Healthpeak Properties - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Healthpeak Properties Incorporated second quarter conference call. All participants will be in 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 of Investor Relations. Please go ahead.

Andrew Johns (SVP of Investor Relations)

Welcome to Healthpeak's second 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 call actual results to differ from materially from our expectations. A discussion of risk and risk factors is included in our press release in detail in our filings to the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on the 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 Reg G 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 second quarter earnings call. Joining me today for prepared remarks is Peter Scott, our CFO. Our senior team is here for Q&A. Last evening, we increased earnings guidance and reported 4.8% blended same-store growth. The balance sheet remains in great shape. Through streamlining and automation, our G&A for 2023 is expected to be 6% below our original 2022 guidance. We're operating in a volatile macro environment, but we have a strong handle on the things we can control. Fundamental driver of demand for our real estate is the desire for improved health, which is only growing. Equally important, we benefit from the impact of technology across our playing field of medical discovery and delivery.

For example, progressive health systems now have 10+ outpatient locations for every one hospital, with a strategic plan to grow that ratio to 20+. The hospital remains the epicenter, much of the growth is outpatient, made possible by technology. This shift in delivery aligns with our strategy to capture the outpatient real estate needs of leading health systems. With tighter profit margins because of the cost of labor, health systems will increasingly seek knowledgeable third-party capital like Healthpeak to expand their footprint. Similarly, technology will reinforce and expand the need for Lab space. AI and machine learning will increase the probability of success in drug research and reduce development timelines. This will drive more capital into the sector. The data needed for the algorithms and the validations comes from the laboratory, which are highly regulated and controlled environments.

A Nobel Laureate in chemistry recently said that she's run her lab for 30 years and never experienced the accelerating discoveries we've seen in just the last five years alone. The science is building on itself, including our understanding of genetics and improved testing, which will transform healthcare delivery. Today, it's reactive. We seek therapeutics after a problem arises. Technology will drive the addition of proactive care, where we detect issues and seek care before a problem arises. This will shift the allocation of healthcare spending and expand the total pie. Outpatient Medical and Lab buildings will be a critical part of this future. A few comments on portfolio performance, starting Outpatient Medical, where we have an irreplaceable portfolio and deep relationships with leading health systems.

More than half of our square footage is now leased directly to a health system, which is 2x the level from 20 years ago, as their business model has shifted toward outpatient care, and we've become a partner of choice. I toured a number of our buildings in recent months and saw very active parking lots and lobbies, a great sign for current and future leasing. Our concentration in high-growth markets like Dallas, Houston, Phoenix, Vegas, and Nashville will benefit our portfolio for the next decade plus. Moving to our Lab business, where we have significant market share in key submarkets, a diversified tenant base, and strong relationships. Biotechs have been doing what they should do in this environment, which is to conserve cash. The default answer has been to make do with existing space.

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

Despite that backdrop, we've sold $130 million of fully stabilized but less core real estate year-to-date at an attractive 5.4% cap rate and used the proceeds to accretively delever. We're currently having good discussions on $200 million of additional less core asset sales. Subject to closing, which isn't guaranteed in this environment, we'll have flexibility to either accretively pay down our line of credit or buy back stock. I'll turn it to Pete to cover financial results, balance sheet, and guidance.

Pete Scott (CFO)

Thanks, Scott. For the second quarter, we reported FFOs Adjusted of $0.45 per share, AFFO of $0.40 per share, and total portfolio same-store Growth of 4.8%. In addition, our Board declared a dividend of $0.30 per share, which equates to an AFFO payout ratio of approximately 75%.

Let me provide a little more color on segment performance. Starting with CCRCs, same-store growth for the quarter was a very strong 19.3%. Occupancy has increased 230 basis points year-over-year. We see additional upside with zero new supply in our markets. Total NREF cash receipts were $31 million in the quarter. For the full year, we expect our cash receipts to exceed NREF amortization by $0.05 per share. Turning Outpatient Medical, we had another solid quarter with same-store growth of 2.5%. Demand for our space is high. Leasing momentum remains strong. We have executed 83% of our full-year leasing budget and have an additional 15% in documentation.

