Healthpeak Properties - Q2 2024
July 26, 2024
Transcript
Operator (participant)
Good morning and welcome to the Healthpeak Properties Inc. 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 touch-tone phone. To withdraw your question, press star one again. Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.
Andrew Johns (Head of Investor Relations)
Welcome to Healthpeak Second Quarter 2024 Financial Results Conference Call. Today's conference call will contain certain forward-looking statements. Although we believe expectations reflected in many 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. The discussion of risks and risk factors is included in our press release and detailed 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 this call. In the exhibit to the 8-K we furnished to the SEC yesterday, we've 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, Chief Executive Officer, Scott Brinker.
Scott Brinker (President and CEO)
Okay. Thanks, Andrew. Good morning, everyone, and welcome to Healthpeak's Second Quarter Earnings Call. Joining me today for prepared remarks is Pete Scott, our CFO, and the senior team is available for Q&A. First, I'd like to congratulate our entire team on an incredible quarter. We executed on every one of our stated priorities, including merger integration, leasing, asset sales, and accretive stock buybacks. Last evening, we increased our 2024 guidance for the second time this year, driven by outperformance in leasing, same-store operations, and stock buybacks. In addition, our conservative balance sheet and dividend payout ratio are competitive advantages that will benefit future earnings growth. Merger integration continues to go exceptionally well, both financially and culturally, as we're meeting or exceeding every goal we set. For example, year-one synergies are now tracking to be a bit higher than $45 million.
More important, over the last several months, our newly combined team has been focused on defining the core values of our desired culture. Those core values are now represented by the acronym WE CARE: W for Winning Mindset, E for Empower the Team, C for Collaborate and Communicate, A for Act with Integrity, R for Respect the Relationship, and E for Excellence in Execution. These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together. One of my strategic goals has been to bring Healthpeak closer to its real estate and to become fully immersed in the underlying businesses of our tenants. The merger helped us accelerate that transformation. Today, 70% of our people directly support our real estate.
Two years ago, that figure was less than 50%. We're increasingly dialed into the healthcare ecosystem. This is critical because the healthcare sector is not a traditional real estate business. Investment outcomes are very much impacted by the underlying business taking place in our building, not just the attributes of the real estate itself. A thorough understanding of the operating and regulatory environment and close relationships with the leading providers will drive superior investment and portfolio management decisions over time. Okay. I'd like to provide an update on our life science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases as our tenants have gotten more comfortable making real estate decisions. We signed 800,000 sq ft of leases in the second quarter. 75% were renewals and 25% were new.
The re-leasing spread was positive 6%. As has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space. 84% of that leasing was done with existing tenants, and the remaining 16% are new to the portfolio. On one hand, highlighting our competitive advantage from existing relationships, at the same time adding new ones for future growth. Sponsorship is paramount to tenants and their brokers in this environment. Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage. Our 2Q results and pipeline suggest we hit an inflection point well ahead of the sector at large. We expect 3Q to be a big leasing quarter as well. We signed an additional 180,000 sq ft of leases in July, all of which were new with an average term of 10 years.
Our pipeline remains strong with 620,000 sq ft under signed LOI, including Vantage, Portside, and Director's Gateway. Moving to our outpatient medical business. We're driving strong performance through our platform, favorable industry fundamentals, and our high-quality portfolio. Occupancy in our outpatient portfolio was up 20 basis points in the quarter, and releasing spreads were positive 4.7%. Operationally, we haven't skipped a beat with the merger, and our increased scale allows us to take advantage of strong volume growth across the sector, as underscored by HCA's exceptional second quarter results this week. Also, as announced yesterday, we're very pleased to strengthen our relationship with CommonSpirit for the next decade plus. We sold about 900,000 sq ft of space leased to CommonSpirit in June and July as part of the sale transactions we announced yesterday.
Our go-forward relationship represents 2 million sq ft, or approximately 3% of our total ABR, and is well-diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City. We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. The WALT had been three years and now improves to more than 11 years. The blended releasing spread is positive 13%, and the annual rent escalator will increase to a fixed 3%. Note that the terms of the existing leases will remain in effect through the original maturity date, most of which are in 2026, 2027, and 2028. We used our in-house leasing team to negotiate and execute the early renewal, another example of the merger augmenting our platform capabilities. This was a win-win outcome, and we're very pleased with the collaboration between Healthpeak and CommonSpirit. Okay. Moving to capital allocation.
Yesterday, we announced $853 million of outpatient medical asset sales in five separate transactions at a 6.8% blended cap rate. These were non- and less-core buildings, and markets we're not looking to grow, such as North Dakota, rural Nebraska, and upstate New York. The sales are accretive to our future growth profile, and the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that supports those statements. The net proceeds create significant dry powder to drive future earnings growth. We bought back $88 million of stock since our last earnings call, as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate.
