Peter Scott: Yes. I mean I think the part of that I’d like to focus on is the submarkets. We never really exited or I should say weird outside of the — or submarkets that we wanted to focus on. So in San Diego is Torrey Pines and Sorrento Mesa. In Boston, it’s the Lexington 128 market in West Cambridge and it’s really South San Francisco. And what we’re actually seeing is a gravitation towards tenants wanting to be in those core submarkets. And I think some of those other submarkets that were not fully proven that the respective of development done in those they’re going to take a lot longer to lease up, if they ever do the lease up.
Wesley Golladay: Okay. And then when you look at potential distressed opportunities, do you think you’ll get any distressed pricing for those? Or is there still a lot of capital allocation of those great submarkets. And how would you look to potentially get involved? Would it be a JV, mezz-lending? Can you elaborate on that?
Scott Brinker: It could be any of the above. It would be very opportunistic, but it would have to be in core submarkets. We really bring something unique to the table, which is our existing footprint, tenant relationships, broker relationships, et cetera. So we’ll be very focused on particular submarkets, but we could be more open-minded on deal structure, but it would have to be opportunistic type pricing.
Wesley Golladay: Okay. Thanks for the time.
Scott Brinker: Yes.
Operator: Your next question comes from the line of Jim Kammert with Evercore. Please go ahead.
James Kammert: Hi, good morning. Thank you. Just building a little further, if possible, on the lab leasing demand. It sounds like your pipeline is larger. These tenants have funding. Is that translating into any ability for landlords like yourself to kind of hold the economics in terms of TI packages and whatnot? Because if I recall, that was kind of being pushed more and more towards landlords in terms of $150, maybe to $250 and plus. Any comments there? And if you are still being required to pay those are you able to get an economic return on that and effectively bake it into the rent? Thanks.
Scott Brinker: Yes. Our re-leasing spread in the first quarter was around 3%. Now it could vary quarter-to-quarter. But as we look at our current pipeline, the renewal spreads will be above that level in the aggregate, some higher, some lower, but on average, certainly above the 3% across the portfolio. We still feel like it’s in the 5% to 10% range. At least in recent quarters, the leasing and TI that we’re putting into the buildings to drive those rents is very modest, around 5% of rent on renewal leasing and around 10% on new leasing. So those are pretty modest leasing costs across commercial real estate.
James Kammert: Right. I’m sorry, it was clear, but I meant like on asset brand new space, landlords being required to put in $250 type of allowance and stuff to make the deal happen? Or am I mistaken?
Scott Brinker: Yes. So for new development, that’s true. I was speaking more to renewal and re-leasing spreads. But for new development, certainly, there’s an expectation of turnkey or closer to it, which we’ve been talking about for the last year or so that we’re actually having more success in the current environment on our second generation space, it’s turnkey in nature but at a much more modest investment, but lower rent, lower OpEx and no TI from the tenants. So that’s certainly a big part of our leasing pipeline. But we are getting some interest in our development projects as well.
James Kammert: All right. Thank you.
Scott Brinker: Yes.
Operator: Your next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.
Michael Mueller: Yes, hi. Thanks. Just curious, how do you see tenant retention shaping up for the balance of the year? And where do you think the 96% operating portfolio occupancy could end the year?
Peter Scott: Yes. Hey, Mike, it’s Pete. Tenant retention, the headline number was a little bit lower, assuming you’re talking just about last, just because we actually had a subtenant that went direct, and we don’t include that in the retention statistics. It was NGM that went direct on one of the M-gen buildings, and they have been a subtenant in that building for years. But the way we report it, we don’t include that as the tenant was retained within the building. We report that as a new lease. Therefore, if you did include it as tenant retention, you’d be right around 60%. And I would say that that’s probably a pretty good number. Lab is always going to be a little bit below what we achieve in outpatient medical, which I think this quarter put a number out there were 84%, which was pretty darn high. So I think the tenant retention number is a little bit misleading and you got to dig into it.
Michael Mueller: And then occupancy, Pete?
Peter Scott: Yes. And then on occupancy on the 96%. Our view is that, that should pick up a little bit. In fact, I know there was a sequential decline from the fourth quarter to the first quarter. That was actually a proactive termination we did at the towers building in South San Francisco, and we’ve actually already re-leased that space which just haven’t commenced yet. So we don’t include that in the occupancy number until the lease commences. So just if you factor that in alone, we’d expect occupancy to tick up a little bit as the year progresses.
