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Good morning. And welcome to the Healthpeak Properties, Inc.’s Third Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note 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 third quarter 2024 financial results conference call. Today’s conference call contains 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 uncertainty 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 these forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit to the 8-K we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance to Reg G. The exhibit is also available on our website at healthpeak.com. I will now turn the call over to our President and Chief Executive Officer, Scott Brinker.

Thanks, Andrew, and welcome to Healthpeak’s third quarter earnings call. Joining me today for prepared remarks is our CFO, Peter Scott, and the senior team is available for Q&A. Congrats to the entire Healthpeak team for another quarter of excellence in execution. Our high-quality portfolio and platform continue to drive earnings growth. Last evening, we increased guidance for the third time this year, driven by outperformance in leasing, same-store operations and merger synergies. We still see significant value and upside in our stock when we look at where our multiple sits versus the earnings growth we have produced and expect to continue producing. We’re also paying a 5%-plus dividend with a conservative payout ratio that leaves nearly $300 million of annual free cash flow to reinvest in the business. Let me provide some color on the four levers across our platform that should drive future earnings growth. First is the merger we closed on March 1st. Year one synergies are now tracking to be $50 million, which is 25% above our initial forecast and we have additional synergies to capture in the next year or two. Most of that outperformance is driven by internalization, which has proven to be a great move, both financially and strategically, as it’s brought us closer to our real estate, one of the strategic goals I communicated when I took this position two years ago. Because of the internalization, our 50 million square foot portfolio is increasingly being operated with the same process, procedure and technology, allowing us to better capitalize on our scale. Our G&A is now 25% more efficient as a result of the merger. Also, our balance sheet improved with the merger and has never been stronger. The second area of earnings growth is leasing momentum in our lab business. Since July 1, we’ve signed more than 700,000 square feet of leases, with positive 10% cash re-leasing spreads in the third quarter. That activity includes more than 300,000-feet of new leasing at our high-priority campuses, Vantage, Portside, and Director’s Gateway. South San Francisco continues to be our strongest market, with activity in a range of suite sizes and price points. We’re uniquely positioned to capture demand with our market-leading footprint and relationships. Just one example is the life science tenant who signed a lease at Portside last week. That same company has now grown with us four times since entering the portfolio six years ago, each time within walking distance, in the same sub-market and with a gradual improvement in building quality to the Class A space they will soon occupy. A couple broader comments on life science. We’re seeing gradual but clearly positive momentum on all the key metrics. Employment in the sector increased year over year and is up 4% in the past 18 months. There were seven IPOs in September and 2024 is on pace to be more than 50% above last year’s total. R&D spending from Big Pharma is on pace for another record year, as those companies have no choice but to continually search for innovative new products to backfill their patent expirations. Venture capital fundraising is on pace for an all-time high in 2024. Also, fundraising is significantly higher than cash deployment, meaning there’s a growing stockpile of capital to invest in a new company formation. One of our tenants in South San Francisco recently became the first $1 billion Series A capital raise in the sector. The co-founder was recently awarded the Nobel Prize in Chemistry, which is one of the few accomplishments more remarkable than a $1 billion Series A. The third area of earnings growth is our outpatient medical business. Industry fundamentals are favorable as demand exceeds supply. Our high quality portfolio is capturing record re-leasing spreads and we’re routinely moving the rent escalator up to 3% on new leases. Across the sector, demand is growing as health systems and consumers prioritize cost-effective and convenient outpatient care. Equally important, new supply will remain low because of the cost of new construction. And finally, a few comments on capital allocation, which is the fourth driver of future earnings growth. First, we like the portfolio we own today, so any future dispositions would be small numbers or opportunistic. Our balance sheet is currently under-levered, so we can fund our current pipeline with debt. While several companies went big when life science was at a peak, our last development start was three years ago in 2021 and that project is now 70% leased. With the market starting to recover and new starts going to nearly zero, we see a compelling window to begin allocating capital to life sciences again, primarily through structured investments that provide immediate accretion and more seniority in the capital stack. We’re also building a pipeline of new outpatient development projects, highly pre-leased to leading health systems with yields that are accretive to earnings. That opportunity set could easily get to a couple hundred million dollars per year. Most recently, we commenced a $37 million project that’s 100% pre-leased to HCA. In summary, we’ve grown earnings per share by mid-double digits the last three years and we have four levers to accelerate that growth moving forward. And now Pete Scott will cover operating results, guidance and the balance sheet.