Year to date, we've repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate in the high 7% range. To accretively fund these repurchases, we've sold $1.2 billion of assets year to date at a blended cap rate of 6.5%. Portfolio fine-tuning is usually dilutive, but we took advantage of a temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings. I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities. The two projects we announced yesterday total $53 million and are 84% pre-leased, with stabilized yields in the mid-7s. These projects offer compelling value. At a positive spread, we're recycling out of older, non- and less-core assets into brand-new buildings in core markets with leading health systems.
We're currently underwriting an attractive pipeline of similar development projects with our health system partners. And now, Pete Scott will cover operating results, guidance, and the balance sheet.
Peter Scott (CFO)
Thanks, Scott. We had a very strong second quarter. We reported FFO as adjusted at $0.45 per share, AFFO of $0.39 per share, and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance, starting with outpatient medical. Our results this quarter underscore the strength of the long-term demand drivers we are seeing. We reported same-store growth of 3.1%, a positive rent mark-to-market on renewal leasing of 4.7%, and a retention rate of 83%. Additionally, we are consistently achieving 3% fixed escalators on new leases, which should improve our earnings growth trajectory for years to come. Turning to lab, the strength of our portfolio, relationships, and reputation are leading to outsized leasing demand and driving results that are exceeding expectations. We reported same-store growth of 3%, driven by 3%+ contractual rent escalators and a positive 6% rent mark-to-market.
Occupancy did tick down a bit but was largely the result of the fully occupied Poway sale in San Diego that was completed earlier in the second quarter. Year to date, we have signed 1.1 million sq ft of leases and have a robust leasing pipeline for the balance of the year. Finishing with CCRCs, we reported same-store growth of positive 21%, driven by 200 basis points of occupancy growth and strong rate growth of 7%. Shifting to the balance sheet, we ended the quarter with a net debt to EBITDA of 5.2 times and nearly $3 billion of liquidity. However, these metrics don't take into account the majority of our dispositions, which closed in July. Pro forma of these dispositions are net debt to EBITDA is approximately 5 times. We have nothing outstanding on our line of credit, and we have a cash balance of $300 million.
So we are sitting on significant dry powder to drive future earnings growth from acquisitions, redevelopments, developments, or stock buybacks. On stock buybacks, our existing authorization was due to expire in August, and we filed a new two-year $500 million authorization. Finishing now with guidance. We are increasing our FFO's adjusted guidance range by one penny to $1.77-$1.81, and we are increasing our AFFO guidance range by one penny to $1.54-$1.58. Our guidance increase is driven by three items. First, we increased same-store guidance by 25 basis points to 2.75%-4.25%. Second, the significant early renewal leasing in lab and outpatient medical, including CommonSpirit, provided an immediate FFO benefit. Third, we accretively bought back an incremental $88 million worth of stock at an FFO yield near 10%. With that, Operator, let's open the line for Q&A.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press Star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press Star, 1 again. So 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 will come from the line of Josh Dennerlein with Bank of America. Please go ahead.
Josh Dennerlein (Head of Business and Information Services equity research)
Yeah. Good morning, everyone. Thanks for the time. Just wanted to touch base on the CommonSpirit renewal here. Looks like you got 3% annual escalators going forward. I think it was 2.5% before. Is that 50 bips improvement from the prior lease? Is that kind of something we should expect across the MOB space? I guess I'm just trying to think about the future growth trajectory or internal growth trajectory of the MOB portfolio as you kind of re-sign leases.
Peter Scott (CFO)
Yeah. I mean, most of what we're signing now is with 3% escalators. When we announced the transaction with Physicians almost a year ago at this point, we talked about the fact that their in-place escalator was a little bit lower, just given the timing of when they struck leases. A lot of them were single-tenant, and their blended escalator was more in the kind of low- to mid-2s%. Healthpeak had moved its escalator in the outpatient business up into the high 2s% already. But as we sign new leases, almost everything's at 3%. So we do see our blended in-place escalator today is at about 2.5%-2.6% in the outpatient business. Over the next few years, it will slowly climb into the high 2s%, if not 3%. So yeah, that should be the new normal.
Josh Dennerlein (Head of Business and Information Services equity research)
Oh, okay. That's good color. And then Scott, I wanted to talk about the internalization on that outpatient medical segment. It looks like you added 2 additional markets in July. Just kind of where are you in that process overall, and then any kind of abilities to kind of see a better synergy as we go forward?