Releasing spreads were up 3.7% during the quarter, which again, was at the high end of our historical 2%-4% range. Trailing 12-month tenant retention was 81%, which is a reflection of the quality of our assets and our time-tested platform, which consistently produces sector-leading customer satisfaction scores. Finishing with Lab, same-store growth for the quarter was 3.8%. Year-to-date, we have executed 461,000 sq ft of leases. Approximately 90% of that leasing activity has been with existing tenants, and we achieved positive releasing spreads of 52% on renewals. In addition, we have another 196,000 sq ft of executed LOIs, with the majority of that activity occurring in July.

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

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

We hope to have clarity on a path forward in the near term. Turning now to our balance sheet. In May, we issued $350 million of 5.25% fixed-rate bonds, bringing year-to-date issuance to $750 million at a blended yield of approximately 5.35%. Our net floating rate debt balance was approximately $150 million at quarter end. Our balance sheet continues to be a competitive advantage in this environment. Our net debt to EBITDA is 5.1x. We have nearly $3 billion of liquidity. We have net floating rate debt exposure of approximately 2%. We have no bonds maturing until 2025. We have approximately $150 million of annual retained earnings, and we have stable ratings from both S&P and Moody's.

Our development spend is self-funded without the need for equity or asset sales from a combination of retained earnings and debt capacity from higher EBITDA. As Scott mentioned, any potential asset sales would be opportunistic and are not contemplated in guidance. Turning now to our 2023 guidance. We are increasing our AFFO as Adjusted and AFFO guidance by $0.01 at the midpoint to $1.75 and $1.51, respectively. As you can see from our year-to-date results, performance across our portfolio remains strong, and we are increasing our full-year blended same-store guidance range by 25 basis points to 4% at the midpoint. Please refer to page 38 of our supplemental for additional detail on our guidance. 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, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. That everyone may have a chance to participate, we ask that participants limit their questions to one and a related follow-up. If you have additional questions, please re-queue. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Juan Sanabria from BMO Capital Markets. Please go ahead.

Juan Sanabria (U.S. Real Estate Analyst)

Good morning, Scott or Pete, I was just hoping you could talk a little bit more about the Life Science or Lab market and the increase you've seen in demand in July? And if you can maybe characterize or put a number around the increase in kind of opportunities or number of companies looking for space or the amount of space being sought after by potential tenants, and how and why that's changed?

Pete Scott (CFO)

Yeah. Hey, Juan, it's Pete. Hope all is well. maybe I'll just, you know, start with that, and perhaps Scott Bohn or Scott Brinker wants to add a little bit to it. you know, we, we talked about this earlier in the year, that our tenant, you know, credit risk profile has been improving in the Lab space. We also saw that sequentially, this quarter as well. I don't wanna repeat a lot of what I said in my prepared remarks, but a lot of that improvement in the credit profile is because the capital markets are improving as well. you know, just a couple stats. When you think about follow-on equity deals, you've had about $14 billion of deals get done year-to-date, tenants that have good data readouts are finding success, raising capital.

You know, you look at the venture capital market, that has improved. It's improved $1 billion sequentially. In fact, we're seeing more Series A capital raises occur as well, which is important because that's really new company formation, and that'd be demand for new space for us. You know, M&A is strong. In fact, there was another M&A deal that got announced this morning, so that $80 billion is actually more like, you know, $87 billion at this point in time. Then, you know, reverse mergers are definitely popular right now, so it's a backwards way of companies going public. We saw that in our portfolio with Frequency merging with Korro Bio. So I'd say really, that's what's driving the improved backdrop.

Obviously, there's other things going on in each individual market, but we feel like things are trending in the right direction for us, and has certainly led to a little bit more leasing demand, as you saw the LOIs that got signed in July, and we hope that that's a harbinger for more to come in the next couple of quarters. Again, feeling a little bit better today than we did six months ago.

Juan Sanabria (U.S. Real Estate Analyst)

Just, our follow-up question, just on the MOB guidance bump. What, what was the driver there? The second quarter seemed solid, but, within, I guess, the, the typical range. Just curious on, on what drove the increased confidence there.

Tom Klaritch (COO)

Yeah, Juan, this is Tom. We continue to see positive operations at Medical City Dallas, and, you know, that, that contributed about 90 basis points for the year and 50 basis points for the quarter. In addition, our escalators remain at that kind of 2.9%-3% range, so that's driving, driving results. We continue to see rebounds in parking income, where we're above our pandemic-level reduction. That continues to drive, drive our results. As you said, the 2Q was really solid at 2.5%, and that was even with some headwinds against it. We had a fairly high comp in 2Q of 2022 at 4.5%, and that included some adjustments in rent abatements, and we had some positives to our expense reconciliation billing.

