Healthpeak Properties, Inc. (NYSE:PEAK) Q2 2023 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:PEAK) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Good morning, and welcome to the Healthpeak Properties, Incorporated Second Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President of Investor Relations. Please go ahead.

Andrew Johns: Welcome to Healthpeak’s second quarter 2023 financial results conference call. Today’s conference call will contain 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 furnished with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

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

Scott M. Brinker: Thanks, Andrew. Good morning and welcome to Healthpeak’s second quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO and our senior team is here for Q&A. Last evening, we increased earnings guidance and reported 4.8% blended same store growth. The balance sheet remains in great shape. Through streamlining and automation Our G&A for 2023 is expected to be 6% below our original 2022 guidance. We’re operating in a volatile macro-environment where we have a strong handle on the things we can control. Fundamental driver of demand for our real estate is the desire for improved health, which is only growing. Equally important, we benefit from the impact of technology across our playing field of medical discovery and delivery.

For example, Progressive Health Systems now have 10 plus outpatient locations for every one hospital, with a strategic plan to grow that ratio to 20 plus. The hospital remains the epicenter, but much of the growth as outpatient is made possible by technology. The shift in delivery aligns with our strategy to capture the outpatient real estate needs of leading health systems. And with tighter profit margins because of the cost of labor, health systems will increasingly seek knowledgeable third party capital like Healthpeak to expand their footprint. Similarly, technology will reinforce and expand the need for lab space. AI and machine learning will increase the probability of success in drug research and reduce development timelines. This will drive more capital into the sector.

The data needed for the algorithms and the validations comes from the laboratory, which are highly regulated and controlled environments. A Nobel Laureate in chemistry recently said that she’d run her lab for 30 years, and never experienced the accelerating discoveries we’ve seen in just the last five years alone. The science is building on itself, including our understanding of genetics and improved testing, which will transform healthcare delivery. Today, it’s reactive, we seek therapeutics after a problem arises, technology will drive the addition of proactive care where we detect issues and seek care before a problem arises. This will shift the allocation of healthcare spending and expand the total pie. Our outpatient medical and lab buildings will be a critical part of this future.

A few comments on portfolio performance starting with outpatient medical where we have an irreplaceable portfolio and deep relationships with leading health systems. More than half of our square footage is now leased directly to a health system, which is 2X the level from 20 years ago as their business model has shifted towards outpatient care, and we’ve become a partner of choice. I toured a number of our buildings in recent months and saw very active parking lots and lobbies, a great sign for current and future leasing. Our concentration in high growth markets like Dallas, Houston, Phoenix, Vegas, and Nashville will benefit our portfolio for the next decade plus. Moving to our lab business where we have significant market share in key sub markets, a diversified tenant base, and strong relationships.

Biotech’s have been doing what they should do in this environment, which is to conserve cash. So the default answer has been to make do with existing space. That mindset made perfect sense the past few quarters but will naturally run in cycles. Despite that backdrop, we’ve had solid leasing activity, primarily with existing portfolio tenants who accounted for 89% of year-to-date leasing. In each case, the broader market either isn’t seeing the prospect, or is it a big disadvantage because we can tear up an existing lease in exchange for a larger, longer-term commitment. More recently, we’ve seen an uptick in leasing discussions, which may reflect the more benign outlook for the Fed and interest rates. I’ll close with transactions. The market remains slow given the financing markets and inactivity from core funds and non-traded REITs, many of which have redemption queues.

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Despite that backdrop, we’ve sold $130 million of fully stabilized but less core real estate year-to-date, at an attractive 5.4% cap rate and use the proceeds to accretively delever. We’re currently having good discussions on a couple $100 million of additional less core asset sales. Subject to closing, which isn’t guaranteed in this environment, we’ll have flexibility to either accretively pay down our line of credit or buy back stock. I will turn it to Pete to cover financial results, balance sheet, and guidance.

Peter A. Scott: Thanks, Scott. For the second quarter, we reported FFO’s was adjusted of $0.45 per share, AFFO of $0.40 per share, and total portfolio same store growth of 4.8%. In addition, our Board declared a dividend of $0.30 per share, which equates to an AFFO payout ratio of approximately 75%. Let me provide a little more color on segment performance. Starting with CCRCs, same store growth for the quarter was a very strong 19.3%. Occupancy has increased 230 basis points year-over-year and we see additional upside with zero new supply in our markets. Total NREF cash receipts were $31 million in the quarter and for the full year we expect our cash receipts to exceed NREF amortization by 5 pennies per share. Turning to outpatient medical, we had another solid quarter with same store growth of 2.5%.

Demand for our space is high and leasing momentum remains strong. We have executed 83% of our full year leasing budget and have an additional 15% in documentation. Re-leasing spreads were up 3.7% during the quarter, which again was at the high end of our historical 2% to 4% range. Trailing 12-month tenant retention was 81% which is a reflection of the quality of our assets and our time tested platform, which consistently produces sector leading customer satisfaction scores. Finishing with lab. Same store growth for the quarter was 3.8%. Year-to-date we have executed 461,000 square feet of leases, approximately 90% of that leasing activity has been with existing tenants, and we achieved positive re-leasing spreads of 52% on renewals. In addition, we have another 196,000 square feet of executed LOI with the majority of that activity occurring in July.