Thanks, Scott. We had an excellent third quarter. We reported FFOs adjusted a $0.45 per share, AFFO of $0.41 per share, and total portfolio same-store growth of 4.1%. Let me briefly touch on segment performance. Starting with lab, our scale, portfolio quality, depth of tenant relationships, competitive positioning, and importantly, our best-in-class team are driving out performance. This is clearly evident in our leasing activity as we posted a second straight quarter of elevated lease execution and we have a robust pipeline to back this up. A few important highlights from the third quarter. Occupancy increased 30 basis points sequentially to 95.9%. The cash rent mark-to-market was 10%, which is at the high end of the 5% to 10% opportunity we see in our portfolio. Tenant retention was 83%, driven by an increase in early renewals across the portfolio. And same-store growth was 2.8%. Year-to-date, our same-store growth is 3.1%, above the high end of our expectations when we set guidance earlier in the year. Turning to outpatient medical, our results this quarter once again underscore the strength of the long-term demand drivers, combined with our unmatched and superior platform. We have executed over 5 million square feet of leases year-to-date and are on pace to have our strongest leasing year in the history of Healthpeak. A few important highlights from the third quarter. The cash rent mark-to-market was 10%, which is the strongest rent mark-to-market we have reported in 60 quarters. Tenant retention was 89%, above our historical average. And same-store growth was 3.4%. Year-to-date, our same-store growth is 3.3%, which is at the high end of expectations when we set guidance earlier in the year. Finishing with CCRCs. We reported another strong quarter with same-store growth of 14.2%. This was driven by occupancy and rate growth, coupled with moderating expense growth. Year-to-date, our same-store growth is approximately 20%, which is well ahead of the expectations we set earlier in the year. Shifting to the balance sheet, we ended the quarter with a net debt-to-EBITDA of 5.1 times and $3 billion of liquidity, with our revolver being completely undrawn. We are sitting on significant dry powder in the range of $500 million to $1 billion, which could fund accretive acquisitions. And our recurring CapEx needs are modest, with over 85% of our FFO translating to AFFO, which combined with an AFFO dividend payout ratio trending toward 75%, provides us with approximately $250 million to $300 million of retained earnings annually. Finishing now with guidance. We are revising upwards for the third time this year. We are increasing our FFO as adjusted guidance by $0.01 to $1.79 to $1.81. We are increasing our AFFO guidance by $0.01 to $1.56 to $1.58. Our guidance increase is primarily driven by two items. First, we increased and tightened same-store guidance by 50 basis points to 3.5% to 4.5%. Second, we are now trending to $50 million of merger synergies in 2024. We continue to execute with excellence, having increased the midpoint of our FFO and AFFO guidance by $0.04 each in 2024 and having increased the midpoint of our same-store guidance by 100 basis points. One last item to note. In advance of upcoming investor meetings, we plan to publish an investor presentation in early November. The focus of the presentation will be on our competitive positioning and key growth drivers of both labs and outpatient medical. The presentation will highlight the strong momentum we see as we finish 2024 and head into 2025. With that, Operator, let’s open the line for Q&A.

[Operator Instructions] Your first question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Thanks. Good morning. So, nice to see the leasing getting done at Gateway, Vantage, Portside. Can you just quantify a couple things there? First, as we think about the commencement of that NOI, I know you gave timing, but an average rent to and then also specifying the square footage of the existing tenant base associated with that in the portfolio and how we should think about that as some level of offset versus the new leasing.

Yeah. Hey, Nick. It’s Pete. I’ll take this one. When you aggregate all of the new lease deals at Portside, Vantage and Gateway, the total square footage is around 340,000 square feet. The existing tenant footprint that underlies that is about 100,000 square feet. So, we’re increasing by around 240,000 square feet, which is a lot of net absorption within the portfolio. And then as you asked your question around the lease commencements, we did add some commentary in the earnings release on it, but to give some specifics around that. Of the $60 million of NOI upside, we’ve now executed leases to capture a little more than $30 million of that $60 million. You won’t see all of that flow into our numbers in 2025. Probably about a third of that will hit in 2025 with a big chunk of the balance hitting in 2026 and then a little bit more in 2027. But certainly we’re trending in the right direction with regards to development earning and pretty pleased to get the leases done that we’ve gotten done.

Okay. Thanks for that. And just to be clear, that $30 million you talked about, is that including the negative offset for the existing square footage, which I’m assuming these tenants are going to be giving up or how should we think about that?

No. That doesn’t include the negative offset on that. But those leases will stay in place up until the commencements begin on that. So I was just speaking to the gross amount that we would expect to get, Nick.

Okay. Thanks. And then just second question is on the broader lab market. You are seeing, I think, some examples in your portfolio of funding, picking up, creating leasing demand. Perhaps if you could just talk a little bit more broadly about that trend and how you think it could impact leasing going forward here.

Hey, Nick. It’s Scott Bohn. I think we have seen some good funding. The IPO market’s been slow generally, but we have seen 2026 done this year, which is already more than 2023 in total. We just had a South San Francisco tenant go public today, Septerna, who had an outsized IPO at, I think, $288 million. So those will certainly turn into demand on the IPO side. The VC market, when you look at fundraising, has been a record year. And the fund deployment, which has lagged over the past 12 months, is continuing to pick up in new company formation. And then from Pharma, you’ve got a lot of M&A. They’re sitting there with $200 billion of revenues coming off patents between now and 2023 -- 2030, excuse me. So they’re continuing to funnel money into biotech, which will continue to increase the tenant demand and the leasing demand. So I think we’re happy with where the demand is today. I think it will continue to grow over the next few quarters.

Okay. Thanks, Scott.

Our next question comes from the line of Joshua Dennerlein with Bank of America. Your line is open.

