Healthpeak Properties - Q1 2024
April 26, 2024
Transcript
Operator (participant)
Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthpeak Properties to report first quarter 2024 financial results and host conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.
Andrew Johns (SVP of Investor Relations)
Welcome to Healthpeak's First Quarter 2024 Financial Results Conference Call. Today's conference call contains certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risk and risk factors is included in our press release in detail 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 our 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)
Okay, thanks, Andrew. Good morning, and welcome to Healthpeak's first quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO, and the senior team is available for Q&A. We are extremely pleased with our first quarter results, and our momentum is positive on every key metric. We increased our 2024 earnings guidance by $0.02 at the midpoint, driven by same-store results, outperformance on merger synergies, and increased stock buybacks. The merger is proving to be a meaningful positive catalyst for the company, and the integration is exceeding our expectations. Many public company mergers are done through auctions, which delays the ability to integrate the two companies. Our transaction was completely different. Neither company would have proceeded with the merger without high confidence in our ability to put the teams and platforms together in a way that one plus one could equal three.
That meant having extensive conversations on people, process, systems, and capabilities before we agreed to proceed. Our integration planning was underway before we even announced the transaction. In the six months since that announcement, our combined team has done an exceptional job integrating every aspect of our business. The continuity and buy-in from JT and the senior team who joined Healthpeak has been critical to the integration, including key health system relationships. Property management internalization has been a huge success to date and is a good example of the merger augmenting our platform. Strategically, it was important to me that our own employees are interacting with our tenants every day, and financially, we're now capturing additional profit that flows through property-level NOI. To date, we've internalized ten markets covering 17 million sq ft.
We chose to accelerate the rollout, given our success to date, and we expect to internalize an additional 4 million sq ft by year-end. Significant upside remains to be captured. We're evaluating 10+ million sq ft for internalization in 2025 and 2026, which in aggregate, would allow us to internalize more than 70% of our total footprint. The positive feedback from the property managers on the ground and our tenants further validates the strategic decision to internalize. Let me take a minute on the value proposition in our stock today, which we think is compelling. The baseline is a strong balance sheet, a high-quality portfolio with 3%-5% same-store growth, and a mid-sixes dividend yield with a conservative payout ratio.
Beyond that baseline, we've identified $80 million of NOI upside potential, none of which is included in our 2024 guidance from additional merger synergies and leasing up our active life science dev / redev pipeline. We also see 30% upside by recapturing our discount to consensus NAV, which we expect to do through consistent earnings growth and smart capital allocation. Industry headlines notwithstanding, over the past two years, we grew FFO per share by 13%, and we expect to continue growing earnings moving forward. Moving to our outpatient business. The fundamentals have never been stronger. Patient volumes are increasing, absorption is accelerating, and new development remains low. That's driving strong re-leasing spreads, retention, and NOI growth. In addition, progressive health systems have a strategic focus to grow their outpatient revenue. It's less expensive for payers, more convenient for consumers, and more profitable for the providers.
We have the premier platform and relationships to capture this outpatient growth, whether on campus or off campus, and both locations are necessary to capture demand. We expect new supply to remain low, given the cost of construction. Today, our triple net equivalent rents are in the low 20s, while most new developments are $35-$40 per foot. Turning to our Life Science business. IPO and venture capital funding have improved recently, which is driving demand for space. Our leasing pipeline today is up 80% from last quarter. We're increasingly optimistic the pipeline will generate lease executions for the balance of 2024 and into 2025.
Roughly 70% of our pipeline is existing tenants, many of which are deals that don't come to the broader market, again, providing us a big advantage versus the new entrants who can't tap into an existing portfolio of growing tenants. We're also seeing a massive reduction in new construction starts that should extend for multiple years, creating a far more favorable leasing environment for landlords. Let me close with capital allocation. The strategic merger with Physicians Realty closed on March 1, and is accretive to our earnings, balance sheet, and platform. Year to date, we've sold $363 million of fully stabilized assets at a 5.8% cap rate, plus $69 million of loan repayments.
The most recent sale was an R&D flex office portfolio in Poway, east of San Diego, that we sold to an affiliate of the tenant in an all-cash deal for $180 million, which was a 6% cap rate. We have additional asset sales in various stages of negotiation and execution, but given the environment, we'll provide details if and when they close. We took advantage of the disconnect in our stock price and repurchased $100 million of stock at an average price just above $17 per share, which represents an implied cap rate of 8%. The year-to-date asset sales are more than 200 basis points inside that level, delivering immediate value to shareholders.
