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Good morning, and welcome to the Healthpeak Properties, Inc. Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Welcome to Healthpeak's Second Quarter 2024 Financial Results Conference Call. Today's conference call will contain certain forward-looking statements. Although, we believe expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures to be discussed on this call. In an Exhibit of the 8-K we furnished with the SEC yesterday, we reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. These details are also available on our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker?

Okay. Thanks, Andrew. Good morning, everyone, and welcome to Healthpeak's second quarter earnings call. Joining me today for our prepared remarks is Pete Scott, our CFO and the senior team is available for Q&A. First, I'd like to congratulate our entire team on an incredible quarter. We executed on every one of our stated priorities, including merger integration, leasing, asset sales and accretive stock buybacks. Last evening, we increased our 2024 guidance for the second time this year, driven by out performance in leasing, same-store operations and stock buybacks. In addition, our conservative balance sheet and dividend payout ratio are competitive advantages that benefit future earnings growth. Merger integration continues to go exceptionally well, both financially and culturally, as we're meeting or exceeding every goal we set. For example, year one synergies are now tracking to be a bit higher than $45 million. More important, over the last several months, our newly combined team been focused on defining the core values of our desired culture. Those core values are now represented by the acronym, WE CARE. W for winning mindset, E for empower the team, C for collaborate and communicate, A for active integrity, R for respective relationship and E for excellence and execution. These are the core values we refer to each day in the office and hold each other accountable for. Our outstanding second quarter results are a reflection of those core values in action and the strong culture we are building together. One of my strategic goals has been to bring Healthpeak closer to its real estate and to become fully immersed in the underlying businesses of our tenants. The merger helped us accelerate that transformation. Today, 70% our people directly support real estate. Two years ago, that figure was less than 50%. And we're increasingly dialed into the health care ecosystem. This is critical because the health care sector is not a traditional real estate business. Investment outcomes are very much impacted by the underlying business taking place in our building, not just the attributes of the real estate itself. A thorough understanding of the operating and regulatory environment and close relationships with leading providers will drive superior investment and portfolio management decisions over time. Okay. I'd like to provide an update on our life science business. 2Q was by far our largest quarter of lease executions in several years. The attractive pipeline we've been talking about is now being converted into leases, as our tenants have gotten more comfortable in making real estate decisions. We signed 800,000 square feet of leases in the second quarter, 75% were renewals and 25% were new. The re-leasing spread was positive 6%, and, as has been the case for several years running, not a single tenant downsized upon renewal. In fact, several of the tenants took additional space. 84% of that leasing was done with existing tenants and the remaining 16% are new to the portfolio. On one hand, highlighting our competitive advantage from existing relationships, at the same time, adding new ones for future growth. Sponsorship is paramount to tenants and their brokers in this environment. Our credibility, portfolio quality, and strong balance sheet give us a competitive advantage. Our 2Q results and pipeline suggest we hit an inflection point well ahead of the sector at large. We expect 3Q to be a big leasing quarter as well. We signed an additional 180,000 square feet of leases in July, all of which were new with an average term of 10 years. And our pipeline remains strong, with 620,000 square feet under signed LOI, including at Vantage, Portside, and Directors Gateway. Moving to our outpatient medical business. We're driving strong performance through our platform, favorable industry fundamentals and our high-quality portfolio. Occupancy in outpatient portfolio was up 20 basis points in the quarter and re-leasing spreads were positive 4.7%. Operationally, we haven't skipped a beat with the merger and our increased scale allows us to take advantage of strong volume growth across the sector as underscored by HCA's exceptional second quarter results this week. Also, as announced yesterday, we're very pleased to strengthen our relationship with CommonSpirit for the next decade plus. We sold about 900,000 square feet of space leased to CommonSpirit in June and July as part of the sale transactions we announced yesterday. Our go-forward relationship represents 2 million square feet or approximately 3% of our total ABR, and is well diversified across more than 30 different cities, including Seattle, Houston, and Salt Lake City. We recently executed early renewals across the portfolio, which extends the blended maturity date to December of 2035. So, whilst have been three years and now improves to more than 11 years. The blended re-leasing spread is positive 13% and the annual rent escalator will increase to a fixed 3%. Note that the terms of the existing leases will remain in effect through the original maturity date, most which are in 2026, 2027, and 2028. We used our in-house leasing team to negotiate and execute the early renewal another example of the merger augmenting our platform capabilities. This was a win-win outcome and we're very pleased with the collaboration between Healthpeak and CommonSpirit. Okay. Moving to capital allocation. Yesterday, we announced $853 million of outpatient medical asset sales in five separate transactions at a 6.8% blended cap rate. These were non and less-core buildings in markets we're not looking to grow, such as North Dakota, Earl, Nebraska, and Upstate New York. The sales are accretive to our future growth profile and the cap rate on our remaining outpatient portfolio would certainly be inside the sales we announced yesterday. We included a comparative asset quality table in our earnings release that support those statements. The net proceeds create significant dry powder to drive future earnings growth. We bought that $88 million of stock since our last earnings call as we continue to believe the share price was undervalued in comparison to the intrinsic value of our real estate. Year-to-date, we repurchased $188 million of stock at a blended price of just under $18 per share, which equates to an implied cap rate in the high 7% range. To accretively fund these repurchases, we've sold $1.2 billion of assets year-to-date at a blended cap rate of 6.5%. Portfolio fine-tuning is usually dilutive, but we took advantage of the temporary dislocation in our stock price to strengthen our portfolio in a way that's actually accretive to earnings. And I'll close with external growth. Our deep health system relationships are driving compelling new development opportunities. The two projects we announced yesterday totaled $53 million and are 84% pre-leased with stabilized yields in the mid-7s. These projects offer compelling value. At a positive spread, we're recycling out of older, non and less-core assets into brand new buildings in core markets with leading health systems. We're currently underwriting an attractive pipeline of similar development projects with our health system partners. And now, Pete Scott will cover operating results, guidance and the balance sheet.

