Healthpeak Properties - Q1 2023
April 28, 2023
Transcript
Operator (participant)
Good morning, and welcome to the Healthpeak Properties Inc. first quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note 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 (SVP of Investor Relations)
Welcome to Healthpeak's first quarter 2023 financial results conference call. Today's conference call will contain certain forward-looking statements. 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 to the 8-K we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with regulatory requirements. The exhibit is also available on our website at healthpeak.com.
I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker.
Scott Brinker (President and CEO)
Thanks, Andrew. Good morning and welcome to Healthpeak's first quarter earnings call. Joining me today for prepared remarks are Pete Scott, our CFO, and Scott Bohn, our CDO. The senior team will be available for Q&A. Starting this quarter, we moved up our earnings call cadence by almost a full week, made possible by the strong systems we've put in place and our streamlined processes. Over the course of the calendar year, this gives the team an extra three to four weeks to focus on value-add real estate activities. After a strong fourth quarter to close out last year, 2023 is off to a solid start despite the market backdrop. We affirmed full-year FFO guidance and increased full-year AFFO guidance, which puts our payout ratio in the 80% range.
Same-store growth was strong in each business segment, blending to 5.5% for the quarter. Our balance sheet is in great shape with 5.4x leverage. Outpatient medical continues to produce best-in-sector growth despite ever more challenging comps driven by the quality of the portfolio and platform. CCRCs are performing strongly on a cash basis, in particular, with entry fee receipts at an all-time high for the first quarter. I want to make a few comments on life science. For the past 20 years, I've invested in and asset managed nearly every variation of healthcare real estate. I've seen firsthand the pluses and minuses of each and believe life science falls on the favorable end of the continuum.
I say that based on secular demand, the impact of innovation, barriers to entry in core submarkets, competitive advantage of incumbents, high operating margins, and net cash flow growth over time. It's a business driven by the aging population and the desire for improved health, two things that aren't going away. We fully acknowledge that any business runs in cycles. Despite the market exuberance the past few years, we correctly underwrote that growth would slow, and we positioned ourselves accordingly. No new development starts in the past 18 months, no material operating acquisitions in more than 24 months, very few lease maturities this year or next due to proactive early renewals, we didn't compromise on asset quality during the boom. The reality is that not every drug candidate will succeed, biotechs don't raise 10 years of cash up front.
It's a given that some companies won't make it, and none of this is a surprise to us. We build our portfolio around these realities. For example, one aspect of our cluster strategy is that growing tenants in our portfolio can take space when another tenant contracts, whether through a direct lease or a sublease. It's often done proactively, powered by our robust asset management. Scott Bohn will share recent examples. For several reasons, we see the pullback in sentiment as a huge opportunity for current and potential Healthpeak shareholders. One, we have a relatively small amount of near-term lease roll, and when we do have availability, we continue to sign leases. Two, new development starts will be very low across the sector for the foreseeable future. Three, higher borrowing costs and delayed lease-up will create acquisition opportunities in the coming years.
Four, we have a big land bank with strong progress on entitlements. When fundamentals turn, which they inevitably will, we expect to be in great shape to capitalize. Recall we were patient with our land at The Cove and The Shore until market conditions were right, then generated huge returns for shareholders. Perhaps goes without saying, but the best opportunities come out of downturns. Now a few Board of Directors updates. First, congratulations to Kathy Sandstrom on being elected as our new Chairperson. Kathy has been an independent member of our Board since 2018 and brings a wealth of real estate, capital markets, and governance expertise. She was previously a senior executive at Heitman, an important public and private real estate investor. An enormous thank you to Brian Cartwright for his five successful years as Chairman while we dramatically improved the company and portfolio.
Brian will remain an independent member of our board and a highly valued advisor to me personally. I would like to formally welcome Jim Connor to our board. Jim has a strong track record of creating internal and external growth as CEO of Duke Realty, in addition to development and outpatient medical experience that will contribute to the execution of our strategic plan. Finally, we are pleased to report that we received the highest possible quality scores from ISS for the E, the S, and the G in our recent proxy statement. I'll turn it to Scott Bohn for commentary on life science fundamentals.
Scott Bohn (CDO)
Thanks, Scott. Before I dive in, I want to touch on a few important topics. First, much like landlords analyze tenant credit, tenants are now doing the same with landlords. With record demand and minimal availability in recent years, tenants didn't always have the luxury of thoughtfully selecting their real estate assets or partners of choice, and many had to settle with what was available.
Today, tenants have more ability to select a landlord that has the financial capability and operating credibility in the market, as well as one that has the ability to provide pathways to growth within its portfolio. Healthpeak is exceptionally well positioned to capture the demand from these tenants. Second, with increased supply and softening demand, there will inevitably be pressure on deal economics. However, purpose-built space in the best sub-markets that is owned by large incumbents like Healthpeak will continue to outperform secondary locations with lower quality projects and sponsorship. Third, we proactively manage our portfolio, leveraging our scale and tenant relationships to provide real estate solutions for our tenants while enhancing our portfolio credit profile.
A very recent example of this is how we proactively downsized Adverum's footprint and simultaneously backfilled the 40,000 sq ft space with Revolution Medicines, a $2.4 billion market cap company that has raised over $600 million in two equity offerings in the past nine months. RevMed entered Healthpeak's portfolio in 2015, initially taking a 42,000 sq ft building and has grown to over 140,000 sq ft across four buildings. While the IPO market has generally remained closed, we've seen continued activity and positive signs from the other funding sources. Public biopharma R&D is at record levels. VC fundraising remains strong, the secondary equity market remains open for those with good data. Moving to the portfolio in our core markets.
Pete will discuss the financial results in detail, but I will note that we had a solid leasing quarter with 311,000 sq ft of leases executed with a positive 55% cash re-leasing spread on renewals. We delivered the final lab space at our 101 Cambridge Park Drive development, and the building is now fully placed into service, capping off another successful Healthpeak development project. Now getting into the markets, starting in Greater Boston. We have only 122,000 sq ft space rolling through year-end 2024 in the entire portfolio. Our only vacancy is in a 49% owned building, where we recently executed a lease on a portion of that space at a triple-digit rental rate and have activity on the remaining space. Moving to San Diego, our 2.6 million sq ft operating portfolio is 100% leased.
Only 200,000 sq ft matures over the next 18 months, and we've already addressed nearly a third of those maturities. We have commenced marketing on our Gateway development following a lease rejection as part of the bankruptcy proceedings. The project was designed to accommodate single or multi-tenant use and has great visibility off the 805 freeway. To South San Francisco, where we enjoy a dominant market share of approximately 40%. We have assembled a portfolio in South San Francisco that is built to accommodate tenants of all sizes and maturity levels, from brand new Class A+ space to small 2,500 sq ft Class B spaces. This holistic portfolio approach, with different price points catering to the needs of a wide variety of tenants, creates an ecosystem that no one can match in this important market.