Our remaining authorization today is roughly $350 million, and we'll continue to pursue buybacks as priority number one on capital allocation, obviously, depending on our stock price and the arbitrage opportunity from asset sales. Priority two for capital is new outpatient medical development with key health system partners, provided there's strong pre-leasing and a positive spread to our asset sales. This capital recycling would be accretive to asset quality and stabilized earnings. We do have an attractive pipeline of such projects today in the $200+ million range. Priority three is distressed opportunities in life science, which we are starting to see, especially development projects lacking capital and or leasing traction. These would be purely opportunistic and could be done on balance sheet or via joint ventures.
Most of the distress won't be interesting to us, as we'll focus on our own core submarkets, where we can use our scale and relationships to drive outperformance. I'll turn it to Pete for financial results and guidance.
Peter Scott (CFO)
Thanks, Scott. 2024 is off to a great start. For the first quarter, we reported FFO as adjusted of $0.45 per share, AFFO of $0.41 per share, and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance. Starting with outpatient medical. We reported same-store growth of 2.6%, driven by a positive 3.4% rent mark-to-market, and an 84% retention rate. Our strong leasing activity continues. During the quarter, we signed nearly 1.5 million sq ft of leases, and we have a backlog of 2.5 million sq ft in active discussions, including 700,000 sq ft under LOI. Importantly, we expect outpatient medical same-store growth to increase as the year progresses due to accelerating internalizations and an increase in occupancy from continued leasing. Turning to lab.
We reported same-store growth of 2.7%, driven by 3% plus contractual rent escalators and a 2.6% positive rent mark-to-market, partially offset by an anticipated tick down in occupancy. During the quarter, we signed approximately 150,000 sq ft of leases, and we have a robust leasing pipeline of nearly 2 million sq ft. We have 455,000 sq ft under LOI, positioning the second quarter to be one of our best lab leasing quarters in recent years. In addition, we also expect lab same-store growth to accelerate for the balance of the year as free rent from some large lease commencement earns off. Finishing with CCRCs, we reported same-store growth of positive 27%, driven by increased occupancy and rate growth.
Occupancy in our CCRC portfolio ended the quarter at 85.2%, and we expect continued positive performance. Shifting to the balance sheet, we had a very active quarter. We successfully completed the assumption of $1.9 billion of debt with a weighted average interest rate of 4%. We closed on our newly originated five-year, $750 million term loan, which we swapped to a fixed rate of 4.5% prior to the recent spike in interest rates. And as Scott mentioned, we opportunistically repurchased $100 million of stock. Subsequent to quarter end, we fully repaid our commercial paper with proceeds from the Poway sale. Pro forma this transaction, our net debt to EBITDA is 5.2x.
We have $3.1 billion of liquidity, no floating rate debt, an AFFO payout ratio of approximately 75%, and nearly $350 million of authorization left on our stock buyback program. Finishing now with guidance. We are increasing our FFO as adjusted guidance range by $0.02 and tightening the range to $1.76-$1.80. We are increasing our AFFO guidance range by $0.02 and tightening the range to $1.53-$1.57. Our increase in earnings guidance is driven by three items. First, we increased same-store guidance by 25 basis points to 2.5%-4%. Second, merger synergies continue to exceed expectations and are now forecast to be $45 million in 2024.
Third, we have bought back $100 million worth of stock at an FFO yield in excess of 10%. One last note before Q&A, we published a revamped supplemental alongside our earnings release. You may have noticed that we streamlined the document and modified it to more closely align with how we view the business. We also added an NAV input page to assist with modeling, which we felt was important for our stakeholders. With that, operator, let's open the line for Q&A.
Operator (participant)
At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Joshua Dennerlein with Bank of America. Please go ahead.
Joshua Dennerlein (Senior Equity Research Analyst)
Yeah. Hey, everyone. Thanks for the time. Pete, just wanted to follow up on your comment that 2Q should be one of the best quarters for lab leasing. Just, I guess, my first question on that is just how are rents trending on what you're signing versus maybe a few quarters ago? And then just what about TIs and concessions?
Peter Scott (CFO)
Yeah. Hey, Josh, I can start with that. I think rents and TIs, as we look across our portfolio, they've been pretty steady for the last six months or so. As we look at market rents today, it's probably in that 5%-10% premium when you compare it to our in-place rent across the portfolio, which is around $60 per sq ft. You know, on new lease deals, tenants are certainly seeking more turnkey space, which has increased the overall, you know, TI packages. But as I said, that's been much more steady the last six months or so. And I think from a lease term perspective, you know, on renewal deals, we're probably seeing more three to five year in term. And then on new leasing deals, we're seeing more seven to ten years there.
And then obviously, the last piece I'll just say fundamentally is, you know, lease deals just take a little bit longer, especially as you price out the TI packages. So if a lease deal took two to three months to get done a couple of years ago, it's probably closer to six months today. But we're certainly highly motivated to get our lab leasing pipeline, which has increased a lot over the last, year or so, converted from a pipeline into a lease transaction.