Thanks, Scott. We had a very strong second quarter. We reported FFO as adjusted of $0.45 per share, AFFO of $0.39 share and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance, starting with outpatient medical. Our results this quarter underscore the strength of the long-term demand drivers we are seeing. We reported same-store growth of 3.1%, a positive rent mark-to-market on the new leasing of 4.7% and a retention rate of 83%. Additionally, we are consistently achieving 3% fixed escalators on new leases, which should improve our earnings growth trajectory for years to come. Turning to lab. The strength of our portfolio, relationships and reputation are leading to outsized leasing demand and driving results that are exceeding expectations. We reported same-store growth of 3%, driven by 3% plus contractual rent escalators and a positive 6% rent mark-to-market. Occupancy did tick down a bit, but was largely the result of fully occupied Poway sale in San Diego that was completed earlier in the second quarter. Year-to-date, we have signed 1.1 million square feet of leases and have a robust leasing pipeline for the balance of the year. Finishing with CCRCs. We reported same-store growth of positive 2%, driven by 200 basis points of occupancy growth and strong rate growth of 7%. Shifting to the balance sheet. We ended the quarter with a net debt to EBITDA of 5.2 times and nearly $3 billion of liquidity. However, these metrics don't take into account the majority of our disposition, which closed in July. Pro forma, these dispositions, our net debt to EBITDA is approximately five times, we have nothing outstanding on our line of credit and we have a cash balance of $300 million. So we are sitting on significant dry powder to drive future earnings growth from acquisitions, redevelopments, developments or stock buybacks. On stock buybacks, our existing authorization was due to expire in August, and we filed a new two-year $500 million authorization. Finishing now with guidance. We are increasing our FFO as adjusted guidance range by $0.01 to $1.77 $1.81, and we are increasing our AFFO guidance range by $0.01 to $1.54 to $1.58. Our guidance increase is driven by three items. First, we increased same-store guidance by 25 basis points to 2.75% to 4.25%. Second, the significant early renewal leasing in lab and outpatient medical, including CommonSpirit, provided an immediate FFO benefit. Third, we accretively bought back an incremental $88 million worth of stock at an FFO yield near 10%. With that, operator, let's open the line for Q&A.

We will now begin the question-and-answer session [Operator Instructions] Our first question will come from the line of Josh Dennerlein, Bank of America. Please go ahead.

Hey, good morning, everyone. Thanks for the time. Just wanted to touch base on the CommonSpirit renewal here. Looks like you got 3% annual escalators going forward. I think it was 2.5% before. Just is that 50 bps improvement from the prior lease, is that kind of something we should expect across like the MOB space? I guess I'm just trying to think about like the future growth trajectory or internal growth trajectory of the MOB portfolio as you kind of resign leases?