All of our LOIs are with existing tenants, which further demonstrates the superior advantage that incumbent property owners like Healthpeak have in their respective markets. With the Biotech index up 10% since the start of the second quarter, we are seeing an increase in tenant capital raising activity. Equity markets are open for companies with positive data readouts. Venture capital investment increased over $1 billion sequentially with Series A rounds growing more popular. M&A continues with $80 billion of deals announced year-to-date. The IPO market is showing signs of life and reverse mergers are becoming more popular, providing an alternative for companies to go public. An important part of our lab strategy is proactive asset management to improve our tenant credit profile.

As we had previously announced, we downsized Adverum in favor of Revolution Medicines trading a small cap credit for a $3 billion market cap company. During the second quarter we backfilled the significant portion of the Kodiak space to Lonza Bioscience and Bicycle Therapeutics. In both cases a significant credit upgrade. And at the cove, we proactively facilitated an assignment of the Harpoon Therapeutics lease to a private Biotech. A quick note on Sorrento Therapeutics. We’ve been paid rent in full through July on the four operating leases, and we hold letters of credit or security deposits of $2.6 million, so no impact on 2023 earnings regardless of the outcome. As you’ve probably seen, Sorrento was working on an exit financing package, but at this point, there are no details I can provide or assurances it will be completed.

We hope to have clarity on a path forward in the near-term. Turning now to our balance sheet. In May, we issued $350 million of 5.25% fixed rate bonds bringing year-to-date issuance to $750 million at a blended yield of approximately 5.35%. Our net floating rate debt balance was approximately $150 million at quarter end. Our balance sheet continues to be a competitive advantage in this environment. Our net debt to EBITDA is 5.1 times with nearly $3 billion of liquidity. We have net floating rate debt exposure of approximately 2%. We have no bonds maturing until 2025. We have approximately $150 million of annual retained earnings and we have stable ratings from both S&P and Moody’s. Our development spend is self-funded without the need for equity or asset sales from a combination of retained earnings and debt capacity from higher EBITDA.

As Scott mentioned, any potential asset sales would be opportunistic and are not contemplated in guidance. Turning now to our 2023 guidance, we are increasing our FFOs adjusted and AFFO guidance by 1 penny at the midpoint to $1.75 and $1.51, respectively. As you can see from our year-to-date results, performance across our portfolio remains strong, and we are increasing our full year blended same store guidance range by 25 basis point to 4% at the midpoint. Please refer to Page 38 of our supplemental for additional detail on our guidance. With that operator, lets open the line for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question comes from Juan Sanabria from BMO Capital Markets. Please go ahead.

Juan Sanabria: Good morning. Scott or Peter, I was just hoping you could talk a little bit more about the Life Science or lab market and the increase you’ve seen in demand in July and how if you can maybe characterize or put a number around the increase in kind of opportunities or number of companies looking for space or the amount of space being sought after by potential tenants and how and what has changed?

Peter A. Scott: Yeah. Hey, Juan, it’s Pete. Hopeful as well. Maybe I’ll just start with that and perhaps Scott Bohn or Scott Brinker wants to add a little bit to it. But, we talked about this earlier in the year that our tenant credit risk profile has been improving in the lab space. We also saw that sequentially this quarter as well. And I don’t want to repeat a lot of what I said in my prepared remarks but a lot of that improvement in the credit profile is because the capital markets are improving as well. Just a couple of stats when you think about follow on equity deals, you’ve had about $14 billion of deals get done year-to-date, tenants that have good data readouts are finding success raising capital. You look at the venture capital market and that has improved.

It’s improved $1 billion sequentially. And in fact, we’re seeing more Series A capital raises as it occurs as well, which is important because that’s really new company formation and that beat demand for new space for us. M&A is strong, in fact, that was another M&A deal that got announced this morning. So that $80 billion is actually more like, 87 billion at this point in time. And then, reverse mergers are definitely popular right now so it’s a backwards way of companies going public. We saw that in our portfolio with frequency merging with [indiscernible]. So, I’d say really that’s what’s driving the improved backdrop. Obviously there’s other things going on at each individual market. But we feel like things are trending in the right direction for us, and has certainly led to a little bit more leasing demand, as you saw the LOIs that got signed in July.

And we hope that that’s a harbinger for more to come in the next couple of quarters. But again, feeling a little bit better today than we did six months ago.

Juan Sanabria: And then just our follow-up question, just on the MOB guidance bump, what was the driver that the second quarter seemed solid, but within I guess the typical range, just curious on what drove the increased confidence there?

Thomas M. Klaritch: Yeah, Juan this is Tom. We continued to see positive operations at Medical City, Dallas, and that contributed about 90 basis points for the year and 50 basis points for the quarter. In addition, our escalators remain at that kind of 2.93% range. So that’s driving results and we continue to see rebounds in parking income where we’re above our pandemic level reduction. So that continues to drive our results. And as you said, the 2Q was really solid at 2.5%. And that was even with some headwinds against it. We had some — a fairly high comp in 2Q of 2022 at 4.5% and that included some adjustments in rent abatements and we had some positives to our expense reconciliation billings. So that had about a 70 basis point impact. We would have been at about 3.2% 2Q without those.