Scott Brinker (President and CEO)
Yeah, Josh, I'd just add our leasing costs have been really pretty modest. If you just look in the supplemental for renewal leases, our TI and LC has been 5% or less of the rental rate, and even for new leases, it's in the 10% range. I mean, it's really pretty modest and very low free rent as well. So I think we've held in exceptionally well, just given the quality of the portfolio and the submarkets and the relationships.
Joshua Dennerlein (Senior Equity Research Analyst)
Thanks, guys. Appreciate that color. Scott, one follow-up for you. You mentioned you expect about 70% of the MOBs will eventually be internalized. How do you think about that 30% that you won't be able to internalize? Is that stuff you would eventually want to sell or maybe add scale in a market to get to a point where internalization makes sense?
Scott Brinker (President and CEO)
Yeah, I wouldn't say it's assets we want to sell. It's more markets where we don't have significant scale. And then there are some markets where we have a big health system relationship, where they prefer to use their own in-house property management firm, and Atlanta is a good example of that we still love that market. The fact the health system wants to use their own people, you know, we can live with that.
Joshua Dennerlein (Senior Equity Research Analyst)
Oh, okay. I recognize that. Thanks.
Operator (participant)
Your next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Austin Wurschmidt (Director and Equity Research Analyst)
Thanks. Good morning, everybody. Can you guys provide a breakdown of what's driving the increase to same-store cash NOI growth by segment?
Scott Brinker (President and CEO)
We didn't provide a breakdown, but I can tell you that all three segments are trending at or above the midpoint of the initial guidance, so we've got good traction across the board. Obviously, this particular quarter, CCRC was above. I expect that growth rate to normalize for the balance of the year. And then in lab and outpatient medical, I think all three quarters from here should be above what we reported in 1Q, but there's volatility quarter to quarter.
Austin Wurschmidt (Director and Equity Research Analyst)
Yeah, I mean, I guess just specific to the cash same-store NOI lab guidance, I think it was 1.5%-3%. You know, Pete, you referenced there's acceleration through the balance of the year as free rent burns off, I think, related to the RevMed and Voyager deals you've highlighted. So I guess, can you give us a sense of what the magnitude of upside is, you know, there, and then, you know, also just maybe what the risks are that's holding you back from going ahead and raising that at this point in the year?
Peter Scott (CFO)
Yeah, well, I would say that the, you know, 25 basis point raise that we did this quarter on the aggregate same store guidance certainly reflects the improved performance in lab. You know, on the, the lab side, in particular, we've been pretty consistent in saying this, that, you know, at the beginning of the year, we will have a little bit of bad debt cushion incorporated into the, you know, guide that we put out. And as we look at where we are today and look at all the capital raising that's gotten done, you know, we feel like we probably had too much of a cushion at the beginning of the year, so we've released a little bit of that, and then we are getting internalization benefit as well.
So, you know, we're probably trending towards the higher end of that initial, you know, 1.5%-3% guide number. You know, the biggest headwind, and this is something that we've talked about, is just the fact that, you know, we did have an occupancy decline as we look towards, you know, full year 2023, compared to where we expect that to be in full year 2024. We do think we'll see an occupancy increase as the year progresses in our operating portfolio, but we're comparing that to the full year number last year.
Austin Wurschmidt (Director and Equity Research Analyst)
Okay. Got it. That's helpful. And then I'm just curious, you know, certainly some of the VC funding and capital raising you highlighted have been, you know, positive, presumably for some of the leasing discussions and pipeline. I'm just wondering if there's been any change in those discussions or the pace with which things are moving forward on the leasing front and lab, just given some of the added economic uncertainty and volatility we've seen in the capital markets. And then just maybe even as you think forward from here, I know it's been sort of the last 30 days or so, but, you know, any impact you see that having on sort of the future pipeline and decision making?
Peter Scott (CFO)
I mean, if you look, Austin, the capital raising has been at least year to date in 2024, relative to year to date 2023. I mean, it's been up across every single category, especially on follow-on equity offerings, as well as, you know, private placements that we fit into that bucket well. You know, certainly there could be some risks going forward with interest rates going up. I think it's a little less, you know, rate sensitive in the lab side of it than maybe, you know, cap rates in the world of real estate, and those private placements and follow-ons do take some time to come together. They're still happening. If you look across the last, you know, 30 days, the data will show you that even with the increase in rates, you're seeing capital flowing into, you know, biotech.
The XBI is still holding up pretty well. You know, last night there were some pretty good tech earnings as well, despite the interest rate environment. So, we still remain optimistic that that capital raising environment has a pretty decent runway in front of it.
Austin Wurschmidt (Director and Equity Research Analyst)
I appreciate the thoughts. Thank you.
Operator (participant)
Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.