Hey, guys. Scott, I wanted to explore your comments on, because you’re looking at structured investments as a way to kind of deploy capital. What kind of opportunities are you seeing and what is it that you like about this versus maybe just buy buildings outright?

Yeah. I mean, there may be situations where we do buy a building outright. At the end of the day, our balance sheet’s in great shape. We have all the key variables that tenants look to when they’re signing leases, whether it’s the footprint, the credibility, the balance sheet, the team. We have all those things. So I think we’re going to be as successful as anyone in getting buildings leased up. There are a lot of opportunities right now. All the new supply that’s not leasing up, while Scott and the team do a great job of leasing up what limited development we do have, not everyone is so fortunate. So we are seeing quite a bit of opportunities, some in our key submarkets where we’d like to grow and have a competitive advantage. Clearly, the sector is improving, but it’s not doing a hockey stick back up. So the structured investments, in our view, would buy us some time to completely lease up buildings. It’s not a six-month turnaround. This could take a couple of years and the structured investments would just buy us more time, as well as immediate accretion in a longer term growth pipeline. So each deal is a little bit different, but I think the majority would be structured accretive day one type investments. But I can’t tell you we’ll get home on any of them, but we are looking at a lot of things right now.

Interesting. And then it looks like you increased the synergies post-merger. Is that kind of new synergies you’re finding or maybe just a pull forward of stuff that would have maybe hit in 2025 or beyond?

Yeah. I mean, we’ll give the 2025 guidance in early February, but across the Board, the merger has been a catalyst in a number of ways, culturally and financially. Financially, I mean, there were some just traditional G&A synergies, but the vast majority of what we accomplished and still have to accomplish are at the property level and the internalization has really been a huge impact on the company and that’s most of the upside that we’ve seen in 2024. I’d say the profit margins are a little bit better than we had underwritten. The rollout’s been more aggressive and successful than we had anticipated. So that’s a big part of the $50 million and $10 million of improvement in 2024 is really property level earnings. So really a great outcome. A lot of hard work, but a great outcome.

Thanks, guys.

Next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Your line is open.

Great. Thanks. Good morning, everybody. Just going back to the lab theme, there are various puts and takes, I guess, in the leasing next year with some of the tenant relocations. But with that, it sounds like you’ve made a lot of progress as well on the 2025, addressing some of the 2025 lease expirations. So I’m just wondering if at a high level, you could provide or characterize kind of how the trend line and lab growth should look from here. Really just trying to get a sense if there’s any disruption from the tenant relocations or free rent that goes along with that?

Hey, Austin. It’s Pete here. And we almost got the highly coveted five green thumbs up. We’ve got four out of five, but we’ll keep trying to get that highly coveted one, one of these quarters. We did add an additional footnote disclosure on our 2025 lease expirations and that was really put in there to just help with forecasting. I think it tells actually a pretty good story. Nearly 40% of the expirations we have, which are quite small at a little less than 800,000 square feet are either under LOI or were in advanced discussions. We did note that there will be some redevelopment space and actually a big chunk of that is some of the giveback space as tenants have grown with us. So just to be clear, it’s not tenants vacating the portfolio, it’s tenants upsizing within the portfolio. And the other thing I just wanted to mention as I focus on that redev amount, I think three points that are really important. One, it’s leased for the majority of 2025, so there is a very, very limited near-term impact. I think the other thing to mention, the in-place rents are in the high 50s, so we actually see a pretty good mark-to-market on that when we do re-let those buildings. And then the third thing is it’s spread over multiple buildings, and primarily in South San Francisco and in Torrey Pines. So we actually feel pretty good about our prospects on re-leasing those. It’s multiple buildings, great locations. They’re just a little bit older and need some capital. But again, we wanted to put that information in there to help with forecasting.

No. That’s helpful. Call it a green-thumb answer. So I appreciate the detail there. And then maybe, Scott Brinker, going back to the structured investment opportunities. I mean, how much capital are you willing to allocate to these investments? What are the returns you’d target for these deals? And are you most focused on deals that you’d ultimately like to own or would you kind of cast a wider net on the structured investment side? Thanks.

Yeah. Yeah. Most, if not all, would have a pathway to ownership.

Okay.

I think a lot of the projects that got either built or converted would not be in our sweet spot that we would consider strategic and want to own long-term. We like the sub-markets that we’re in. There’s a few others that could be interesting, but having scale has proven to be a competitive advantage and we wouldn’t change that philosophy. In terms of quantum, I mean, Pete talked about $500 million and more of just balance sheet capacity. Given we’re under levered today, hopefully the stock continues to perform. I think it should. I think it will. That would obviously give us potential capacity to increase that amount. But we’ve got a big outpatient development pipeline as well that’s highly attractive, so we’ll have to balance that. But it could easily be several hundred million dollars, based on the things we’re looking at. The returns, they would all be accretive on day one, but obviously the risk profile would impact the rate of return as well. So I probably won’t say anything more than that at this point.

Yeah. Appreciate the detail. Thanks, everybody.