Yes. I mean most of what we're signing now is with 3% escalators. When we announced the transaction with physicians, almost a year ago at this point, we talked about the fact that their in-place escalator was a little bit lower, just given the timing of when they struck leases. A lot of them were single tenant, their blended escalator was more in the kind of low to mid-2s. Healthpeak had moved its escalator in the outpatient business up into the high 2s already. But as we sign new leases, almost everything is at 3%. So we do see our blended in-place escalator today is at about 2.5%, 2.6% in the outpatient business. Over the next few years, it will slowly climb into the high 2s, if not 3%. So yes, that should be the new normal.

Okay. That's good color. And then I want to talk about the internalization of that outpatient medical segment. It looks like you added like two additional markets in July. Just kind of where are you in that process overall? And then any kind of ability to kind of add better synergies as we go forward?

Yes. I mean we started the year with $40 million of synergies. We're up above $45 million at this point because, in large part, the internalization has gone ahead of plan in terms of more markets than we anticipated sooner and a little bit better upside. So that's a big reason for the increase in merger synergies. But even more important to us as a leadership team is just the improvement in the platform and interaction that Healthpeak employees now have with our properties and with our health systems. I think longer term is an even bigger impact than the financial accretion. It's more than 100 people now on Healthpeak's payroll directly interacting with our team that are interacting with our tenants every day. It's just a -- I think it's a terrific change in terms of our platform capabilities. So we've got two more planned for the balance of this year, including here in Denver, which we're excited about. It's a super high-quality team that we're bringing on that's going to manage this really high-quality portfolio that we have in Denver. So we'll be at about 50% of our outpatient and lab business by year-end will be internally managed. And we've got, I don't know, 10 million to 12 million square feet next year that is not in process yet, but we should be able to execute in 2025.

Excellent. Thanks.

Our next question comes from the line of Nick Yulico with Scotiabank. Please go ahead.

Thanks. In terms of the lab leasing that got done and the pipeline activity, just hoping to understand a little bit more about how much is actually related to Gateway, Vantage and Portside, of what was leased in the second quarter in July versus the pipeline of activity still to close?

Yes. Hey, Nick, it's Pete. So the 620,000 square feet of LOIs, I would say that about half of that is associated with the three large projects you just mentioned, Vantage, Gateway as well Portside. And a couple of them are pretty large deals as well. Our hope is to convert all of those to leases this upcoming quarter. And as we do, we can provide more detail. I think the thing one I would add to it is the phasing in of the upside, that will happen over a couple of years. The lease is probably on average will commence middle of next year. So we'll get an immediate FFO benefit once a lease commences. And then beyond that, it's probably the year after that where you start to see a really big pickup in AFFO as cash rent starts getting paid. So I think that's probably the best way I can describe the LOI bucket and the upside opportunity. But we're trending in the right direction, and we feel really good about the foot traffic and all of those.

Okay. Great. And then if I'm doing some math on this, I mean, it seems like if you actually convert those leases you talked about in the pipeline, and then based on what you've already done, that you get to almost about 50% of that $60 million NOI upside number that that you've spoken about previously. Is correct?

Yes. I think directionally, Nick, that is correct. I would say, a lot of our lease deals that you've seen have been with existing tenants as well. And there may be a little bit of giveback space that we'll have to lease up. But I'd say just on the gross numbers you mentioned, yes, probably about half of that.

Okay. That's helpful. And then just last question, maybe more broadly in lab, is if you could talk about what types of tenant activity you are seeing on the new leasing side, if it's existing tenants expanding other tenants in the market where you're just capturing some market share? And then from an activity standpoint, how that shakes out between South San Francisco, San Diego or I think -- I imagine the bulk of the activity is?

Hey, Nick, it's Scott. I'll take that. I think our team is doing a fantastic job capturing market share. We've got the big footprint in all three of the core markets, but I really feel like we are capturing an outsized share of the market right now. So hats off to the team. And the footprint that we build, even when kind of the business was exploding in popularity for the last decade, we held true to our strategy, staying the core submarkets, campus model. And it's really paying off right now because having a great real estate platform and building quality is obviously a huge differentiator as well. And we like the fact that we have A+ buildings, we have B- buildings and everything in between. So that when I talk about having a pretty broad base of demand, it's in part because of that footprint. We can cater to all types of tenants, and that's a huge advantage. So we're working with credit tenants doing big deals, early renewals. We're working with Series A relative startups and everything in between. But for the most part, the leasing is tied to companies that have successful capital raises, whether it's private or public. In 2Q, it was primarily existing tenants. The pipeline is a combination and more weighted towards new leasing, which is obviously a great thing to see.

