Healthpeak Properties, Inc. — 2023 Q4

Yes. Nick, it's Pete here. Maybe I'll just start with AFFO. We did provide AFFO this year because of all the GAAP merger-related items, and we don't necessarily want to get mired into discussion on all of those on this call. But if you look at AFFO this year versus where we were last year, our outlook is effectively flat, but that does include the benefit of the synergies.

Good question, Nick. I'm not surprised that you're asking it. We did disclose that we've signed year-to-date about 175,000 square feet of leases and LOIs. The first week of January is quite slow. So that's probably a pretty good 4-week number. If you annualize that, it's still trending in a positive direction as you compare it to a year ago where leasing was. I'll turn it actually to Scott Bohn to give a little bit more color on the composition of those leases and LOIs.

Yes. Nick, this is Scott. On those LOIs, we're -- it's a multitude of deals. It's not just one large deal, really across all the markets. As we talked about over the past few quarters, the demand has really trended towards the kind of sub 30,000 square foot range, and that's where the bulk of those deals that are today. We're pretty happy with the economics that we are shaking out on those. When you look at mark-to-market on the portfolio, we were probably in the 20% range last year.

Juan, it's Scott. I mean, obviously, we're not happy with where the stock is trading. There's a pretty big disconnect between what the private market would value our assets at and what the public markets would. So we're certainly looking at all available opportunities to create value. So I would say, it's a pretty wide-ranging menu of things that we're considering. If it's core assets like we did in San Diego a couple of weeks ago, it would be more likely than not kind of a recap where we maintain an ownership stake.

Yes. Sure, Juan. I think from an FFO perspective, I would say that the cadence, there's probably not a huge amount of variability as you look out across the 4 quarters in the year. I will say that some of these larger leases that are commencing in the first quarter for lab, especially some of the ones we've been pretty vocal about like the Voyager deal out in Boston that we did that commenced at the beginning of this month or January, I should say, beginning of the year as well as the RevMed deal. I mean, they just came with 3 months of free rent, and we have the MGM deal that we just commenced as they took over one of the Amgen buildings that expired.

Yes. Greg, it's Pete. I can certainly start with that. And I'll hit on the biggest ones. Vantage, we actually delivered a portion of that late last year. And then the initial occupancy is for what's remaining, and we do have another lease with Astellas that's expected to start later this year. So that's really the reason why that got pushed back a little bit. It's because we delivered a portion of that.

No, it's good, Pete.

Yes. Griff, I'll take that. It's Scott. In October, we talked about $40 million of year 1 run rate synergies, and we've got a full $40 million in our 2024 guidance. So I would say, we are ahead of expectations in year 1. So hopefully, we can exceed that number as well. In terms of year 2, we'll see. The internalization so far is going well, 3 markets down, 6 more in the queue, so we're taking them one at a time just to make sure that it goes well, reduce execution risk.

Yes. I think, Rich, as you quoted 2 years, that's really more of a same-store figure. I would say from a lease-out perspective, as you pointed out, the 2 campuses. Sorrento, the scope of work is less significant on that than the scope of work on the port side project that we've rebranded. So I would say that we can finish the scope of work on Sorrento, and that's the Directors Place campus a lot quicker, and we'll actually finish the work on the portside campus.

Can I add something to that? From my seat, like our lab business, even 2 years ago, we're essentially at 98%, 99% occupancy, essentially nothing in redevelopment and a completely pre-leased development pipeline. From where we sit today, we've got some upside in occupancy on the operating portfolio. Scott and Mike are working on. We've got a pretty big redevelopment bucket that has a lot of NOI upside and then a fair amount of development that hasn't been leased yet.

Yes. I mean it's really been a 2% to 3% growth business for the last decade. We do see that accelerating. It's not going to 10%, but we do think it's going to improve for the forward 5 to 10 years versus the previous 5 to 10 years, just given supply demand, construction cost and therefore, our ability to push rents. So our guidance this year is at the very high end, actually well above the high end of any guidance we've given in that segment historically.

Yes. And I'll ask John and Tom to comment as well. They're both here today.