Juan Sanabria (U.S. Real Estate Analyst)
Hi, good morning. Just hoping you could talk a little bit more about the disposition pipeline, how much is potentially for sale, and what you could, what you could expect to transact on, and how those proceeds would be split between debt reductions to stay leverage neutral versus buybacks from here.
Scott Brinker (President and CEO)
Yeah, hey, Juan, it's Scott here. We've done $350 million+ of pure asset sales year to date. The pipeline is, you know, at least that large, but it's a volatile environment, as Austin just pointed out. So when we have clarity on transactions, you know, we'll announce the details at that time, but it's certainly a big pipeline, more focused on outpatient medical, whereas the sales to date have been more life science or this R&D portfolio that we had in Poway. So yeah, it's an active pipeline. In terms of how the proceeds would be used, in large part it depends on the environment, in the stock price in particular. That's been the highest and best use of capital in recent months, just given where the stock was trading.
If that continues to be the case, then that would be priority number one. If interest rates stay high or move higher, obviously, we could always delever even beyond staying leverage neutral, which is just we for sure will do that. We won't lever up the balance sheet to buy back stock. So those are kind of priority numbers 1 and 1A. And then in terms of playing offense, it would be primarily focused on outpatient medical development, where we are seeing some highly pre-leased core markets, core health systems, strong yields. And we feel like we should be recycling out of some older assets with a little bit more CapEx and risk in exchange for those brand-new assets in the right markets, right systems.
Juan Sanabria (U.S. Real Estate Analyst)
Just as a quick follow-up on that question. You previously talked about $500 million-$1 billion of potential dispositions. Does that still kind of a big placeholder in our, in people's minds just to think about that going forward for the balance of the year?
Scott Brinker (President and CEO)
It's probably the right range. Yes.
Juan Sanabria (U.S. Real Estate Analyst)
And then just curious, as a second question, just on AI. Lots of discussions, not just in real estate, on what the transition is gonna mean for everybody. But just curious, when we think about the physical infrastructure of plant and lab, what the incremental use of power may mean for CapEx or just the buildings being able to handle it? Just curious on your early thoughts on, as this kind of progresses and evolves.
Scott Bohn (Chief Development Officer and Head of Lab)
Hey, Juan, it's Scott Bohn. I think, you know, with AI, you know, you are seeing some, you know, maybe some automation labs within the labs, but you still have, you know, the bulk of those facilities still have chemistry and biology and, you know, your typical lab build-outs. So we aren't seeing a dramatic shift in any, by any means, in the build-outs for some of our tenants who are you know, more AI focused. Our buildings, you know, have a ton of power to them, have the infrastructure, have the capabilities to handle any of those needs.
Juan Sanabria (U.S. Real Estate Analyst)
Thank you very much.
Operator (participant)
Your next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Richard Anderson (Managing Director)
Hey, thanks. Good morning, everyone. So next beat on the synergies, you know, typical, I guess, you know, most REITs, that's the low-hanging fruit of the story. But going forward is, is perhaps, a little bit more difficult, which is the, the life science leasing that you've been talking about, I think $60 million of upside. Can you, can you take a shot about, you know, what the timing of that is? It's, it's not all next year. Could it, could it be as far out into 2027? Or, you know, how, how, how long of a tail to the life science leasing do you think is, is possible here going forward?
Peter Scott (CFO)
Yeah. Hey, Rich. Well, as you mentioned on the synergies, I'll just start there. We do feel quite good about the trajectory that we're on. $45 million that we've been able to articulate, we think we can hit this year, and we feel very confident in our ability to hit the $60 million run rate as we head into next year. Obviously, the trickier part that you mentioned is on the leasing pipeline and especially those three marquee campuses. What I can say is that within our pipeline, we are having discussions on all of those campuses. I'd say some of those discussions are, you know, much further along than others.
You know, realistically, if we signed a lease today or in the second quarter, it really wouldn't commence, given some of the work we have to do until, you know, the earliest, the beginning of 2025. So what I would say probably is, and it's high level, it's probably a one to two year, you know, period where we phase in and get to the full run rate there on the NOI. And it's probably the best guidance I can give you. As we sign leases, and we're pretty good at disclosing those, we can try and get a little bit more specific on that number, but it's probably a bit in 2025, a bit more in 2026, and hitting that, you know, full run rate number probably towards the end of 2026.
Richard Anderson (Managing Director)
Okay.
Scott Brinker (President and CEO)
Hey, Rich, one other thing. I wouldn't characterize the synergies as low-hanging fruit. Most mergers actually don't achieve their projections. We've got a team of 300+ people here that have been working on the clock to achieve those synergies, so hats off to them for making it happen. It was anything but low-hanging fruit.
Richard Anderson (Managing Director)
I don't mean to trivialize it.
Scott Brinker (President and CEO)
Yeah.