Next question comes from the line of Vikram Malhotra with Mizuho. Your line is open.

Hey. This is George Young [ph] from Vikram. Thank you for taking my question. Can you just walk us through how much of the leasing is from existing tenants and can you just talk about the type of tenants that are driving the demand?

Hey, George. It’s Scott Bohn. I can start with that one. On the 733,000 square feet in the quarter and subsequent, it was about 71% existing tenants in the portfolio. And from the new demand driver perspective, it really is a great cross-section of the life science industry. I mean, we’ve got everything from Series A tenants that we did deals with this quarter up through mega cap pharmaceutical companies. So it really runs the gamut across the spectrum there.

Yeah. And George, you just add to your first part of the question, I mean, from a square footage perspective, tenants are increasing if they had existing footprint within the portfolio over 3X.

Yeah.

So they’re growing over 3 times. So pretty significant. It’s not like we’re just trading the same amount of square footage for different square footage in other buildings. We are actually increasing net absorption pretty significantly in the portfolio.

Right. That’s helpful. And just a follow-up, can you just comment on the TI packages, and if you have seen any signs of moderation, or they continue to remain elevated?

Yeah. I would say, I mean, we’re still looking at turnkey TIs on a lot of these fields, on the new development or some of the major redevs. And we talked about that for several quarters now, in those TI packages in the $300 a foot range. But that’s not every deal. If you look at where we’ve been year-to-date on new deals, we’ve averaged right around $85 a foot on new deals and sub $40 a foot on renewal deals. So we have talked about those elevated TIs, which have leveled off, but those are not -- certainly not on every single deal.

Great. Thank you.

Next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Hi. Good morning. Just hoping to follow up a little bit on the merger synergies. It sounded like you’re outperforming on the margins in terms of internalizing some of the property management. So does that mean that there could be upside to the $60 million initially targeted in the longer term?

Yeah. Probably, Juan, it’s Scott. But like I said, we’ll give guidance in 2025. We’re still working through exactly which markets we internalize in 2025 and the timeline. So a lot of that is still under discussion. But we feel great about the numbers we put out in March, if not last October, versus what we’re actually executing.

Great. And then just on the CCRC, just curious on the latest thoughts about that business and wanting to own that longer term. It’s been a great performer year-to-date, performing initial expectations. You’re just curious if there’s any opportunities to sell out near-term or how you’re thinking about that?

Yeah. It’s really been a great performer for 15 years since we bought it. It’s outperformed rental senior housing in virtually every year. In those 15 years, steady growth. Even during the overbuilding that occurred in the kind of 2015 to 2020-time period, we had strong growth and that’s continued. So we have a really strong portfolio, great operating partner in LCS and a team that manages it very, very effectively. So it’s performed. It’s not exactly strategic to our overall platform. There aren’t a total a ton of synergies with life science and outpatient medical. And as we’ve said in the past, it’s a great business, but if public investors want access to senior housing, they have other great companies they can turn to. So if and when the price made sense, we would look to recycle capital out of it, but we’re also in no hurry. The dynamic today is the public market investors are a lot more excited about that segment than the private market. So that’s not a great time to sell. If that dynamic ever reversed, we would obviously consider transacting. But for right now, we’re fully focused on growing NOI, which we have been.

Thank you.

Our next question comes from the line of John Kilichowski with Wells Fargo. Your line is open.

All right. Thank you. Maybe I’ll just start on lab. Another quarter of acceleration here on the rent mark-to-market at 10% and then also occupancy picked up in the quarter after several quarters consecutively of decline. Just kind of curious about the cadence here moving forward. If you expect this to be a steady climb or if you see volatility over the next 12 months? And maybe part two of that, if you could just talk about like from a fully diluted occupancy perspective, where you think you are today and where you think that number can get over the next 12 months?

Yeah. Hey, John. It’s Pete. Maybe I’ll start with the last question first. Heading into this call, we were probably around 85% on a fully diluted basis from an occupancy perspective. With some of the new leasing we’ve gotten done, it’s probably ticked up a couple hundred basis points. And as we look at where we’d like to get in the next 12 months to 18 months, I mean, we don’t see any reason why we shouldn’t be able to get to a low 90% stabilized occupancy level. I know that’s a bit lower than where we were 100% a couple of years ago. I think 100% is probably going to take a really long time to get back to and I think we feel really comfortable with stabilized occupancies in the call it low 90% area and I think the pathway is there for us to achieve that. And then on the rent mark-to-market question, look, it’ll be lumpy sometimes. In fact, I think the fourth quarter and what we see in our pipeline could actually be the best rent mark to market quarter if we get a lot of those leases across the goal line that we will put up for 2024. That said, we’ve been pretty clear that it’s basically a 5% to 10% rent mark-to-market opportunity. It’s probably closer to 10% than it is to 5% based upon leases that we’re getting done and we see that as a pretty good number if you’re forecasting going forward.