Michael Mueller: Got it. Okay. Thank you.
Operator: Your next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Michael Stroyeck: Thanks and good morning. Could you just provide some color on the outpatient medical sequential occupancy decline during the quarter? And just whether that largely came from legacy dock or legacy peak portfolios?
Thomas Klaritch: Yes. Really, you typically see a — this is Tom Klarich, but you see a decline from Q4 to Q1 pretty regularly because a lot of doctors hold over the holiday period and then when things settle down after the first of the year, they move out. So that’s pretty typical. I wouldn’t point to legacy peak or legacy dock as a cause for that.
Michael Stroyeck: Got it. So I guess nothing really stands out in terms of like tenant credit, asset quality or anything else, just normal seasonality?
Thomas Klaritch: Just normal rhythm during the year.
Michael Stroyeck: Got it. Okay. And then maybe following up on the Poway disposition discussion. Can you just help us understand how much of your portfolio is similar to these assets in terms of not necessarily being traditional life science properties?
Scott Brinker: That was really it. I mean we have like the land bank and conversions in West Cambridge, where we’ll eventually tear buildings down and build by science. But in terms of the stabilized assets, that’s it.
Michael Stroyeck: Okay. That’s helpful. Thank you.
Scott Brinker: Yep.
Operator: Your next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra: Good morning. Thanks for taking the questions. Maybe just first one, the — you’ve talked a lot about the life sciences leasing pipeline, but I’m wondering if you can update us or just provide color on the watchlist, given the capital raising model? I’m assuming it’s lower, but any numbers, any magnitude or perhaps in other ways, like what’s baked into the guide for the watchlist?
Peter Scott: Yes. Vik, it’s Pete here. I think you’ve done a very nice job actually in your research talking about this. And what’s happening is actually following suit with [indiscernible]. The strong capital raising is certainly causing us to have a much lower tenant monitoring list. Our monitoring list would be a tenant that’s got less than 12 months of cash runway. And if you just want to put percentages on that, I’d say that list today is 50% of the size of what it was a year ago, continues to trend in the right direction. So it’s down considerably. And the other thing I would just mention, we said this before, even in the best of lab market, you’re always going to have a couple of tenants. We’ve got 200 tenants. You’re always going to have a couple of tenants that you’re paying close attention to because it really comes down to the science and the success of the science and not necessarily always about the capital markets and ability to raise capital.
Vikram Malhotra: Okay. That’s helpful. Just second, I’m wondering, the HCA sort of programmatic deal you had in terms of MOBs was — has been pretty fruitful. I’m wondering with the combined company now with physicians. Is there a likelihood of a similar deal with another system? Or is that — is it just given the capital environment, even hospital systems are just waiting on development?
Unidentified Company Representative: Hey, Vikram, it’s JT. We have a lot of historical relationships across the portfolio. So we start — we have kind of — I hate to call it systematic, but routine kind of steady pipeline with a number of health systems in multiple states. So all highly pre-leased all kind of outpatient services that are higher margin and that they need to kind of expand into kind of new markets for providing access to care in those markets. So it’s pretty systematic across the board and just has to be at the right price and kind of the right markets for us to proceed, but pretty steady flow of in off-market relationship business.
Vikram Malhotra: And then just one more, if I may. Just a clarification. I think on the medical office rent spreads, there was a 500,000-plus square foot deal that I think you noted was not in there or it would impact rents later on. Can you just elaborate upon that? Like when will that hit the rent spread metrics? And what was that?
Thomas Klaritch: Yes. The — that lease was a master lease with a system in Houston, and it covers basically three campuses. I do want to point out that we did do that lease internally. So we saved about $3.5 million of lease commissions on that deal. And we also had no TI contribution, and we eliminated our capital liability for 10 years. So it was a great deal. Two of the campuses did have an increase. There’s one of the campuses had a decrease. So we’ll have an impact on mark-to-market in July of ’25, I think it was 6% to 8% decline. But to me, that’s a great deal if you get absolutely no capital for 10 years on 600,000 square feet.
