to the 11:40 A.M. session of Citi's 2024 Global Property CEO Conference. I'm Michael Griffin with Citi Research, and we're pleased to have with us Healthpeak's CEO, Scott Brinker. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC 24 to submit any questions if you do not want to raise your hand. Brinker, we'll turn it over to you to introduce Healthpeak and the team, provide any opening remarks, and then we'll get into Q&A.
Okay. Yeah, thanks for the invitation. Griff, I've got Pete Scott here with me, our, our CFO. So quick introduction. We feel like there's enormous value and opportunity in the stock today. Headlines notwithstanding, we're still growing. Our same store, 3%, it's translating into earnings growth. It has, and we expect that to continue. We're trading at a dividend yield of 7%+. That's a very well-covered dividend, with a very high-quality portfolio and balance sheet. On top of that, in terms of upside opportunity, right, the 10%+ I just described is just a baseline, even if we don't recapture any of that multiple improvement. But we're trading in the mid-eights on a very high-quality portfolio, that the private market still embraces.
I don't know exactly what NAV is because the market is still a little bit slow, but my best estimate would be in the low to mid-sixes, which is in line with our NAV, and that's a 35% or better upside opportunity in the stock beyond that baseline that I just described. Then in the deck that we published on Friday, we identified $80 million of NOI upside in the portfolio beyond our 2024 outlook. That's all upside to our current guidance. And it's a combination of additional synergies from the merger, as well as recapturing NOI at 3 of our big life science redevelopments. Very well-located, Main and Main type locations. We will recapture the NOI, it's just a matter of time. Then the last point I would make is, the power of a, a great platform.
I feel, and I think objectively could make the case, that we had the two best outpatient medical platforms in the business between Physicians Realty and Healthpeak. By putting them together in a true merger, a true combination, we've created, without doubt in my mind, the best platform in the outpatient medical business. And I do think that that will prove to be beneficial for shareholders over time as we drive internal and external growth.
Thanks for that, Brinker. We're starting off each of these roundtable sessions with the same question: What are the top reasons investors should buy Healthpeak's stock today?
I think I maybe already answered that question. So I mean, it's the return opportunity, 10% baseline growth expectation with upside for 35% or better. The additional $80 million of NOI upside that is not in our numbers, that I don't think investors are underwriting, as well as the strength of the platform that we've put together through this merger that closed on Friday. Those would be the three.
Let's start off with the merger. Why does this deal make sense for both DOC and PEAK shareholders? And does this signal a shift towards medical office and away from your life science platform?
Yeah, I mean, the U.S. spends $5 trillion a year on healthcare. It's an enormous number, and you think about our playing field includes health systems, physicians, and pharmaceuticals. That's 75% of the $5 trillion a year that the healthcare system in the U.S. spends. So an enormous opportunity for us. We think there is significant back-office synergies between the two businesses. But in terms of the merger itself, it's clearly accretive to earnings, set AFFO per share by 3%-4% in 2024, with more upside to capture in the future. It's clearly accretive to our balance sheet because of the synergies, about 0.2-0.3 turns on our leverage, which was already strong. Now it's even stronger.
Then the benefits of the platform, which I mentioned earlier, which over time I think will prove to produce a lot of shareholder value. In terms of outpatient medical, it's always been a big part of our business, and it's a consistent growth business. We have an excellent portfolio and platform and relationships to drive that growth, and fundamentals are accelerating. It's a business that grew in the 2%-3% range over the previous decade, but that was a different environment. Today, we see that number accelerating. Our growth the last 3 years in outpatient medical has been 3.5%. It maintains that consistent low volatility profile, but at a higher baseline than it has for the previous decade, because demand continues to grow as health systems have a mandate to move more of their care to an outpatient setting.
It's more profitable for them, it's more convenient and efficient for patients. So that will continue to happen. So demand is strong and supply is as low as it's ever been because of the cost of construction. Rental rates on new development today are in the $40 per sq ft range, plus or minus. The in-place rent in our portfolio is in the low $20s. So it's just an enormous gap between what we charge for Class A space, that's in good condition and well-located, versus what it would take to fill up a new development. And that's created an enormous opportunity that we think we'll take advantage of for the foreseeable future. Those dynamics will continue.