Pete, I add one thing on the occupancy. There’s kind of the operating portfolio and then there’s the total portfolio. And we’ve just had a period of time here where we have some big campuses that needed to be redeveloped and some development projects that were in lease up. So although the operating portfolio is at 95%, our total portfolio is more like 85% and that’s obviously what drives earnings is the total portfolio. So we do see pretty significant upside from where we sit today and I think that’s what Pete’s referring to when you talk about what’s a go forward occupancy number. Hopefully that’s for the entire portfolio. In the actual like stabilized operating portfolio could be even higher than that in part because we have a lot of single tenant buildings. It’s just that the frictional vacancy is lower in life science than it would be in a business like outpatient medical.

Got it. Thank you. And then maybe just a similar question on outpatient medical. We put up a 10% number there as well, but it has the previously communicated CommonSpirit deal. Could you maybe parse that apart and give us what the rest of that or those leases were mark-to-market at and then kind of the expectation of how you think the next 12 months will look for that space?

Yeah. I can quickly take that. And then if others have some thoughts, they can jump in. But yeah, we were up 10%. That’s on the 3 million square feet of lease executions we got done last quarter. If you back out CommonSpirit, which was $2 million, up 13%-ish, we were probably up 3% to 4%, right, which is still pretty darn strong. And I think we’ve been averaging probably close to that 3% to 5%, maybe a little bit higher in some quarters. And I think that’s the trend that’s here to stay, right? Between that as well as the lease escalators no longer being 2.5% but really pushing those at 3%. As we’ve been saying, we think the fundamentals in outpatient medical are as strong as they’ve ever been. And we think we feel great about maintaining that occupancy in the 92%, 93% range. I don’t know, Tom Klaritch, anything you want to add to that?

I think you covered it. That’s exactly what we’re looking for…

Yeah.

Okay. Thank you.

Our next question comes from the line of Rich Anderson with Wedbush. Your line is open.

Hey. Thanks. Good morning, everybody. So on the internalizations, $50 million now, I assume that still means $25 million G&A. I think you said, Scott, that the incremental has been at the property level. But beyond that, and I know it also applies to your life science portfolio, would you say internalization, like what is not being internalized? I just want to sort of definitionally what you mean by internalization and what, if there’s anything, after all this is said and done, that there’s another leg up of synergies that isn’t a part of the quote-unquote internalization process today that might be in the future?

Yeah. Fair question, Rich. When we talk about internalization, we’re speaking to the onsite property manager, as well as in most cases, the property level accountants. So that’s the personnel that we’ve brought in house. And for the most part, it’s simply been a matter of taking the existing third-party team and bringing them onto the Healthpeak team. So the execution risk has been really low and we’ve had near 100% success rate bringing people over. So I think that’s one reason we’ve been able to roll it out faster than we anticipated without a whole lot of hiccups, but again, with a lot of hard work by our team. The leasing, there are times when we do internal leasing, particularly on big renewals, especially in the outpatient medical space. In life science, Scott and the team end up doing a lot of the negotiation, but it’s critical to have really strong broker relationships. So that’s not a function that we’ve quote-unquote internalized. We still utilize third-party brokers to help canvass the market and give us the broadest possible exposure for our portfolio. Does that help…

Yeah. That’s great…

… Rich.

Okay, so…

Okay.

… there’s no…

All right. Thanks.

… thought about bringing in the brokerage function internal, that that’s something you see you need long-term generally?

Not beyond what I mentioned with outpatient medical, we were doing some big renewals in-house.

Okay. Second question, looking at your disclosure, about $900 million of development underway, total cost. That’s call it 3.5%, 4% of your enterprise value. You mentioned you haven’t done a new development start since 2021 and sort of you’re sort of teasing us into thinking that perhaps that day is coming even, despite the structure finance and structure investments that you’re talking about for life science. What is your sort of ceiling in terms of size of development relative to the totality of the company, so that you don’t kind of get into the situation where you have the market goes against you and you’re having trouble financing it for some period of time? Like where are you comfortable allowing development get to in terms of the size of the organization? Thanks.

Yeah. Thanks, Rich. I mean, we do have a threshold that we talk about with the Board. It’s generally been in the 5% of total balance sheet, but I’d also point out that outpatient development is vastly different than life science development. They tend to be 18-month type projects. They’re oftentimes 70% or more pre-leased. So the risk profile there is obviously different. You don’t have the lease up risk. You just have the timing risk and what happens with cost of capital and cap rates in the interim 18 months. So that would have an impact as well as we think about our maximum exposure, but as well as our balance sheet. But today it’s never been stronger.

It used to be that your life science was the overwhelming part of the development pipeline. That’s not the case anymore. Do you think that there’ll be more of a balanced longer term despite what you’re saying about the risk profile of medical office development?

Yeah. That’s probably right. But for the next year or two, at least I would expect the development pipeline to be focused on the outpatient business where there’s some really exciting opportunities. I mean, best-in-class health systems, highly pre-released, beautiful new buildings, good yields. That’s really our emphasis for development in the near-term.

Okay. Great. Thanks.

Next question comes from the line of Michael Griffin with Citi Group. Your line is open.

