Healthpeak Properties, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights:

• Merger: Closed on March 1st, year one synergies tracking to $50M (25% above initial forecast), G&A 25% more efficient, balance sheet strengthened.
• Lab leasing: Since July 1, signed over 700,000 sq. ft. of leases, 10% cash re-leasing spreads in Q3, strong activity in South San Francisco.
• Outpatient medical: Favorable industry fundamentals, capturing record re-leasing spreads, routine 3% rent escalators on new leases.
• Capital allocation: Focus on small dispositions, under-levered balance sheet, considering structured investments in life sciences and outpatient development projects.

Segment Performance:

• Lab: Occupancy increased 30 basis points sequentially to 95.9%. Cash rent mark-to-market was 10%, tenant retention 83%, same-store growth 2.8% in Q3, YTD same-store growth 3.1%.
• Outpatient medical: Cash rent mark-to-market was 10% (strongest in 60 quarters), tenant retention 89%, same-store growth 3.4% in Q3, YTD same-store growth 3.3%.
• CCRCs: Same-store growth 14.2% in Q3, YTD same-store growth approximately 20%.

Guidance:

• Revised FFO as adjusted guidance to $1.79 - $1.81 per share, AFFO to $1.56 - $1.58 per share.
• Tightened same-store guidance to 3.5% - 4.5%.
• Trend to $50M of merger synergies in 2024.
• Increased midpoint of FFO, AFFO, and same-store guidance in 2024.

Risks:

• Market conditions could impact development and leasing of new supply.
• Potential challenges in fully leasing up buildings with long lease-up times.
• Dynamics in the market, such as varying demand and supply conditions affecting leasing and occupancy.

Q: Nice to see the leasing getting done at Gateway, Vantage, Portside. Can you quantify a couple things?

A: Pete Scott responded that total square footage of new lease deals at those locations is ~340,000 sq. ft., existing tenant footprint ~100,000 sq. ft., and ~$30M of NOI upside captured with leases, with flow into numbers starting in 2025.

Q: Broader lab market, talk about funding and leasing demand trend.

A: Scott Bohn said good funding, IPO market improving, VC fundraising record, Pharma M&A driving tenant demand.

Q: Structured investments for capital allocation.

A: Scott Brinker said structured investments would buy time to lease up buildings, accretive day one type, potential several hundred million dollars allocation.

Q: Merger synergies, new vs pull forward.

A: Scott Brinker said merger has been catalyst, majority upside from property level earnings, profit margins better than underwritten.

Q: Lab leasing trend, disruption from tenant relocations.

A: Pete Scott said nearly 40% of 2025 lease expirations under LOI or advanced discussions, tenants upsizing, limited near-term impact, good mark-to-market on re-letting.

Q: TI packages in lab leasing.

A: Peter Scott said average $85 a foot on new deals, sub $40 a foot on renewal deals, elevated TIs have leveled off.

Q: Merger synergies, what's not internalized.

A: Scott Brinker said internalization includes onsite property managers and accountants, leasing still uses third-party brokers for broad exposure.

Q: Development underway, ceiling for development.

A: Scott Brinker said threshold is 5% of total balance sheet, outpatient development different with lower risk, focus on outpatient for near-term.

Q: Portside lease, marketing and demand.

A: Peter Scott said Portside lease not marketed, tenant has been with them for years, demand skews small but larger deals emerging.

Q: MOBs, renewal and rent pushing.

A: Tom Klaritch said 3% - 4% rent mark-to-market, pushing 3.25%, 80% of leases in that range.

Q: Lab portfolio development pipeline, hurdles.

A: Scott Brinker said life science development economics tight, need cost of capital and rental rates to improve, but land bank is controlled.

Q: Lab market conditions, improvement.

A: Scott Brinker said market improving, supply down, fundraising up, Big Pharma redeploying profits into innovation.

Q: Lab portfolio redevelopment, magnitude.

A: Scott Brinker said ongoing assessment of redevelopment candidates, prioritizing, $100M aggregate benchmark.

Q: Outpatient medical development, pre-lease and yields.

A: Scott Brinker said everything 70%+ pre-leased, yields 7%+, pipeline attractive but depends on return thresholds.