All right. Thanks, guys.

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

Hey. Good morning, everybody. Just curious what brought on the negotiations for the early renewal of CommonSpirit. And is that 13% mark-to-market net effect if any -- including any capital that you provided? Just kind of looking for some color on overall economics of that deal. Thanks.

Yeah. Hey, Austin, yeah, we could have waited, but I think we were able to strike a mutually beneficial outcome, and that's the reason that we went ahead and did the early renewal. There are some TIs, but it's pretty modest. We did an 8-plus year extension on average, and the TIs are roughly one year of rent, so pretty modest or at market. So we're happy with that that outcome. But more than anything, it was just -- it was a deal we thought was favorable to the company, and we were happy to move forward with it.

That's helpful. And then, Scott, you've spoken a lot about kind of the environment having an impact on how you approach capital allocation and disposition, share buybacks have been top priorities up until this point. But given where the stock is today, where interest rates are, is that still the top priority? Or are you rethinking your approach moving forward?

Well, I mean, stock buybacks are more of a tactical move. It turned out very favorably for the company. We were trading at a pretty big discount to the value of the real estate, where were to sell assets in match fund to accretively buy back stock. We were trading at a discount to consensus NAV and our internal NAV. So just the dynamics made that easy decision. The profitability from buying back stock today is lower. But we do have a fantastic balance sheet. I mean, we finished the quarter at 5.2 times. And if you account for the sale proceeds from Uniti transaction, we're down near 5 times leverage, which on a balance sheet our size is pretty substantial dry powder. So depending on what happens with the stock, we do have the authorization to keep buying it back. It's obviously a bit less attractive today, but we still feel like we're trading at a discount to the value of our assets. When I think about an implied 7-cap today, plus or minus, and we just sold, for us, relatively low-quality outpatient medical by our standards, at a cap rate below that. So I think that's telling in terms of where the stock is trading. But I don't expect that to continue. I mean, if we continue to grow earnings signed leases and put up excellent results like we just did. I mean, our expectation is that we're going to be trading at a premium and issuing stock and growing the company. We do have big outpatient medical opportunity. We announced $50 million of new development today with one of our important partners. Core market, core system, highly pre-leased, accretive, 7.5% stabilized yield, there's a fairly big pipeline of similar projects behind that, that we could execute on and certainly have the dry powder to do so.

So, I guess what would it take or what would you need to see before maybe some of the deep pipeline you've spoken a few years ago within the lab segment, for you to approach commencing construction on some of that? Thanks.

Yeah. So if you think about our operating portfolio in life science, we're around 95% leased. But our development -- redevelopment portfolio has a lot of opportunities. So when you include the vacancy or availability there, I mean, it's more like 1.5 million feet that we need to lease up first, and that's our priority. But if our team continues to sign leases at these big development redevelopment projects, we could consider activating our land bank. We just need to -- to get comfortable with the return on cost relative our cost of capital. But we're certainly moving closer to making decisions like that, but I wouldn't say that we're there yet, Austin.

That's really helpful. Thanks, Scott.

Our next question comes from the line of John Kolakowski [ph] with Wells Fargo. Please go ahead.

Hi. Thank you. First, I'd just like to start with a conversation we had with our biotech team recently, where they said there's been a push to bring back some work from CDMOs that have been done internationally to return state side. Have you heard or seen any of that?

John, it's Scott Bohn. Yes, we've seen some of that come through. I mean we don't have a lot of kind of biomanufacturing bases in the portfolio. We've got some small-scale manufacturing within some of our facilities, but not a lot of true CDMOs. A handful throughout the portfolio, we actually have a deal that we're working on in Boston is one, but we are seeing some of that come back to the state. A lot of that, though, does end up in markets like RTP versus some of the core markets?

Okay. Thank you. And then I don't know how much color you can give here. But just as far as your guidance is concerned, what does it imply for lab leasing for the rest of year or for lab handle and leasing for the rest of the year?