... How confident are you in realizing the synergies from the merger? You talked about $40 million in year one, up to an incremental $20 million on top of that in year two. Could we see any additional synergies realized on top of that?
Yeah, I might ask Pete to answer that, but I want to make one additional comment on the merger. Because life science is still 40% of our business, a lot of the $80 million of upside that I identified earlier in the presentation is in life science. We still have a 5 million sq ft entitled land bank. It's very easy for a year or two from now for life science to once again be 50%+ of our business. So it, it's in no way a statement about our belief in the life science business. It was simply a decision that we think this combination made us a better company, and that there's still a lot of upside to recapture in life science. So Pete, do you want to answer the synergy question?
Yeah, sure. Hopefully you all can hear me, but we're fully confident in the synergies. And to that point, we had $40 million of synergies included in our outlook this year. Previously, when we announced the deal, we said we'd have $40 million in year one, so we hit that $40 million mark in essentially 10 months this year because the deal closed on March first. You know, the $20 million of synergies for next year, a lot of that will come from internalizing property management. We've already internalized 4 markets so far this year. We've got 5 more slated and more to come next year, and we'll get the full year benefit from that. So highly confident in the $40 million this year, and highly confident in the $20 million incremental next year.
And then, in terms of the integration, how has it been coming along so far? Was there a lot of overlap between the two portfolios in terms of health system relationships or markets? And have you made any new health system relationships or expanded in it, into any new markets as a result of the merger?
Yeah, I mean, on the integration, Pete just spoke to the synergies, but beyond that, I mean, I couldn't be happier with the level of integration across the company, whether it's technology, forecasting, internalizing property management, which is way ahead of schedule. Really, on every single level, I'm happy about the level of integration and teamwork between the two organizations. We just closed on Friday. We've already internalized property management on four markets in advance of the closing date, with five more on tap, and that's a material part of the synergy number. So a financial benefit, but also a strategic benefit of getting our own team more directly in contact with our tenants on a day-to-day basis.
We gave combined guidance for the company in early February, a month before the transaction even closed, which I think speaks to the level of integration on the accounting and forecasting side. And this is a very different transaction than, say, a public company auction, right? Where there's only so much underwriting that can be done and only so much integration that can be done prior to the closing. This was a privately negotiated true merger, where two companies decided they'd be better as one, and we've been integrating since October. And it explains why we're so far ahead of what you would expect in a traditional public company setting. In terms of relationships, that's one of the major benefits, in the transaction. Today, if you look at our outpatient portfolio, 67% of our tenants are health systems.
That's 3x what it was two decades ago, and almost 2x what it was even a decade ago, as more and more of our tenants are health systems directly and not small physician groups. So having those relationships, which Physicians Realty Trust had, in scale, and deep relationships, is critical to our success moving forward. There wasn't a ton of overlap. There's some big national names like Optum or McKesson, where naturally we have overlap. But for the most part, they're new relationships, like, in Atlanta with Northside, Ascension in Indianapolis, Baylor in Dallas. It's mostly new relationships coming into the combined company.
Does the combined platform give you additional scale and competitive advantage to win on new acquisitions?
Oh, a competitive advantage across the board. Acquisitions, yes, although it's not something we'd be excited about today, given cost of capital. But leasing, development, redevelopment across the board. I spoke to it earlier, but given how much of our tenancy are health systems, those relationships are what drive opportunity internally and externally in the sector.
Have you identified any properties as a result of the merger that you'd be looking to dispose of? And if so, what do you think the dollar amount could be?
Yeah, well, it's two high-quality portfolios, so there's nothing that we have to sell. But given we're trading at an implied mid-8% cap rate, and our assets probably trade more in the 6%-7% range, depending on asset quality, we would consider pursuing asset sales. We're actively pursuing it, in fact, and one of the use of proceeds could be stock buybacks. So it'd be really two benefits: accretively recycle capital by buying back stock and improve the quality of the portfolio that remains. So that is something that we're pursuing. And the market is opening up a bit in 2024, especially in outpatient medical. It feels like there's a stronger bid as, at least in the private market, investors are attracted to not only the consistent growth, but an accelerating growth rate in that segment.