That had about a 70 basis point impact. We would've been at about 3.2% 2Q without those.

Juan Sanabria (U.S. Real Estate Analyst)

Thank you, guys.

Operator (participant)

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

Vikram Malhotra (Managing Director)

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

Pete Scott (CFO)

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

That's, that's the Amgen portion of this. I think just a couple other things I wanted to point out. You know, the, the mark-to-market we have talked about, we still feel good about, you know, the 20%-ish mark-to-market within our current portfolio when you look at where market rents are versus in-place rents in the portfolio. That's obviously gonna be a nice driver the next couple of years, we believe, of, of some earnings growth. And, you know, the balance sheet's in, you know, great shape. Again, Sorrento, I can't really speak to that, but that could be a, a pretty big driver as we look at 2023 relative to, you know, what, what 2024 could look like. It's a pretty big

... you know, number when you, you consider accepting the leases versus a, a liquidation there. I can't necessarily comment on 2024 much more than that at this point in time, but just to say that I think some of those big expirations, we've actually been working pretty hard on backfilling. Actually, in what we previously disclosed, we actually didn't have a lot of those Amgen leases getting leased up until 2025, as there'd be some downtime, and some CapEx associated with them.

Scott Brinker (President and CEO)

Hey, Vikram.

Vikram Malhotra (Managing Director)

Oh, oh, yeah, sorry.

Scott Brinker (President and CEO)

Maybe a general comment on just the trajectory of lab, leasing and rents. I mean, the last 18 months, interest rates are up more than 500 basis points. Obviously, that has resulted in board and management teams essentially saying not to expand real estate needs for the most part. The easy answer was just to, you know, make do with existing space. At the same time, you've got a likely outlook where interest rates are probably gonna come down over the next year or so, and we are starting to see a little bit more interest in having those types of discussions. When you think about the activity we actually had over the last 18 months, despite that change in interest rates, signed leases or LOIs on almost 2 million sq ft of space, at strong rents, very modest TIs.

90% of that is with existing clients and pretty significant mark-to-markets. Really, in the teeth of a pretty tough market over the last 18 months, I mean, we've had significant success, and we see the general macro environment being more favorable over the next 12-18 months, not less favorable.

Vikram Malhotra (Managing Director)

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

Scott Brinker (President and CEO)

Yeah, the answer is yes. We covered that in the prepared remarks. We are having those discussions. These are assets that others would find attractive, but aren't necessarily central to our longer-term strategy. 100%, our expectation is that over the next 12, 18 months, I don't know if it's sooner or maybe later, our balance sheet, strong portfolio platform, efficient G&A, I mean, this will be a bigger company going forward. There will be opportunities coming out of this downturn in the Lab segment. A lot of the development that's underway is with owners that aren't as well connected to the tenant base. Their balance sheets aren't in nearly the same shape that ours is.

Yes, there are gonna be opportunities for us, and our whole mindset right now is to weather through this downturn, which we have, I think, really well, controlling the things that we can, continuing to put up good earnings. Balance sheet's in great shape. Yeah, I think there's gonna be a lot of opportunity on the other side of this.

Vikram Malhotra (Managing Director)

Sorry, just to clarify, when, when you said you... I might have missed it in the remarks. Did you mean, you know, potentially monetizing non-core? If, if you did, could you give us just a broad range, like, how big is that opportunity for you?

Scott Brinker (President and CEO)

Yeah, it's $200 million that we're having discussions on. We haven't signed any contracts, so I don't wanna talk about specific assets or pricing, but obviously, we would only sell if we like the pricing. These are opportunistic. We don't need to sell any assets to fund our pipeline, so we'd only do this if we like the pricing. Our expectation is that the cap rates would allow us to repay our line of credit accretively, which gives us more flexibility down the road when we do see opportunities.

Vikram Malhotra (Managing Director)

Great. Thank you.

Scott Brinker (President and CEO)

Yeah.

Operator (participant)

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

Austin Wurschmidt (Senior REIT Analyst)

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

Scott Bohn (Chief Development Officer and Head of Lab)

Yeah, Austin, it's Scott Bohn. I would say it's across the entire portfolio. It's across all three core markets. Obviously, we have more space to lease in South San Francisco versus Boston and San Diego, just with where the occupancy of the portfolio stands. You know, you'll see the bulk of it there. If you look at the LOIs we've talked about today, you know, 2/3 of those are for spaces in South San Francisco.