Juan Sanabria: Thank you guys.

Operator: The next question comes from Vikram Malhotra from Mizuho. Please go ahead.

Vikram Malhotra: Thanks for taking the questions. Just sort of building upon the Life Science comments you made, can you just help us think about kind of the trajectory or the potential for your Life Science segment going into 2024. Not looking for a specific guide, but just looking for the sustainability given the bumps, given that if leasing velocity remains as it is today and you do have Amgen coming up, which I think is now is a known move out. Let’s assume you’re not able to leave that up for the full year or it goes to redef. Can you just talk about sort of the potential of this segment, assuming trends remain as they are intact today?

Peter A. Scott: Yeah, hey Vikram, it is Pete here. On the Amgen leases that you mentioned, the good news is we’ve actually backfilled a significant portion of those and that’s been a pretty known vacate for a while. I can’t necessarily comment on the LOIs in specificity. But I think you guys see and understand where our leasing focus is right now, and obviously re-leasing the Amgen space is an important focus of ours. But, three of those buildings are currently leased today, and don’t have expirations until the end of this year or early next year. And we’ve always planned to redevelop those and really bring that campus up to a little bit of a better level. It’s adjacent to the cove there. So that’s the Amgen portion of this.

I think just a couple of other things I wanted to point out, the mark to market we have talked about, we still feel good about that the 20 percentish mark to market within our current portfolio. When you look at where market rents are versus in place rent in the portfolio, that’s obviously going to be a nice driver, the next couple of years, we believe of some earnings growth. And, the balance sheet is in great shape. Again, Sorrento, I can’t really speak to that. But that could be a pretty big driver, as we look at 2023 relative to what 2024 could look like. It’s a pretty big number when you consider accepting the leases versus a liquidation there. So I can’t necessarily comment on 2024 much more than that at this point in time. But just to say that I think some of those big explorations we’ve actually been working pretty hard on backfilling.

And actually, in what we previously disclosed, we actually didn’t have a lot of those Amgen leases getting leased up until 2025, as there’ll be some downtime and some CAPEX associated with them. [Multiple Speakers].

Scott M. Brinker: Just maybe on just the trajectory of lab leasing and rents. I mean, the last 18 months, interest rates were up more than 500 basis points. Obviously, that has resulted in Board and management teams essentially say not to expand real estate needs for the most part. The easy answer was just to make do with the existing space. But at the same time, you’ve got a likely outlook where interest rates are probably going to come down over the next year or so, and we are starting to see a little bit more interest in having those types of discussions. And you think about the activity we actually had over the last 18 months despite that change in interest rates, signed leases or LOIs on almost 2 million square feet of space at strong rents, very modest TIs, 90% of that is with existing clients and pretty significant mark-to-markets.

So really in the teeth of a pretty tough market over the last 18 months, I mean, we’ve had significant success, and we see the general macro environment being more favorable over the next 12 to 18 months, not less favorable.

Vikram Malhotra: That makes sense. And just for my follow-up, Scott, or maybe even Pete, just stepping back, this is a sort of a unique environment. We don’t know where rates are going. You’ve got, as you mentioned, self-funded development, solid balance sheet. I’m just wondering, are there bigger picture opportunities or changes to the portfolio you consider as we transition into whatever the next macro is? And just related to that, I guess, Pete specifically, would you look at monetizing more assets, delevering even further to create that buffer, assuming there are opportunities down the road?

Scott M. Brinker: Yes, the answer is yes. So we covered that in the prepared remarks. We are having those discussions. These are assets that others would find attractive but aren’t necessarily central to our longer-term strategy. But 100%, our expectation is that over the next 12-18 months, I don’t know if it’s sooner, maybe later, our balance sheet, strong portfolio platform, efficient G&A, I mean this will be a bigger company going forward. There will be opportunities coming out of this downturn in the lab segment, a lot of the development is underway is with owners that aren’t as well connected to the tenant base, their balance sheets aren’t nearly the same shape that ours is. So yes, there are going to be opportunities for us and our whole mindset right now is to weather through this downturn, which we have I think really well, controlling the things that we can continue to put up good earnings.

Balance sheet is in great shape. So yes, I think there’s going to be a lot of opportunity on the other side of this.

Vikram Malhotra: Sorry, just to clarify, when you said you — I might have missed it in the remarks, did you mean potentially monetizing noncore and if you did, could you give us just a broad range, like how big is that opportunity for you?

Scott M. Brinker: Yes, it’s a couple of $100 million that we’re having discussions on. We haven’t signed any contracts. So I don’t want to talk about specific assets or pricing, but obviously we would only sell if we like the pricing, these are opportunistic. We don’t need to sell any assets to fund our pipeline. So we’d only do this if we like the pricing. And our expectation is that the cap rates would allow us to repay our line of credit accretively, which gives us more flexibility down the road and we do see opportunities.

Vikram Malhotra: Great, thank you.

Operator: The next question comes from Austin Wurschmidt from KeyBanc. Please go ahead.