Thanks. I wanted to go back to the Portside lease in South San Francisco and if you can give us a sense, if this deal was more broadly marketed to the brokerage community, did you mainly work on it in-house so you kind of had a leg up on the competition? And if you have a sense, maybe not just in South SF, but your other markets, if there have been larger space requirements that have been popping up?

Yeah. I think maybe I’ll start and Scott Bohn can jump in. It’s Pete. I mean, that deal was not marketed whatsoever. So I know Scott Bohn’s gotten a lot of communications and I’m sure there’s other landlords out there trying to figure out why they didn’t get a shot at that deal. That’s a tenant that’s been in the portfolio for quite some time and never spoke to another landlord about potentially leaving our portfolio and has actually told us that they will never do a deal with another landlord other than Healthpeak. So I think we feel pretty well positioned with that. And I think the other thing to just mention with your questions and I know we’ve said it a lot the last couple of quarters, but it’s a great example of our competitive advantage that we have in labs. We’re in the best markets and best submarkets. Our brand is exceptional. We have a best-in-class team led by, Scott Bohn, and our extensive tenant relationships are going to continue to fuel our leasing pipeline. So I appreciate you bringing that up because it’s actually a great point that I wanted to expand on. I don’t know, Scott, if there’s anything else you wanted to...

Yeah. Hey, Griff. On the demand side part of your question, we’ve talked for the past several quarters about kind of that barbell of demand with a lot of the demand leaning towards the smaller kind of sub-30,000-square-foot range and then some large deals out there. So I think it still probably skews towards the smaller deals, but we’ve started to see that, you call it the handle of the barbell, start to fill in there. Of the deals we did this past quarter, eight of them were greater than 35,000-square-feet. So it’s really good to see that, tenants of that size range coming back into the market and transacting on deals. And there are some larger requirements out in the market that have been out in the market. Those take a long time to actually transact and take place, but there are a few.

Great. Appreciate the color there. And then just maybe one on MOBs. It seemed like a strong quarter from a renewal standpoint, but just given the more favorable supply-demand backdrop we’ve seen this year, have you seen a greater ability to push rents either through cash-releasing spreads or maybe larger lease escalators? And are tenants willing to commit to longer-term leases, just given kind of the positive backdrop you’re seeing in the industry?

Yeah. This is Tom. I think when you look at it, we’ve been pretty successful over the past three or four years getting 3% escalators. You can see our average has jumped up to 2.7% overall. We actually have been pushing the past couple of quarters, 3.25%, so hopefully we can get more of those pushed in there and the mark-to-markets Pete mentioned, 3% to 5%. We’ve been absent the CommonSpirit lease. That’s kind of where we’ve been falling out all year. And you’ll tend to see leases, 80% of them are going to be in that 3% to 4% range and then you get an outlier group on either end of that that drives what the total is. But overall, the 3% to 4% or 5% is kind of where we’ve been running.

Great. That’s it for me. Thanks so much for the time.

Next question comes from the line of Michael Carroll with RBC Capital Markets. Your line is open.

Yeah. Thanks, Scott. I know DOC announced a few life science leadership changes and specifically, I think you added a Boston leader. I mean, should we think about DOC positioning itself to be more active on the investment side with these additions or is this just partly driven by winding down some of your external partnerships to kind of manage some of these assets?

It could be a combination of both. Part of it is rewarding really strong performance for some of our existing employees. Obviously, Scott Bohn has dramatically increased his seniority at the company, and Natalia has always been his number two and had tremendous success. So we have to reward our best internal people. There’s been a real emphasis on that. The new hire in Boston, we’re super excited about. She’s a long-time fixture in that marketplace, which is important just given the dynamics in Boston. We did buy out our primary joint venture partner in Boston earlier this year, so there was a need to step up. So that certainly had an impact, but we would like to grow in Boston. It’s a hugely important market. We’re up to roughly 3 million square feet, but we see a lot of opportunity and stress in that market in particular that could be interesting. So it’s all of those factors, Mike.

Okay. And then, because I know you provided some on the leasing that you completed this quarter and some of the new leasing and the developments kind of gave us some commencement times, and I understand Portside’s a little bit more elongated, but the new leases signed this quarter, I mean, is there a rough timeline of when you think that those leases could commence? Is it over the next few quarters or is it longer than that?

Yeah. On the renewals, I mean, a lot of those will just commence immediately once we sign them. And then obviously the Portside lease has a longer lease-up time associated with it because it’s a much larger lease. I’d say the balance of it is probably mid-2025. We’ve got to build out some TI space, and I think that the ones that are in San Diego and at Gateway will probably be more mid-ish 2025, and then the lease at Vantage will probably be kind of second half of 2025. That’s probably the best way to characterize the commencement for those.

Okay. Great. Thank you.

Yeah.

Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open.

Hi. Good morning. This is Derrick Metzler on for Ron. Yes. My question is about the lab portfolio development pipeline. Given positive leasing trends and these positive absorption trends, are you getting any closer, you think to putting the pipeline into play and are the hurdles to starting new projects now more about occupancy in your existing lease-up properties or more about cost of capital? And if there are not starts in the near future, then is there kind of other optionality or alternative uses that you would consider for that land bank? Thanks.