Austin Wurschmidt (Senior REIT Analyst)

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

Scott Bohn (Chief Development Officer and Head of Lab)

Yeah. Austin, we're not gonna get into the individual LOIs today. It's just too early. I mean, these are, you know, obviously competitive deals, and we've got LOIs and signatures on those, but, you know, we still need to get them across the finish line to lease execution. You know, probably more to come on those next quarter.

Austin Wurschmidt (Senior REIT Analyst)

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

Tom Klaritch (COO)

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

Scott Brinker (President and CEO)

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

Austin Wurschmidt (Senior REIT Analyst)

That's helpful. Thanks, Scott.

Operator (participant)

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

Nick Yulico (Managing Director)

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

Scott Brinker (President and CEO)

Roughly half of it is, is Oyster Point and Point Grand. Assume that half of the remaining 2023 and 2024 lease maturities in lab are going into redevelopment because the buildings just need to be redeveloped to remain competitive. The remaining 50%, maybe I'll ask Scott Bohn to comment.

Scott Bohn (Chief Development Officer and Head of Lab)

Yeah, I mean, I would... Excuse me. Hey, Nick, we've only got about 250,000 sq ft of unaddressed maturities, you know, through 2024, excluding the Amgen buildings that we talked about going into redevelopment. you know, the bulk of that rollover doesn't come until the back half of 2024. we're really just getting into the renewal windows on those leases over the next few months. kind of more to come in upcoming quarters, but, you know, very manageable lease rollover across the portfolio, the balance of this year and to 2024.

Nick Yulico (Managing Director)

Okay, great. Thank you. You know, second question is just in terms of, you know, when you talked earlier about the mark-to-market on the portfolio, I guess, you know, in Lab, you know, any thoughts on, you know, what you're seeing kind of across the markets right now? You know, feels like maybe, you know, South San Francisco, Greater Boston, Cambridge, is where there is some more vacancy that has just hit the market, realizing you guys are, you know, seem like you're outperforming the market. Just, you know, any, any sort of viewpoint on whether market rents are gonna, you know, remain stable or they get correct? Are you gonna see just more competitive, you know, leasing concessions in the market?

Scott Bohn (Chief Development Officer and Head of Lab)

Hey, Nick, Scott Bohn again. You know, I think first and foremost, I'd say the leases that, that we've signed and, and the LOIs in all three markets have been at really strong rates in deal terms. You know, overall, I would say, looking at face rates, you know, they flattened, as I think we all know, this year, which we expect to probably continue in the near term. Rates for A buildings and A locations with, with strong sponsorship like Healthpeak, have held up well. You've seen some a little bifurcation between that and then the B buildings, and secondary locations. Luckily, we don't have a lot of that product at all, or really any.

From a net effective perspective, we've talked about some pressure on TIs, with, with tenants looking to have a little more capital put in by the landlord, to extend cash runways. We're open to that in, in select cases, depending on tenant credit, reusability of TIs, et cetera. We talked about that going, you know, dating back to the end of 2022 and 2023. I would say, you know, no real incremental change on that, this quarter versus last. I mean, I think that those, those asks and those TI levels have, have, have leveled off.

Nick Yulico (Managing Director)

Thanks, Scott. Appreciate it.

Scott Bohn (Chief Development Officer and Head of Lab)

Thanks.

Operator (participant)

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

Connor Siversky (Director and Senior Equity Research Analyst)

Good morning. Thank you for the time. Interesting comment in the prepared remarks that progressive health systems now have 10 outpatient facilities for every hospital. In the context of that comment, I'm wondering how you're seeing performance trends for on-campus versus off-campus. Then if this shift in delivery continues to align with Healthpeak strategy, I mean, what does it take for Healthpeak to start putting shovels in the ground again on medical office Outpatient Medical? sorry.

Scott Brinker (President and CEO)

Start?

Tom Klaritch (COO)

Yeah, go ahead.

Scott Brinker (President and CEO)

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

Tom Klaritch (COO)

Yeah. With regards to putting shovels in the ground, you know, we did announce, I think it was two quarters ago, our Savannah building, which is with HCA and our, our development program with them, and we're in active discussions with quite a few buildings with them also, and probably, you know, in the next quarter or so, we'll have some more to announce there.