Yeah. Hey, John, it's Pete here, and welcome to the earnings call. I think this is your first one. I think just big picture, as we think about all three of our segments, lab, we think lab should continue to improve through the second half of this year. Certainly, leasing helps. But one of the things I mentioned at the beginning of the year was we did have some free rent on a couple of large leases that impacted the first half of year. As that burns off, we expect to see acceleration in the second half of the year, and we continue to expect that. Obviously, with getting a lot of leasing done our confidence level improves as well. I think on outpatient medical, we did say that we expected the second, third and fourth quarters to accelerate relative to the first quarter. We got a lot of questions on that. And as you saw, we were above 3% this quarter, and we continue to believe we'll be above 3% for the second half of the year. And then I know, we don't spend a lot of time on CCRCs, but we've had a pretty good first half of the year. Our expectation is not to hit 20% growth. I mean, that's going to normalize everything eventually normalize, and it will normalize on the CCRC side. But we still feel pretty, pretty confident about our full year growth expectations for that segment. In fact, we're doing a lot better than what our original expectations were. So I know you just asked about lab, but I figured I'd give you a more fulsome update.

I appreciate it. Thank you.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Capital Markets. Please go ahead.

Hi good morning. Congratulations on all the lab leasing. Just curious if you could spend a little time talking about the cost to get that done, TIs associated with that seem go up. So, just curious -- or hoping you could give us some color around new and renewal PIs in today's market.

Yes. I mean the renewal TIs were really low, especially given the length of term that we signed for those renewals. The new leasing, the TIs were up relative to last year, but I guess we have a different reference point. I would say they were exceptionally low last quarter, and this year, they were just a bit higher. I don't think they were outsized in any way. I mean, what, 20% to 25% of the rent is pretty modest. But each space is different. I mean that's the thing that's important to comment on. When you're looking quarter-to-quarter, it all comes down to what leases were signed, which buildings, how much work that space needed but we don't see the TIs being outsized in any way, especially considering the improvements that that were made to those buildings, should last for the next 10 to 20 years and the length of leases that we signed. So, yes, we would not characterize it as high TIs to generate the leasing volume, not at all.

Thanks for that context. And then just maybe a more topical question in the news today. Alphabet was moving one of its life science companies from South San Fran to Dallas, where you have an Alphabet company in the lab space in your top tenants. So, just curious if there's any conversations going there? And maybe you could comment on how much term is left with your Calico exposure?

Well, we got 10 years left with Calico, but I didn't see that news, but that would be a first. I mean despite what's happening in other sectors and industries moving out of higher-cost areas to lower-cost, lower-tax states, it just doesn't happen in life science, it's just the reverse. In fact, a lot of times, if a company has some promise, they need to move to one of the three core markets to find the talent, to hook up with the right venture capital firms, to have the infrastructure. What you just described, that's one in a million. The vast majority of our tenants are coming into South San Francisco, not out of it.

Thanks Scott.

Yes.

Our next question comes from the line of Michael Carroll with RBC Capital. Please go ahead.

Yes thanks. I just wanted to touch on your life science leasing pipeline. I know in the past, you've kind of tagged that around 2 million square feet. And obviously, you got a lot of leasing done in 2Q and so far in July. I know on the call, you continue to highlight that the pipeline is strong. Can you kind of quantify where the pipeline is today? And have you backfilled some new tenant interest given the space that you signed?

Yes. We continue to cycle through the pipeline. So, obviously, you don't just do a tour and sign at least the next day. I mean there's a process involved in terms of inquiry and tours and sign an LOI and then signing a lease. So, you have pretty good leading indicators, which is why we've been more positive on our pipeline. And sure enough this quarter, it's turned into reality. And I think the third quarter will be equally strong. But we continue to see good traffic in our buildings, so including the 600-plus square feet we have under LOI, 200,000 square feet of leases signed in July alone. That's awfully strong.

Okay. But then the overall volume of the pipeline doesn't stand at about 2 million square feet anymore since you signed about roughly 1 million square feet? And then just real quick, too, on the 180,000 square feet that you signed in July, I mean that was -- can we assume that was in the in-place portfolio, not the development projects?

That's correct. Although last night, we did sign a lease at one of our development projects. So yeah, that's always good, I guess. We thought we had the most up-to-date information, but we did sign, convert one of those LOIs to a lease last night at one of our development projects. So it's great progress.

Very good. Thank you.

Our next question comes from the line of Rich Anderson with Wedbush. Please go ahead.

Thanks. Good morning. So what do you think explains this behavioral switch on the life science space with tenants starting to think more constructively about doing deals? At NAREIT, you talked about some good signs from a capital raising standpoint in the biopharma sector, but then you have an Alumis IPO that was – looks like my own personal EKG right now? So, I'm just wondering where this positive mindset is coming from in your mind?

