Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Healthpeak Properties Inc (DOC, Financial) increased its 2024 guidance for the second time this year, driven by outperformance in leasing and same-store operations.
- Merger integration is going exceptionally well, with year-one synergies now tracking to be higher than $45 million.
- The company signed 800,000 square feet of leases in the second quarter, with a positive re-leasing spread of 6%.
- Healthpeak Properties Inc (DOC) has a strong balance sheet with nearly $3 billion of liquidity and a net debt to EBITDA ratio of approximately 5 times.
- The company executed $853 million of outpatient medical asset sales at a 6.8% blended cap rate, creating significant dry powder for future growth.
Negative Points
- Occupancy in the lab segment ticked down due to the sale of a fully occupied property in San Diego.
- The company has a significant amount of free rent on new leases, which delays the immediate FFO benefit.
- Despite strong leasing activity, the overall volume of the leasing pipeline has decreased from previous levels.
- The market for stabilized life science product remains limited, with few opportunities for acquisition.
- The company had to provide seller financing for a large asset sale, indicating a challenging financing environment.
Q & A Highlights
Q: Just wanted to touch base on the CommonSpirit renewal here. It looks like you got 3% annual escalators going forward. Is that improvement from the prior lease something we should expect across the MOB space?
A: Most of what we're signing now has 3% escalators. Previously, Healthpeak had moved its escalator in the outpatient business up into the high twos. As we sign new leases, almost everything's at 3%, so that should be the new normal.
Q: Can you talk about the internalization on the outpatient medical segment? Where are you in that process overall, and any potential for better synergies going forward?
A: We started the year with $40 million of synergies, now above $45 million due to internalization ahead of plan. By year-end, about 50% of our outpatient and lab business will be internally managed, with more planned for 2025.
Q: In terms of the lab leasing that got done and the pipeline activity, how much is related to your major projects like Gateway, Vantage, and Portside?
A: About half of the 620,000 square feet of LOI is associated with these projects. We hope to convert all of these to leases this upcoming quarter, with leases commencing around mid-next year.
Q: What types of tenant activity are you seeing on the new leasing side in the lab sector?
A: Our team is capturing market share, working with a broad base of tenants from credit tenants to startups. The leasing is primarily tied to companies with successful capital raises. The pipeline is a combination of existing and new tenants, with more weight towards new leasing.
Q: What brought on the negotiations for the early renewal with CommonSpirit? Is the 13% mark-to-market net effective?
A: We struck a mutually beneficial outcome. The TIs are modest, roughly one year of rents for an eight-plus year extension. We are at market, and it was a favorable deal for the company.
Q: Are stock buybacks still a top priority given where the stock is today and where interest rates are?
A: Stock buybacks are more tactical. We were trading at a discount to the value of our real estate, making it an easy decision. The profitability from buying back stock today is lower, but we still feel like we're trading at a discount to the value of our assets.
Q: Could you talk about the cost to get lab leasing done, particularly TIs associated with new and renewal leases?
A: Renewal TIs were low, especially given the lease terms. New leasing TIs were up relative to last year but not outsized. Each space is different, but we don't see the TIs being outsized in any way.
Q: Can you quantify where the life science leasing pipeline is today?
A: Including the 620,000 square feet under signed LOI and 200,000 square feet of leases signed in July, the pipeline remains strong. We continue to see good traffic in our buildings.
Q: What explains the behavioral switch in the life science space with tenants starting to think more constructively about doing deals?
A: Capital raising has been strong, with the first half of this year being the strongest since 2021. This has helped with tenant demand for space. Companies like Alumis have raised significant capital, driving demand for space.
Q: How much more of the lab or OEM portfolio would you sell if the price was right?
A: The $850 million we just sold was mostly opportunistic. There's not much left to sell, but it depends on where we're trading. We have a high-quality portfolio that should produce stable, strong growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
