Scott Bohn: Hey, Juan, it’s Scott Bohn. I think with AI, you are seeing some — maybe some automation labs within the last, but you still have the bulk of those facilities will have chemistry and biology and your typical lab buildouts. So we aren’t seeing a dramatic shift in any by any means in the build-outs for some of our tenants who are more AI focused. Our buildings have a ton of power to them, have the infrastructure, and they have the capabilities to handle any of those needs.
Juan Sanabria: Thank you very much.
Operator: Your next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Richard Anderson: Hey, thanks. Good morning everyone. So next beat on the synergies, typical, I guess, most REITs that’s the low hanging fruit of the story. But going forward is perhaps a little bit more difficult, which is the life science leasing that you’ve been talking about, I think $60 million of upside. Can you take a shot about what the timing of that is? It’s not all next year? Could it be is far out into 2027? Or how long of a tail to the life science leasing do you think is possible here going forward?
Peter Scott: Yes. Hey, Rich. Well, as you mentioned on the synergies, I’ll just start there. We do feel quite good about the trajectory that we’re on, $45 million that we’ve been able to articulate we think we can hit this year. And we feel very confident in our ability to hit the $60 million run rate as we head into the next year. Obviously, the trickier part that you mentioned is on the leasing pipeline and especially those three marquee campuses. What I can say is that within our pipeline, we are having discussions on all of those campuses. I’d say some of those discussions are much further along than others. Realistically, if we signed a lease today or in the second quarter, it really wouldn’t commence given some of the work we have to do until the earliest the beginning of 2025.
So what I would say probably is it’s high level, it’s probably a one to two year period where we phase in and get to the full run rate there on the NOI. And it’s probably the best guidance I can give you is we signed leases, and we’re pretty good at disclosing those we can try and get a little bit more specific on that number, but it’s probably a bit in ’25, a bit more in ’26 and hitting that full run rate number probably towards the end of 2026.
Scott Brinker: Hey, Rich, one of the things I wouldn’t characterize the synergies of low-hanging fruit. And most mergers actually don’t achieve their projections. We’ve got a team of 300-plus people here that have been working on the clock to achieve those synergies. So hats off to them for making it happen. It was anything but low-hanging fruit.
Richard Anderson: But I don’t mean to trivialize it, let’s call it, middle-hanging fruit, right? So second question might be a tough one to answer, but I’m going to ask it anyway. When you think about the entirety of the transaction, including everything, including whatever the transaction fees were if that’s 3% of $5 billion, that’s $150 million. When do you think the merger, the combination is truly kind of breakeven for the company when you take everything into consideration?
Scott Brinker: Yes. I mean if you’re just referring to like a payback period, I mean it’s less than three years. If you just take the synergies in comparison to the upfront cost, but obviously, company valuations based on future cash flows, not just one year. And we feel with high confidence we’re going to achieve those synergies, and it is permanent. And if the discounted value of those future cash flows is many multiples of the upfront transaction costs. So it’s certainly value-creating transaction from that standpoint. And then most important for me, for our Board, and the same for the Physicians Realty Board is we created the best platform in the sector, and that has intangible benefits that will last forever. So hard to put a number on that, but we have that now.
Richard Anderson: All right. Sounds good. Thanks very much. Great quarter.
Operator: Your next question comes from the line of Michael Griffin with Citi. Please go ahead.
Michael Griffin: Great. Thanks. I was wondering if you could give some more color on the Poway disposition. You mentioned it’s a mix of industrial lab and office space. Is the cap rate indicative of where lab might be trading today? Or were there some specificities given the asset mix that might warrant a higher cap rate?
Scott Brinker: Yes, it wasn’t really a life science property in any event. It’s kind of a mix of uses, R&D, there’s some manufacturing and some office kind of an industrial footprint and build out in parts of it, it certainly wasn’t traditional life science nor was it in the traditional life science market. So I wouldn’t view that as a read through. I think it was a great price. That’s why we sold it. So we were happy to recycle those proceeds into the balance of our portfolio. But yes, I don’t think that’s indicative of life science cap rates.
Michael Griffin: And Brinker, where would you say kind of Class A lab space is trading these days on a cap rate basis?
Scott Brinker: Yes. Hard to say. Cap rates are always tough in life science, just given market rents versus in-place rents. What we did in San Diego to refines a couple of months ago, rents were pretty close to market. So that — in that case, cap rate is more indicative of valuation. And that was in the low 5s, but it was also a premier submarket, brand new building credit tenant. I mean, so if you’re trying to make your list of A+. It was pretty much A+ across the board. So I’d say that’s the low end of the continuum for life science.