Yeah. Hey, Rich, it's Pete. One of the things that we have been talking a lot about is just capital raising, generally speaking. If you look at the first half of this year, and we're talking not about R&D capital spend by large cap pharma M&A. I mean, that's a separate bucket. But the bucket we tend to focus on a lot is on -- you mentioned the IPO market, the secondary equity offerings, pipe deals, venture capital raising. And when you look at the first half of this year, it was the strongest year dating all the way back to 2021, where at that point, we were in that virtuous cycle within the lab space. So that's certainly helping with regards to tenants looking to lease space. We have some correlation between that and our leasing pipeline increasing. On the Alumis IPO, I mean, that a great company. They are in our portfolio. Martin Babler, the CEO, was previously at Principia. We've had a long-term relationship with them. They grew from 10,000 feet to 50,000 square feet with us. And I know you like to point to the EKG on the IPO, but they have raised $500 million year-to-date, which is pretty darn strong. So we feel great about having them in our portfolio. And that's an example of a company as they raise capital, the demand for space has increased.

Okay. Good. And then second follow-up on the asset sales out of the outpatient medical, and maybe I should know this, but where is that coming from? Is that legacy dock or legacy doc? Sorry, confusing. Where -- is it the acquired portfolio or the legacy portfolio, let's put it that way?

Yeah, Rich, we did that on purpose so that we don't have those types of conversations. But it was a mix of portfolio, I'd say it was weighted towards legacy physicians, probably obviously given a lot of CommonSpirit was in that portfolio. But it was a mix.

Okay. Thanks.

Thanks.

Our next question comes from the line of Michael Griffin with Citi. Please go ahead.

Thanks. It's Mick Casper [ph] with Girffin. I just want to follow-up on the optionality with the cash and liquidity after the asset sales. You touched on the share buybacks earlier in development. But just from an acquisition standpoint, are you starting to see more interesting opportunities present themselves? And if so, kind of where are you seeing yields and IRRs today?

Yes. I mean the market is opening up. I would still say it's pretty slow. I mean volumes are way off their historical norms, but starting to pick up. There's still a lot of volatility in interest rates, which is a key driver of transaction volume, certainly in the private market. We were happy with the pricing that we got, high six cap for the asset quality that we sold. And I think if we were to acquire anything, it would be higher quality assets in our current stock price. Although improved is not yet where we would be out acquiring stabilized product, but we're getting closer. And certainly, if our cost of capital supported it, there'd be a significant pipeline just given the depth of the relationships that the key people here have across the health system environment. So that's obviously something that we think will happen in time. It's just a matter of when. In terms of life science, very little stabilized product is available. But there's certainly signs of distress. It seems like it always takes longer to play out than you might think. The vast majority is probably not interesting to us for the reason I mentioned, that we purposely did not go outside of our core market or do a bunch of conversions. But there's a handful that we're keeping a close eye on that would be very interesting to us, but there has not been capitulation to date. But remember, as I said, it always takes longer to play out than you think. So we now have the flexibility to pursue things like that when and if they become available.

Thanks. That's helpful. And then just on the asset sales with the seller financing. What was the rationale of doing seller financing? And what does the secured lending market look like today?

Yes, it's pretty simple, just certainty of execution. It's a transaction that the team has been working on for several months, if not a few quarters. And despite a lot of volatility, the buyer didn't retreat us on price and we can retreat them on the terms of the seller financing. We're comfortable with it. It's a very low LTV, relatively short-term. So there's clarity and certainty on getting the balance of the proceeds back over the next two to four years, if not sooner. But there really just isn't a financing market for something that large. So it was pretty simple. If we wanted to do a big execution on a sale, we really had no choice in a market like this, but to do the financing.

Thank you very much.

Yes.

Our next question comes from the line of Wes Golladay with Baird. Please go ahead.

Hey, good morning, everyone. Can you quantify how much you can grow the outpatient medical development pipeline over the next few years?

This is JT. There's a lot of development right now that we've disclosed in our pipeline under construction, and there's a lot of appetite by the health systems as they continue to transform more and more of their inpatient services to the outpatient setting, particularly in the stronger suburban demographics around those cities like Phoenix and Atlanta, two good examples. But it's – it could be substantial, $500 million to $1 billion over the next few years, is probably a pretty conservative guess.

All right. Thanks for that. And then you did call out the free rent to be aware of a potential move in earnings going forward. Is there any other moving parts to be aware of?