Yeah. Happy to take that one. We do control upon full entitlement almost 5 million square feet of potential life science development in core submarkets where we already have a presence and competitive advantage and a tenant base. So from that standpoint, we feel great about the land bank. The economics today, when you look at construction costs, which is up very dramatically in the past couple of years, including the term TTI, as well as where rents are relative to cost of capital, it’s going to be difficult for life science landlords to start anything new in the foreseeable future. The economics are just tight. That won’t last forever. That will obviously benefit our existing portfolio. So we feel good from that standpoint, but I don’t expect us to start new life science development in the foreseeable future. We would need costs to come down. They could be stabilized, but we need them to start coming down. Cost of capital improve and obviously rental rates start to move higher. All of those things are a combination that would allow us to consider activating the land bank. In the interim, we’re going through the entitlement process. In some cases doing construction drawings so that we’re ready to proceed because part of our business plan is obviously catering to growth tenants. And some prefer to have Class B space, but others prefer to have Class A space. You need to have both available so a development pipeline becomes an important part of our marketing pitch to all of our tenants, which is one reason we’re also looking at some of the distress in the marketplace and whether that could be an outlet at a much lower cost basis to provide a growth avenue for our tenants.

Yeah. That’s helpful. Appreciate the color. I think as a follow-up, just in terms of the lab market conditions, I mean, it’s easy for us to point to new supply as a potential headwind, but your portfolio has performed really well. I guess, in terms of competitive supply that you see and do you think conditions are improving over the next year or moving sideways? Are there markets that could be potentially more challenging over the next year?

I mean, the overall market is clearly improving. It might be a little bit slower than we’d like. I do think we’re capturing outsized market share, but the trajectory is obviously positive. I mean, the amount of supply that’s underway today is 50% of what it was a year ago and it will be down another 70%, 80% a year from now and then it will go to zero. I think that will last for quite a while, and clearly, the fundraising environment is starting to improve as interest rates decline. In particular, venture capital fund raising has never been stronger. They obviously didn’t raise that money to sit on it. They’re going to deploy that into new companies going forward. So we do feel good about the big picture market backdrop and what it should lead to for landlords like Healthpeak over the next three years to five years. An even bigger picture is just the way the industry works with Big Pharma. They have a seven-year to 10-year time horizon to make a profit on a drug. When that window expires, they have to replace it, right? They’re not shutting down. I don’t think BMS or J&J, they don’t have a business plan that entails just, let’s run out our patents and close up shop. I mean, they’re redeploying those profits into new innovative drugs and already today the majority of the revenue comes from drugs developed by biotechs and it feels like the momentum is only positive in terms of most of the innovation happening at the biotech level. So we remain incredibly confident about the longer-term outlooks for the industry. In the next three years to five years, we clearly see an improving backdrop.

That’s great. Helpful. Thanks for the questions.

Our next question comes from the line of Wes Golladay with Baird. Your line is open.

Hi, everyone. I just want to go back to the supply question. How much early -- how early will you lead the recovery? I imagine there’s a subset of landlords that have the money that can do the TIs. There’s other subset of the people that are delivering zero percent occupied projects and may just struggle. I’m just trying to get a sense of will you be leased up in a year or two, and then everyone else may take another three years or four years? What kind of landscape are we looking at?

Yeah. I mean, good question. I think in the core sub-market, stuff is going to lease up a heck of a lot faster and I think for those large incumbent landlords, you’re going to see us continue to gain market share. For those that developed in new sub-market and don’t have existing tenant relationships, they’re going to struggle. They are struggling. They will struggle. Hard for us to tell you how that product leases up or if it ever does lease up, but it’s non-competitive for us.

Okay. And then just regarding…

You already see projects that were planned. Hey, Wes, I was just going to say…

Go ahead, Scott.

… you’ve already seen projects that were planned for life science that have gone the other direction, either planned conversions that never went anywhere or potential developments that have stalled and are basically mothballed. So that’s happening as well as projects just sitting vacant, in some cases looking for capital. So the markets, it’s not a criticism. It’s just a reality that they tend to overshoot in both directions. They got overly excited about life science and there’s a period of time where they probably underappreciate the strength of the business. So we’re clearly in that phase and we’re trying to take advantage of it.

Okay. And then one final one. Maybe you can comment on how your tenant watch list is looking since the start of the year. Anything adding or maybe even falling off for both the outpatient medical and the lab?

Yeah. I think we’ve had within our portfolio tenants have raised $7 billion year-to-date, and as a result of that, you’ve seen our monitoring list come down to what we consider just normal course at this point in time and a lot of that is just the function of capital markets opening up, which is certainly leading to better credit for our tenants, as well as additional leasing.

Thanks for the time.

Next question comes from the line of John Pawlowski with Green Street. Your line is open.

Hey. Thanks for the time. I am curious if you can give us a sense about the typical amount of free rent concession on leases executed in the third quarter and then the batch of leases and all allies for fourth quarter work?

