date 2023, I mean, it’s been up across every single category, especially on follow-on equity offerings as well as private placements that we fit into that bucket as well. Certainly, there could be some risk going forward with interest rates going up. I think it’s a little less rate sensitive in the lab side of it and maybe cap rates in the world of real estate and those private placements and follow-ons do take some time to come together. They’re still happening, if you look across the last 30 days, the data will show you that even with the increase in rates, you’re seeing capital flowing into biotech, the XBI is still holding up pretty well. Last night, there were some pretty good tech earnings as well despite the interest rate environment. So we still remain optimistic that that capital raising environment has a pretty decent runway in front of it.

Austin Wurschmidt: Okay. Appreciate the thoughts. Thank you.

Operator: Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.

Juan Sanabria: Hi, good morning. Just hoping you could talk a little bit more about the disposition pipeline, how much is potentially for sale and what you could expect to transact on and how those proceeds would be split between debt reductions to stay leverage neutral versus buybacks from here?

Scott Brinker: Yes. Juan, it’s Scott here. We’ve done $350 million plus of pure asset sales year-to-date. The pipeline is at least that large, but it’s a volatile environment as Austin just pointed out. So when we have clarity on transactions, we’ll announce the details at that time, but it’s certainly a big pipeline, more focused on outpatient medical, whereas the sales to date have been more life science or this R&D portfolio that we had in Poway. So yes, it’s an active pipeline in terms of how the proceeds would be used in large part, it depends on the environment in the stock price, in particular. That’s been the highest and best use of capital in recent months just given where the stock was trading. If that continues to be the case, then that would be priority number one.

If interest rates stay high or move higher, obviously, we could always de-lever even beyond staying leverage neutral, which is just — we, for sure, will do that. We won’t lever up the balance sheet to buy back stock. So those are kind of priority numbers, 1 and 1A. And then in terms of playing offense, it would be primarily focused on outpatient, medical development, where we are seeing some highly pre-leased core markets, core health systems, strong yields. And we feel like we should be recycling out of some older assets with a little bit more CapEx and risk in exchange for those brand new assets in the right markets, right systems.

Juan Sanabria: And just as a quick follow-up on that question. You previously talked about $500 million to $1 billion of potential disposes. Is that still kind of a good placeholder in people’s minds just to think about that going forward for the balance of the year?

Scott Brinker: It’s probably the right range. Yes.

Juan Sanabria: And then just curious as a second question, just on AI, a lot of discussions, not just in real estate on what the transition is going to mean for everybody. But just curious, when we think about the physical infrastructure plant in lab, what the incremental use of power may mean for CapEx or just the buildings being able to handle it. Just curious on your early thoughts as this kind of progresses and evolves.