And then maybe just one last one on MOBs before we shift over to life science. You're anticipating about 3% MOB same-store growth for the year, which is slightly above the long-term average, we'll call it 2.5%. As a result of the merger, could we expect same-store growth to stay above that long-term average level over the next few years?
Yeah, that's our expectation. We grew outpatient medical same store by 2.5% the last decade, but keep in mind, inflation was only 2% during that era. In the last three years, we've grown our same store by 3.5%. So a pretty significant increase, 40% increase. Our guidance this year does include the full DOC portfolio, and the midpoint is 3%. We have a pretty good track record of exceeding our initial guidance. It doesn't mean we will necessarily this year, but our track record is to do so, and that's above trend. There is some occupancy upside, but equally important, we're getting highest escalators we've ever had. Our re-leasing spreads are at the very high end of our historical range, and so is our retention.
Those are the things that obviously drive earnings growth.
Has there been any more interest on your end in tying future leases to CPI growth, just given the high inflationary environment we were, you know, previously in?
Yeah, we could consider it. We've tended to go more with the fixed escalators. It's just complicated negotiations to introduce inflation-linked escalators. They usually require ceilings and floors, and it just has not been worth the negotiation trade-off.
Then maybe switching gears to life science. Despite some concerns we've seen around elevated supply and tenant health, particularly on the small and private biotech side, the long-term fundamentals seem to remain intact. Are you seeing anything out there that might make you, you know, more cautious on that business in the near term?
No. I mean, when you look at what drives demand for that business over time, it's really three things. Capital coming into the business, and 2023 was at or near an all-time high in the aggregate, approaching $500 billion of capital. That includes NIH, venture capital, public markets, and then R&D off the balance sheet of big pharma. That's critical, the amount of capital coming into the space. Two is the amount of drugs that are being approved, in any given year, and we're at or near all-time highs. And if you look at the third thing, which is how many drugs are in the pipeline, clinical trials, we're at all-time highs. As long as those three things persist, which they have been, even through this down cycle, the demand will be there.
With the potential for AI to make things even more successful in terms of the discovery phase, I mean, it's the one largest impediment to research funding coming into the sector, is the odds of failure are relatively high, and we feel like AI is something that could dramatically improve the odds of success. So we see upside from that for sure. Obviously, the biggest concern has been supply. No real estate sector is immune from new supply, and life science is one of the best segments in all of real estate for the last 10 years, and it drew a lot of interest for obvious reasons, especially as other segments of real estate had their challenges.
And what we've been telling investors for the last two years is, one, we positioned our portfolio defensively in that we haven't started a new development in the last two years, so we don't have a lot of unleased development. We also don't have a whole lot of near-term lease maturities in 2023, 2024, or 2025. So even though the market backdrop is less favorable, we don't have a whole lot of maturities that we're trying to address during that window, and I think that's proven to be a good decision. And then the last thing we've told investors that has proven to be true, and we've heard BioMed and ARE say the same thing, and we agree with it. Talk to third-party brokers, they'll tell you the same thing, is that each, each real estate sector functions a little bit differently in terms of what creates a competitive advantage.
In life science, local scale and relationships are a massive competitive advantage. Why is that? Well, 75% of our leases are typically signed with existing tenants. ARE would probably say the same thing. Our pipeline today is 1.6 million sq ft. It's about 3x what it was a year ago, and it's a pretty big increase even from six months ago, and 75% of that is existing tenants. If we were a new entrant with no relationships and no existing footprint, you could cut our pipeline by 75%. That's a very significant competitive advantage.
Whether it's through the relationship or an in-place lease, that gives us a lot more bargaining power to attract tenants who are looking to take space, and we think that any downturn is going to create winners and losers, and we think that that competitive advantage of scale and relationships will allow us to emerge as one of the winners here.
What is the typical lag time between capital formation via IPOs or VC funding, you know, the lag time to then have these companies look to lease space?
Yeah, I mean, our best guess is it's probably, you know, two quarters out, so call it six months, is a little bit of a lag time. And if you think about the pipeline, Scott just talked about it, at 1.6 million sq ft, you know, capital raising improved in 2023. It was pretty low in the first half, but it definitely improved in the second half, and we saw that with our, you know, internal pipeline growing. It probably doubled in size, and it's grown even since then. And, you know, year to date, secondary equity offerings are pretty significant. I think it's north of $12 billion. I think I saw this morning there were 4 or 5 additional capital raises by biotech tenants just yesterday as well. So that number is growing at a pretty big clip.