Richard Anderson (Managing Director)
Let's call it middle-hanging fruit, right? So, second question might be a tough one to answer, but I'm gonna ask it anyway. When you think about the entirety of the transaction, including everything, including, you know, whatever the transaction fees were, if that's 3% of $5 billion, that's $150 million. When do you think the merger, the combination is truly kind of break even for the company when you take everything into consideration?
Scott Brinker (President and CEO)
Yeah, I mean, if you're just referring to, like, a payback period, I mean, it's less than three years. If you just take the synergies in comparison to the upfront cost, but obviously, company valuation is based on future cash flows, not just, you know, one year.
Richard Anderson (Managing Director)
Right.
Scott Brinker (President and CEO)
We feel with high confidence, we're gonna achieve those synergies, and it is permanent. And if, you know, the discounted value of those future cash flows is many multiples of the upfront transaction cost, so it's certainly a value-creating transaction from that standpoint. And then most important for me, for our board, and the same for the Physicians Realty board, is we created the best platform in the sector, and that has intangible benefits that will last forever. So hard to put a number on that, but we have that now.
Richard Anderson (Managing Director)
All right. Sounds good. Thanks very much. Great quarter.
Operator (participant)
Your next question comes from the line of Michael Griffin with Citi. Please go ahead.
Michael Griffin (Senior Equity Research Analyst)
Great, thanks. Was wondering if you could give some more color on the Poway disposition. You mentioned it's a mix of industrial lab and office space. Is the cap rate indicative of where, you know, lab might be trading today, or were there some specificities given the asset mix that might warrant a higher cap rate?
Scott Brinker (President and CEO)
Yeah, it wasn't really a life science property in any event. It was kind of a mix of uses, R&D, there's some manufacturing, some office, kind of an industrial footprint and build-out in parts of it. It certainly wasn't traditional life science, nor was it in the traditional life science market, so I wouldn't view that as a read-through. I think it was a great price. That's why we sold it, so we were happy to recycle those proceeds into the balance of our portfolio. But, yeah, I don't think that's indicative of life science cap rates.
Michael Griffin (Senior Equity Research Analyst)
Brinker, where would you say, kind of Class A lab space is trading these days on a cap rate basis?
Scott Brinker (President and CEO)
Yeah, hard to say. Cap rates are always tough in life science, just given market rents versus in-place rents. You know, what we did in San Diego, Torrey Pines, a couple months ago, rents were pretty close to market. So that in that case, cap rate is more indicative of valuation, and that was in the low fives. But it was also a premier submarket, brand-new building, credit tenant. I mean, so if you're trying to, you know, make your list of A plus, it was pretty much A plus across the board. So I'd say that's the low end of the continuum for life science.
Michael Griffin (Senior Equity Research Analyst)
Gotcha. That's helpful. And then maybe could you add some commentary around supply, particularly in South San Francisco, where,
You know, I think we've seen an elevated relative to the other core markets. And how might your competitive set compare to market supply overall?
Peter Scott (CFO)
Yeah, I mean, maybe I'll just touch on supply for a second, Chris, because it is a good question, and I'm gonna repeat a statement that we've been saying for a while and others have been saying as well. But, you know, not all new supply is built equally, and we do fully expect the incumbent landlords, which there's not a lot of them out there in the core submarkets, to outperform. You know, as we think, just big picture, there were a lot of new entrants into the space over the last couple of years. Not surprising, 'cause it was such an incredible money-making subsector in real estate for such a long period of time.
But I think a lot of these new entrants, and I think a lot of the very poorly capitalized landlords that we see now, they just fail to underwrite this incumbent risk, and we think a lot of them will struggle. But as we look at each one of our, you know, core submarkets, when you look at the headline number that, you know, gets quoted by brokers, when we parse through the data, and we have included this in our investor presentation, the competitive supply, going back to the fact that I said not all supply is created equal, what we view as competitive, and I think we're probably still conservative in what we include in that bucket as well, it's a very manageable number.
Michael Griffin (Senior Equity Research Analyst)
Great. That's it for me. Thanks for the time.
Operator (participant)
Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll (Managing Director)
Yeah, thanks. I wanted to touch on the life science LOIs that you kind of highlighted in the press release. I mean, how many of those are true expansionary spaces that could be earmarked to push up overall occupancy levels within the space?
Peter Scott (CFO)
Yeah. Well, maybe I'll just talk quickly about the overall leasing pipeline, Mike. I think that may be an easier way to answer your question. But, you know, our lab leasing pipeline today sits at around 2 million sq ft, and all of those LOIs are included within that pipeline. Obviously, we have a pretty high degree of confidence those LOIs are going to turn into, you know, leases. But as we look at some of the parsing of that 2 million sq ft, I'd say about, you know, 70% of that is with existing, you know, tenants within the portfolio. And then taking it, you know, even a step further, I'd say that probably 50% new lease deals, about 1 million sq ft, would be new lease deals within the portfolio, and then the rest would be renewals. So a nice 50/50 split.