Through 2022 and early 2023, over 78% of Healthpeak's leasing in South San Francisco has been with existing tenants. Additionally, over the past two years, Healthpeak's share of total executed leases has approached 50% of the market total, highlighting the importance of our deep tenant relationships and portfolio scale in the South San Francisco market. To a quick update on our top 3 priority campuses in South San Francisco. At Oyster Point, we have completed leasing on 87% of the recent expirations. This quarter, we placed our only vacancy at the campus, a 68,000 sq ft building that expired at the end of 2022 into redevelopment. The space has 20-year-old improvements, so we'll need some capital as we work to re-lease it.
The balance of the near term expirations, which total 320,000 sq ft, don't expire until late this year and early 2024 and will go into redevelopment at that time. We are marketing and are in active negotiations on a portion, but still generally too early to be signing leases. At our Pointe Grand redevelopment, which we have de-risked with our strategic JV, we have leased 53% or 185,000 sq ft of the active redevelopment space. We have executed three leases at the campus between December and March, totaling over 130,000 sq ft, two in very late 2022 and one last month, with a weighted average lease rate on those deals of just under $90 per sq ft. Additionally, we are in active negotiations with prospective tenants on portions of the remaining space.
At our Vantage project, we have pre-leased the full building, totaling 45% of the first phase to Astellas, and have recently executed an LOI with an existing portfolio tenant for a 23,000 sq ft full floor space, bringing the project to over 50% committed. Wrapping up with supply in South San Francisco, competitive new supply delivering in 2023 totals 800,000 sq ft, of which 71% is pre-leased. There's another 1.7 million sq ft delivering in 2024, 26% of which is conversion space that will be less competitive to our purpose-built products. It's critical to understand that the unleased space delivering in 2023 and 2024 resides in only five projects, and two of those are conversions.
We have consistently competed successfully with these same projects over the past 12 to 18 months while leasing up our Shore, Nexus, and Vantage projects. Lease-up at Healthpeak's projects have continuously outpaced the competition, and we expect the same to continue. With that, I'll turn it over to Pete to cover financial results.
Pete Scott (CFO)
Thanks, Scott. Despite the challenging market backdrop, we have started the year on a strong note. For the first quarter, we reported FFO as adjusted of $0.42 per share, AFFO of $0.38 per share, and total portfolio same-store growth of 5.5%. Notably, our FFO as adjusted this quarter was impacted by $0.02 of one-time straight-line rent write-offs. Per our policy, we do not add this back to FFO as adjusted. Let me provide a little more color on segment performance. In life sciences, we finished the quarter with an occupancy rate of 98% and same-store growth with a very solid 6.3%. The drivers of same-store growth were contractual rent bumps, positive mark-to-market and lower free rent. Partially offset by a known vacate of a non-life science user at our 8000 Marina building, which is adjacent to the shore.
Turning to medical office, we had another great quarter with same-store growth of 3.7%, and we finished the quarter with an occupancy rate of 91%. Same-store growth was driven by strong in-place lease escalators at our Medical City Dallas campus, which continues to exceed our expectations. Finishing with CCRCs. Same-store growth for the quarter was a very healthy 9.5%. Cash and rep sales of $29 million set a first quarter record. The strong starts of the year allowed us to increase our full year and rep guidance to $107 million at the midpoint. That is $27 million or $0.05 per share greater than what is forecast in FFO and AFFO. Last item under financial results. For the first quarter, our board declared a dividend of $0.30 per share.
This equates to an AFFO payout ratio of less than 80%, the lowest reported payout ratio at Healthpeak in over a decade. That is a good segue to our balance sheet, which we believe continues to be a competitive advantage. Our net debt to EBITDA is 5.4x. We have liquidity of $2.5 billion. We have limited floating rate debt exposure at 5%. We have no bonds maturing until 2025. Our development pipeline is fully funded, and we have no additional asset sales in our forecast. We have approximately $150 million of annual retained earnings, and we have stable ratings from both S&P and Moody's. Turning now to our 2023 guidance. We are reaffirming our FFO as adjusted range of $1.70-$1.76 per share.
We are increasing our AFFO range by one penny to $1.46-$1.52 per share, we are increasing our blended cash same-store growth by 25 basis points to 3%-4.5%. Let me expand on some important items underlying our guidance. We see 3 pennies of benefits from the following items. One penny from the 50 basis point increase in medical office same-store growth and the $2.3 million letter of credit at Gateway. One penny due to earlier than anticipated revenue recognition at our Hayden Campus in Boston. One penny from the combined impact of lower interest expense and higher interest income. For FFO as adjusted, the positive 3 penny increase is offset by a 3 penny decrease in straight line rents, inclusive of the one-time write-offs I previously mentioned.
For AFFO, we were able to increase guidance by $0.01 while maintaining a level of conservatism as it's still early in the year. As a reminder, AFFO is not impacted by non-cash items, including straight line rent and revenue recognition. Please refer to page 36 of our supplemental for additional detail on our guidance. A couple of quick items before turning to Q&A. On the Sorrento Therapeutics operating leases, we have been paid rent in full through April. Although not guaranteed, we could receive additional rents as their strategic alternatives process is expected to run through July. With the rents received year to date, combined with the potential for additional rent payments and the letters of credit, there is minimal financial impact to 2023, regardless of whether the leases are accepted or rejected. On the Kodiak leases, we have been paid rent in full through April.
Due to our proactive subleasing, our annual net exposure is only $3 million across 40,000 sq ft at 35 Cambridge Park Drive. I walked the space last week and it is in A-plus condition. If the leases are rejected, we are confident in our ability to re-lease the space on favorable terms. With that operator, let's open the line for Q&A.
Operator (participant)
Thank you. We will now begin the question and answer session. To ask a question, you may press star 1 on your touch tone phone. If you're using a speaker equipment, please pick up your headset before pressing the star keys. To withdraw your question, please press star then 2. That everyone may have a chance to participate, we ask that participants limit their question to 1 and a related follow-up. If you have additional questions, please queue. At this time, we will pause momentarily to assemble our roster. Our first question comes from Juan Sanabria, BMO Capital Markets. Please go ahead.
Speaker 17
Hi, good morning, guys. It's Eric on for Juan. Just starting with life science, just a quick question on occupancy and appreciate the color in the remarks. You know, was it just the 1 move out that drove the decline in 1 Q-23? What's assumed in guidance for the balance of 23? Is there any other large move-outs that to be aware of?