You know, as we think about the correlation to that and tenant demand, we certainly see that as benefiting tenant demand as the year progresses, and it's certainly benefited our pipeline already.
Maybe just switching to markets. Even within core biotech markets, presence in the strongest submarkets matters. I think about, you know, Cambridge and Boston or Torrey Pines or Sorrento Mesa in San Diego. With the supply picture where it is, and as you mentioned, Brinker, the kind of increase in newer entrants that we've seen over the past couple of years... How is Healthpeak's life science platform poised to differentiate itself?
Yeah, well, beyond the existing tenant base that I mentioned earlier, I think it's the scale and at different price points. So we can cater to 100,000+ foot users who want Class A space in new development, and we can cater to a 10,000 foot user who wants the lowest price point possible. Our focus has been more on being located in the core submarkets. You can take our entire life science portfolio, and 90+% of it is in 5 core submarkets: South San Francisco, Cambridge, Lexington, Sorrento Mesa, Torrey Pines. It's virtually our entire portfolio is in those 5 submarkets, where we're the number one or number two market share landlord in those areas, and that's more how we've built our business.
Some markets where tenants want to be, there's a critical mass of activity, and then a platform or a portfolio that allows us to cater to a broad range of tenants at multiple price points, multiple suite sizes. That's proven to be most effective because a Series A company only wants 10 or 20,000 sq ft. But guess what? If they're successful, then they need 50 or 100, and to be able to accommodate that tenant is critical to success in the business, and that's how we've built our portfolio, as opposed to one beautiful, brand-new building in a random location. It's just a totally different dynamic when you're competing for a tenant.
We had a question come in from live QA on the recent J&J news. Can you add any additional color on the J&J vacate at your San Francisco campus and expectations for, you know, rents and leasing at that property?
Yeah, I mean, the rents are roughly at market. It's at our Shore campus, which is a Class A, 600,000 sq ft campus. There's no downside in that scenario. There's only upside for us. I mean, they had eight years left on their lease. Sometimes big pharma space has a mix of office. This is high-end lab. They were doing a very specific R&D program, so for company-specific reasons, they've chosen to pull the plug on that program. Which, you know, it's not great in terms of sentiment, but in terms of economic impact, there is none. They, the default is they pay us rent for the next eight years, and the only alternative other than that, that I just described, is even better for us.
They write us a check that's too big to ignore, and we go try to re-lease the space on top of it. So no economic downside, company-specific reason for pulling out in its purpose-built Class A lab space. It is not office.
To that end, while you know you said big pharma is well-capitalized from a credit perspective, is there any update to you know a potential tenant watch list, as it might you know regard those small and private biotech firms? I think about Sorrento Therapeutics last year as an example.
Yeah, I mean, the tenant watch list continues to improve is the bottom line. There's still a handful of tenants that we watch. It's a very robust program that we have, qualitatively and quantitatively, to monitor every tenant in the portfolio. Obviously, there's always gonna be some that we have to keep a close eye on, but as a general statement, tenant credit is dramatically better than it was in the past. Part of that is capital raising in the public and private markets, and part of it is M&A and partnerships. And if you think about the drug discovery process in the U.S. today, big pharma ends up selling the drugs, but the actual drug discovery rarely takes place inside of big pharma. It's more than almost two-thirds of their revenue today comes from drugs that were developed by smaller biotech companies.
So that process of where the drug discovery takes place versus how it gets sold and marketed continues to accelerate, and that's the... Those are the types of tenants that we cater to.
From a leasing perspective, in terms of life science, how have you seen concessions, whether it be TI dollars or free rent, been trending as of recent, and when would you expect them to stabilize?