Peter Scott (CFO)
Yeah. I mean, we started the year with $40 million of synergies. We're up above $45 million at this point because, in large part, the internalization has gone ahead of plan in terms of more markets than we anticipated, sooner in a little bit better upside. So that's a big reason for the increase in merger synergies. But even more important to us as a leadership team is just the improvement in the platform, in the interaction that Healthpeak employees now have with our properties and with our health systems. I think longer term is an even bigger impact than the financial accretion. It's more than 100 people now on Healthpeak's payroll directly interacting with our team that are interacting with our tenants every day. It's just, I think, a terrific change in terms of our platform capabilities.
So we've got two more planned for the balance of this year, including here in Denver, which we're excited about. It's a super high-quality team that we're bringing on that's going to manage this really high-quality portfolio that we have in Denver. So we'll be at about 50% of our outpatient and lab business by year-end. We'll be internally managed, and we've got, I don't know, 10-12 million sq ft next year that is not in process yet, but we should be able to execute in 2025.
Josh Dennerlein (Head of Business and Information Services equity research)
Thanks for the time.
Operator (participant)
Our next question comes from the line of Nick Yulico with Scotiabank. Please go ahead.
Nick Yulico (Managing Director)
Thanks. In terms of the lab leasing that got done and the pipeline activity, just hoping to understand a little bit more about how much is actually related to Gateway, Vantage, and Portside of what was leased in the second quarter in July versus the pipeline of activity still to close?
Peter Scott (CFO)
Yeah. Hey, Nick, it's Pete. Of the 620,000 sq ft of LOIs, I would say that about half of that is associated with the three large projects you just mentioned: Vantage, Gateway, as well as Portside. A couple of them are pretty large deals as well. Our hope is to convert all of those to leases this upcoming quarter. As we do, we can provide more detail. I think the one thing I would add to it is the phasing in of the upside, that will happen over a couple of years. The leases, probably on average, will commence middle of next year. We'll get an immediate FFO benefit once a lease commences. Then beyond that, it's probably the year after that where you start to see a really big pickup in AFFO as cash rent starts getting paid.
So I think that's probably the best way I can describe the LOI bucket and the upside opportunity. But we're trending in the right direction, and we feel really good about the foot traffic and all of those.
Nick Yulico (Managing Director)
Okay. Great. And then if I'm doing some math on this, I mean, it seems like if you actually convert those leases you talked about in the pipeline and then based on what you've already done, that you'd get to almost about 50% of that $60 million NOI upside number that you've spoken about previously. Is that correct?
Peter Scott (CFO)
Yeah. I think directly, Nick, that is correct. I would say a lot of our lease deals that you've seen have been with existing tenants as well, and there may be a little bit of give-back space that we'll have to lease up. But I'd say just on the gross numbers you mentioned, yeah, it's probably about half of that.
Nick Yulico (Managing Director)
Okay. That's helpful. And then just last question, maybe more broadly in lab, is if you could talk about what types of tenant activity you are seeing on the new leasing side, if it's existing tenants, expanding, other tenants in the market where you're just capturing some market share, and then from an activity standpoint, how that shakes out between South San Francisco, San Diego, where I think both, I imagine, the bulk of the activity is?
Scott Brinker (President and CEO)
Hey, Nick, it's Scott. I'll take that. I think our team is doing a fantastic job capturing market share. We've got the big footprint in all three of the core markets, but I really feel like we are capturing an outsized share of the market right now. So hats off to the team and the footprint that we build. Even when kind of the business was exploding in popularity for the last decade, we held true to our strategy, staying the core submarkets, campus model. And it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator as well. And we like the fact that we have A-plus buildings, we have B-minus buildings, and everything in between. So that when I talk about having a pretty broad base of demand, it's in part because of that footprint.
We can cater to all types of tenants, and that's a huge advantage. So we're working with credit tenants doing big deals, early renewals. We're working with Series A relative startups and everything in between. But for the most part, the leasing is tied to companies that have successful capital raises, whether it's private or public. In 2Q, it was primarily existing tenants. The pipeline is a combination and more weighted towards new leasing, which is obviously a great thing to see.
Nick Yulico (Managing Director)
All right. Thanks, Scott.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
Austin Wurschmidt (Director and Equity Research Analyst)
Hey. Good morning, everybody. Just curious what brought on the negotiations for the early renewal with CommonSpirit, and is that 13% mark-to-market net effective, including any capital that you provided? Just kind of looking for some color on overall economics of that deal. Thanks.