Pete Scott (CFO)
It's Pete here. I'll take that. Please send our regards to Juan. You know, we did end 2022 at 99% occupancy. In a multi-tenant portfolio. Kind of hard to go up from there. You know, occupancy did decline modestly in the first quarter, but if you put it into context, 50 basis points of an occupancy decline is actually around 50,000 sq ft within our portfolio. If you equate that to the size of our leases, that's really just one lease. Our guidance for the year did assume occupancy would decline a bit in 2023. As I mentioned, it's hard to go up from that 99% number.
As I did mention in our prepared remarks, we did have an expected tenant vacate at our 8000 Marina project over in Brisbane, and that's adjacent to the shore. It was a non-life sciences user, and we're evaluating, you know, converting that space to lab, and that was certainly expected. With regards to occupancy, generally, that's probably the best way to answer that question.
Speaker 17
Great. Thank you, guys.
Operator (participant)
Next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll (Managing Director)
Thanks. How built out is the Sorrento Gateway development today? Did Sorrento Therapeutics already start its TI build, or does a new tenant or potential new tenant still have a big required TI package that they need to put into that asset to make it usable?
Pete Scott (CFO)
Hey, Mike, it's Pete here again. You know, as we said in our prepared remarks, that building was designed for either a single tenant or multi-tenant users there. We were probably around 3 months from delivering that when Sorrento filed for bankruptcy. So we have pushed out the date with regards to the initial occupancy in our supplemental to, you know, mid-2024 at this point in time. It's hard to comment on any additional TIs that may have to go into that if we had to build out additional lab space on individual floors at this point in time. I think at, you know, we look at the location of that right off the 805, we feel quite good about our prospects there. It's just gonna take a little bit more time.
Hard to comment on any additional TIs at this point, but, you know, the building is progressing.
Scott Brinker (President and CEO)
Yeah, we should get additional rent as well. The rents there are in the low fives per month, which is an awfully low rental rate in today's market. I think the 8.5% return on cost that we had underwritten is still a good number.
Michael Carroll (Managing Director)
Okay, how much activity has there been? I know this probably just happened, so I'm not sure how long you've had to show it. How much activity has there been? Just kinda getting back to the underwritten rents, I mean, is it fair to assume that the TI package that's required to go into the building is significantly smaller, so it's more attractive and more like a second-gen pre-built lab than just a ground-up development that where a tenant needs a pretty big cash outlay to go into the asset?
Scott Brinker (President and CEO)
I'm not sure I followed the question in its entirety. It's space that is probably three months from being fully built out and ready for occupancy. It was designed for that user. If we end up multi-tenanting, we may have to take some time to build out the TIs in a little bit different way. It's a purpose-built lab building, I'm not sure I follow the second question.
Michael Carroll (Managing Director)
Yeah, just I think that it is harder for tenants today to lease development projects because there's a big TI commitment that they have to put in. If it's a second gen pre-built lab, then there's less cash outlay. There's more interest. Correct me if I'm wrong on that statement.
Scott Brinker (President and CEO)
Oh, I see what you're saying. No, there wouldn't be necessarily a TI requirement for many new tenant. I mean, this project is fully funded and ready for occupancy.
Michael Carroll (Managing Director)
Okay, great. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Next question comes from Nick Yulico from Scotiabank. Please go ahead.
Nick Yulico (Managing Director of Equity Research)
Thanks. Good morning. I was hoping to get an update on, you know, if we on your, you know, tenant watchlist. You may not wanna call it a watchlist, but if we put aside Sorrento and Kodiak, is there a way for you to just quantify, you know, a level of the life science, you know, rents right now that you are keeping an eye on from a tenant base?
Pete Scott (CFO)
Yeah. Hey, Nick, it's Pete. You know, I'm not gonna comment on specific tenants, but I will say that our overall tenant risk profile has actually improved quarter-over-quarter. I think that is a pretty key takeaway alongside of our guidance updates that we released on this call. You know, we've had a few tenants raise capital over the last month or so. Scott Bohn also talked about the Adverum RevMed transaction, that proactive lease termination, that we completed. One of our tenants, Seres, and I saw you put that in your note, thank you for doing that, did have their drug approved yesterday as well, and they're collecting a pretty significant milestone payment on that.
You know, I will also say that our disclosure is, we think, pretty good, and we did add cash balances to our top tenants within the supplemental this quarter. Like I said, I think the big key takeaway alongside our guidance updates is that our tenant risk profile has improved a little bit.
Scott Brinker (President and CEO)
The only thing I would add is, hey, Nick, it's Scott. You know, when you look at our life science portfolio, we're essentially in the 3 core markets, but we're also essentially in 5 core sub-markets. You can tour our portfolio awfully quickly. In the last two or three weeks alone, Pete, Scott and myself, the team, I've seen the vast majority physically of the space that is either vacant today or could be vacant if there was an issue with a tenant, and it's all in good shape. You know, there's a number of factors that have to be considered when evaluating credit of tenants. For sure, there's been a lot more good news over the past few months than bad news. The qualitative aspect is important too. The real estate's in really, really good shape.
These are core sub-markets where we have meaningful market share. You know, we're not trying to compete in every sub-market across the U.S. We're in five core sub-markets: South San Francisco, Torrey Pines, Sorrento Mesa, West Cambridge, and Lexington. I mean, that's our footprint. We have huge market share in each of those local core sub-markets. That puts us in awfully good shape when buildings become available.
Nick Yulico (Managing Director of Equity Research)
Okay, thanks. Second question is just on South San Francisco. If you could talk a little bit about the impact that, you know, sublease space is having in the market and in your own portfolio as well. You know, I know like Graphite Bio put 85,000 square feet of sublease space at the Nexus on Grand. Anything else you could talk about of, you know, meaningful sublease space in your existing portfolio, and then how just the overall increase in sublease space in that sub-market is impacting maybe rents or just overall, you know, trends in that market?
Scott Bohn (CDO)
Yeah. Hey, it's Scott Bohn. Yes. There's certainly been an uptick in sublease space in all the markets. You know, it's still at manageable levels. You know, I think sublease space, it's important to note, has its own challenges, and it's not always directly competitive to a direct deal with the landlord. You know, there's a few things to think about. Generally, no TI allowances, you know, any incoming subtenant is gonna be coming out of pocket for any modifications to the space. With those modifications, they also face, you know, restoration obligations at the end of the sublease that are additional costs.
I think most importantly, there's typically not a recognition of a sublease, in the event of a master lease termination, meaning a subtenant is taking the credit risk of the sublessor, you know, on their mission-critical facilities. You know, I think one other note I would make is that subleases have historically been contributors to our leasing success. It provided our team the ability to build relationships with subtenants and oftentimes take them direct at the expiration of a sublease. You know, leasing directly to a subtenant at the end of the sublease, has been advantageous. It's often with very little downtime, very little capital. If you just look at The Cove, you know, of the 1 million sq ft here, 200,000 sq ft of tenants, were former subtenants within the project.