... There's a lot of pent-up demand for MOB development out there. You know, in addition to HCA, we're having discussions with two or three other systems about potential new buildings with them. I think it's gonna get pretty active over the next year.

Scott Brinker (President and CEO)

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

Connor Siversky (Director and Senior Equity Research Analyst)

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

Tom Klaritch (COO)

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

Connor Siversky (Director and Senior Equity Research Analyst)

Okay, thank you.

Operator (participant)

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

Joshua Dennerlein (Head of Business and Information Services)

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

Pete Scott (CFO)

Yeah. You know, maybe I'll just take a second on that, Josh, and talk generally about, you know, what we think the second half of the year looks like relative to the, the first half of the year within each one of our businesses. You know, if you look at year-to-date total same-store growth, we're at 5%, right? Pretty strong, healthy number. It's actually just a little bit above the high end of our guidance range, which was at 4.75% right now. We're off to a good start through the first six months of the year. You know, CCRCs had a really strong first half of the year, and we hope to keep that momentum going into the second half of the year.

You Outpatient Medical, year-to-date, we're at 3.1%, which is right in line with, you know, the midpoint of our guidance, maybe a little bit better, actually. I push Tom Klarich every day on how do we get to the high end. I think he thinks I'm a broken record on that, but we've had success getting to the high end of our guidance range pretty much every year that I've been CFO, so hopefully more to come on that for the second half of the year, this year for us, not to put too much pressure on Tom. In the Lab space, you know, look, we had a really good first quarter. We had a strong second quarter.

There is probably a little bit of deceleration in the second half of the year, but I wanted to point out that the two biggest items that are impacting that, you know, one is the Codiak space that we got back this past quarter. We backfilled about half of it, but we still have some space that needs to get backfilled in the second half of the year. If we don't backfill it, that could be a little bit of an impact on our overall same-store NOI. The second piece, just to remind everybody, you, you probably pay close attention to our top 20 list. Adverum has dropped out of our top 20 list. I mentioned it in my prepared remarks. There is downtime on that. The Revolution Medicines lease does not begin until January 1st of next year.

There's some downtime in the back half of the year that will certainly have an impact on occupancy, as well as same store NOI in the second half of the year. Wanted to really point out the two biggest items that will drive that decel in Life Sciences in the second half.

Joshua Dennerlein (Head of Business and Information Services)

That's super helpful. Appreciate that.

Pete Scott (CFO)

Yeah.

Joshua Dennerlein (Head of Business and Information Services)

Maybe just on, actually, I remember at Nareit, I think you guys mentioned a, a couple tenants might have come to you looking for space. Just given where your portfolio occupancy was, this is on the Life Science side, it sounded like, you just didn't have the space for them. What would I get you guys to kind of restart the development pipeline?

Scott Brinker (President and CEO)

Yeah, well, it wouldn't be a, a tenant coming to us today. I mean, the, the timeline to get permits and build something would be far longer than accommodating a tenant who needs space today. The, the thought process on near-term re-tenanting space is really looking towards credits that are unlikely to renew a lease or in the coming years, and seeing if we can find a way to early terminate and, and backfill with a growing tenant who wants a longer-term commitment. In terms of new development starts, we are making really good progress on entitlements in the core markets, that we'd be in a position potentially to start construction on something in 2024. I would get back to my comment that I made about Outpatient Medical.

The decision to actually start depends a lot more on our view of supply and demand, potentially pre-leasing, cost of capital and returns, and the like. It's not something that we would do today, but as you look into 2024, I mean, we'll see. The market can obviously turn pretty quickly, and we've got a huge base of existing tenants that generally are the ones filling up these new developments.

Joshua Dennerlein (Head of Business and Information Services)

Appreciate it. Thank you.

Scott Brinker (President and CEO)

Yep.

Operator (participant)

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

Michael Griffin (VP and Equity Research Analyst)

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

Scott Bohn (Chief Development Officer and Head of Lab)

Sure. Hey, Griff, it's Scott Bohn. I mean, I think, you know, 90% of the leasing we've done, as we said, is with existing tenants. That's a huge competitive advantage of ours. I mean, that's the scale we have in the local markets. It was certainly easier to do a deal with someone you know. You know, that said, we're obviously, we welcome tenants from the outside as well. It's a mix of both. You know, I think we, we capture our fair share of leasing from tenants that are outside of our portfolio as well. Certainly try to cater to our client base, as best we can to accommodate their growth.