Scott Brinker (President and CEO)
Yeah. Hey, Austin. We could have waited, but I think we were able to strike a mutually beneficial outcome, and that's the reason that we went ahead and did the early renewal. There are some TIs, but it's pretty modest. We did an 8+ year extension on average, and the TIs are roughly one year of rent, so pretty modest or at market. So we're happy with that outcome. But more than anything, it was a deal that we thought was favorable to the company, and we were happy to move forward with it.
Austin Wurschmidt (Director and Equity Research Analyst)
That's helpful. Then, Scott, you've spoken a lot about kind of the environment having an impact on how you approach capital allocation and disposition. Share buybacks have been top priorities up until this point. But given where the stock is today, where interest rates are, is that still the top priority, or are you rethinking your approach moving forward?
Scott Brinker (President and CEO)
Well, I mean, stock buybacks are more of a tactical move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate. We were able to sell assets and match fund to accretively buyback stock. We were clearly trading at a discount to consensus NAV and our internal NAV. So just the dynamics made that a relatively easy decision. The profitability from buying back stock today is lower, but we do have a fantastic balance sheet. I mean, we finished the quarter at 5.2 times. And if you account for the sale proceeds from the unity transaction, we're down near five times leverage, which on a balance sheet our size is pretty substantial dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back.
It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets. When I think about an implied 7 cap today, plus or minus, and we just sold, for us, relatively low-quality outpatient medical by our standards at a cap rate below that. So I think that's telling in terms of where the stock is trading. But I don't expect that to continue. I mean, if we continue to grow earnings, sign leases, and put up excellent results like we just did, I mean, our expectation is that we're going to be trading at a premium in issuing stock and growing the company. We do have the big outpatient medical opportunity. We announced $50 million of new development today with one of our important partners, Core Market, Core System, highly pre-leased, accretive, 7.5% stabilized yield.
There's a fairly big pipeline of similar projects behind that that we could execute on and certainly have the dry powder to do so.
Austin Wurschmidt (Director and Equity Research Analyst)
I guess what would it take or what would you need to see before maybe some of the deep pipeline you spoke on a few years ago within the lab segment for you to approach commencing construction on some of that? Thanks.
Scott Brinker (President and CEO)
Yeah. So if you think about our operating portfolio in life science, we're around 95% leased. But our development redevelopment portfolio has a lot of opportunities. So when you include the vacancy or availability there, I mean, it's more like 1.5 million sq ft that we need to lease up first, and that's our priority. But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to get comfortable with the return on cost relative to our cost of capital. But we're certainly moving closer to making decisions like that, but I wouldn't say that we're there yet, Austin.
Austin Wurschmidt (Director and Equity Research Analyst)
That's really helpful. Thanks, Scott.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Our next question comes from the line of John Kilichowski with Wells Fargo. Please go ahead.
John Kilichowski (Executive Director Equity Research)
Hi. Thank you. First, I'd just like to start with a conversation we had with our biotech team recently where they said there's been a push to bring back some work from CDMOs that have been done internationally to return stateside. Have you heard or seen any of that?
Scott Brinker (President and CEO)
Yeah. Hey, John, Scott Bohn. Yeah. We've seen some of that come through. I mean, we don't have a lot of kind of biomanufacturing spaces in the portfolio. We've got some small-scale manufacturing within some of our facilities, but not a lot of true CDMOs, a handful of them throughout the portfolio. We actually have a deal that we're working on out in Boston with one, but we are seeing some of that come back to the States. A lot of that, though, does end up in markets like RTP versus some of the core markets.
John Kilichowski (Executive Director Equity Research)
Okay. Thank you. Then I don't know how much color you could give here, but just as far as your guidance is concerned, what does it imply for lab leasing for the rest of the year or for lab and/or office leasing for the rest of the year?
Peter Scott (CFO)
Yeah. Hey, John. It's Pete here, and welcome to the earnings calls. I think this is your first one. I think just big picture, as we think about all three of our segments, we do think labs should continue to improve through the second half of this year. Certainly, leasing helps, but one of the things I mentioned at the beginning of the year was we did have some free rent on a couple of large leases that impacted the first half of the year. As that burns off, we expected to see acceleration in the second half of the year, and we continue to expect that. Obviously, with getting a lot of leasing done, our confidence level improves as well. I think on outpatient medical, we did say that we expected the second, third, and fourth quarters to accelerate relative to the first quarter.
We got a lot of questions on that. As you saw, we were above 3% this quarter, and we continue to believe we'll be above 3% for the second half of the year. Then I know we don't spend a lot of time on CCRCs, but we've had a pretty good first half of the year. Our expectation is not to hit 20% growth. I mean, that's going to normalize. Everything eventually does normalize, and it will normalize on the CCRC side, but we still feel pretty confident about our full-year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. I know you just asked about lab, but I figured I'd give you a more fulsome update.