Yes. If you look at, Rich, the rents, I mean, we've seen -- what's actually benefited us is the new developments because the market rents that are coming in on those is typically 20% or so higher than what the existing rates are. So it gives us a little room to grow. And then if you look at our tenancy back 20 years ago, it was 25% hospital leases and 75% third-party physicians. Today, that number is 65% hospital. So you do have a little more ability to push the rents up when you're dealing with the institutions like that.

Yes. No, I agree with that, Tom. And I think we've seen 6 straight quarters of well above that in renewal spreads and then conditioning -- your comment about conditioning tenants, the options, as Tom said, historically was to go to a new building, but the rents now are 20% higher than the new building. So it's just -- it's much more, I guess, negotiating leverage. And if you're raising the rents 5% to 10%, that's better than the 20%, and that's the conditioning.

Yes. The seller financing, I mean, we actually did quite well off of providing that on our senior housing sales, which were 3, 4 years ago. So it's a business that we actually like if we provide the right LTV to the counterparty. With these loans, we've gotten repaid a lot over the last few years. I mean the balance was, I think, $600 million, $700 million. It was pretty high, down now to about $175 million. And our guidance for this year, call it, outlook, we had 0 to $100 million getting repaid. So $50 million at the midpoint, could be a little bit higher than that. And obviously, that's probably more front of the year weighted as well. I think our expectation is if it gets repaid, it will get repaid in the very near term, if not, it would get extended, which obviously, if it gets extended versus repaid, then there's an earnings benefit to that. But again, the expectation given where the LTVs of those are is that as the counterparty sell assets, we'd expect to get those loans repaid and probably more towards the front end of the year.

Yes. Wes, this is Scott. Scott Bohn I think from a demand perspective, we're in line with pre-COVID levels across all 3 portfolios. Boards are still cautious, as Pete mentioned, is taking new space and expansions and things like that. We are seeing some groups who have been on the sidelines are kind of -- have been floating around in the market, really kind of starting to dig in on space plans and getting real as they approach funding at some of the capital markets, both private and public open up. So I think that we're off to a strong start for the year. We like the way that the pipeline is shaping up.

Yes. Happy to take that, Jim. I mean, obviously, on the development side, we still have to finish out the Vantage project, which is pretty significant. We've also got some new HCA developments that are kicking off. I mean that's a great program for us, and we'd like to continue to recycle capital and keep that program going and the yields are starting to increase on that, which is great.

Yes, there's no new starts in lab in that forecast. There's a couple of new starts in outpatient medical. Some are from legacy Healthpeak, others from legacy DOC just commitments that were made in some cases, 2 years ago. Any new commitments, though on development, it's because the yields are attractive, 7%, 8%, highly pre-leased. So we continue to find those very attractive and would recycle capital so that we can go ahead and move forward with those.

Yes. Correct .

Yes, we're at 85% occupancy today. I would think we could get back into 90s. In that portfolio, it's performing well. We've got good assets, mostly in Florida, obviously, favorable supply/demand in that market for seniors, we've got a really good operating partner in LCS. We've got a really strong internal team overseeing it.

Yes, hard to say. We are getting the benefit of the internalization in the peak portfolio that we obviously would not have done absent the merger, so it comes hard to parse the 2 numbers. But I think we said historically, DOC has lower in-place escalators than Healthpeak, but that's converging over time as they sign new leases with, as John said, 3% or better escalators. So I'm guessing it'd be a little bit lower but not materially.

Yes. We did buy back some stock, albeit at a higher price 1 year, 1.5 years ago. And I would say that the response from the Street was pretty unenthusiastic to that. That said, we do put an authorization every quarter for stock issuance or buyback with our Board. And we're not at a level, I think, today, where we buy back stock, but certainly, it's something that we're paying attention to. We're certainly a long ways away from a level where we even consider issuing equity, which is why we're talking more about capital recycling.

Yes. Mike, it's Pete. I'll handle that. So obviously, our outlook is 1.5% to 3% positive. What are the positive drivers within that, I mean, obviously, you've got rent escalators, which tend to be on average in the low 3s. We've got some positive mark-to-market embedded in there on lease renewals that we do get done. And then as we've said, there's a little bit of internalization benefit as well. So I think if we just stop right there, we'd probably be 5% plus from a same-store growth perspective, Which actually would kind of mirror what's happened over the last 10 years. .