Yeah. As we’ve been saying, it’s probably for every year of lease term, it’s about a month of free rent and that’s actually consistent with what we’ve achieved with all of our leases, especially those that are these larger new developments. So it’s in line with what we’ve been saying to the street. And by the way, John, that hasn’t really changed all that much over the last year. It certainly has gone up from the house beyond days a couple of years ago, but it’s stabilized as well as rental rates stabilizing the last couple of really the last year.

Okay. Understood. And then maybe if you could just expand on that, Pete, I think maybe a quarter or two ago, the expectation was for lab and a wide growth to accelerate throughout the year and there was a sequential decline this quarter ostensibly because of free rent. So what, I guess, what has surprised the downside on the trajectory of occupancy or free rent? Just any more color on the sluggish rebound and NOI growth in the second half of this year would be helpful?

Yeah. On that in particular, that’s a good question. The free rent, as you point out, can have an impact from one quarter to another. I step back and I just look at the fact that at the beginning of the year, we thought we’d be at 1.5% to 3% same-store growth in lab, year-to-date we’re at 3.1%. So we’re actually exceeding the upside of what our original expectations are. So I’d say we, we feel like there’s been modest improvement. There is a lumpiness to that free rent that could have an impact one quarter to the next, but it is important to step back and look at it, not just in a one quarter increment, but to look at it over a longer period of time. So we feel like year-to-date, we’re doing quite well.

And that the same-store NOI is just a lagging indicator. It’s also a bit misleading. I mean, the fact is all the key metrics are moving in a positive direction, releasing spreads, now occupancy, the watch list, policing. Those are the things that drive earnings.

Yeah. Yeah. Obviously goes without mentioning as well. Occupancy did tick up sequentially from 2Q to 3Q and so the free rent had a little bit of an impact on the same-store NOI, but certainly with occupancy increasing, that’s a pretty good trend line.

Okay. Thanks for the time.

Yeah.

Next question comes from the line of Jim Kammert with Evercore. Your line is open.

Good morning. Thank you. If we could go back maybe just to the leasing you called out for 2025, the 320,000 square feet, would that -- what is it to really to know what sort of the dollar magnitude will be expended on that redevelopment and the particular yields you expect on that incremental capital?

Yeah. I mean, I don’t know that we’re going to get into all the specifics because every building’s a little bit different with regards to the amount of capital, depending upon the age of the building. But I do want to just mention that those buildings are leased for the majority of 2025. So I just want to lay any concerns that people think those buildings are just going dark on January 1st. And as I said, a lot of those are buildings where tenants are upsizing and we’ve had a lot of success leasing those buildings up to earlier stage biotech tenants and having them grow in the portfolio. So we don’t look at it as a headwind. We look at it as an opportunity. But as we’ve said, if you had to put first gen type TIs in, it’s probably $300 a foot. I’m not sure that we’d have to do that across the entirety of that portfolio, but it will require a little bit of an investment because the average age is around 25 years and we are moving tenants out of those buildings into really high quality buildings. But again, we look at that as an opportunity, not as a headwind.

Yeah. They’re core sub markets too. It’s not like they’re just random buildings. So I think the execution risk is a lot lower. We just need to put some capital in and confident that we’ll get them re-leased. We really do like the portfolio that we own. I think it’s a unique position to be in.

Right. That’s fair. And then, Scott, your earlier comments said that greenfield development obviously we know doesn’t really make a lot of sense in most markets. So when you think about these redevelopment opportunities, you’ve got some coming up at 2025. If you look at your lab portfolio, what order of magnitude, either maybe in square footage or just give us a guidance, perhaps what is still not in state-of-the-art where you could continue to kind of harvest and increase the returns on an annual basis? What 1 million square feet or what else might you want to redevelop in the lab portfolio as it sits today in the operating?

Yeah. I mean, we do a pretty thorough across the 50 million square foot portfolio, ongoing assessment of redevelopment candidates, kind of prioritizing them out one year, two years, three years. So I think the disclosure we gave as part of this earnings release was incremental and hopefully positive. We could consider providing something additional, but it is a pretty intense portfolio management effort that we have just to prioritize those redoubts. But $100 million a year in the aggregate still feels like the right benchmark given the strength of the portfolio, the age of the portfolio.

Okay. Appreciate it. Thank you.

And our last question comes from the line of Mike Mueller with JPMorgan. Your line is open.

Yeah. Hi. Just a quick one on outpatient medical development. Are you seeing more pre-lease build-the-suit type or spec opportunities for the next few years? And when you think about your yield requirements, how different are those two?

Well, there’s nothing spec. Everything is 70% or more pre-leased. In some cases, they are complete build-the-suits at 100%, like the one we announced yesterday with HCA. The yields continue to be 7% plus, at least in today’s cost of capital environment. That’s been our target. The pipeline could be even bigger if the return thresholds were lower. There’s no shortage of health systems that would like to expand their outpatient footprint. It’s just a matter of which projects get the green light given the rental rates that need to be paid. That’s really the governor on our opportunity set right now.

Okay. Thank you.

Yeah. Thanks, Mike.

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

Yeah. Well, thanks for your time and attention today and congrats again to our team on a really excellent quarter. Have a good weekend.