If you think about the amount of vacancy that we have within the portfolio across the marquee projects, whether it be Vantage or Gateway, as well as Portside in South San Francisco, you know, 1 million sq ft within our pipeline of new lease deals actually matches up quite well with what we have as vacancy for new lease deals.
Michael Carroll (Managing Director)
I guess related to that pipeline, how many tenants need to raise funds to kind of take down that space? Or will any of those tenants decide to delay making decisions, just given the increased volatility that we've seen in the capital markets over the past handful of weeks?
Peter Scott (CFO)
Yeah. I'd say very few need to raise capital, if any. We wouldn't be having active discussions. In fact, you don't really have a lot of active discussions for deals that are contingent upon capital raising. Those discussions tend to happen, at least today, after the capital has been raised. So I'd say that, you know, there's really no risk to that within the pipeline.
Michael Carroll (Managing Director)
Will those tenants delay making decisions, or will they? Do you think that they could wait longer, just given what's happened in the capital markets and the geopolitical landscape over the past few weeks?
Peter Scott (CFO)
No, because as I said, I think all those tenants have effectively raised capital if they needed to raise capital. Not all of them need to raise capital. There's some mid-cap and large-cap names in there as well. So I think the answer to that is no, they're not delaying decisions. It does take a little bit longer to get lease deals done today, though, specifically as you price out the various, you know, TI packages and build out.
Michael Carroll (Managing Director)
Okay. And then just last one from me. I know, there has been issues over the past year where the companies wants to take down space, but the boards of those companies have kind of vetoed it. I mean, have the... Do you-- I don't know, do you know if the boards have approved just the leasing that's currently in the pipeline, and, and do you think that they could potentially veto some of those transactions or at least push them out?
Scott Brinker (President and CEO)
I mean, the pipeline is 30+ tenants, so we'll refrain from going down the list. But the quality of the discussions today is much higher than it has been in the last two years. So we can't give you certainty on any of this stuff. And certainly, the geopolitical environment doesn't help at the margin, but I don't think it's a driving factor. The bottom line is the pipeline is massively bigger than it ever has been in the last two years, continues to grow, and the quality of the conversations is higher.
Michael Carroll (Managing Director)
Okay, great. Thank you.
Operator (participant)
Your next question comes from the line of Wes Golladay with Baird. Please go ahead.
Wes Golladay (Senior Research Analyst)
Hey, yeah, good morning, everyone. Just want to follow up on the new lease conversation. Looking at the 1 million sq ft, are you seeing any change in demand for first-generation space? Any submarket standing out, and any tenant categories picking up activity?
Scott Brinker (President and CEO)
Yeah, I mean, I think the part of that I'd like to focus on is the sub-markets. You know, we never really exited, or I should say veered, outside of the four sub-markets that we wanted to focus on. So in San Diego, it's Torrey Pines and Sorrento Mesa. In Boston, it's the Lexington Route 128 market, in West Cambridge, and it's really South San Francisco. And what we're actually seeing is the gravitation towards tenants wanting to be in those core sub-markets, and I think some of those other sub-markets that were not fully proven, that the respective development done in those, they're gonna take a lot longer to lease up, if they ever do lease up.
Wes Golladay (Senior Research Analyst)
Okay, and then when you look at potential distressed opportunities, do you think you'll get any distressed pricing for those, or is there still a lot of capital chasing those great sub-markets? And how would you look to potentially, you know, get involved? Would it be a JV, mezz lending? Can you elaborate on that?
Scott Brinker (President and CEO)
It could be any of the above. It would be very opportunistic, but it would have to be in core sub-markets. We really bring something unique to the table, which is our existing footprint, tenant relationships, broker relationships, et cetera. So we'll be very focused on particular sub-markets, but we could be more open-minded on deal structure. But it would have to be opportunistic-type pricing.
Wes Golladay (Senior Research Analyst)
Okay. Thanks for the time.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Your next question comes from the line of Jim Kammert with Evercore. Please go ahead.
Jim Kammert (Managing Director)
Hi, good morning. Thank you. You know, just building a little further, if possible, on the lab leasing demand. It sounds like your pipeline's larger, these tenants have funding. Is that translating to any ability for landlords like yourself to kind of hold the economics in terms of TI packages and whatnot? Because if I recall, that was kind of being pushed more and more towards landlords in terms of, you know, $150, maybe to $250 and plus. Any comments there? If you are still being required to pay those, are you able to, you know, get an economic return on that and effectively bake it into the rent? Thanks.
