Healthpeak Properties, Inc. (NYSE:PEAK) Q4 2023 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:PEAK) Q4 2023 Earnings Call Transcript February 9, 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: Good morning and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Andrew Johns: Welcome to Healthpeak’s fourth 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, forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations. 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. And in an exhibit to the 8-K we furnished to the SEC yesterday, we have reconciled all 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, Chief Executive Officer, Scott Brinker.

Scott Brinker: Thanks, Andrew. Good morning and welcome to Healthpeak’s fourth quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO. Joining for Q&A is John Thomas, the CEO of Physicians Realty Trust and our senior team. I want to start by thanking our entire team for their contributions in 2023. Public market volatility, notwithstanding, your collaboration and winning mindset allowed us to produce record leasing volumes in two of our three business segments and to exceed our initial same-store and earnings guidance by 130 basis points and $0.05 per share respectively. Last evening, we reported a strong fourth quarter, both operationally and financially. For the fiscal year, we grew same-store NOI by 4.8% and AFFO per share by 5.5%, driving our dividend payout ratio below 80%.

The balance sheet remains in great shape with 5.2x net debt to EBITDA at year end. We expect to close the strategic combination with Physicians Realty Trust on March 1. Since the announcement in late October, the two teams have been working side by side on culture, best practices, tenant relationships, technology and every other area that will determine the success of the merger. We have the highest level of confidence that this combination will in fact augment our platform capabilities, relationships, balance sheet and earnings. Just last week, we internalized property management in three markets, with up to 6 additional markets expected to go in-house by midyear. We have had near 100% success, bringing the existing third-party staff onto our team.

Those employees, on average, have worked in these buildings for 7 years, minimizing execution risk. As for synergies, we are confident we’ll achieve the targets we outlined in late October and they are contributing several cents per share to our earnings in 2024. Pete will expand upon the synergies and outlook in a few minutes. I want to share some thoughts on the operating environment for the two largest segments, starting with outpatient medical, where the sector is benefiting from demand exceeding supply. We have two decades of operating history in the sector and in 2023 we were at or near all-time highs for leasing volume, retention, renewal spreads and same-store growth. Looking forward to 2024, our same-store outlook includes the DOC portfolio and is 75 basis points above our 5-year history for initial guidance.

We expect to benefit from sector fundamentals that have never been stronger, high-quality assets and operations and internalization. Most important, we believe we are combining the two best outpatient platforms in the country to create an even bigger and better company to drive internal and external growth for the next decade plus. Today, more than 65% of the tenants in the combined portfolio are health systems. When they make leasing decisions, it’s often driven by relationships and no one is better positioned than the combined company. It’s a very different leasing dynamic than other real estate sectors who deal with tens of thousands of very small tenants. Relationships are absolutely critical in our sector and the senior team of the combined company has more than 200 years of experience in the sector, creating an unrivaled relationship network.

Our next generation coming behind them is learning from the best and bringing energy to continue innovating as the sector evolves. Let me turn to our lab business. The fundamental drivers of long-term growth are solidly intact with both drug approvals and new drug applications at or near all-time highs. That means R&D funding is paying dividends, creating a virtuous cycle. Big Pharma is ramping up partnership deals and M&A to replace looming patent expirations and companies with good data have ready access to capital. At the same time, venture capital deployment and the IPO market remains soft and boards are deferring leasing decisions when possible. Those dynamics will eventually turn in our favor and we’ll be well positioned to capitalize.

We can also comfortably underwrite a massive reduction in new deliveries starting in 2025. Fortunately, even during the market exuberance for life science, we stuck to our strategy. As a result, we’re highly concentrated in five of the best submarkets in the country where we have significant scale and deep relationships to capture leasing demand. Moreover, 85% of our rent is from campuses with 400,000 feet or more, which allows us to offer a wide range of price points and space plans and to accommodate expansions, all of which are important to tenants. Year-to-date, we have signed 58,000 feet of leases with another 115,000 feet under LOI plus active discussions across our portfolio, so an encouraging start to the year. Cyclical slowdowns create opportunity on the other side, and we’re preparing accordingly.