No, the fourth quarter number was an outlier. I mean there may be select spaces within the portfolio that would have a negative renewal rate mark-to-market, but that was an outlier. I think 10-year-old TIs, the tenant that wanted to stay in the space with credit -- investment-grade credit, no downtime, no TI. So I mean that was a unique situation. I wouldn't expect a lot of those. .

Yes. Well, we still see some occupancy growth in 2024. Rental rates will grow, but more in the mid-single digits as opposed to high single digits just given the fundamentals in that sector. Then obviously, we've had a huge benefit from contract labor coming down over the past 18 months. We're largely through that benefit. We have very little contract labor in the portfolio today. So you just lose a lot of that benefit in same store. So I mean, that's what's happening at the property level. And then obviously, our accounting for this asset class has an impact as well.

The answer is yes across the port. I mean there's a massive opportunity to help these big health systems grow their outpatient network. I might ask John to comment specifically.

Yes. Vikram, I think you're aware, we've been doing this with Northside in Atlanta, have a project that's actually about to top out and further opportunities on the Northside pretty routinely. Same thing at -- we both -- both organizations have a great relationship with on [indiscernible], and we continue to have development opportunities there as well to come, so standby. But those are just a couple of great examples and fantastic markets.

Yes, sure. On the mark-to-market, I think it's slightly lower in the very near term just with the Amgen leases rolling. It's kind of weighed down a little bit, those were relatively high rent that grew over that 20-year period that Pete mentioned. And then on the tenant demand side and leasing, we've talked about over the past several quarters, I mean, if you look across all 3 markets, the after demand probably somewhere between 60% to 75% of that is sub 30,000 square feet. So it's been really the strike zone for deals over the past 6 to 9 months.

It's more of the former. '23 and '24 were more modest because of Amgen and it starts to pick up a lot more materially in '25 and thereafter. But keeping in mind, Scott's bigger picture comment that it is down year-over-year from what we would have said a year ago just because of market fundamentals. But this should be the low point on the mark-to-market, and then we'll gather some momentum into '25 and beyond.

Yes. Austin, it's Pete. I keep hoping one of these days we'll open [indiscernible] and see 5 thumbs up that are green, but it wasn't this quarter. Maybe it will be next quarter.

We certainly do. Look, on the synergy -- what I would say on the $40 million, we said the vast majority of that is actually on G&A savings, and we would expect to achieve pretty much all of that at closing. Some of those G&A savings are difficult. We have to have conversations with employees on our side. DOC has to have those on their side. Those conversations have been had, never fun, but I'd expect the vast majority of that to hit right away. As we talked about on the balance, on the internalization, most of that really is the 3 markets that we've said we've internalized already.

I mean, it could be 0 if the market is tighter, it could be a couple of billion dollars if the market opens up. I mean, we'll see, John, we're having all sorts of discussions, but we have them. We've been saying that on a couple of quarters in a row of earnings call. So we'll just have to see how the market plays out. But there's a lot of active discussions across the portfolio today.

Yes. I don't really have a different answer than what I gave in active discussions across the portfolio. I mean it could be a very material number if the markets open up..

Yes. I think the other thing I would add, John, is obviously, we don't have any acquisitions dialed into our forecast as well. And then on top of that, we did actually bake in, and hopefully, this was something that everyone got from our prepared remarks is that we have baked in potential dilution from if we wanted to sell noncore assets the likely use of proceeds immediately would be to repay debt, right? And that's got a dilutive impact to it. That's not to say that we're going to look to further delever. We'd like to recycle that capital over time into our core business segments, but we have dialed in some flexibility within our forecast to allow us to recycle capital.

Yes. I mean it's with a top partner in HCA. One of them is in Dallas, where we've had tremendous success. We've got assets on that campus. It's bursting at the seams. We're obviously highly pre-leased -- signing long-term leases with no CapEx for the foreseeable future. So the cash flow returns are still quite attractive in our view, and we're selling assets to fund it at an accretive level. So I still find those to be an attractive use of capital for our shareholders, John.

Yes, I want to thank everybody for their interest. The team here is completely focused, hard at work on beating our earnings guidance again. I think we delivered really strong AFFO growth this year at more than 5%, we grew FFO more than 7% the year before that, and we expect to continue that. So in any of that, I appreciate you tuning in today, call with any questions. Thanks, everyone.