Austin Wurschmidt: Yes, thanks. And good morning everybody. With respect to the uptick in leasing discussions, is that just broadly across the portfolio or are you in active discussions as well for some of the vacant space and across the development — the active development projects?

Scott R. Bohn: Austin, it’s Scott Bohn. I would say it’s across the entire portfolio. It’s across all three core markets. Obviously, we have more space to lease in South San Francisco versus Boston, San Diego, just with where the occupancy of the portfolio stands. So you’ll see the bulk of it there. And if you look at the LOIs we’ve talked about today, two thirds of those are for spaces in South San Francisco.

Austin Wurschmidt: And then just a clarification on the leases, the $196,000 under LOI, I guess, how many leases are comprised in that, is any of that for the active development, and when would you expect some of that to commence?

Scott R. Bohn: Yes, Austin, we’re not going to get into the individual LOIs today. It’s just too early. I mean, these are obviously competitive deals and we’ve got LOIs and signatures on those, but we still need to get them across the finish line to lease execution. So probably more to come on those next quarter.

Austin Wurschmidt: Fair. And then just last one for me, just going to MOBs a little bit, you touched on what drove the 2Q guidance bump. But last quarter, you referenced the company’s track record, increasing MOB guidance through the year. Clearly, success doing that this quarter. But what levers are left to pull in the back half of the year that could get you or maybe said differently, could get you to the high end of the range.

Thomas M. Klaritch: Well, we continue to see really good activity on leasing. We’ve got our lease commencements are a little bit above where we expected to be for the year, and we have quite a few executions — executed leases as well as LOIs in place. So occupancy is going to be a piece of it. As I said earlier, the escalators and mark-to-market, we’re at the upper end of our typical range on mark-to-market. So that’s going to help some. And then Medical City continues to do well and if they have another couple of strong quarters, that will definitely push us up to the higher end.

Scott M. Brinker: Austin, we’re also having what’s interesting in both segments, lab and medical conversations with tenants or prospects about much bigger leases and spaces than we had over the last 18 months. It felt like a lot of the activity was smaller spaces. We’ll see if anything proceeds, but I think that’s another sign that Boards and management teams are more willing to make big commitments today than they would have been over the past 18 months. Now I don’t know any of that translates into 2023 earnings or same store, but if you look forward into 2024 and beyond, obviously, it’s a great sign.

Austin Wurschmidt: Yeah, that’s helpful. Thanks Scott.

Operator: The next question comes from Nick Yulico from Scotiabank. Please go ahead.

Nicholas Yulico: Thanks, good morning. I guess first question is just in terms of — as you think about the portfolio and some of the lease expirations and lab this year, next year, is there any way to just quantify what piece of that you think are tenants that you expect to maybe not renew or those that you would proactively look to re-tenant because of some potential credit issues or other factors kind of facing the tenant base, just trying to understand like how we should think about some of the phasing of occupancy in the portfolio over the next year?

Scott M. Brinker: Roughly half of it is Oyster Point and Pointe Grand. So I assume that half of the remaining 2023 and 2024 lease maturities in lab are going into redevelopment because the billings just need to be redeveloped to remain competitive. For the remaining 50% maybe I’ll ask Scott Bohn to comment.

Scott R. Bohn: Yes. I mean we’ve only got about 250,000 square feet of unaddressed maturities through 2024, excluding the Amgen buildings that we talked about going into redevelopment. And the bulk of that rollover doesn’t come until the back half of 2024. So we’re really just getting into the renewal windows on those leases over the next few months. So kind of more to come in upcoming quarters, but very manageable lease rollover across the portfolio, the balance of this year and into 2024.

Nicholas Yulico: Okay, great, thank you. And second question is just in terms of when you talked earlier about the mark-to-market on the portfolio, I guess, in lab any thoughts on what you’re seeing kind of across the markets right now, it feels like maybe South San Francisco, Greater Boston, Cambridge is where there is some more vacancy that’s just hit the market, realizing you guys are — seem like you’re outperforming the market, but just any sort of viewpoint on whether market rents are going to remain stable, are they correct, are you going to see just more competitive leasing concessions in the market?

Scott R. Bohn: Nick, it’s Scott once again. I think first and foremost, I’d say the leases that we’ve signed and the LOIs in all three markets have been at really strong rates in deal terms. Overall, I would say looking at face rates, they flattened as I think we all know, this year, which we expect to probably continue in the near term. Rates for A buildings and A locations with strong sponsorship like Healthpeak have held up well. You’ve seen some a little bifurcation between that and then the B buildings in secondary locations. Luckily, we don’t have a lot of that product at all or really any. From a net effective perspective, we’ve talked about some pressure on TIs with tenants looking to have a little more capital put in by the landlord to extend cash runways, and we’re open to that in select cases depending on tenant credit, usability, TIs, etcetera.

We talked about that getting back to the end of 2022 and 2023. But I would say no real incremental change on that this quarter versus last. So I mean, I think that those ask and those TI levels have leveled off.

Nicholas Yulico: Thanks Scott, appreciate it.

Operator: The next question comes from Connor Siversky from Wells Fargo. Please go ahead.