No, I think, Wes, it's when the lease commences, right? Because when you sign a new lease, it doesn't typically commence next day, right? It commences once you finish completion of the work. So I think that's kind of hurdle number one, to getting FFO recognition. And then hurdle number two is the free rent burn off to getting to AFFO recognition or cash NOI recognized. And I'd say on average, it's probably -- for every year of lease term, it's probably around a month of free rent on a new lease deal to the extent that we're pushing pretty darn hard for 7- to 10-year terms on our new lease deals. And as you saw on the table we disclosed, we're having success achieving that. .

I got that. Just maybe a clarification on the question, like -- there's no move-outs that you know of or anything in the portfolio that would cause anything that we need to model as we look into next year?

No. I think as Scott mentioned, on our operating portfolio, we're kind of in that mid-90s occupancy perspective and we tend to be able to feel like we can hold firm at that. Really the other one for us is leasing up the vacancy outside of the operating portfolio. And as we think about next year in lab, we have about 800,000 square feet of expirations. So a lot of that is back of the year weighted. And at this point, within our pipeline, I think we feel like close to half of that is under discussions at this point in time. So more to come. And we're just entering that 12-month period for exploration. So on the balance of it, we're starting to have conversations right now. But it's a pretty manageable number and within our pipeline, a lot of it is actually spoken for already.

Thanks for the time, everyone.

Yep.

Our next question comes from the line of Vikram Malhotra with Mizuho. Please go ahead.

Good morning. Thanks for taking the question. Just I guess, first on the life sciences side, could you just maybe help clarify on the LOIs, just so we know sort of for modeling, what percent roughly or what proportion is sort of existing tenants in your maybe core portfolio relocating just so we can -- we know sort of what's move in, move out and then versus new? And if you can maybe just expand upon your comments and talk about reaching that $60 million NOI. Like is that sort of -- should we expect that sort of a second half 2024? Or could some of this spill over into 2025?

Yeah. On the first question, I mean, more than half of the LOI pipeline is new, new leasing on currently vacant space. So there's a lot of upside in that pipeline. But just to clarify and reemphasize Pete's point, I mean, there's still a time lag between signing the lease and when the rent gets paid. But obviously, great progress on that. And Pete, do you want to take the second one?

Yeah. I think you said, second half 2024 and into 2025, maybe you meant second half 2025 and into 2026 -- excuse me, -- Vikram. Our thought on the phasing in of the full $60 million is that, it would take a couple of years to get to that stabilized $60 million of cash NOI. We still feel good about that. But that phasing in would start next year and would be spread out probably over a couple of years. Hard to get into more specifics, as we said, as these LOIs convert leases, we will provide certainly more information on it for modeling purposes. But I'd say, it's best guess today, spread out over a couple of years, starting kind of middle of next year.

No, that's great. A lot of good progress on the Life Science side. So maybe just to clarify, you mentioned accelerating growth on -- in MOBs, I think on the same-store portfolio in life science as well in the second half. And I just want to tie that back to sort of the guide on same-store, you moved it up by 25 bps. But just wondering if you can tie it to, if you're having accelerating growth, it would seem like there's perhaps more upside. So I'm wondering if there's something -- maybe the CCRCs or something else is pulling that back?

Yes. We do see deceleration of CCRCs in the second half of the year just because you're not going to continue at a 20%-plus clip. So if there's any deceleration, it's just within CCRCs. And we're seeing acceleration in the other two segments. I would say that year-to-date, we're right around 4.5%. The upside of our guidance is 4.25% from a same-store perspective. And if I were just to focus on FFO, I think year-to-date, we're right around $0.90. That annualizes to $1.80, right? So you're sort of trending towards the higher end of our guidance ranges. We still have two more quarters to go. So we're not going to take it all the way to max to the middle of the year. There is maybe a little bit of conservatism in that. But again, we feel great about what we've done year-to-date. Remember, we did raise our guidance $0.02 each in the first quarter, FFO and AFFO, and $0.01 each again this quarter and the second quarter. So we're off to a great start. We had a great quarter. And for trending to the high end, that's great.

Great. Congrats on the strong quarter. Thanks.

Our next question comes from the line of Jim Kammert with Evercore. Please go ahead.

Good morning. Thank you. Obviously, you've done a lot of portfolio curation to-date. But theoretically, how much more of the lab or OM portfolio would you sell if the price was right? To understand what's really sort of non-core remaining, if you will.