In the past few months, we received approvals or entitlements that expand our land bank to more than 4 million square feet in two of the most important life science submarkets in the country. We are well positioned when new development begins to pencil. On a related point, we were pleased to close on the sale of a 65% interest at our Callan Ridge development for a 5.3% cap rate with rents essentially at-market on a long-term lease. The sale was driven by favorable pricing, not a desire to reduce our lab exposure. We are actively evaluating capital recycling opportunities across the combined $20 plus billion portfolio including outright sales and JV recaps. Any such proceeds would likely be used to fund a growing pipeline of relationship-driven opportunities across our core segments that we could always consider stock buybacks or debt repayment depending on relative returns.

I’ll close by saying that the macro backdrop has been casting a shadow over the underlying strength of the company. We can’t control that shadow, but we are more confident than ever about what lies behind it, in particular, platform, portfolio and balance sheet. I’ll turn it to Pete.

Pete Scott: Thanks, Scott. Starting with our financial results, we finished the year on a strong note. For the fourth quarter, we reported FFO as adjusted of $0.46 per share and total portfolio same-store growth of 3.6%. For the full year, we reported FFO as adjusted of $1.78 per share and total portfolio same-store growth of 4.8%. And our balance sheet is in great shape as we finished the year with a 5.2x net debt to EBITDA. Let me provide a little more color on segment performance. In lab, same-store growth for the quarter was 2.7%, bringing our full year growth to 3.7%, in line with the midpoint of our guidance range. During the year, we signed 985,000 square feet of leases with positive cash re-leasing spreads on renewals of 23%.

The majority of these lease transactions were signed with existing relationships and we were also successful in capturing incremental demand from new tenants. Occupancy in our operating portfolio ended the year at 97%. Turning to outpatient medical. We had a strong finish to the year, with 4.3% same-store growth, bringing full year growth to 3.4%, in line with the midpoint of our guidance range. Occupancy ended the year at 91% and our tenant retention was approximately 80%. Both metrics are reflective of our leading portfolio and platform. Finishing with CCRCs, same-store growth for the quarter increased 5%, bringing full year growth to 15.6%. 2023 was a record year of entrance fee sales and cash collection. These cash collections exceeded the amortized amount included in both FFO and AFFO by $40 million.

Two quick items on our financial results before shifting gears to our 2024 outlook. For the fourth quarter, our Board declared a dividend of $0.30 per share. The dividend payment is forecast to remain the same post closing of the merger, which should provide us with incremental retained earnings in 2024. You probably also noticed that DOC filed an 8-K earlier this week with preliminary fourth quarter and full year 2023 results. They expect to complete their 10-K and other financial reporting on their normal timeline in the next few weeks. Turning now to our combined outlook for 2024. Given our high degree of confidence the merger will close, coupled with the heavy lifting done by our respective teams to successfully integrate our forecasting, we are in a position to provide investors with an initial view of our combined 2024 outlook.

However, critical items, including finalizing the GAAP merger adjustments will not occur until after the closing date. So we will make any necessary updates to our outlook and finalize guidance most likely in conjunction with our first quarter earnings. With all that said, our initial outlook for 2024 is as follows: FFO as adjusted ranging from $1.73 to $1.79 per share, which includes merger-related benefits of approximately $0.02 to $0.03; AFFO ranging from $1.50 to $1.56 per share which includes merger-related benefits of approximately $0.05; and total same-store growth ranging from positive 2.25% to positive 3.75%. Let me touch on some of the major items that underlie our outlook. First, based on the March 1 closing date, our outlook is for 2 months standalone Healthpeak and 10 months combined Healthpeak and DOC.

The result of this is a weighted average share count of approximately $690 million for full year 2024, assuming no additional equity issuances. Second, we have identified sources for all of our capital needs and have no remaining funding requirement in 2024. We upsized our 5-year term loan to $750 million and recently swapped the entire amount to a fixed rate of 4.5%. Last month, we closed on our well-received Callan Ridge joint venture, generating $130 million of proceeds and eliminating $22 million of future TI spend. We have $250 million of projected retained earnings given our well-covered dividend and we expect some seller financing debt repayments. These proceeds will be used to fund our development and redevelopment pipeline, repay $210 million of DOC’s private placement notes and fund all of our transaction costs.