Connor Siversky: Good morning, thank you for the time. Interesting comment in the prepared remarks that Progressive Health Systems now have 10 outpatient facilities for every hospital. In the context of that comment, I’m wondering how you’re seeing performance trends for on-campus versus off-campus? And then if the shift in delivery continues to align with peak strategy, I mean, what does it take for peak to start putting shovels in the ground again on medical office or outpatient medical, sorry?

Scott M. Brinker: Yes. Well, the good news is the hospitals are busier than ever. So at least the ones we’re on the campus of obviously, we tour those as well and a number of them are undergoing expansion or redevelopment. So they remain extremely profitable. It’s just the health systems are growing their market share and the total pie is expanding. So a lot of the growth is outpatient and off-campus but the hospital campus itself is as busy as ever. So I don’t see it having a negative impact on what we own today. The comment is more forward-looking as we grow the portfolio, we want to align our business plan with the growth in the actual underlying business itself. Klaritch, do you want to take the other.

Thomas M. Klaritch: Yes. With regards to putting shovels in the ground, we did announce, I think it was two quarters ago, our Savannah building, which is with HCA in our development program with them, and we’re in active discussions with quite a few buildings with them also and probably the next quarter or so, we’ll have some more to announce there. So there’s a lot of pent-up demand for MOB development out there. In addition to HCA, we’re having discussions with two or three other systems about potential new buildings with them. So I think it’s going to get pretty active over the next year.

Scott M. Brinker: There’s definitely interest from name brand health systems to partner with us on development in particular, obviously a decision to proceed depends on all the normal things, right. I mean cost of capital and returns and the spread to acquisition cap rates and pre-leasing. I mean, obviously, demand is different than saying, yes, we’ll pull the trigger, but we do see a pretty big pipeline when the numbers start to make sense.

Connor Siversky: Thank you. That’s helpful. And then sticking to outpatient, could you offer any color or quantify at all how much of that space is utilized by, call it, administrative or maybe revenue cycle functions or more broadly speaking, just how do you see the hybrid work environment impacting outpatient operations?

Thomas M. Klaritch: It’s interesting. We had that conversation with HCA the other day and they estimate probably 80 — high 80s, low 90s percent of their workforce is never going to work from home. It’s just not practical. If you look at our portfolio specifically, as you asked the amount of administrative or back office space is probably 8% to 10% when we look at across the portfolio, and that seems pretty stable. We haven’t really had any — we haven’t seen a lot of move out in that area. So the demand continues to be there.

Connor Siversky: Okay, thank you.

Operator: The next question comes from Joshua Dennerlein from Bank of America. Please go ahead.

Joshua Dennerlein: Hey, guys. Just had some questions on your same-store NOI guidance range. When I look at the CCRCs, it looks like you’re tracking 14.3% year-to-date, but your full year range is 7% to 11%. Just kind of curious what you’re expecting in the back half there?

Peter A. Scott: Yes, maybe I’ll just take a second on that, Josh and talk generally about what we think the second half of the year looks like relative to the first half of the year within each one of our businesses. If you look at year-to-date total same-store growth, we’re at 5%, right. So pretty strong healthy number. It’s actually just a little bit above the high end of our guidance range, which was at 4.75% right now. So we’re off to a good start through the first six months of the year. CCRC has had a really strong first half of the year, and we hope to keep that momentum going. Into the second half of the year, outpatient medical year-to-date, we’re at 3.1%, which is right in line with the midpoint of our guidance, maybe a little bit better actually.

And I push Tom Klaritch every day on how do we get to the high end. So I think he thinks I’m a broken record on that. But we’ve had success getting to the high end of our guidance range pretty much every year that I’ve been CFO. So hopefully, more to come on that for the second half of the year this year for us, not to put too much pressure on Tom. But then in the lab space, look, we had a really good first quarter. We had a strong second quarter. There is probably a little bit of deceleration in the second half of the year. But I wanted to point out that the two biggest items that are impacting that; one is the Kodiak space that we got back this past quarter. We backfilled about half of it but we still have some space that needs to get backfilled in the second half of the year.

We don’t backfill if there could be a little bit of an impact on our overall same-store NOI. And then the second piece, just to remind everybody, you probably pay close attention to our top 20 list. Adverum has dropped out of our top 20 list. I mentioned it in my prepared remarks. There is downtime on that, the Revolution Medicines lease does not begin until January 1st of next year. So there’s some downtime in the back half of the year that will certainly have an impact on occupancy as well as same-store NOI in the second half of the year. But I wanted to really point out the two biggest items that will drive that decel in Life Sciences in the second half.

Joshua Dennerlein: That’s super helpful. Appreciate that. Maybe just on — actually, I remember at NAREIT, I think you guys mentioned a couple of tenants might have come to you looking for space and just given where your portfolio occupancy was. This is on the Life Science side. It sounds like you just didn’t have the space for them. What would get you guys to kind of restart the development pipeline?