Michael Griffin: Got you. That’s helpful. And then maybe could you add some commentary around supply, particularly in South San Fran, where I think we’ve seen kind of elevated relative to the other core markets. And how might your competitive set compare to market supply overall?
Peter Scott: Yes. I mean maybe I’ll just touch on supply for a second, Griff, because it is a good question. I’m going to repeat a statement that we’ve been saying for a while and others have been saying as well, but not all new supply is built equally. And we do fully expect the incumbent landlords, which there’s not a lot of that out there in the core submarkets to outperform. As we think just big picture, there are a lot of new entrants into the space over the last couple of years, not surprising because it was such an incredible moneymaking subsector and real estate for such a long period of time. But I think a lot of these new entrants, and I think a lot of the very poorly capitalized landlords that we see now, they just fail to underwrite this incumbent risk and we think a lot of them will struggle.
But as we look at each one of our core submarkets, when you look at the headline number that gets quoted by brokers. When we parse through the data and we have included this in our investor presentation, the competitive supply going back to the fact that I said not all supply is created equal. What we view as competitive and I think we’re probably still conservative in what we include in that bucket as well, it’s a very manageable number.
Michael Griffin: Great. That’s it for me. Thanks for the time.
Operator: Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll: Yes, thanks. I wanted to touch on the life science LOIs that you kind of highlighted in the press release. I mean how many of those are true expansionary spaces that could be earmarked to push up overall occupancy levels within the space?
Peter Scott: Yes. Well, maybe I’ll just talk quickly about the overall leasing pipeline, Mike, I think that may be an easier way to answer your question, but our lab leasing pipeline today sits at around 2 million square feet and all of those LOIs are included within that pipeline. Obviously, we have a pretty high degree of confidence those LOIs are going to turn into leases. But as we look at some of the parsing of that 2 million square feet, I’d say about 70% of that is with existing tenants within the portfolio. And then taking it even a step further, I’d say that probably 50% new lease deals, about 1 million square feet would be new lease deals within the portfolio. And then the rest would be renewals. So a nice 50-50 split.
And if you think about the amount of vacancy that we have within the portfolio across the marquee project, whether it be Vantage or Gateway as well as portside in South San Francisco, 1 million square feet within our pipeline of new lease deals actually matches up quite well with what we have as vacancy for new lease deals.
Michael Carroll: And I guess related to that pipeline, how many tenants need to raise funds to kind of take down that space? Or will any of those tenants decide to delay making decisions just given the increased volatility that we see in the capital markets over the past handful of weeks?
Peter Scott: Yes. I’d say very few need to raise capital, if any. We wouldn’t be having active discussions. In fact, you don’t really have a lot of active discussions for deals that are contingent upon capital raising, those discussions tend to happen at least today after the capital has been raised. So I’d say that there’s really no risk to that within the pipeline.
Michael Carroll: And will those tenants delay making decisions? Or are they — do you think that they could wait longer, just given what’s happened in the capital markets and the geopolitical landscape over the past few weeks?
Peter Scott: Because, as I said, I think all those tenants have effectively raised capital if they needed to raise capital. Not all of them need to raise capital. There’s some mid-cap and large-cap names in there as well. So I think the answer to that is no, they’re not delaying decisions. It does take a little bit longer to get lease deals done to date, specifically as you price out the various TI packages and build-out.
Michael Carroll: Okay. And then just last one for me. I know there have been issues over the past year where the company wants to take down space, but the Boards of those companies have kind of vetoed it. I mean have the — I don’t know, do you know if the Boards have approved this — the leasing that’s currently in the pipeline? And do you think that they could potentially veto some of those transactions or at least push them out?
Scott Brinker: I mean the pipeline is 30-plus tenants. So we’ll refrain from going down the list, but the quality of the discussions today is much higher than it has been in the last two years. So we can’t give you certainty on any of the stuff. And certainly, the geopolitical environment doesn’t help at the margin, but I don’t think it’s a driving factor. The bottom line is the pipeline is massively bigger than it ever has been in the last two years, continues to grow and the quality of the conversations is higher.
Michael Carroll: Great. Thank you.
Operator: Your next question comes from the line of Wes Golladay with Baird. Please go ahead.
Wesley Golladay: Hey, good morning everyone. Just want to follow-up on the new lease conversation. Looking at the 1 million square feet, are you seeing any change in demand for first generation space, any submarket standing out and any kind of categories picking up activity?