Michael Griffin (VP and Equity Research Analyst)

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

Scott Bohn (Chief Development Officer and Head of Lab)

Yeah, from a supply perspective, I mean, not, not a ton change, not a ton of change from last quarter that we talked about in the 2023, 2024 deliveries. As you'd expect, we're certainly seeing a slowdown in new starts, in many of the conversions that have been, you know, advertised, aren't doing anything on a spec basis, so we don't really even count many of those in the competitive supply. As we've noted before, not all supply is built equal. We think that we're positioned very well in each of our markets. When you look at the Bay Area, competitive new supply, what we deem as competitive to our portfolio, is about 800,000 sq ft in 2023.

It's about 70% pre-lease, and, you know, coming in 2024, there's about 3 million sq ft delivering in the North Peninsula. About a third of that is conversion space that we think is going to be less competitive to our product. We view about 1.8 million sq ft of that as competitive. The good news in San Francisco on that is it's, it's a small number of actual projects, you know, so it's a, it's a decent amount of square footage, but a small number of projects. When you're thinking about competing on deals, you know, you're not going out competing against 10 projects, right? Smaller number there. Boston, you know, well, we certainly have very little rollover, and no ongoing developments out there today.

There's some big headline numbers, but what we truly look at as competitive in Lexington and Waltham and West Cambridge, our portfolios there, is really shrinks down to, you know, a little over 2 million sq ft. We feel, feel good about our positioning there, and again, if, if no development starts anywhere in the near term, as we work through our AO Life entitlements. In San Diego, there's about 5 million sq ft in total under construction, but only about 2 million of that is in Torrey Pines and Sorrento Mesa, and that's about 30% pre-leased. You know, when you whittle down to what we actually view as competitive, it's pretty manageable in the near term.

Scott Brinker (President and CEO)

Hey, Griff, one other thing, and, you know, this, every situation is different, this isn't a statement that's true across the board. In general, what we've noticed is that the new development projects, if anything, in this environment, have been a bit harder to lease up. If you think about a new development, usually the tenant needs to invest at least $100/ft of TI. It could be $200, $300, $400, depending upon their program. That's a tough ask in this environment. A new development already is going to come with higher lease rents as well as higher operating expenses, just given the amenities and the cost basis. It's just less competitive. You think about what's happening in a, a, a real estate sector that's just the polar opposite of lab, which is office.

It's like the 8+ buildings are the only ones leasing up. Lab right now is kind of the exact opposite. It, it's the kind of well located, but lower price point in terms of rent, OpEx, as well as TI investment from the tenant. It actually is the most desirable and in demand today, so we're actually benefiting from that quite a bit. We do have some new development to lease up, obviously, so we're not completely immune from that dynamic, but it actually puts the incumbents with existing operating portfolios in even better shape, I think, as you think about who's going to weather the kind of deliveries over the next 18-24 months.

Michael Griffin (VP and Equity Research Analyst)

Great. That's it for me. Thanks for the time.

Operator (participant)

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

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

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

Pete Scott (CFO)

Yeah. Hey, Ron, it's Pete here. You know, I, I think the $1.3 billion you're referring to was about $200 million of, of NOI growth over three years. I, I would say we still feel good about that NOI growth opportunity today. It may take a little longer to get there. That shouldn't be a surprise. Within that, we, we didn't include new development starts. That was basically the lease-up-

... and the stabilization of the existing development pipeline. There were no new starts that was, you know, feeding into that. It's a good question. Again, we feel good about it. It may just take a little bit longer to get there.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Great. Then just on the Lab guidance, I know this has been asked a lot of different ways, so I'll take a stab at it, too. The 3%-4.5% same store NOI, is the reason is the bottom and the top end of that range, is that mostly, you know, Sorrento? Like, why, why is that range so wide with five months of the year left? Just can you talk about what's at the top end and the bottom end being contemplated? Thanks.

Pete Scott (CFO)

Yeah. You know, look, we're right at the midpoint through the first, you know, six months of the year. I would say that, you know, the biggest item is any unknown, you know, tenant credit issues, like you point out with Sorrento, or with the likes of, you know, Codiak. We do have some conservatism we embed within the guidance at the beginning of the year, and as we get further along in the year, you know, we try and tighten and/or increase that. I'd say, you know, two months, or excuse me, two quarters into the year, we still feel good about hitting the midpoint within that, you know, segment. I think it's still a little too soon for us to either trim the range or consider increasing the range right now.