Scott M. Brinker: Yes. Well, it wouldn’t be a tenant coming to us today. I mean the time line to get permits and build something would be far longer than accommodating the tenant you need space today. So the thought process on near-term re-tenanting space is really looking towards credits that are unlikely to renew a lease in the coming years and seeing if we can find a way to early terminate and backfill with the growing tenant who wants a longer-term commitment. In terms of new development starts, we are making really good progress on entitlements in the core markets that we’d be in a position potentially to start construction on something in 2024, where I would get back to my comment that I made about outpatient medical. The decision to actually start depends a lot more on our view of supply and demand, potentially pre-leasing cost of capital and returns and the like.

So it’s not something that we would do today. But as you look into 2024, I mean, we’ll see the market can obviously turn pretty quickly, and we’ve got a huge base of existing tenants that generally are the ones filling up these new developments.

Joshua Dennerlein: Appreciate it, thank you.

Operator: The next question comes from Michael Griffin from Citi. Please go ahead.

Michael Griffin: Great, thanks. Maybe just on leasing for Life Science, you talked about 90% retention from existing tenants. Do you need to see the number of new tenants entering the portfolio in order to achieve longer-term growth or are you comfortable sort of growing with your existing tenant base to drive that growth going forward?

Scott R. Bohn: Sure, hey Greg, it’s Scott Bohn. I mean, I think is 90% at least what we’ve done, as we said, is with existing tenants. That’s a huge competitive advantage of ours. I mean that’s the scale we have in the local markets. It’s certainly easier to do a deal with someone you know. That said, we’re — obviously, we welcome tenants from the outside as well. So it’s a mix of both. But I think we capture our fair share of leasing from tenants that are outside of our portfolio as well, but certainly try to cater to our client base as best we can to accommodate their growth.

Michael Griffin: Thanks. And then just a question on supply. I know there has been kind of market reports out there about elevated supply in core biotech markets. But I mean if you sit back and look at your portfolio, I mean, how does a lot of this compare to your competitive stock, and then if you can give any color on your supply expectations for 2024 and your competitive stock? And then I know it’s a bit early, but 2025 as well, anything you can add would be helpful?

Scott R. Bohn: Yes. From a supply perspective, I mean not a ton of change from last quarter that we talked about in the 2023, 2024 deliveries. As you’d expect, we’re certainly seeing a slowdown in new starts in many of the conversions that have been advertised aren’t doing anything on a spec basis. So we don’t really even count many of those in the competitive supply. And as we’ve noted before, not all supply is built equal. So we think that we’re positioned very well in each of our markets. When you look at the Bay Area, competitive new supply, we think is competitive to our portfolio. It’s about 800,000 square feet in 2023, it’s about 70% pre-leased coming into 2024. There’s about 3 million square feet delivering in the North Peninsula.

About a third of that is conversion space that we think is going to be less competitive to our product. So we view about 1.8 million square feet of that as competitive. The good news in South Francisco on that is it’s a small number of actual projects. So it’s a decent amount of square footage, but a small number of projects. So when you’re thinking about competing on deals, you’re not going out competing against 10 projects, right, smaller number there. Boston, where we certainly have very little rollover and no ongoing development out there today, there are some big headline numbers. We truly look at as competitive in Lexington and Waltham and West Cambridge our portfolio is there. It really shrinks down to a little over 2 million square feet.

So we feel good about our positioning there and again, no development starts anywhere in the near term as we work through our Airwave entitlements. Then in San Diego, there’s about 5 million square feet in total under construction, but only about 2 million of that is in Tory Pines and Sorrento Mesa. That’s about 30% preleased. So when you whittle down to what we actually view as competitive, it’s pretty manageable in the near term.

Scott M. Brinker: Hey Griff, one other thing, and this — every situation is different. So this isn’t a statement that’s true across the board. But in general, what we’ve noticed is that the new development projects, if anything, in this environment have been a bit harder to lease up. If you think about a new development, usually the tenant needs to invest at least $100 per foot of TI, it could be $200, $300, $400 depending upon their program, that’s a tough ask in this environment. A new development already is going to come with higher lease rents as well as higher operating expenses, just given the amenities and the cost basis. So it’s just less competitive. You think about what’s happening in a real estate sector that’s just a polar opposite of [indiscernible] office, it’s like the 8 plus buildings are the only ones leasing up.

Lab right now is kind of the exact opposite. It’s still kind of well located, lower price point in terms of rent, OPEX as well as TI investment from the tenant that actually is the most desirable and in demand today. So we’re actually benefiting from that quite a bit. We do have some new development to lease up, obviously. So we’re not completely immune from that dynamic, but it actually puts the incumbents with existing operating portfolios in even better shape I think, as you think about who’s going to weather the kind of deliveries over the next 18-24 months.

Michael Griffin: Great, that’s it for me. Thanks for the time.

Operator: The next question comes from Ronald Kamdem from Morgan Stanley. Please go ahead.

Ronald Kamdem: Hey, just two quick ones or one and a follow-up, I should say. Just on the lab portfolio, I think you talked about in I think last November about the $1.3 billion total peak NOI opportunity. I think part of that was sort of lab development earnings as well as sort of the lab mark-to-market, just half a year into it from those. Maybe can you talk about what the puts and takes are, how do you feel about that $1.3 billion plus opportunity in 2025 or is there incremental upside or incremental downside?