You know, I think sublease space can certainly pull from leasing demand in the short term, but if you look at it over the long term, it provides an opportunity for us from a leasing perspective.
Nick Yulico (Managing Director of Equity Research)
Okay, thanks.
Operator (participant)
Next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra (Managing Director of Equity Research)
Thanks for taking the questions. I just wanted to maybe step back and you talked about some sublease space. You talked about, you know, the known, the move-outs you've outlined going to year-end with Amgen, the risk profile that, you know, your view is it's lower Q over Q. Can you sort of at a higher level just talk about the earnings power or trajectory if you were to take slightly longer term view? I'm not looking for a specific, you know, guidance for next year, but I'm just trying to understand the guardrails with all the moving pieces, given how big of a space Amgen is. Would you give us some building blocks to think about, you know, the same store growth profile of the life science segment into 2024?
Scott Brinker (President and CEO)
Maybe I'll start with it, Vikram, I'm sure Pete has some thoughts as well on earnings. When I step back, you know, it's a pretty challenging capital markets over the past couple of quarters, and really it dates back to 2022, at least in the biotech sector. Despite the business being pretty capital intensive, and the challenged capital markets, you see our occupancy is still at 98%. Our leasing volume continues to be strong. It'd be hard to paint a tougher financing environment for tenants, and yet we just had 6.3% same store growth. We're at 98% occupancy. That makes us feel pretty good about our market position. The fundamentals of the business haven't changed, in terms of the aging population, desire for improved health.
I mean, the science isn't going backwards. It only builds on itself. Probably gets even faster in terms of the improvement with AI. If the odds of success on drug development increase with AI, which they almost certainly will, that's only gonna cause more funding to come into the business. There's plenty of reasons to be positive that this 25% mark to market that we have across the portfolio over the next decade, that should still be achievable. It's not an ideal leasing environment today, when you think about fundamental demand drivers, it's all there. Our market position is fantastic to capture it, relationships, the team, the buildings, the locations. We're at The Cove here in South San Francisco all week. I mean, it's a special place. We've got landlords using our building to market to tenants.
That's no joke. I mean, it's what Scott and the team created here is pretty unique. Life science, I think, is gonna continue to produce strong growth. You think about the supply, maybe it doesn't go to zero in terms of new starts over the next year, but pretty close. The supply-demand outlook over the next three to five years should actually be quite favorable from what we would have said two years ago. CCRC business, it's only 10% of what we do, but it continues to perform. There's still significant occupancy upside and NOI to recapture. Then, the medical office platform continues to perform.
It's at 90%. Maybe not dramatic upside, but if it can continue to generate that 3%-4% same store growth, that's awfully attractive base of earnings growth for the company. Pete, anything to add?
Pete Scott (CFO)
The only couple of things I would add is, obviously, we're not putting out 2024 guidance today, but I do like the question that you're asking, Vikram, because we have a diversified portfolio and a great balance sheet bolted onto it. I'm sure we'll talk about medical office and CCRCs at some point on this call. We did put out this NOI growth trajectory for the next 3 years in our NAREIT deck about 6 months ago, and we still feel good about that NOI growth trajectory. You know, the timing of when the Gateway project will work its way into our earnings has been pushed back a little bit, but the overall growth story we still feel very good about.
Then with regards to Amgen, in particular, and that Oyster Point campus, as Scott Bohn mentioned, we have re-leased pretty much the majority, the vast majority of the leases that have expired there. We did put one building into redevelopment, we have three buildings that we will get the leases back over the next year, couple the end of this year, and then some the beginning of next year as well. We did put out a full, you know, set of assumptions on how we think we will re-lease those and the timing of that, and I think we still feel good about those assumptions. We will look to update that in future presentations as well because we do get some questions on what's gonna happen with that campus.
From where we sit today, we feel quite good.
Vikram Malhotra (Managing Director of Equity Research)
Okay. That's helpful. I just wanna maybe just try to get a bit more flavor of the. You mentioned the credit profile in your minds have improved over Q over Q. You know, last June NAREIT, if I remember correctly, you had thrown out a number, I think the watch list at that time, you had estimated around 4% to 5% of NOI, and that's kind of when you had pushed out development lease-up schedules, et cetera, which obviously then got refined during the subsequent quarters. You know, our work suggests, you know, today, and not from an NOI, but from a square footage perspective, that risk is probably in that still 5%-ish percent range of square feet.
Would you be able to just comment, you know, is that in your. If you don't wanna share a number, is that number in the ballpark? Is it much higher, much lower? Given your comments around Q-over-Q, your risk profile has been lowered.
Scott Brinker (President and CEO)
Yeah. Vikram, appreciate your support, and report and all the time you put into it. I mean, we define things a little bit differently. We obviously have access to data that not everybody would have, both public and private. I don't wanna talk about specifics. I think Pete's point that quarter-over-quarter, the risk profile has definitely gone down is an important one, and that includes a lot of good news over the past 2-3 weeks alone, with companies raising capital, doing licensing agreements. I mean, it's a company-by-company analysis, obviously, that we're doing, and we feel better where we sit today than we would have even 2 weeks ago.
Vikram Malhotra (Managing Director of Equity Research)
Okay, great. Thanks so much.
Operator (participant)
Next question comes from Michael Griffin with Citi. Please go ahead.
Michael Griffin (Senior Equity Research Analyst)
Hey, thanks. Maybe going back to the Sorrento development. I mean, you talked about it, being used for single or multi-tenant, potential use. Correct me if I'm wrong, was the building initially built for one tenant? Like, maybe you can set up the floors differently from, like, the TI packages. Is there anything structurally different with the building would preclude you from multi-tenanting it?
Scott Bohn (CDO)
No, I would say, Hey, Michael, it's Scott Bohn. The core and shell of the building was certainly designed to be single or multi-tenant. You know, the TIs for the previous deal, you know, were built as single tenant. You know, you're able to flex those to multi-tenant, and the building structure itself can go multi-tenant very easily.
Michael Griffin (Senior Equity Research Analyst)
Okay, cool. Just back to San Francisco supply. I think, Scott, in your prepared remarks, you mentioned about 800,000 sq ft coming online in 2023 that's competitive. I mean, do you have a sense if like these proposals, I think the mayor's proposing some buildings in the CBD, the office towers converted to lab space. I mean, that stuff seems like it's gonna be a tougher lift than the conversions down the peninsula. Any sense of, like, how big this supply market is and, like, how the market might be misinterpreting that headline number when really they just need to probably look under their hood a bit?