John Kilichowski (Executive Director Equity Research)
I appreciate it. Thank you.
Operator (participant)
Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go ahead.
Juan Sanabria (Managing Director)
Hi. Good morning. Congratulations on all the lab leasing. Just curious if you could spend a little time talking about the cost to get that done. TIs associated with that seem to go up. So just curious or hoping you could give us some color around new and renewal TIs in today's market?
Scott Brinker (President and CEO)
Yeah. I mean, the renewal TIs were really low, especially given the length of the term that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point. I would say they were exceptionally low last quarter, and this year they were just a bit higher. I don't think they were outsized in any way. I mean, what, 20%-25% of the rent is pretty modest, but each space is different. I mean, that's the thing that's important to comment on when you're looking quarter to quarter. It all comes down to what leases were signed, which buildings, how much work that space needed.
But we don't see the TIs being outsized in any way, especially considering the improvements that were made to those buildings that should last for the next 10-20 years and the length of leases that we signed. So yeah, we would not characterize it as high TIs to generate the leasing volume, not at all.
Juan Sanabria (Managing Director)
Thanks for that context. And then just maybe a more topical question in the news today. Alphabet was moving one of its life science companies from South San Fran to Dallas. You have an Alphabet company in the lab space in your top 10. So just curious if there's any conversations going there, and maybe you could comment on how much term is left with your Calico exposure.
Scott Brinker (President and CEO)
Well, we got 10 years left with Calico, but I didn't see that news, but that would be a first. I mean, despite what's happening in other sectors and industries, moving out of higher-cost areas to lower-cost, lower-tax states, it just doesn't happen in life science. It's just the reverse. In fact, a lot of times if a company has some promise, they need to move to one of the three core markets to find the talent, to hook up with the right venture capital firms, to have the infrastructure. What you just described, that's one in a million. The vast majority of our tenants are coming into South San Francisco, not out of it.
Juan Sanabria (Managing Director)
Thanks, Scott.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Our next question comes from the line of Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll (Managing Director)
Yeah. Thanks. I just wanted to touch on your life science leasing pipeline. I know in the past you've kind of pegged that around 2 million sq ft, and obviously you've got a lot of leasing done in 2Q and so far in July. I know in the call you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today and have you backfilled some new tenant interest given the space that you signed?
Scott Brinker (President and CEO)
Yeah. We continue to cycle through the pipeline. So obviously you don't just do a tour and sign a lease the next day. I mean, there's a process involved in terms of inquiry and tours and sign an LOI and then sign a lease. So you have pretty good leading indicators, which is why we've been more positive on our pipeline. And sure enough, this quarter it's turned into reality, and I think the third quarter will be equally strong. But we continue to see good traffic in our buildings, including the 600+ thousand sq ft we have under signed LOI and 200,000 sq ft of leases signed in July alone. That's awfully strong.
Michael Carroll (Managing Director)
Okay. But then the overall volume of the pipeline doesn't stand at that 2 million sq ft anymore since you signed about roughly 1 million sq ft. And then just real quick too, on the 180,000 sq ft that you signed in July, I mean, can we assume that was in the in-place portfolio, not the development projects?
Scott Brinker (President and CEO)
That's correct. Although last night we did sign a lease at one of our development projects. So yeah, that's always good, I guess, to sign. We thought we had the most up-to-date information, but we did convert one of those LOIs to a lease last night at one of our development projects. So it's great progress.
Michael Carroll (Managing Director)
Okay. Great. Thank you.
Operator (participant)
Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.
Rich Anderson (Managing Director)
Hey, thanks. Good morning. So what do you think explains this sort of behavioral switch on the life science space with tenants starting to think more constructively about doing deals? At Nareit, you talked about some good signs from a capital-raising standpoint in the biopharma sector, but then you have an Alumis IPO that looks like my own personal EKG right now. So I'm just wondering where this positive sort of mindset is coming from in your mind.
Peter Scott (CFO)
Yeah. Hey, Rich. It's Pete. One of the things that we have been talking a lot about is just capital raising, generally speaking. If you look at the first half of this year, and we're talking not about R&D capital spend by large-cap pharma, M&A. I mean, that's a separate bucket, but the bucket we tend to focus on a lot is on, you mentioned the IPO market, the secondary equity offerings, pipe deals, venture capital raising. And when you look at the first half of this year, it was the strongest year dating all the way back to 2021, where at that point we were in that virtuous cycle within the lab space. So that's certainly helping with regards to tenants looking to lease space. We have seen a correlation between that and our leasing pipeline increasing. On the Alumis IPO, I mean, it's a great company.