Peter A. Scott: Yeah, hey Ron, it’s Pete here. I think the $1.3 billion you’re referring to was about $200 million of NOI growth over three years. I would say we still feel good about that NOI growth opportunity today; it may take a little longer to get there. That shouldn’t be a surprise. And within that, we didn’t include new development starts that was basically the lease-up and the stabilization of the existing development pipeline. So there were no new starts that was feeding into that. So it’s a good question. Again, we feel good about it. It may just take a little bit longer to get there.

Ronald Kamdem: Great. And then just on the lab guidance, and I know this has been asked a lot of different ways. So I’ll take a stab at it, too. So the 3% to 4.5% same-store NOI — is the — the bottom and the top end of that range, is that mostly Sorrento, like why is that range so wide with five months of the year last, just can you talk about what’s at the top end and the bottom end being contemplated? Thanks.

Peter A. Scott: Yes. Look, we’re right at the midpoint through the first six months of the year. I would say that the biggest item is any unknown tenant credit issues like you point out with Sorrento or with the likes of Kodiak. We do have some conservatism we embed within the guidance at the beginning of the year. And as we get further along in the year, we try and tighten and/or increase that. I’d say two months or excuse me, two quarters into the year we still feel good about hitting the midpoint within that segment. But I think it’s still a little too soon for us to either trim the range or consider increasing the range right now, but obviously, more to come when we get to the fall in our third quarter call.

Ronald Kamdem: Thanks so much.

Operator: The next question comes from Steven Valiquette from Barclays. Please go ahead.

Steven Valiquette: Yeah, thanks. Good morning guys. Just my question here is around just the industry transaction. Volumes obviously are way down again this year versus historical averages, both in Life Science and medical office. But despite this, I guess I’m just curious if you can comment on whether you noticed any recent directional shifts in either direction in just industry cap rates and recent LS or medical office industry transactions? Thanks.

Scott M. Brinker: I feel like there’s no volume to draw any conclusions. A lot of the transactions that have happened in the lab space have been more recaps, but the pricing has been pretty strong, whether you look at it on a cap rate or a price per foot basis. Obviously, the buyers are thinking about IRRs as well. They’re definitely up from the peak 18 months ago, 100, 150 basis points, but I don’t know that there’s been a difference in the last couple of months that is noteworthy. There’s just not enough activity to state that definitively? Do you have a different view on outpatient Tom?

Thomas M. Klaritch: No, same. I mean, there just hasn’t been a lot of transactions. We saw the spike two to three quarters ago, and it’s been pretty consistent since then.

Steven Valiquette: Okay, that’s fair. Okay, thanks.

Operator: The next question comes from Michael Mueller from J.P. Morgan. Please go ahead.

Michael Mueller: Thanks, hi. Just two quick ones here. I guess first, how much was the ad rent in 2Q from Med City Dallas and how much of that was above normal? And then on the CCRC front, where do you think occupancy can go over the next say, three years?

Scott M. Brinker: On the ad rent, we typically run about $2.3 million to $2.4 million a quarter. So it’s up about 8% from last year. Where we’ve had as high as $3 million. So it’s going to be in that range, kind of 2.4% to the upper 2s moving forward. Yes, and then CCRC today, we’re around 83%. That portfolio is mostly independent living. So longer length of stay and then there’s big barriers to entry. So there’s essentially no new supply. I mean, hopefully, we can get back into the 90% range from 83% today. We’ve got one or two campuses that don’t do as well. So that may be a limit on the upper end of occupancy for that business, at least in the current environment. But good progress to date, our NOI is essentially back to where it was in 2019, at least on a cash basis. Occupancies recovered, but we still have quite a bit to go. So yes, get upside for that portfolio.

Thomas M. Klaritch: Sorry, this is Tom again. Just to clarify, the numbers I was quoting is our monthly numbers. So for the quarter, it’s between $8 million and $9 million.

Michael Mueller: Got it, okay, thank you.

Operator: The next question comes from John Pawlowski from Green Street. Please go ahead.

John Pawlowski: Good morning, thanks for the time. Scott Brinker, I just had a follow-up question about the dispositions or the appetite to sell assets. Just curious with the pretty resilient private market pricing on Life Science properties that have traded, curious why you aren’t selling assets more aggressively to help close the disconnect between public and private market values?

Scott M. Brinker: Yes. Well, we have sold assets year-to-date and we just said we’re going to look to sell some more. So I mean, we’re doing exactly that. It’s not an easy market to transact in, but that is our expectation. That feels like the best move. At least for assets that we view as highly desirable by some buyers, but maybe not core to our strategy. A tougher to sell super core assets within our big campuses and clusters. At some point, we may have to consider that, but that — we don’t feel like we’re in that spot today. We certainly, from a balance sheet perspective, don’t need to. And sentiment, it comes and goes. Obviously, it’s been more negative lately. We don’t think that lasts forever, certainly. I think the results today, the fundamentals are a lot better than the sentiment. So we’ll see if that in fact transpires in the coming quarters, if not, then we’ll continue to look at additional asset sales.

John Pawlowski: Okay. But the size of dispositions in your mind right now is in a couple of $100 million range likely?