Scott Brinker (President and CEO)
Yeah. You know, our re-leasing spread in the first quarter was around 3%. Now it could vary quarter to quarter, but as we look at our current pipeline, the renewal spreads will be above that level in the aggregate, some higher, some lower, but on average, certainly above the 3% across the portfolio. We still feel like we're in the 5%-10% range, and at least in recent quarters, the, the leasing and TI that we're putting into the buildings to drive those rents is very modest, around 5% of rent on renewal leasing and around 10% on new leasing. So those are pretty modest leasing costs across commercial real estate.
Jim Kammert (Managing Director)
Right. I'm sorry I wasn't clear, but I meant, like, on, let's say, a brand-new space, weren't landlords being required to put in, you know, $250 type of allowance and stuff to make the deal happen, or am I mistaken?
Scott Brinker (President and CEO)
Yeah. So for new development, that's true. I was speaking more to renewal and re-leasing spreads, but for new development, certainly there's an expectation of turnkey or closer to it, which we've been talking about for the last year or so, that we're actually having more success in the current environment on our second-generation space. It's turnkey in nature, but at a much more modest investment, but lower rent, lower OpEx, and no TI from the tenants. So that's certainly a big part of our leasing pipeline, but we are getting some interest in our development projects as well.
Jim Kammert (Managing Director)
All right. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
The next question comes from the line of Mike Mueller with J.P. Morgan. Please go ahead.
Mike Mueller (Managing Director)
Yeah. Hi, thanks. Just curious, how do you see tenant retention shaping up for the balance of the year, and where do you think the 96% operating portfolio occupancy could end the year?
Peter Scott (CFO)
Yeah. Hey, Mike, it's Pete. You know, tenant retention, the headline number was a little bit lower, assuming you're talking just about lab. Just because we actually-
Mike Mueller (Managing Director)
Yeah
Peter Scott (CFO)
had a subtenant that went direct, and we don't include that in the retention statistics. It was NGM that went direct on one of the Amgen buildings, and they had been a subtenant in that building for years. But the way we report it, we don't include that as the tenant was retained within the building. We report that as a new lease. Therefore, if you did include it as tenant retention, you'd be right around 60%. And I would say that, you know, that's probably a pretty good number. Lab's always gonna be a little bit below what we achieve in outpatient medical, which I think this quarter put a number out there where 84%, which was pretty darn, you know, high.
So, I think the tenant retention number is a little bit misleading, and you gotta dig into it.
Mike Mueller (Managing Director)
And then occupancy too.
Peter Scott (CFO)
Yeah, and then on occupancy, on the 96%, our view is that should pick up a little bit. In fact, I know there was a sequential decline from the fourth quarter, the first quarter. That was actually proactive termination we did at The Towers building in South San Francisco, and we've actually re-leased that space. It just hasn't commenced yet, so we don't include that in the occupancy number until the lease commences. So just if you factor that in alone, we'd expect occupancy to tick up a little bit as the year progresses.
Mike Mueller (Managing Director)
Got it. Okay. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Your next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Michael Stroyeck (Equity Research Analyst)
Thanks, and good morning. Could you just provide some color on the outpatient medical sequential occupancy decline during the quarter, and just whether that largely came from legacy DOC or legacy Healthpeak portfolios?
Tom Klaritch (COO)
Really, you typically see a decline from Q4 to Q1 pretty regularly. This is Tom Klaritch, but you see it, you see a decline from Q4 to Q1 pretty regularly because a lot of doctors hold over the holiday period, and then when things settle down after the first of the year, they move out. So that's pretty typical. I wouldn't point to legacy Healthpeak or legacy DOC as a cause for that.
Michael Stroyeck (Equity Research Analyst)
Got it. So I, I guess nothing really stands out in terms of, like, tenant credit, asset quality, or anything else, just, just normal-
Tom Klaritch (COO)
No
Michael Stroyeck (Equity Research Analyst)
-seasonality?
Tom Klaritch (COO)
Just normal rhythm during the year.
Michael Stroyeck (Equity Research Analyst)
Got it. Okay. And then maybe following up on the Poway disposition discussion, can you just help us understand how much of your portfolio is similar to these assets in terms of it not necessarily being traditional life science properties?
Scott Brinker (President and CEO)
That was really it. I mean, we have, like, the land bank and conversions in West Cambridge, where we'll eventually tear buildings down and build life science. But in terms of the stabilized asset, that's it.
Michael Stroyeck (Equity Research Analyst)
Okay. That's helpful. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Your next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra (Managing Director)
Morning. Thanks for taking the questions. Maybe just first one, you talked a lot about the life sciences leasing pipeline, but I'm wondering if you can update us or just provide color on the watchlist. You know, given the capital raising environment, I'm assuming it's lower, but any numbers, any magnitude, or perhaps in other ways, like what's baked into the guide for the watchlist?