Scott Bohn (CDO)
You're talking about, sorry, Michael, in the city of San Francisco?
Michael Griffin (Senior Equity Research Analyst)
I presume that when you look at a market supply report for life science in San Francisco, it accounts for both the CBD and the peninsula. There are probably sub-market reports, but I imagine if you type in a broker name in San Francisco life science, the whole number will come up. It's effectively like how Boston and Waltham are different, but they'd probably be lumped into the same MSA supply.
Scott Bohn (CDO)
Yeah, 100%. I mean, I think you'll see the headline numbers are always gonna be much larger. You know, not all of that is competitive to our footprint. We're not overly focused on that. You know, we look at really what is
Truly competitive to our products within our submarkets. As Scott mentioned, you know, we're really in 5 submarkets, and that's where we focus. You know, when you look at like San Francisco CBD, for example, I mean, there's, you know, there's talk, and like you said, the mayor, you know, mentioned, you know, conversions to life sciences. Those are challenging down there. I don't look at those as, you know, something that's on our radar or we're truly competitive.
Michael Griffin (Senior Equity Research Analyst)
A quick one I could sneak in on MOBs. Looks like guidance was raised kind of on the strength of MedCity Dallas. I feel like people almost forget about that business sometimes, but it is steady state and produced solid results. I mean, you know, what are your expectations throughout the rest of the year? Do we maybe see another guidance increase if, you know, operating results are better than anticipated? You know, it's my opinion that, you know, if we do get a really severe downturn, medical office could be a really good place to be, essentially.
Pete Scott (CFO)
Hey, Griff. We agree with you. It's Pete here, maybe I'll let Tom Klaritch chime in. We do look forward to touring Medical City Dallas with you in about 2.5 weeks from now. That campus continues to exceed our expectations and certainly is helping with regards to our same-store numbers. The segment generally is performing well. We increased our guidance for that segment this quarter by 50 basis points. You know, we like to keep a little bit in the tank as well. If you go back and historically look in MOBs, we have been able to increase guidance as the year progresses on multiple occasions. We feel good about that from where we sit today right now.
There is a little bit of volatility with the MCD ad rent component, so we're gonna be a little bit more conservative at the beginning of the year. Tom Klaritch, why don't you give a little sense for what you're seeing within the segment overall?
Tom Klaritch (COO)
I think if you look, our escalators continue to perform well. We average about 3%. A lot of that's driven by our fixed escalators that, you know, that are averaging 2.8%. Obviously, CPI escalators will fluctuate here and there, but they're doing well. We had a good quarter for mark to market on renewals, at 4.1%. You know, we tend to see mark to market kind of the bulk of it's in that 2%-4% range, you always have a number of leases that are above that and a number that are below it. You know, this quarter, we had a lot more above it than below it. That worked out well for us.
Parking, you know, continues to get back to and sometimes above pre-pandemic levels. We saw a little bit of a bump from that. Overall, you know, most of the major metrics for us have been positive. As Pete said, if Medical City continues to perform the way it has been, yeah, we might have some room there too.
Michael Griffin (Senior Equity Research Analyst)
All right, guys. That's it for me. Thanks for the time.
Pete Scott (CFO)
Thanks, Griff.
Operator (participant)
Next question comes from Steve Valiquette with Barclays. Please go ahead.
Steve Valiquette (Managing Director)
Hello, everyone. Thanks for taking the question. Two topics here quickly. On the MOB zone, you just kind of talked about this, but I wanted to ask about the, for whether portfolio or just development pipeline. I know one quarter does not make a trend, but just with overall health systems really seeing a major resurgence in their operating performance year to date in 2023, has that led to any more, you know, invigorated discussions on development opportunities, or is it too soon for just further evolution on that? Maybe I'll ask you to answer that first, then I'll ask the follow-up.
Tom Klaritch (COO)
Okay. Yeah, this is Tom. Certainly, we're in discussions. You know, we have the HCA development program. There's a number of buildings in that pipeline. HCA just announced on top of having excellent results with almost every major metric being up, they're gonna invest about $4.6 billion in capital into their portfolio. As they do that and expand bed towers and services, we certainly would see the need for more medical office space. You mentioned the health systems. Tenant reported great results. UHS reported great results. You know, if that continues on for the year, we'd certainly expect to see good development opportunities. One thing we were encouraged by is costs seem to be stabilizing and in some instances, even coming back down some.
We have our Savannah development down in Georgia. We got about 85% of that bought out, and the cost actually came in lower than our base case. We were able to remove some assumed escalators that were gonna be in there. It improved the return on that project by, you know, at least 25 basis points. Hopefully, as we finish the project up, we can get even a little better return out of it.
Steve Valiquette (Managing Director)
Okay, great. That's helpful. Quick question for Pete on a different topic here. I know there's obviously a lot of moving parts within the full year outlook, but with the increase in the same-store cash NOI growth guidance for the year, but the FFO guidance remaining unchanged, just wasn't clear. Was there a specific variable that explains the delta between the two, or is it just that a 25 basis point increase in SSNOI growth is still absorbed in the preexisting full-year FFO guidance range? Thanks.
Pete Scott (CFO)
Yeah. Good question, I'm glad you brought it up, Steve. You know, we did increase our AFFO guidance by a penny, you know, one of the drivers of that is taking up our same-store guidance within MOB's 50 basis points, 25 basis points overall for our blended same store. You know, AFFO is not impacted by those straight-line rent write-offs. The reason we just reaffirmed FFO as adjusted at this point is because we did have those, you know, 2 penny impacts to FFOs adjusted, we didn't have to take that impact into AFFO. That's really the reason for that.
Steve Valiquette (Managing Director)
Got it. Okay. All right. Thanks.
Operator (participant)
Next question comes from Connor Siversky with Wells Fargo Securities. Please go ahead.
Connor Siversky (Director and Senior Equity Research Analyst)
Hi there. Thanks for having me on the call. Last earnings call, it was mentioned that movements in cap rates were such that you could see a more favorable return profile on acquisitions at some point this year, perhaps versus development projects. In consideration of the share price coming off a bit since then and muted activity during the first quarter, I mean, are you seeing enough movement in caps that you would feel more comfortable taking an aggressive posture through the balance of 2023?
Scott Brinker (President and CEO)
I wouldn't say an aggressive posture, not at today's cost of capital. Our view on development hasn't really changed. Tom did mention at the margin, at least, development costs are maybe starting to stabilize, if not come down in certain cases. That's encouraging. We are making strong progress on entitlements in West Cambridge, South San Francisco and in San Diego. Several million sq ft of development that at some point the returns will make sense. Our view is development at the right point in the cycle can be spectacular, and at the wrong point in the cycle can be pretty rough. We're not doing a whole lot of development right now, but we're preparing to do a lot of development.
