Healthpeak Properties, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Thanks the entire team for operational excellence, including merger integration, internalization, leasing, and senior housing operations. Over the past three years, FFO per share grew by 12% and AFFO per share by 19%.
• Announced an increase to the dividend, to be paid monthly starting in April, with a conservative AFFO payout ratio. The merger with Physicians Realty closed less than a year ago and has been highly successful, accretive to earnings, balance sheet, and platform.
• In 2025, will continue to internalize property management across the portfolio, which is financially and strategically accretive. Sees opportunities in the life science sector due to overbuilding, lack of liquidity, and a vacuum in private credit, with a $75 million mortgage loan in Torrey Pines as an example.
• Outpatient medical business has sustainable internal and external growth driven by health system relationships, with a current pipeline of over $300 million of highly pre-leased and accretive development projects.
• CCRC portfolio has a strategy with less than 20% refundable entry fees, leading to record sales and net cash collection. Periodically received inbound interest from potential buyers but no compelling offers yet.
• Announced leadership changes and promotions, including Kelvin Moses promoted to EVP of Investments and Portfolio Management, Tracy Porter to EVP and General Counsel, and Mark Theine to lead the outpatient medical business.

Segment Performance

• Outpatient Medical: Year-over-year same store growth was 3.2%, well above the midpoint of the original outlook. Executed 6.2 million square feet of leases with a positive 7% rent mark-to-market on renewals. Ended the year at 92% occupancy and a tenant retention rate of 88%.
• Lab: Year-over-year same store growth was 5%, far exceeding the high end of the original outlook. Executed 2 million square feet of leases with a positive 11% rent mark-to-market on renewals, highlighted by a positive 30% rent mark-to-market in the fourth quarter.
• CCRCs: Year-over-year same store growth was 20.8%, smashing the original outlook driven by better than expected occupancy gains and entrance fees. Starting in the first quarter of 2025, AFFO will be reported on a supplemental basis inclusive of entrance fee cash collections.

Guidance

• Forecasts FFOs adjusted to range from $1.81 to $1.87 per share in 2025.
• Total same store growth expected to be 3% to 4%, with outpatient medical ranging from 2.5% to 3.5%, lab ranging from 3% to 4%, and CCRCs ranging from 4% to 8%.
• Includes $500 million of investments in the forecast, with a weighted average yield of 8% plus. Interest expense forecast to increase approximately $15 million or $0.02 a share. Capital spend forecast at $600 million, largely focused on development and redevelopment.
• Leasing up of marquee development and redevelopment projects has signed over 370,000 square feet, but four pennies of FFO from signed but not yet occupied leases excluded from 2025 guidance, with benefit to earnings beginning in late 2025.

Risks

• Market risks, including interest rate volatility and uncertainties in the life science sector.
• Life science sector faces challenges with new entrants and lenders feeling distress, creating a vacuum in private credit but also opportunities.
• Potential for actual results to differ materially from forward-looking statements due to various risks and uncertainties discussed in press releases and SEC filings.

Question and Answer

Q: Based on last quarter's comments on sitting on significant dry powder, how does this tie to acquisition guidance and capital deployment?

A: Pete Scott states they typically don't guide to investments within the pipeline but included $500 million as it's within the pipeline, with more dry powder available and a midyear time horizon associated with the guidance.

Q: How are M&A in the life science area impacting demand and clientele?

A: Scott Brinker notes M&A has been quiet in the last four years due to FTC approval challenges, but expects it to pick up, with potential positive impacts like tenant credit upgrade and capital recycling.

Q: On lab leasing, how is the pipeline shaping up and progress on lease up of development projects?

A: Scott Brinker says they had solid lab leasing in 2024, over 300,000 square feet under LOI, with over 50% of the $60 million cash upside signed, but much of the benefit to earnings delayed until late 2025.

Q: On merger synergies and internalizing management for assets, where are we in the process?

A: Scott Brinker mentions the merger added $0.05 to $0.07 of earnings in 2024, internalized almost 20 million square feet of real estate last year, plans to internalize another 8 million square feet in 2025, with run rate total synergies expected to be around $65 million.

Q: On CCRCs, are offers getting closer to being compelling?

A: Scott Brinker states there have been no recent conversations on CCRCs offers, and the expectation is to hold the portfolio for the foreseeable future.

Q: On structured Life Science investments, details on purchase options and mix of debt vs. preferred?

A: Scott Brinker says each investment is unique, with purchase options in some cases, and the opportunity set is significant, with a focus on core submarkets and risk-adjusted returns.

Q: On AFFO guide and its rationale, why the change in granularity?

A: Peter Scott explains it's a simpler story now, with the guide being cleaner, and the rationale for not including certain details was to simplify the presentation while still including key components like same store growth and investment impacts.

Q: On NIH funding and RFK impact, exposure and potential?

A: Scott Brinker notes NIH funding is up and the administration is positive for the business, with potential upside from deregulation and shorter drug approval timelines, and RFK's impact is seen as potentially positive with focus on key agency appointments.

Q: On lab leasing and pricing power, at what availability rates will pricing power return?

A: Peter Scott and Scott Bohn state they're starting to gain pricing power with their portfolio in the mid-to-high 80% occupied/leased, competing well with existing tenants and leveraging scale, with some projects having existing lease terms providing additional pricing power.

Q: On development and redevelopment, impact of delays and CapEx on unleased space?

A: Peter Scott and Scott Bohn explain delays in some development deals are related to tenant TI timing, with cash rents collected based on rent start, and CapEx for TIs varies by project, with expectations of 9% to 12% cash-on-cash returns and potential for higher returns on some projects.