Peter Scott (CFO)
Yeah. Hey, Vic, it's Pete here. I think you've done a very nice job actually in your research talking about this, and what's happening is actually following suit with what you're saying. The strong capital raising is certainly, you know, causing us to have a much lower tenant monitoring list. You know, our monitoring list would be a tenant that's got less than 12 months of cash runway. And if you just wanna put percentages on that, I'd say, you know, that list today is 50% of the size of what it was, you know, a year ago. Continues to trend in the right direction. So it, it's down considerably. And the other thing I would just mention, we've said this before, even in the best of lab markets, you're always gonna have a couple of tenants. We've got 200 tenants.
You're always gonna have a couple of tenants that you're paying close attention to because it really comes down to the science and the success of the science, and not necessarily always about, you know, the capital markets and ability to raise capital.
Vikram Malhotra (Managing Director)
Okay, that, that's helpful. Just second, I'm wondering, you know, the HCA sort of programmatic deal you had on with in terms of MOBs was, you know, has been pretty fruitful. I'm wondering, with the combined company now, with Physicians, is there a likelihood of a similar deal with another system, or is that—is it just given the capital environment, even hospital systems are just waiting on development?
Speaker 18
Hey, Vikram, it's JT. You know, we have a lot of historical relationships across the portfolio. So it's not, you know, we have kind of, I, I hate to call it systematic, but routine kind of steady pipeline with a number of health systems, you know, in multiple states. So all highly pre-leased, all, you know, kind of outpatient services that are higher margin and that they need to, you know, kind of expand into, you know, kind of new markets for providing access to care in those markets. So it's pretty systematic across the board and just has to be at the right price and, you know, kind of in the right, the right markets for us to proceed. But pretty steady flow of kind of off-market relationship business.
Vikram Malhotra (Managing Director)
And then just one more, if I may. Just, clarification. I think on the medical office rent spreads, there was a 500,000+ sq ft deal that I think you noted was not in there or it would impact rents later on. Can you just elaborate upon that? Like, when will that hit the rent spread metrics, and what was that?
Tom Klaritch (COO)
Yeah, that lease was a master lease with a system in Houston, and it covers basically three campuses. I do wanna point out that we did do that lease internally, so we saved about $3.5 million of lease commissions on that deal, but we also had no TI contribution, and we eliminated our capital liability for 10 years. So it was a great deal. Two of the campuses did have an increase. One of the campuses had a decrease, so it will have an impact on mark-to-market in July 2025. I think it was, you know, 6%-8% decline. But, you know, to me, that's a great deal if you get absolutely no capital for 10 years on 600,000 sq ft.
Vikram Malhotra (Managing Director)
Thank you.
Operator (participant)
Your next question comes from the line of Tayo Okusanya with Deutsche Bank. Please go ahead.
Tayo Okusanya (Managing Director and Head of U.S. REIT Research)
Yes, good morning. Congrats on a solid quarter and a solid improving outlook. Wanted to get some clarification on the MOBs and the synergies. When you do the next round of internalization, the targeted internalization, is that additional synergies beyond the $45 million that's been identified? Like, does that go into the additional $20 million bucket that you kind of talked about? And could you also talk to us a little bit about just revenue synergies and how that fits also into maybe the $20 million additional revenue target you talked— additional synergy target you talked about?
Tom Klaritch (COO)
Yeah, Tayo, it's additional, and it's actual, you know, net cash revenue that comes in. So we're really ahead of schedule on, you know, kind of internalizing markets across the portfolio, and there's more to come. So I, you know, I think we've assumed a kind of a couple of year plan to internalize most of the markets that we where we had scale and where it made sense, but it's, it's, it's, it's net cash continuously, you know, year, year after year after year, net cash to the to the bottom line.
Peter Scott (CFO)
Yeah. And then on revenue synergies, we've been pretty clear that, you know, that $60 million run rate does not include revenue synergies, so that could be some upside, whether that's through better lease execution, better retention, you know, better lease rates, so on and so forth. That would be upside. I think it's a little challenging to articulate or to go through what we think that is, but we certainly think that there are revenue synergies out there for us to get.
Tayo Okusanya (Managing Director and Head of U.S. REIT Research)
Gotcha. So the $60 million run rate is just from more G&A type, operating expense type synergies that gets you from the $40 million to the $60 million, and then revenues are anything on top?
Peter Scott (CFO)
Yeah, that's the right way to characterize that.
Tayo Okusanya (Managing Director and Head of U.S. REIT Research)
Perfect. That's very helpful. Thank you.
Operator (participant)
I will now turn the call back over to Scott Brinker for closing remarks. Please go ahead.
Scott Brinker (President and CEO)
Yeah, thanks for joining us, everyone. Good momentum here. Happy to talk about it today, and look forward to seeing you in the coming weeks and months. Take care.
Operator (participant)
Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.