I think that's important to keep in mind that we do have that land bank and development expertise when the timing makes sense. Yeah, the comment is that it could be a rough couple of years in the, in the real estate market, especially on the private side. It depends on what happens with the financing environment, but today it's pretty ugly in terms of lack of liquidity, banks really not lending, certainly not at portfolio level quantums, LTVs down, interest rates significantly higher. I wouldn't be surprised to see return targets move quite a bit higher. It's just nothing's getting done right now. Well, I shouldn't say nothing, but pretty close to nothing.
There's a select trade now and then, but anything material in scale or that requires financing would be near impossible to get done today. We are optimistic that this downturn is gonna lead to opportunities, but obviously we will need our cost of capital to move up, which we think it will. I mean, the sentiment overshoots in both directions. It always does. It's nothing that we're complaining about. It's just a reality. The sentiment is way worse than the reality. There'll be a point in the cycle when the opposite is true, and we'll have a really strong cost of capital. My guess is there'll be quite a few things to acquire.
We toured some stuff in the last 2 or 3 weeks alone in our core markets that's sitting vacant, because it's on 1 hand, maybe not a sponsor that has the right footprint, the right relationships or scale to really fill the building, that we feel like with the Healthpeak sponsorship over time, buildings like that would probably lease up. There could be some unique opportunities over the next year or 2. We'll see.
Connor Siversky (Director and Senior Equity Research Analyst)
Okay. Thanks for that. That's really helpful. Quickly on leasing activity and TIs. I mean, we've heard some chatter that TIs have come up significantly from the start of the year, particularly in life science, though looks like the numbers Peak posted in Q1 seem pretty reasonable. I'm just wondering what the expectation is for TIs going forward on a square foot basis.
Scott Brinker (President and CEO)
Sure, Connor. I think you made a good point. At least as we've executed recently, you know, we've held our TIs as a percentage of rent pretty low, at sub 10% of rents. You know, you do have some tenants, it's pretty deal specific. You know, they're typically on smaller deals. You know, you have tenants asking for a higher landlord contribution, you know, to preserve cash. You know, depending on the deal, the space and the tenant credit, at times we can get comfortable with that when it's appropriate.
I mean, I think we focus on making sure those build outs are highly generic and reusable, to make sure that, you know, if we're putting in additional capital on any deal, that's gonna be space that we can use over, you know, the next 10 to 20 years from a build out perspective. You know, it's hard to give exact TIs. Every deal is different, every space is different. I'd probably stop there.
Connor Siversky (Director and Senior Equity Research Analyst)
Got it. We'll just work on the guidance number. We'll work with the guidance number then. I'll leave it there. Thank you.
Scott Brinker (President and CEO)
Thanks, Connor.
Operator (participant)
Next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.
Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)
Great. Hey, just a couple quick ones. Going back to the comments on the life sciences funding, I think the question earlier was trying to get at just sort of the funding environment. Is your thinking, is your view that, you know, sort of the companies with sort of the right products, there's still sort of funding to be had there? Just trying to get a sense of just, you know, we're hearing that, you know, there's a lot of companies that will need funding in the next 6 to 9 months. Just in your mind, how are you guys thinking about how those gaps get filled?
Pete Scott (CFO)
Yeah. Hey, Ronald Kamdem, it's Peter Scott here. You know, I would say, think about some of the first quarter statistics. You know, the secondary equity market, which is a big market for our tenants to raise capital. You know, there were over 30 follow-on offerings, raising about $4.5 billion of proceeds for biotech companies. Actually, within our portfolio, tenants raised about $1 billion. If you have good data, and some good readouts that you can raise capital off of, you certainly can, even in the volatile markets that we're in right now. You know, venture capital fundraising, we get a lot of questions on that. You know, fundraising for venture capitalists is actually, it was around $6 billion in the first quarter.
From a deployment perspective, the venture capitalists investing into companies. That number was at $4 billion. We're seeing a little bit of a pause or a delay in those funds getting invested into companies, but $4 billion is still pretty healthy. From an M&A perspective, you know, there have been some pretty big deals that have been announced. Merck did a deal, GSK did a deal as well. I think the premiums on those were 75%-100%. We've continued to say that pharma has a pretty big war chest that we think they will continue to put to work in acquisitions or licensing deals with biotech companies. Despite the volatile capital markets, you know, we are seeing capital raising occurring at, you know, a healthy pace.
It's obviously down a little bit relative to where it was a year or two ago. You know, what are we looking for going forward? Obviously, the IPO market would be something that we'd like to see improve. There is a pretty big backlog, we've been told, of companies that are trying to go public. Just at this moment in time, it's more challenging. So we'd like to see that improve. You know, and, you know, generally, I think we feel like, if the capital markets volatility does subside, interest rates normalize a little bit, that it should be a more improved environment going forward.
Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)
Great. Super helpful. Just moving on to just a quick update on CCRC, so I don't know if it's been asked about. You know, clearly with the capital markets where they are, it's probably hard to get a transaction. You talked about that nothing was imminent, but just curious where we stand there, how you guys are thinking about the CCRC business and a potential sale.
Pete Scott (CFO)
There's no real update. It's challenging capital markets to do anything strategic with that business, and it does have significant scale. We've seen some smaller things get done, but nothing remotely as big as the CCRC portfolio. We've had some outreach, but just not an opportune time to sell. In the interim, it continues to perform really well. It's a good portfolio, great partner. It's got a really strong team here that's asset managing. Performance has been good. Occupancy is up more than 200 basis points year-over-year. The NOI growth is strong. On a cash basis, it's fantastic. On a cash NOI basis, we're essentially back to 2019 NOI levels, and yet we still have a lot of upside to recapture in terms of occupancy. There's still some cost pressure for sure.
The labor market is improved, but it's a pretty low bar. It's still challenging. Contract labor is down about 70%. Our rate growth this year for existing residents was around 10%. Some of those are mid-year, based on anniversary dates, so not all of that will show up in our report growth, but 10% is pretty strong. Yeah, I mean, we like the business. It's just not a perfect fit for where we see Healthpeak five to 10 years from now. Unless we get a great price for it, we'll just hold it. We got a great team managing it, and they're good assets, and they're obviously performing.
Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)
Great. That's it for me. Thanks so much.
Operator (participant)
Next question comes from Tayo Okusanya with Credit Suisse. Please go ahead.
Tayo Okusanya (Managing Director of Equity Research)
Yes. Good morning to all of you, again, congrats on a very solid quarter. I wanted to go back to the capital allocation question. Just again, clearly, again, no one's kind of happy with your cost of capital today, most especially you. If you don't see a lot of improvement near term, how does one kind of think about acquisitions versus development versus redevelopment versus stock buyback versus debt buyback? Like, how would you kind of think through those kind of five options to kind of allocate capital, and what are you more likely to do or least likely to do?