Yeah, Griff, I would say that, you know, we feel like they're starting to stabilize. Enough new supply has come onto the market, and I think the, you know, existing, you know, under-construction projects are gonna hit the market pretty soon, that, you know, as we think about rental rates, we think that that number has stabilized. I mean, a couple years ago, we would probably be at a 25%-30%, you know, plus rent mark-to-market. We've been telling everybody we're in more of that, you know, 5%-10% rent mark-to-market. So rents are certainly not, you know, declining. We don't see from this point, and we have pretty good indications on that, given our, you know, pipeline right now. I'd say TIs went up the last couple of years.
You know, the new phenomenon is, like, tenants just don't want to come out of pocket a lot of capital, right? They want to preserve as much capital as possible. So I'd say that your typical first-gen TI that used to be $150 a foot is probably $200-$250 a foot, but we're getting good rental rates for that. So I would say that, you know, on both those perspectives, we feel like, you know, the net effectives have stabilized at this point and have a little bit of upside going forward. And the other, you know, part to that, too, is, look, our portfolio, we do have, you know, pockets of vacancy, but our operating portfolio is 96%-97%, you know, leased at this point in time.
So tenants that wanna be within that operating portfolio are gonna have to pay up for that, right? That's a little bit different than, you know, some of the other portfolios out there, but we feel like the trends are working better within our portfolio than, you know, other companies out there.
And then maybe just on same-store expectations for life science-
Yeah.
For 2024. You know, they came in, I think, a bit lower relative to where you were in 2023. Can you maybe give some color on what's driving that delta, and is there any way you think you can beat it to the upside?
... Yeah, I mean, look, I thought 1.5%-3% was actually pretty good. You know, and there are some idiosyncratic things that impact that year to year. I mean, you're really anchored by your escalators. Your escalators typically are in the low 3% across, you know, our portfolio. Occupancy, you know, we're expecting it's declining a little bit, about 100 basis points, so that's a drag down. And then, you know, free rent, free rent sometimes helps, sometimes it hurts your same-store growth. I'd say this year it was a little bit of a headwind, and that's really what's driving us to that 1.5%-3%. Now, we do have some conservatism that we set in that number every year.
We've been very consistent saying that we include a little bit of conservatism when we set guidance at the beginning of the year. So you didn't ask, can we outperform the 1.5%-3%? I mean, we'd certainly like to outperform, more to come as we report earnings throughout the year. But that's really what the initial 1.5%-3% was, which frankly, I thought was, quite a good number, given market expectations.
Maybe just touching on development and redevelopment-ish initiatives. You know, it seems like new ground-up development might not pencil in today's environment, but, you know, it seems like redevelopment is driving incremental yield and upside. Kind of, how are you thinking about that in the context of your current portfolio, and where could we see redevelopment grow as a percentage of external growth?
Yeah. So in the last six months alone, we've entitled about 5 million sq ft of our land bank in two of the best submarkets in the country, in West Cambridge and South San Francisco. So we wouldn't start those today, just given supply, demand, fundamentals, and cost of capital. But at some point, those would be a huge asset and growth engine for the company. So behind the scenes, like, doing the work to prepare ourselves for that opportunity, like, really strong success in those two submarkets that are hard to build in. We have strong relationships in each. And then on redevelopment, there's the three big campuses that I mentioned earlier in life science. It's a big part of that $80 million of upside. It's temporary downtime. A lot of that earnings was in 2023.
The leases expired, the buildings need to be brought back to current market standards, and we'll recapture that NOI. Is there anything beyond that? Yeah, we've had an active redevelopment program across our business for a decade plus, including outpatient medical, as buildings age and we get a really attractive return on cost. And importantly, we do that all with retained earnings. Given our payout ratio below 80%, we can fund 100% of our CapEx, including all those redevelopments, with operating cash flow.
We have a question from the audience.
Yeah, just wanted to go back to the life science portfolio. Wondering what your current utilization is in the life science portfolio, and how do you measure that? And then, what are you seeing in terms of renewals, in terms of people taking space or, you know, relative to where they stood before? And I guess part of that would be, what's your mix of office versus lab space in the...?
A lot of questions there.
Yes.