Third, G&A is expected to range from $95 million to $105 million, which compares to standalone peak at approximately $95 million for full year 2023. All in, our G&A is only increasing by approximately $5 million at the midpoint despite inflation and our asset base increasing by $5 billion. Fourth, our current FFO outlook includes a negative $0.03 mark-to-market on the $1.9 billion of DOC debt that we will assume. Notably, we do not add back this headwind to FFO as adjusted. Fifth, perhaps conservatively, we do not include any benefit from the Graphite Bio termination fee in our FFO as adjusted. Sixth item, the components of same-store growth are as follows. We see outpatient medical ranging from positive 2.5% to positive 3.5%. Fundamentals in outpatient medical continue to improve versus historical norms, including higher tenant retention, increased rent mark-to-market and increased escalators.

Our outpatient medical same-store NOI for 2024 is approximately $825 million or 60% of the overall pool. We have included the DOC portfolio in our same-store pool for 2024, given the size and strategic nature of the merger. Turning to lab. We see same-store growth ranging from positive 1.5% to positive 3%. Lab growth is driven by contractual rent escalators, positive rent mark-to-market and the benefit of increased NOI from internalizing operations in San Francisco and San Diego. Not surprising, we do have some offsets, including a modest decline in occupancy relative to 2023 and timing of free rent, which naturally fluctuates year-to-year and is a headwind, particularly in the first quarter. Finishing with CCRCs, we continue to see growth in 2024 with a same-store outlook of positive 4% to positive 8%.

I thought it would be helpful to finish with a high-level bridge of the major drivers in our outlook. Our outlook includes $40 million of synergies from the merger noting that a portion of these synergies are operational and flowing through NOI. We see approximately $30 million of year-over-year earnings benefit from same-store growth. And we see a positive $15 million benefit from development earn-in, largely Vantage and Nexus plus the benefit from the Callan Ridge joint venture. So there are certainly a lot of tangible positive trends. But we are facing some headwinds. Interest expense is forecast to increase $35 million due to a combination of rising interest rates as well as the aforementioned debt mark-to-market. There is an approximate $10 million earnings roll down due to some one-time security deposits received in our lab business in 2023 that are not forecast in 2024 plus dilution from potential seller financing debt repayment, which although dilutive does provide capital to recycle into our core businesses.

We have $40 million of a temporary decline in NOI at two marquee campuses that I wanted to spend a moment on. First, there is $30 million of year-over-year decline in NOI from the well disclosed Amgen expiration at Oyster Point. The 323,000 of combined square footage across three assets is being put into redevelopment as we upgrade these assets to Class A product and multi-tenant buildings. We are rebranding the campus Portside at Oyster Point and substantially upgrading the amenity package and infrastructure in order to integrate the buildings more with co-creating a nearly 2 million square foot contiguous mega campus with leading life science tenants. We have backfilled 101,000 square feet of the expirations already with our client lease, although we don’t expect that lease to commence until the third quarter as we complete work to the base building and their suite.

Second, after months of uncertainty, we have clarity on the Sorrento Therapeutics situation, although the lease rejections do result in a negative $10 million NOI impact in 2024. We have placed the 168,000 square foot Directors Place assets into redevelopment and are actively touring tenants through the buildings. There is a nice mark-to-market upside opportunity on this campus as we retenant the buildings, but the downtime is a headwind in 2024. In addition to the headwinds discussed already, we have included about $10 million in conservatism in our outlook for various items, including potential further capital recycling activities, proactive lease terminations and bad debt. In conclusion, while there are lots of puts and takes to our outlook, let me try and sum it up succinctly.

Core operations are performing in line to perhaps better than expectation. Lab is not growing at the same rate as the last 10 years. Nothing grows to the sky in perpetuity, but we do like our market positioning and firmly believe we will outperform as sentiment and fundamentals improve. On the other side of the spectrum, outpatient medical is growing at a higher rate than historical averages as demand is outstripping supply, a key thesis in our merger with DOC combined with the improved capabilities and significant synergies. We have managed the balance sheet conservatively, but like all REITs, we are not immune to rising rates nor can we avoid the required merger-related debt mark-to-market. And as we have consistently pointed out, we have two large marquee campuses undergoing significant repositioning.

We have forecast the capital spend for these redevelopments in our 2024 plan, but none of the earnings upside. We are confident in our ability to recoup the lost NOI, but our base case assumption is lease commencements won’t start at these projects until 2025 and beyond. If we can outperform that time line, then we will have further upside to our outlook. With that, let’s open it up to Q&A.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico: I guess first question is just relating to the guidance. I appreciate all the info you gave us on the DOC impact plus some of the other year-over-year items. But is there any way to kind of think about what just legacy Peak FFO or AFFO growth would be year-over-year? Just putting aside sort of all the merger impacts, maybe is that like a percentage basis or pennies impact? Thanks.

