Healthpeak Properties, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Technology Upgrade: Completed an enterprise-wide technology upgrade after over a year of planning and testing, improving data integration, productivity, and AI capabilities.
• Political and Regulatory Environment: Reconciliation bill reduced sector uncertainty; favorable changes to drug pricing for rare diseases and tax treatment for research and manufacturing. Proposed CMS rule on inpatient-only list is positive for outpatient business.
• Property Management Internalization: Strategic and financial success; internalized 2 million square feet in Boston and 1 million square feet in Texas. Employees now interact with tenants daily, removing bureaucracy and enhancing relationships.
• Segment Highlights:
  • Outpatient medical: Strong demand due to aging population and low new supply; closed $150 million development projects in Atlanta.
  • Lab R&D: Leading indicators turning positive; spec new supply near 0; regulatory changes promoting innovation.
  • CCRC: Record leasing, unique entry fee structure, 50% higher NOI than 2019.
• Financials: FFO as adjusted was $0.46 per share, AFFO was $0.44 per share, total portfolio same-store growth was 3.5%. Net debt to adjusted EBITDA was 5.2x, with nearly $2.3 billion of liquidity.

Segment Performance

• Outpatient Medical: Same-store growth, retention, and re-leasing spreads near record levels. Same-store cash NOI growth was 3.9%, with 85% tenant retention and a positive rent mark-to-market of 6%. Executed over 1 million square feet of leases in the quarter, with a strong leasing pipeline. It is the largest business segment.
• Lab R&D: Same-store growth was 1.5%, with a positive rent mark-to-market of 6% and 87% tenant retention. Occupancy declined by 150 basis points due to natural lease expirations and tenant departures following failed capital raises. Spec new supply is near 0.
• CCRC: Record leasing volumes last quarter. Net entry fee is 60% of the local median home value. The portfolio generates approximately $200 million of annual NOI, 50% higher than in 2019. Same-store growth was 8.6% driven by rate growth and higher entrance fee sales, with current occupancy at 86%.

Guidance

• Reaffirmed FFO as adjusted and same-store cash NOI expectations.
• CCRC portfolio on track to exceed the high end of its segment guidance due to strong market fundamentals.
• Outpatient medical portfolio on track to the high end of initial segment guidance supported by a robust leasing pipeline.
• Confident in the diversified portfolio delivering results within the same-store growth range despite challenges in the lab sector.

Risks

• Lab R&D: Occupancy decline due to tenant departures from failed capital raises; impact of capital market volatility on small-cap biotech tenants.
• Regulatory Uncertainty: Potential pressure from policies like most favored nation for drug pricing, though current regulatory changes are mostly positive.
• Seasonality: CCRC occupancy dip due to typical seasonality in the skilled nursing component.

Question and Answer

• Q: On Lab segment occupancy decline: A: Kelvin O. Moses stated occupancy decline broke down into about 1/3 from expirations, 1/3 from tenant migration, and 1/3 from tenants unable to raise capital.
• Q: Capital allocation: A: Scott M. Brinker said maintaining a strong balance sheet is priority #1; includes opportunistic asset sales, buybacks, and capitalizing on outpatient development opportunities.
• Q: Lab leading indicators: A: Scott M. Brinker mentioned supply coming offline, regulatory changes promoting innovation, and M&A deals recycling capital as positive leading indicators.
• Q: MOBs cap rates: A: Scott M. Brinker said most transactions for MOBs are in the 6%-7% range, with good quality assets.
• Q: AI impact: A: Kelvin O. Moses said early stages of deploying AI for efficiencies and decision-making, with potential revenue opportunities.
• Q: Tenant defaults in lab: A: Scott M. Brinker said defaults occur via bankruptcy or ABC process, with technology bought out of bankruptcy.
• Q: Lab submarket recovery: A: Scott R. Bohn said core submarkets like Bay Area, Boston, and San Diego expected to recover first.
• Q: CCRC occupancy slowdown: A: Scott M. Brinker said it was typical seasonality, with independent census up quarter-over-quarter.
• Q: Acquisition deployment: A: Scott M. Brinker said the thesis of waiting for better values is playing out, with the opportunity set increasing.