They are in our portfolio. Martin Babler, the CEO, was previously at Principia. We've had a long-term relationship with them. They grew from 10,000 sq ft to 50,000 sq ft with us. And I know you like to point to the EKG on the IPO, but they have raised $500 million year to date, which is pretty darn strong. So we feel great about having them in our portfolio. And that's an example of a company as they raise capital, the demand for space has increased.
Rich Anderson (Managing Director)
Okay. Good. And then second follow-up on the asset sales out of the outpatient medical. And maybe I should know this, but where is that coming from? Is that legacy dock or legacy dock? Sorry. Confusing. Is it the acquired portfolio or the legacy portfolio? Let's put it that way.
Scott Brinker (President and CEO)
Yeah. Rich, we did that on purpose so that we don't have those types of conversations. But it was a mix of portfolios. I'd say it was weighted towards legacy Physicians. Probably obvious given a lot of CommonSpirit was in that portfolio, but it was a mix.
Rich Anderson (Managing Director)
Okay. That's all I got. Thanks.
Scott Brinker (President and CEO)
Thanks.
Operator (participant)
Our next question comes from the line of Michael Griffin with Citi. Please go ahead.
Nick Joseph (Senior Equity Research Analyst)
Thanks. It's Nick Joseph here with Griff. Just want to follow up on the optionality with the cash and liquidity after the asset sales. You touched on the share buybacks earlier in development, but just from an acquisition standpoint, are you starting to see more interesting opportunities present themselves? And if so, kind of where are you seeing yields and IRRs today?
Yeah. I mean, the market's opening up. I would still say it's pretty slow. I mean, volumes are way off their historical norms, but starting to pick up. There's still a lot of volatility in interest rates, which is a key driver of transaction volume, certainly in the private market. We were happy with the pricing that we got, high six cap for the asset quality that we sold. I think if we were to acquire anything, it would be higher quality assets in our current stock price. Although improved is not yet where we would be out acquiring stabilized product, but we're getting closer. And certainly, if our cost of capital supported it, there'd be a significant pipeline just given the depth of relationships that the key people here have across the health system environment. So that's obviously something that we think will happen in time.
It's just a matter of when. In terms of life science, very little stabilized product is available, but there's certainly signs of distress. It seems like it always takes longer to play out than you might think. The vast majority is probably not interesting to us for the reason I mentioned that we purposely did not go outside of our core markets or do a bunch of conversions. But there's a handful that we're keeping a close eye on that would be very interesting to us, but there has not been capitulation to date. But remember, as I said, it always takes longer to play out than you think. So we now have the flexibility to pursue things like that when and if they become available.
Thanks. That's helpful. And then just on the asset sales with the seller financing, what was the rationale of doing seller financing and what does the secure lending market look like today?
Scott Brinker (President and CEO)
Yeah. It's pretty simple. Just certainty of execution. It's a transaction that the team's been working on for several months, if not a few quarters. And despite a lot of volatility, the buyer didn't retrade us on price and we didn't retrade them on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short term. So there's clarity and certainty on getting the balance of the proceeds back over the next 2-4 years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this, but to do the financing.
Nick Joseph (Senior Equity Research Analyst)
Thank you very much.
Scott Brinker (President and CEO)
Yep.
Operator (participant)
Our next question comes from the line of Wes Golladay with Baird. Please go ahead.
Hey, good morning, everyone. Can you quantify how much you can grow the outpatient medical development pipeline over the next few years?
Scott Brinker (President and CEO)
This is JT. There's a lot of development right now that we've disclosed in our pipeline under construction. And there's a lot of appetite by the health systems as they continue to transform more and more of their inpatient services to the outpatient setting, particularly in the stronger suburban demographics around those cities like Phoenix and Atlanta. Two good examples. But it could be substantial, $500 million-$1 billion over the next few years is probably a pretty conservative guesstimate.
Wes Golladay (Senior Research Analyst)
All right. Thanks for that. Then you did call out the free rent to be aware of as a potential mover in earnings going forward. Is there any other moving parts to be aware of?
Peter Scott (CFO)
No, I think, Wes, it's when the lease commences, right? Because when you sign a new lease, it doesn't typically commence the next day, right? It commences once you finish completion of the work. So I think that's kind of hurdle number one to getting to FFO recognition. And then hurdle number two is the free rent burn-off to getting to AFFO recognition or cash NOI recognition. I'd say on average, it's probably for every year of lease term, it's probably around a month of free rent on a new lease deal to the extent that we're pushing pretty darn hard for 7-10-year terms on our new lease deals. And as you saw on the table we disclosed, we're having success achieving that.