I'll try to remember everything. The mix of office and lab, I mean, the traditional build-out is roughly 50% lab versus non-technical space. That really hasn't changed in the last decade. We've signed 5 million sq ft of leases in the last 4 years, and it's roughly the same build-out that it always has been. So that, we haven't really seen any change there. In terms of utilization, it's more company specific. Now, I don't think anybody's coming to the office 5 days a week anymore, although Pete and I do. But for the most part, that's not happening in corporate America. But the buildings are still utilized, given that the science is why they leased the space in the first place. So any situation where the campus isn't being utilized is company specific, where they just don't need the space, period.
It's not that they're downsizing the amount that they need. We're making really strong headway on our early renewals. So when I talked about a 1.6 million sq ft pipeline today, a material part of that is discussions with tenants about early renewals, whether it's 2024 or 2025 or thereafter. So yeah, we're really happy with the trend in tenants showing interest. Given capital raising environment, I think they'll now have more confidence to actually make the decision and sign the lease.
I appreciate the comment on, you know, company-specific utilization, but I'm just wondering, do you guys measure that in your portfolio?
Yeah.
Turnstile data, some other way?
Yeah, I mean, we have the same type of, tracking in terms of, mobile phone utilization, and it continues to improve. It's obviously lower on Mondays and Fridays than it would be during the week, but it's trending in the right direction. In terms of energy utilization, it's similar, if not higher. A lot of our campuses have amenities in terms of gyms and, food and beverage, and those revenues are at or above, levels from 2019. So, various metrics that we look at to track it, and, it's certainly either back to 2019 levels or trending in the right direction.
Thanks.
Maybe, in that same line of questioning, is there any worry about a work-from-home hit on some of your medical office properties, just given that there's probably some space that's used for administrative or back office needs?
Yeah, very little administrative space. We tour our real estate. I've never seen the parking lots busier. Most of us have a hard time getting an appointment with a physician, so it's the opposite problem. You know, our parking lots are packed. I don't see any impact from work from home. The telehealth was viewed as a potential threat in 2020. It's leveled off, and now it's just complementary. It brings more people into the system, it makes the physicians more important. It certainly hasn't reduced demand for space. We've only seen that accelerate. So no, we don't have any concern around that.
Yeah, the other thing I would add to that is we did add a slide in our latest investor deck around absorption's been going up within outpatient medical, and new development starts are coming way down as the financing market's difficult for, you know, some of the private developers out there to source to be able to do new development starts. That if you think about the net impact of that, the last couple years, occupancy is up over 100 basis points. You compare that to traditional office, and it's incomparable, right? We didn't put a slide in our deck on that, but there's certainly slides out there for what's happening with CBD office occupancy rates, and the exact opposite's happening with outpatient medical.
Maybe we can just finish up with your CCRC platform. What are you seeing from, you know, a labor perspective in terms of availability of labor or wage inflation? And, and do you expect strong fundamentals to continue in 2024?
Yeah, the businesses continue to perform. We had 15% growth in 2023. A bit lower in 2024, most likely, but still very positive. Most of the labor upside has been recaptured. You know, the contract labor is largely out of the portfolio, but the downside is part of getting rid of contract labor is just paying people more, so there's just a higher baseline rate of growth. Most of our CCRCs are here in Florida, actually, so enormous barriers to entry and strong demand. But labor is a challenge, so even this year, we still expect labor to be up in the 4% range. So lower than the last couple of years, but certainly higher than the historical growth rate. But it's performing well.
It's a good portfolio, no new supply, good operator in LCS, who's been an industry leader in that business for five decades, and a really high-quality internal team managing it. So, it's performing fine. If there was ever a time that we could recycle out of it, without being dilutive, it's something we'd consider just because it doesn't have overlap with our two core businesses. But we're in no rush because it's performing really well, and we've got a good team.
Great. Well, if there are no other investor questions, I'm gonna turn it over to Avery to do the rapid fire.
What is the best real estate decision for Healthpeak today? Buy, sell, develop, redevelop, or pause?
Yeah. Well, to sell, buy back stock, selective redevelopment, and even more selective development.
What will same-store NOI growth be for outpatient medical and life science overall, in 2025, not Healthpeak, overall?
I think a bit stronger than this year.
Care to put any numbers behind that or just stronger?
3, 4+ %.
Thanks. Last one, will there be more, fewer, or the same number of publicly traded healthcare REITs one year from now?
Yeah, I'll say the same.
Thank you very much, Healthpeak team.