Pete Scott: Yes. Hey, Nick, it’s Pete here. Maybe I’ll just start with AFFO. We did provide AFFO this year because of all the GAAP merger-related items, and we don’t necessarily want to get mired into discussion on all of those on this call. But if you look at AFFO this year versus where we were last year, our outlook is effectively flat, but that does include the benefit of the synergies. If you try and back those out, you’d say our AFFO would be down year-over-year. That’s actually a correct statement. And if you go back to the merger proxy, the S-4 we put out, you’d actually see that in our forecast as well. And that’s really primarily because of the temporary lost NOI at the two large campuses I mentioned in the prepared remarks.

So if were not for this merger, our AFFO would actually be down year-over-year, but Certainly, with the benefits of this merger, the accretion we’ve articulated being about $0.05 per share, we’re able to keep our AFFO flat year-over-year.

Nick Yulico: Okay. Thanks, that’s helpful. I guess second question is just in terms of the lab business, if you can give maybe a little bit more feel for the leasing that you talked about that’s in the pipeline right now. Kind of how the – if any of that relates to San Diego plus how we should think about, I guess, the composition of what leasing would look like going forward from a maybe mark-to-market standpoint because I know that was impacted in the fourth quarter? Thanks.

Pete Scott: Yes. Good question, Nick. I’m not surprised that you’re asking it. We did disclose that we’ve signed year-to-date about 175,000 square feet of leases and LOIs. The first week of January is quite slow. So that’s probably a pretty good 4-week number. If you annualize that, it’s still trending in a positive direction as you compare it to a year ago where leasing was. I’ll turn it actually to Scott Bohn to give a little bit more color on the composition of those leases and LOIs.

Scott Bohn: Yes. Nick, this is Scott. On those LOIs, we’re – it’s a multitude of deals. It’s not just one large deal, really across all the markets. As we talked about over the past few quarters, the demand has really trended towards the kind of sub 30,000 square foot range, and that’s where the bulk of those deals are today. We’re pretty happy with the economics that we are shaking out on those. When you look at mark-to-market on the portfolio, we were probably in the 20% range last year. If you look at it today, taking into account where we are probably more in the 5% to 10% range, but that varies greatly given the TI Capital and other aspects of the lease that are in play today, so hard to pin down an exact number because there is so much differentiation in the leases today. But I’d say, it’s probably in the 5% to 10% range overall.

Nick Yulico: Okay, thanks.

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

Juan Sanabria: Hi, good morning. Just a question on dispositions. You talked about potential for more assets to come on the market. So just curious, if you could give a little bit more flavor for the types of assets that you may look to sell. Would they be kind of core, long-leased assets, stabilized or maybe more non-core assets. Just kind of curious on what may be being floated out there at this point in time.

Scott Brinker: Yes. Hey, Juan, it’s Scott. I mean, obviously, we’re not happy with where the stock is trading. There is a pretty big disconnect between what the private market would value our assets at and what the public markets would. So we’re certainly looking at all available opportunities to create value. So I would say, it’s a pretty wide-ranging menu of things that we’re considering. If it’s core assets like we did in San Diego a couple of weeks ago, it would be more likely than not kind of a recap where we maintain an ownership stake. We don’t have a whole lot of sorts of true non-core assets but we have less core assets that we could consider selling those may come at slightly higher cap rates than the print we had a couple of weeks ago in San Diego.

That was obviously an A+ type asset in campus. But we’re looking at a number of things. We’ve been saying that for the last year. We were a net seller of real estate in 2023. From where we sit here today, we will probably be a net seller in 2024. But we have the ability to be price sensitive. Balance sheet is in great shape, sources and uses are spoken for. So we’d be price sensitive on anything that we do.

Juan Sanabria: Great. And then hoping maybe you could talk to the – maybe a question for Pete. The cadence of lab same-store growth, you mentioned there could be kind of a temporary drag in the first quarter. I believe you said free rent, I’m not sure. Lots of information, which is great. But just curious if you could talk about the cadence of expected growth for fiscal year ‘24.