Wes Golladay (Senior Research Analyst)
Yeah. Okay. Got that. Just maybe a clarification on the question. There's no move out that you know of or anything in the portfolio that would cause anything that we need to model as we look into next year?
Peter Scott (CFO)
No, I think as Scott mentioned, on our operating portfolio, we're kind of in that mid-90s occupancy perspective. We tend to be able to feel like we can hold firm at that. Really, the upside for us is leasing up the vacancy outside of the operating portfolio. As we think about next year in lab, we have about 800,000 sq ft of exploration. A lot of that is back of the year weighted. At this point within our pipeline, I think we feel like close to half of that is under discussions at this point in time. More to come. We're just entering that 12-month period before exploration. On the balance of it, we're starting to have conversations right now. But it's a pretty manageable number. Within our pipeline, a lot of it is actually spoken for already.
Wes Golladay (Senior Research Analyst)
Thanks for the time, everyone.
Scott Brinker (President and CEO)
Yep.
Operator (participant)
Our next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra (Managing Director)
Morning. Thanks for taking the question. Just, I guess, first on the life sciences side, could you just maybe help clarify on the LOIs just so we know sort of from modeling what percent roughly or what proportion is sort of existing tenants in your maybe core portfolio relocating just so we know sort of what's move in, move out, and then versus new? And if you can maybe just expand upon your comments and talk about reaching that $60 million NOI, is that sort of should we expect that sort of a second half, 2024, or could some of this spill over into 2025?
Scott Brinker (President and CEO)
Yeah. On the first question, I mean, more than half of the LOI pipeline is new leasing on currently vacant space. So there's a lot of upside in that pipeline. But just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid. But obviously, great progress on that. And Pete, do you want to take the second one?
Peter Scott (CFO)
Yeah. I think you said second half 2024 and into 2025. Maybe you meant second half 2025 and into 2026, 2021. Or excuse me, not 2021, Vikram. Our thought on the phasing in of the full $60 million is that it would take a couple of years to get to that stabilized $60 million of cash NOI. We still feel good about that. But that phasing in would start next year and would be spread out probably over a couple of years. Hard to get into more specifics. As we said, as these LOIs convert into leases, we will provide certainly more information on it for modeling purposes. But I'd say it's best guess today, spread out over a couple of years starting kind of middle of next year.
Vikram Malhotra (Managing Director)
No, that's great. And a lot of good progress on the life science side. So maybe just to clarify, you mentioned accelerating growth on MOBs, I think, on the same-store portfolio and life sciences as well in the second half. And I just want to tie that back to sort of the guide on same-store. You moved it up by 25 bps. But just trying to, if you can tie the two, if you're having accelerating growth, it would seem like there's perhaps more upside. So I'm wondering if there's something, maybe the CCRCs or something else is pulling that back.
Scott Brinker (President and CEO)
Yeah. We do see deceleration of CCRCs in the second half of the year just because you're not going to continue at a 20%+ clip. So if there's any deceleration, it's just within CCRCs. And we're seeing acceleration in the other two segments. I would say that year to date, we're right around 4.5%. The upside of our guidance is 4.25% from a same store perspective. And if I were just to focus on FFO, I think year to date, we're right around $0.90. That annualizes to $1.80, right? So you're sort of trending towards the higher end of our guidance ranges. We still have two more quarters to go. So we're not going to take it all the way to the max the middle of the year. There is maybe a little bit of conservatism in that.
But again, we feel great about what we've done year to date. Remember, we did raise our guidance $0.02 each in the first quarter, FFO and AFFO, and $0.01 each again this quarter and the second quarter. So we're off to a great start. We had a great quarter. And if we're trending to the high end, that's great.
Vikram Malhotra (Managing Director)
Great. Congrats on the strong quarter. Thanks.
Operator (participant)
Our next question comes from the line of Jim Kammert with Evercore ISI. Please go ahead.
James Kammert (Managing Director)
Good morning. Thank you. Obviously, you've done a lot of portfolio curation to date. But theoretically, how much more of the lab or OM portfolio would you sell if the price was right? Just trying to understand what's really sort of non-core remaining, if you will.
Scott Brinker (President and CEO)
Yeah. I mean, even the 850 that we just did, I would characterize as mostly just opportunistic. They're perfectly fine assets. They were performing. We're managing them well. But they were, by our standards, relatively low quality. And to my point earlier, usually when you fine-tune the portfolio, it's dilutive. This environment just gave us a unique opportunity to fine-tune the portfolio in a creative way and increase the growth profile of what's remaining. So how much of that is left? It's pretty modest, but a lot of it depends on where are we trading. So I mean, we could sell. There'd be a lot of interest in our remaining assets, but hopefully, that's not the environment that we're in. I think we have a very high-quality portfolio across the three segments that should produce stable, strong growth at the high end of the peer group for years to come.