Obviously, more to come, when we get to the fall and our third quarter call.

Ronald Kamdem (Managing Director and Head of U.S. REITs and CRE Research)

Thanks so much.

Pete Scott (CFO)

Yeah.

Operator (participant)

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

Steven Valiquette (Managing Director and Healthcare Technology and Distribution Analyst)

Thanks. Good morning, guys. Hey, just my question here is around just the industry transaction volumes. Obviously, are way down again this year versus historical averages, both in Life Science and medical office. Despite this, I guess I'm just curious if you can comment on whether you're have noticed any recent directional shifts in either direction in just industry cap rates and recent LS or medical office industry transactions? Thanks.

Scott Brinker (President and CEO)

I don't feel like there's enough volume to draw any conclusions. A lot of the transactions that have happened in the Lab space have been more recaps, but the pricing's been pretty strong, whether you look at it on a cap rate or a price-per-foot basis. Obviously, the buyers are thinking about IRRs as well. They're definitely up from the peak 18 months ago, 100-150 basis points, but I don't know that there's been a difference in the last couple of months that is noteworthy. There's just not enough activity to state that definitively. Do you have a different view on outpatient, Tom?

Tom Klaritch (COO)

No, it's same. I mean, there just hasn't been a lot of transactions. You know, we, we saw the spike two, three quarters ago, and it's been pretty consistent since then.

Steven Valiquette (Managing Director and Healthcare Technology and Distribution Analyst)

Okay. Okay, that's fair. Okay, thanks.

Operator (participant)

The next question comes from Mike Mueller from JPMorgan. Please go ahead.

Mike Mueller (Senior Equity Research Analyst)

Thanks. Hi, just two quick ones here. I guess, first, how much was the ad rent in Q2 from MedCity Dallas, and how much of that was above normal? On the CCRC front, where do you think occupancy can go the next, say, three years?

Pete Scott (CFO)

On the ad rent, we typically run about $2.3 million-$2.4 million a quarter. It's up about 8% from last year, and we've had as high as $3 million, so, you know, it's gonna be in that range, kind of $2.4 million to the upper $2 million moving forward.

Scott Brinker (President and CEO)

Yeah, CCRC, today we're around 83%. That portfolio is mostly independent living, so longer length of stay, and then there's big barriers to entry, so there's essentially no new supply. I mean, hopefully, we can get back into the 90% range from 83% today. We've got one or two campuses that don't do as well. You know, that may be a limit on the upper end of occupancy for that business, at least in the current environment. Good progress to date. Our NOI is essentially back to where it was in 2019, at least on a cash basis. Occupancy's recovered, we still have quite a bit to go. Yeah, good upside for that portfolio.

Mike Mueller (Senior Equity Research Analyst)

Got it.

Tom Klaritch (COO)

Sorry, this is Tom again. Just to clarify, the numbers I was quoting are monthly numbers, so, you know, in a quarter, it's between $8 million and $9 million.

Mike Mueller (Senior Equity Research Analyst)

Got it. Okay, thank you.

Operator (participant)

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

John Pawlowski (Managing Director and Residential and Health Care Analyst)

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

Scott Brinker (President and CEO)

Yeah, well, we have sold assets year-to-date. We just said we're gonna look to sell some more. I mean, we're, we're doing exactly that. It's not an easy market to transact in, but that is our expectation. That feels like the best move, at least for assets that we view as highly desirable by some buyers, but maybe not core to our strategy. Tougher to sell super core assets within our big campuses and clusters. You know, at some point, you know, we may have to consider that, but we don't feel like we're in that spot today. We certainly, from a balance sheet perspective, don't need to. You know, sentiment, it comes and goes. Obviously, it's been more negative lately. We don't think that lasts forever, certainly.

I think the results today, the fundamentals are a lot better than the sentiment. You know, we'll see if that, in fact, transpires in the coming quarters. If not, we'll continue to look at additional asset sales.

John Pawlowski (Managing Director and Residential and Health Care Analyst)

Okay. But the size of the dispositions in your mind right now is in the $200 million range, likely?

Scott Brinker (President and CEO)

Yeah, that's right.