Yes. I mean, even the $850 million that we just did, I would characterize as mostly just opportunistic. They're perfectly fine assets. They were performing. We're matching them well. But they were, by our standards, relatively low quality. And to my point earlier, usually when you fine-tune the portfolio, it's dilutive. This environment just gave us a unique opportunity to fine-tune the portfolio in an accretive way and increase the growth profile of what's remaining. So how much of that is left side's pretty modest, but a lot of it depends on where we're trading. So I mean we could sell -- there's a lot of interest in our remaining assets, but hopefully, that's not the environment that we're in. I think we have a very high-quality portfolio across the three segments that should produce stable, strong growth at the high end of the peer group for years to come.

That's great. And then just a quick housekeeping. In an earlier question in response, you noted that you thought it's pretty likely that the buyer of the OM portfolio here in July, would -- you're assuming they have other existing proceeds? Or you just expect them to refinance kind of the next two years or so, and that's going to be your source of repayment?

Yes, refinance. I mean there's a maturity date on these loans that they will have to repay, refinance the loans by that date, if not sooner.

Got it. All right. Thank you.

Our next question comes from the line of Mike Mueller with JPMorgan. Please go ahead.

Yes. Hi. I know you quote renewal spreads for lab and outpatient leasing. But how similar or different would the lab spreads be if you included comparable new leasing spreads as well?

It just would be misleading. I mean, we could give you that information, but sometimes you're doing pretty significant TIs or changing the use of the buildings that I think it would be misleading. I don't think there'll be a material difference, but you have even more volatility quarter-to-quarter depending upon which space. Meaning somebody could be paying $5 in a 25-year-old space, and you put a bunch of money into it and it's almost brand new, and now they're paying $7. Well, is that really a 30% mark-to-market whatever the number is? It's kind of misleading. So, we choose to just go with re-leasing spread on renewals.

Got it. Okay. And then does it feel like the mid-single-digit renewal spread should be sticky in the back half of the year based on what you're seeing for expirations?

For the lab business. Yes, if anything -- yes, it should be. I mean our mark-to-market across the portfolio is in the high single-digits. That's not hard to do that number with precision. But that's where we're at, best estimate across the entire portfolio, just acknowledging that it bounces around quarter-to-quarter. But the 6% is good, but it's below the average throughout the portfolio.

Got it. Okay. Thank you.

Yes.

Our next question comes from the line of Michael Stroyeck with Green Street. Please go ahead.

Thanks. Good morning. I know you already touched on the rationale behind the seller financing. Were there any bids that didn't require seller financing? And if so, are you able to share where those cap rates were shaking out? I'm just trying to understand if seller financing may have ultimately impacted pricing on the deal? Or if it is a fairly clean comp, and it was just needed to get the deal done?

Yes, I mean we didn't shop the deal. This was a direct negotiations. So, there really isn't even an answer to that question. These are just the terms that were discussed from day one. There's not exactly a deep market of loans of this size in the outpatient medical business in recent years. So, yes, not a great comp.

Yes. The other thing just to add to that, not all the sales had seller financing. Obviously, smaller portfolios or smaller asset deals, you don't necessarily need financing to get those done. And I'd say the cap rates ranged pretty much on average in the high 6s on those as well relative to the high 6s we got on the portfolio we provided seller financing on. So, just to go back to what Scott said earlier, it was really more just about certainty of close on a portfolio that large. And we've had success providing seller financing on asset sales in the past. We did pretty large amount on our senior housing sales years ago, and we have very little left within that seller financing bucket. In fact, the vast, vast majority has been paid off and we feel confident the same thing will happen here.

Got it, that's helpful. And then maybe one just on the mark-to-market on renewals. I saw a nice step-up in the MOB portfolio. Are there any common themes across the type of tenants or assets where you are seeing stronger pricing power?

I think if you look at our tenancy, about 69% is the hospital. So, we don't see a lot of difference there. I mean it's basically where are we at in the market, how much demand is. A lot of times, what's interesting is if we've got a new MOB on a campus that helps drive rents a little higher. Most of the mark-to-market increases we saw this quarter were in Nashville. We do have a couple of new buildings in Nashville, so that's been driving things. But we had 13 leases that had anywhere from 11% to 32% mark-to-markets this quarter, and that drove the overall average up. Absent that, we'd probably be still at the upper range of about 3% to 4% number, but in the upper 3s.

Great. Thanks for the time.

You’re welcome

This concludes our question-and-answer session. I'd like to turn conference back over to Scott Brinker for any closing remarks. .

Yes. Thank you for joining today, everyone, and thanks again to our team for an incredible quarter. So enjoy the weekend. Take care.