James Kammert (Managing Director)
That's great. And just a quick housekeeping. In an earlier question response, you noted that you thought it's pretty likely that the buyer of the OM portfolio here in July would. You're assuming they have other existing proceeds or you're just expecting them to refinance kind of the next two years or so? And that's going to be your source of repayment?
Scott Brinker (President and CEO)
Yeah. Refinance. I mean, there's a maturity date on these loans that they will have to refinance the loans by that date, if not sooner.
James Kammert (Managing Director)
Got it. All right. Thank you.
Operator (participant)
Our next question comes from the line of Mike Mueller with JP Morgan. Please go ahead.
Michael Mueller (Analyst)
Yeah. Hi. I know you quote renewal spreads for lab and outpatient leasing. But how similar or different would the lab spreads be if you included comparable new leasing spreads as well?
Scott Brinker (President and CEO)
It just would be misleading. I mean, we could give you that information, but sometimes you're doing pretty significant TIs or changing the use of the buildings that I think it would be misleading. I don't think there'd be a material difference, but you'd have even more volatility quarter to quarter depending upon which space. Meaning somebody could be paying $5 in a 25-year-old space, and you put a bunch of money into it, and it's almost brand new, and now they're paying $7. Well, is that really a 30% mark to market, whatever the number is? It's kind of misleading. So we choose to just go with the releasing spread on renewals.
Michael Mueller (Analyst)
Got it. Okay. And then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expirations?
Scott Brinker (President and CEO)
For the lab business? Yeah. If anything.
Michael Mueller (Analyst)
Yeah.
Scott Brinker (President and CEO)
Yeah. It should be. I mean, our mark to market across the portfolio is in the high single digits. That's not hard to do, that number with precision. But that's where we're at, best estimate across the entire portfolio, just acknowledging that it bounces around quarter to quarter. But the 6% is good, but it's below the average throughout the portfolio.
Michael Mueller (Analyst)
Got it. Okay. Thank you.
Scott Brinker (President and CEO)
Yeah.
Operator (participant)
Our next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.
Michael Stroyeck (Equity Research Analyst)
Thanks. Good morning. I know you already touched on the rationale behind the seller financing. Were there any bids that didn't require seller financing? And if so, are you able to share where those cap rates were shaking out? I'm just trying to understand if that seller financing may have ultimately impacted pricing on the deal or if it is a fairly clean comp and it was just needed to get the deal done.
Scott Brinker (President and CEO)
Yeah. I mean, we didn't shop the deal. This was a direct negotiation. So there really isn't even an answer to that question. These are just the terms that were discussed from day one. There's not exactly a deep market of loans of this size in the outpatient medical business in recent years. So yeah, not a great comp.
Peter Scott (CFO)
Yeah. The other thing to just add to that, not all the sales had seller financing. Obviously, smaller portfolios or smaller asset deals, you don't necessarily need financing to get those done. And I'd say the cap rates ranged pretty much on average in the high 6s on those as well relative to the high 6s we got on the portfolio we provided seller financing on. So just to go back to what Scott said earlier, it was really more just about certainty of close on a portfolio that large. And we've had success providing seller financing on asset sales in the past. We did a pretty large amount on our senior housing sales years ago, and we have very little left within that seller financing bucket. In fact, the vast, vast majority has been paid off, and we feel confident the same thing will happen here.
Michael Stroyeck (Equity Research Analyst)
Got it. That's helpful. And then maybe one just on the mark-to-market on renewals. Saw a nice step up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power?
Peter Scott (CFO)
I think if you look at our tenancy, about 69% is really the hospital. So we don't see a lot of difference there. I mean, it's basically where are we at in the market, how much demand is. A lot of times what's interesting is if we've got a new MOB on a campus, that helps drive rents a little higher. Most of the mark-to-market increases we saw this quarter were in Nashville. We do have a couple of new buildings in Nashville, so that's been driving things. But we had 13 leases that had anywhere from 11%-32% mark-to-markets this quarter, and that drove the overall average up. Above that, we'd probably be still at the upper range of our 3%-4% number, but in the upper threes.
Michael Stroyeck (Equity Research Analyst)
Great. Thanks for the time.
Scott Brinker (President and CEO)
You're welcome.
Operator (participant)
This concludes our question and answer session. I'd like to turn the conference back over to Scott Brinker for any closing remarks.
Scott Brinker (President and CEO)
Okay. Yeah. Thank you for joining today, everyone. Thanks again to our team for an incredible quarter. Enjoy the weekend. Take care.