Scott Brinker (President and CEO)
Well, redevelopment's first on the list. The returns there are strongest in comparison to acquisition or development, and the return profile is lower risk given we already know the asset and sub-market so well, and the turnaround time is a lot lower than a new development in terms of the risk of your time period that you're trying to underwrite. That's our best use of capital today. You know, we don't wanna overreact when market sentiment overreacts. Obviously, if there was a sustained differential between our own cost of capital and acquisition cap rates, and once we have cleared in what those even are, right, and there's stability in the financing markets, you know, we could always consider stock buybacks through asset sales, but we'd certainly not lever up to do that.
That's not high on our priority list right now. It's not a great time to sell assets realistically, we don't have to. Our preference is to not do that. If there was a point in time where acquisition cap rates and were clearly below our cost of capital, and our applied trading ratios, and the financing market was available to buyers, yeah, I mean, of course we'd consider that's not on the table today. Tayo, development, well, I think I covered it earlier, that's not something that we'd consider starting in today's marketplace. One year from now, two years from now, it could be. We're happy to sit on the land and the entitlements until the timing makes sense. There's no urgency there.
Tayo Okusanya (Managing Director of Equity Research)
Gotcha. Then a follow-up question on the life sciences side. Just kind of given everything that's happening within the space or just the overall concerns people have, any thoughts about diversifying more within life sciences? Specifically, I think about things like, again, doing more of the agric farmer stuff in North Carolina, possibly, you know, going to a new market or even doing more of the kind of academic university-based life sciences stuff. Just kind of curious if there's any thoughts to move in those directions and whether the returns in those areas would be potentially attractive to PEAK.
Scott Brinker (President and CEO)
Yeah. I mean, the life science title for the business is a pretty broad title. Our business today is more biotech, biopharma-focused, and for that, I see us sticking in the 3 core markets, at least for now. If you look far enough into the future, I suppose there could be enough scale that it could be interesting to us. If you think about R&D, that could be something different than just for-profit biotech companies. There's an awful lot of R&D happening in nonprofit health systems and for-profit health systems like HCA. We, we toured a number of them recently, including our own portfolio, you know, lab space in a quote-unquote medical building that would rival what we have here in South San Francisco. I could see us doing things like that within the quote-unquote life science bucket.
In terms of for-profit biotech, I don't see us straying outside of the 3 core markets in the near future. We just have such a huge competitive advantage, and that's where the depth of demand is and frankly, will always be.
Tayo Okusanya (Managing Director of Equity Research)
Gotcha. Thank you.
Operator (participant)
Next question comes from John Pawlowski with Green Street. Please go ahead.
John Pawlowski (Managing Director)
Thanks for the time. Having a follow-up question on South San Francisco. Scott, I appreciate the comments on the amount of supply coming online this year and next year. Just curious how you think through a reasonable scenario and decline in market rents and decline in market occupancy. Given the amount of supply in the way the next two years, if demand doesn't get meaningfully worse or meaningfully better from here, where do you think market rents and market occupancy in South San Francisco head to?
Scott Brinker (President and CEO)
Yeah, I mean, I think it's hard to tell, you know, right now. You know, I think when you look at those again, as I mentioned, you look at the supply that's coming on that we view as competitive to our project, you know, it's really only in those in 5 products. Two of those are conversions which aren't gonna compete as well versus our purpose-built. You know, I think that with our portfolio and the demand we see from within our own portfolio, you know, we do a lot of the majority of our leasing that we do, especially in our developments, you know, 90% of our leasing, when you go back to The Cove and then The Shore and Nexus, and now Vantage, just come from within our portfolio.
You know, I think we're able to capture the, you know, higher rents than some other landlords may be able to. You know, a lot of those deals come from tenants with existing leases in place, you know, so we're growing a tenant, say, from, you know, 50,000 sq ft to 100,000 sq ft, right? We're letting them out of the lease on the back end, which we're able to, you know, blend into the economics to keep the rents, you know, probably higher. Hard to tell on where exactly it goes, depending on demand, but I think we're confident that we'll be able to certainly outperform and capture the high end of market rent.
I mean, you just got one project that's an outlier that changes the quote-unquote market occupancy when 900,000 sq ft goes under development. That's obviously intended to be a multiyear lease-up. How do you treat something like that in terms of market occupancy? You know, I think that's an important consideration. Obviously, to fill something that big, I mean, you're gonna need a lot of large tenants. A lot of the space we have right now, frankly, is perfect for what the market is looking for. Series A companies, 20,000-30,000 sq ft, lower OpEx, quicker time to get into the building. We're in a pretty good competitive position given today's demand to continue leasing space.
John Pawlowski (Managing Director)
Okay. Understood. Could you comment on the trajectory of your mark to what you think is a reasonable mark-to-market in your South San Francisco portfolio this year? Like, what are you seeing on the ground right now? Is that mark-to-market kind of collapsing each month as fundamentals deteriorate? Any comments there would be helpful.
Scott Brinker (President and CEO)
I mean, the only reason it's going down, and it's still in that 25% range for the portfolio. South San Francisco's always been on the lower end of the range, Boston more on the higher end because of the Amgen leases. That's a huge amount of space that's essentially at market, and that's included in our number. When they burn off over the next year or so, that will actually be a benefit to the mark-to-market on the, on the remaining portfolio. It's still in that range. You know, keep in mind, we've had several quarters in a row now of 30%, 40%, 50% mark-to-markets. As that rolls through the portfolio, obviously the mark-to-market on what remains is gonna start to decline.
We said all along our lease rollover in 2022, 2023, and 2024 is relatively small as a percentage of the portfolio, and the mark-to-market just happen to be lower in those years. It's not a static number. It's gonna jump around from quarter to quarter and year to year. Our biggest mark-to-markets actually take place in 2025 and thereafter, which could end up being great timing. There was a point when people were kind of disappointed that we couldn't get to our mark-to-market quicker. As it turns out, having a really low lease maturity profile this year and next is a huge competitive advantage.
John Pawlowski (Managing Director)
Okay. I appreciate it. Last one for me, for Tom Klaritch. I'm just looking through your market level occupancy on page 28 of the sup for medical office. I'm just curious, a few of these big markets are kinda stuck in the mid-80% occupancy range, Denver, Nashville, Houston, and a few of them actually went down quarter-over-quarter. Can you just help me understand why vacancy in some of these markets is so high? What, what's structurally different on the ground in terms of demand and supply in these markets versus the rest of the portfolio?