Scott M. Brinker: Yes. right.

John Pawlowski: Okay. Last question from me. Curious in the last few years if you’ve seen any case studies in your Life Science portfolio, where just lower utilization of back office space is requiring maybe an uptick in capital spending from you to repurpose the space or a kind of concession on rents for certain operators just to accommodate different work patterns in the post-COVID environment?

Scott M. Brinker: I mean, John, we sign more than 5 million square feet of leases since COVID, so three years ago, both existing spaces and new spaces. And the allocation between the lab and the collaboration space really hasn’t changed. So understand the headlines and the theories. But when we look at real tenants and releases and real buildings, the mix hasn’t really changed much. So we have not seen that. Could it flex a little bit in the future, sure, it could, and our purpose-built assets can actually accommodate that. A lot of the redevelopment type properties struggle to get to 30%, 40% of the lab mix, whereas our purpose-built labs could go up to, I don’t know, Scott, 75% lab, if they needed to, but we’re just not seeing that.

John Pawlowski: Okay, makes sense. Thank you.

Operator: The next question comes from Wes Golladay from Baird. Please go ahead.

Wes Golladay: Hey, good morning everyone. I want to go back to that comment about seeing an uptick in discussion with lab tenants. Has that been broad-based or is that more of the pharma or the biotech tenants or anything in between?

Scott R. Bohn: I think it’s broad-based. We spent a lot of time talking to both our large-scale pharma clients as well as VC is talking about company formation startups. There’s probably more activity favoring the sub 50,000 square foot type tenants. There’s a lot of Series A funding going on, a lot of company formation going on. I think those companies that are still in that Series B, C range over the early public are probably the ones that are just now starting to feel more comfortable and as Scott mentioned, and have more clarity on kind of the interest rate and macro environment. So we expect to see more of that coming over the next few months. But overall, the activity as well as the LOIs we talked about are a broad range of tenant sizes as well as kind of where they’re at in the spectrum from a funding perspective.

Wes Golladay: Okay, and then do you have a lot of traction on some potential contingent leases for the Sorrento space if they do get rejected? And if so, how quickly can you turn the space?

Peter A. Scott: Yes. I mean I think on Sorrento we obviously have contingency planning with regards to what we would do with those assets if they were projected. As I said in my prepared remarks, I mean, not looking necessarily today to reject those leases and to liquidate. They’re clearly trying to exit bankruptcy and put financing package together to achieve that. Too soon for us to comment on what that means for the leases, but I would say that we generally feel like that could be a positive thing with regards to the existing leases. Those leases actually have pretty significant below market rents. But obviously, if they were rejected, there would be some downtime and some TIs and capital spend that varies across the four different properties. But again, I think it’s too soon to start delving into the individual properties right now.

Wes Golladay: Okay. Great, thanks for the time everyone.

Operator: The next question comes from Jim Kammert from Evercore. Please go ahead.

James Kammert: Hey, good morning. Thank you. Given the high retention in the lab side, is it safe to assume that those tenants are less likely to be price shoppers, if you will? And do you have any examples in the last 12-18 months where you’ve done leasing with existing tenants in the lab side where they might have been able to go down the street to a new development or something at a lower rent, but stuck with PEAK? Thank you.

Scott R. Bohn: Yes, it’s Scott Bohn. Labs aren’t easy to move at the end of the day. I mean there’s a lot of — that goes into the build-out of those labs. There’s FDA approvals within certain labs that are hard to relocate. So I think that, that’s one thing that tend to be relatively sticky. I also think that the actual price per square foot isn’t always the most important thing to them from a tenant perspective. I mean, the labs sophistication, balance sheet, portfolio of landlord weighs in, oftentimes, most times, much heavier than the actual cheaper option down the street, so to speak.

James Kammert: Alright. And so — but do you have examples maybe where you were able to keep them and you can extract a nice bump as opposed to them moving, I’m just curious if that’s been a phenomenon insulating you from the new supply, in other words?

Scott R. Bohn: Yes, it’s a good question, Jim. And actually, I think if you go back to our NAREIT deck from November of last year, we actually included a slide and we have in the past about tenants that have gone from small amounts of square footage with us and grown to well over 100,000, if not even more than that square feet within our portfolio. It’s one of the things that we think differentiates us and gives us a competitive advantage. I mean we don’t know if the tenant turned down another deal. To be honest with you, oftentimes, they’re just talking to us and expanding with us. So I’m not sure I can give like a specific example, except to point to the amount of tenants that have gone from a small amount of square footage to a lot of square footage with us through the years, and we’ve been continuing to pound the table that we think that’s a competitive advantage for all the incumbent landlords.

Scott M. Brinker: Yes, — too many bidding wars. Obviously, Scott and Mike are on the front lines, but they’re talking to us on any of the big leases. I don’t have like a strong recollection of them coming to us where we’re like bidding aggressively against another landlord, maybe there’s one or two of those, but that’s a very rare situation.

James Kammert: Perfect, thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks.

Scott M. Brinker: Yes. Thanks, everyone, for joining. We’ll see a lot of you in September at the Bank of America conference. Enjoy the rest of your summer. Thanks.

Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.