Nick Yulico

Nick Yulico asked about the company's strategy for addressing 2026 lease expirations, including expected retention rates and the impact of signed but not yet occupied space. He also inquired about the competitive landscape in San Francisco, specifically regarding Kilroy's space, the availability of sublease space, and the overall depth of the tenant pool.

Answer

CEO Angela Aman detailed the reduction of 2026 lease expirations from 1.9 million to 970,000 square feet, noting a limited opportunity for further renewals and a focus on new leasing. She highlighted the trend of tenants prioritizing quick occupancy, especially in San Francisco. EVP, Chief Leasing Officer Rob Paratte added that larger tenants are returning to San Francisco and Seattle, with a shift from 'bargain space' to 'impactful space.' He also noted a significant reduction in sublease space and strong AI demand in San Francisco.

Nick Yulico asked about the outlook for 2026 lease expirations, expected retention rates, and the anticipated benefit from commencing occupancy on currently signed but not yet occupied space.

Answer

Angela Aman (CEO) detailed the reduction of 2026 lease expirations to 970,000 sq ft from an initial 1.9 million sq ft, noting a limited opportunity for further renewals and a focus on new leasing, particularly with quick occupancy. Rob Paratte (EVP, Chief Leasing Officer) added that San Francisco and Seattle are seeing larger tenants return, a shift from 'bargain' to 'impactful' space demand, and significant AI-driven demand, alongside a reduction of over 2 million sq ft in sublease space.

Nick Yulico asked about the balance between Welltower's increased focus on senior housing and the potential for higher earnings volatility as the company becomes less diversified.

Answer

CEO Shankh Mitra clarified that the company is concerned with risk (probability of losing capital) rather than volatility, which it embraces. He explained that risk mitigation is achieved through a low-leveraged balance sheet and operational excellence via the Welltower Business System, which helps manage tail risk in a complex adaptive system.

Nick Yulico asked for clarification on the lab portfolio's lease rate versus its occupied rate, specifically in relation to the reported 81% occupancy. He also questioned the trigger for the lab joint venture impairment this quarter and its connection to leasing performance.

Answer

Kelvin Moses, CFO, clarified that the total lab occupancy of 81% is largely in line with the occupied rate, with some minor instances of tenants occupying more space than needed. Regarding the impairment, Mr. Moses explained it was triggered by unconsolidated JV accounting rules requiring a charge when carrying values fall below fair values for more than a temporary period, emphasizing it's a non-cash item not impacting FFO. Scott Brinker, President and CEO, added that while leasing up the campus (60% leased) is progressing well, the impairment reflects current rents and cap rates compared to the original deal valuation.

Nick Yulico inquired about the lab portfolio's lease rate versus its occupied rate, seeking clarification on how current leasing efforts are impacting vacancy and the overall physical occupancy.

Answer

CFO Kelvin Moses clarified that the 81% total occupancy in the lab segment is largely consistent with the physical occupied rate, though some tenants may occupy more space than currently needed. President and CEO Scott Brinker added that the impairment was not due to leasing issues, as the campus is approximately 60% leased, but rather a re-evaluation of rents and cap rates against the initial deal valuation.

An analyst on behalf of Nick Yulico sought clarification on the projection for new lease rates turning positive in Q3, asking if rates are expected to continue improving sequentially into Q4 or revert to a normal seasonal pattern.

Answer

President and CFO Alexander Jessett confirmed that the company's budget assumes a return to normal seasonality. This implies that after turning positive in the third quarter, new lease rates would likely experience a seasonal softening in the fourth quarter, which is historically the weakest period for pricing power.

Elmer Chang from Scotiabank questioned Omega's investment strategy between skilled nursing and senior housing, given the recent portfolio shift, and asked about the company's development exposure in Florida.

Answer

CEO C. Pickett explained that investments are driven by operator relationships rather than a specific segment allocation goal, though the trend towards senior housing may continue. He noted that Florida's reimbursement environment has become more favorable, making it an attractive market for development with the right operator.

Asked about the office occupancy trend for the second half of the year and for more detail on the types of tenants looking at PENN2.

Answer

Office occupancy is expected to dip slightly in Q3 due to a known move-out but should end the year around the current level of ~89.3%, with timing of new deals being a key variable. Tenants looking at PENN2 are a diverse mix of industries, including new entrants to the district, drawn by the redeveloped product and superior transit access.

Inquired about the timing of NOI recognition from PENN 1 leasing, requested a leased rate for PENN 1 and PENN 2 to gauge progress, and asked for a quantification of the future NOI benefit from these projects.

Answer

Some NOI from PENN 1 leasing will be recognized in 2024, but it's a rolling program. They did not provide a specific leased rate but stated that over the next ~3 years, PENN 1 and PENN 2 are expected to generate an incremental ~$200 million in NOI, which is a net benefit of ~$150 million after accounting for capitalized interest.