Pete Scott (CFO)
Typically it's because of really developments in many cases. In Houston, we just built a new building. It was 130,000 sq ft that's not yet stabilized, so that's brought like the occupancy down some there. We bought a building in Denver, a year ago, Pinnacle, we bought it at 7% occupancy. It's up to 50%, and it's actually leased to close to 90%. Some of it's just because there's leasing out there that's not yet commenced in some cases. Some of it's because we put a non-stabilized asset into play. Some of them we have redevelopment. For example, we have two redevelopments we're working on in Denver that are close to 100% leased, but they're not fully occupied yet.
One of those redevelopments, we were able to add some square footage, so you know, we increased the actual capacity in that building. There's a variety of reasons for it. Some of the, you know, most of the big reasons are the non-stabilized developments and developments.
John Pawlowski (Managing Director)
All right. Thanks for the time.
Operator (participant)
Question comes from Mike Mueller, JPMorgan. Please go ahead.
Mike Mueller (Analyst)
Hi. 2 quick life sciences as well. One being a follow-up from a prior question. I guess in terms of the lease mark-to-market that you had this quarter, 55%, how do you see that trending even though I know the roles are a little bit more limited. How do you see that trending in the balance of the year? Can you remind us what portion of your tenant roster in life sciences is more tech as opposed to life science?
Pete Scott (CFO)
The first one or the last one first. We have almost no tech. I mean, it's low single digits. We purposely stayed away from the office market. So that's an easy question. The first question you asked, you know, we won't speculate on mark-to-market. It just depends on exactly which tenant renews. Those are chunky leases, so depending upon which one does or which one does not, it could move the number pretty materially. That is gonna bounce around quarter to quarter, so we're not gonna give you a specific target or projection for that.
Mike Mueller (Analyst)
Got it. Okay. Thank you.
Operator (participant)
Next question comes from Josh Dennerlein with BofA. Please go ahead.
Josh Dennerlein (Senior Equity Research Analyst)
Hey, guys. Thanks for the time. Just thinking about the life science guide and just your results for 1Q. Looks like you did 6.3% on the same-store cash basis. The guide you kept at 3%-4.5% for the year. I guess, how are you thinking about the cadence? Could you remind us what, like, the typical rent bump is for on an annual basis for the-
Pete Scott (CFO)
Yeah. Hey, it's Pete here. You know, when you think about the rent bumps, I'll take the last part first. When you blend the 3 markets, our rent bumps are in the 3.2%-3.3% range. Most of our same-store growth this year is driven by those rent bumps because as we said last quarter, and we'll just repeat again on this call. You know, when you're at 99% or 98% occupancy, it's hard to get same-store benefit from increasing occupancy at those levels. The majority of our growth is coming from those escalators. With regards to the, you know, 6.3% in the 1st quarter, as you note, yes, that is meaningfully ahead of our full year guidance range. You know, the 55% mark-to-market, you know, that will get spread out over the balance of the year.
A couple other items I do think are important to mention. You know, we don't have clarity on the Sorrento operating leases that certainly could swing the second half of 2023. I wish I could give you guys perfect information on that. We'd like perfect information on it. We just don't have it at this point in time. Also another item as we get towards the back half of the year with regards to the Adverum RevMed proactive lease termination. There will be some downtime as we get to the back half of the year. This is a great positive, you know, 10-12 year benefit for us as a, you know, company and for our segment. We do have a little bit of downtime, and we incorporate that stuff into our guidance as well.
We feel good about reaffirming the 3% to 4.5%. Obviously, we're still early in the year. We will maintain some level of cushion as well within our numbers. It's, you know, more volatile within life sciences today than it has been the last couple of years. But again, we had a great first quarter, and we feel good about reaffirming guidance for the balance of the year.
Josh Dennerlein (Senior Equity Research Analyst)
That's great color. Maybe just one follow-up on that. I guess, what are the assumptions that get you to the low end of the life science same-store guide?
Pete Scott (CFO)
Yeah. You know, I don't know that I want to get into assumptions for high and low. I would say, as I mentioned, there is a little bit of cushion still within those numbers with regards to a variety of things, right? We think about cushion as it could be three different items. It could be a proactive lease termination and some downtime. It could be, you know, a delay in some revenue recognition, as a result of, you know, some development projects, you know, delivering a month or two later. It could be bad debt, right? I know everyone likes to talk about the third one first.
Scott Brinker (President and CEO)
I wanted to take that in reverse order. I don't know that I wanna say what's gonna be, you know, the assumptions at the low end or the high end. You know, I just sort of keep it at we feel good about the 3% to 4.5% that we reaffirmed.
Josh Dennerlein (Senior Equity Research Analyst)
Great. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Next question comes from Nick Yulico with Scotiabank. Please go ahead.
Nick Yulico (Managing Director of Equity Research)
Thanks. I just wanted to follow up on Sorrento and the operating leases. I think it's 210,000 sq ft, which is a fair amount of space. I guess I'm just wondering at this point, how you're thinking about the need of Sorrento for all that space versus some of it. If you could also just talk about if they were to reject the operating leases, what you think demand would be like for that possible downtime, et cetera. Thanks.
Scott Brinker (President and CEO)
Yeah, Nick, on the first one, I mean, the company's in bankruptcy, it's not like you just pick up the phone and call their CEO and ask, you know, what their, what their outlook is. There's quite a few people involved in that process. We're not gonna speculate on what they're saying behind closed doors. We're also on the creditors committee, in some cases, privy to certain information that's just not public. Obviously, we're not gonna share that. We don't have clarity yet on whether they're going to accept or reject, you would expect us to be doing some contingency planning either way. We'll see what they end up doing. Yeah, we're obviously thinking about alternatives.
Nick Yulico (Managing Director of Equity Research)
Okay. If they do reject some of the space, I mean, how would that work from a re-leasing, repositioning standpoint, those buildings?
Scott Brinker (President and CEO)
It depends on which building, but it's all part of the same campus, essentially, Directors Place with the Gateway development. It's a spectacular location. Sorrento Mesa is a big sub-market, and we think we've got the best footprint in all of Sorrento Mesa in terms of visibility and accessibility. Those are, you know, buildings that are, in some cases, already built out fully for lab. In other cases, could accommodate a range of uses and pretty flexible. Each building's a little bit different, and we'd have a different game plan for each. We got a big presence in that local market. We got a fantastic team and great relationships. If there's demand out there, I think Mike and the guys will be high on the list of those capturing it.
Nick Yulico (Managing Director of Equity Research)
Thanks. Appreciate it, Scott.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks. Please go ahead.
Scott Brinker (President and CEO)
Thanks for joining today and have a great weekend.
Operator (participant)
Conference is now concluded.