John Pawlowski (Managing Director and Residential and Health Care Analyst)

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

Scott Brinker (President and CEO)

Yeah, I mean, John, we signed more than 5 million sq ft of leases since COVID, so three years ago, both existing spaces and new spaces, and the, the allocation between the Lab and the collaboration space really hasn't changed. I understand the headlines and the theories, but when we look at real tenants and real leases and real buildings, the mix hasn't really changed much. We have not seen that. Could it flex a little bit in the future? Sure, it could. Our purpose-built assets can actually accommodate that. A lot of the redevelopment-type properties struggle to get to 30%-40% of the Lab mix, whereas our purpose-built labs could go up to, I don't know, Scott, 75% Lab if they needed to, but we're just not seeing that.

John Pawlowski (Managing Director and Residential and Health Care Analyst)

Okay. Makes sense. Thank you.

Operator (participant)

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

Wes Golladay (Senior Research Analyst)

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

Scott Bohn (Chief Development Officer and Head of Lab)

I think, I think it's, it's broad-based. You know, we spent a lot of time talking to both, you know, our large-scale pharma clients, as well as, you know, VCs talking about, you know, company formation and startups. There, there's probably more activity favoring, you know, the sub 50,000 square foot type tenants. You know, there's a lot of Series A funding going on, a lot of company formation going on. I think those companies that are still in that Series B, C range or the early publics are probably the ones that are, you know, just now starting to feel more comfortable, and as Scott mentioned, and have more clarity on kind of the, the interest rate and macro environment. We, we expect to see more of that coming over the next few months.

You know, overall, the activity, as well as the LOIs we talked about, are a broad range of tenants, sizes, as well as kind of where they are at, they're at in the spectrum from a funding perspective.

Wes Golladay (Senior Research Analyst)

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

Pete Scott (CFO)

Yeah, I mean, I think on Sorrento, we obviously have contingency planning with regards to what we would do with those assets if they were rejected. As I said in my prepared remarks, I mean, they're not looking necessarily today to reject those leases and to liquidate. They're clearly trying to exit bankruptcy and put, you know, a financing package together to achieve that. Too soon for us to comment on what that means for the leases, but I would say that we generally feel like that could be a positive thing with regards to the existing leases. You know, those leases actually have pretty significant below-market rents, but obviously, if they were rejected, there, there would be some downtime and, and some, you know, TIs and capital spend that varies across the, the four different properties.

Again, I think it's too soon to start delving into the individual properties right now.

Wes Golladay (Senior Research Analyst)

Great. Thanks for the time, everyone.

Operator (participant)

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

Jim Kammert (Managing Director)

Good morning. Thank you. Given the high retention in the Lab side, is it safe to assume that those tenants are less likely to be price shoppers, if you will? Do you have maybe examples in the last 12 to 18 months where you've done leasing with existing tenants in the Lab side, where they might have been able to, you know, go down the street to a new development or something at a lower rent, but stuck with Peak? Thank you.

Scott Bohn (Chief Development Officer and Head of Lab)

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

Jim Kammert (Managing Director)

Right. Do you, do you have examples maybe where, you know, you, you were able to keep, keep them, and you, you even extract a nice bump, and as opposed to them moving? I'm just curious if that's been a phenomenon, you know, insulating you from the new supply, in other words.

Scott Bohn (Chief Development Officer and Head of Lab)

Yeah. You know, it's a good question, Jim, and actually, I think if you go back to our Nareit deck from November 2022, we actually included a slide, and we have in the past, about, you know, tenants that have gone from, you know, small amounts of square footage with us and grown to, you know, well over 100,000, if not even more than that, square feet within our portfolio. It's one of the things that we think differentiates us and gives us a competitive advantage. I mean, we don't know if the tenant turned down another deal, to be honest with you.

Jim Kammert (Managing Director)

Right.

Scott Bohn (Chief Development Officer and Head of Lab)

Oftentimes, they're just talking to us and expanding with us. Not sure I can give, like, a specific example, except to point to the amount of tenants that have gone from a small amount of square footage to a lot of square footage with us through the years. We've been continuing to pound the table that we think that's a competitive advantage for all the incumbent landlords.

Scott Brinker (President and CEO)

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

Jim Kammert (Managing Director)

Terrific. Thank you.

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.

Scott Brinker (President and CEO)

Yeah. Thanks, everyone, for joining. We'll see a lot of you in September at the Bank of America conference. Enjoy the rest of your summer. Thanks.

Operator (participant)

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.