DOC - NYSE

Good morning, and welcome to the Healthpeak Properties, Inc. Second Quarter 2025 Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President of Investor Relations. Please go ahead.

Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, these statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. 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 will be discussed on this call. In the exhibit of the 8-K we furbished to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker.

All right. Thanks, Andrew, and welcome to Healthpeak's second quarter 2025 earnings call. Our CFO, Kelvin Moses, is here with me for prepared remarks, and our senior team is available for Q&A. I want to start by thanking our entire team for another quarter of excellence in execution, one of our WE CARE core values. In addition to their normal responsibilities and strong financial results, our team completed an enterprise-wide technology upgrade after more than a year of planning and testing. The new platform will improve the integration and availability of data, increased productivity and provide a foundation for rapid deployment of additional AI capabilities. All right. Let me touch on the political and regulatory environment. The reconciliation bill signed in early July should be a first step in reducing the uncertainty that has impacted our sector. As is often the case, the reality was far better than the attention-grabbing headlines earlier this year. We were pleased to see the changes made to drug pricing for rare diseases and favorable tax treatment for research and manufacturing. Both changes helped promote biopharma investment here in the U.S. In our outpatient business, the impact of the Medicaid cuts should be pretty immaterial given our locations and our tenants payer mix. More important is a recent proposed rule from CMS to the so-called inpatient-only list. Current policy requires surgical procedures to be performed in a hospital and less explicitly approved by CMS for an outpatient setting. In other words, the default option is the hospital. The proposed rule would reverse that, and the default option would be to allow the outpatient setting. This would be very positive for our business. Our decision to internalize property management continues to be a strategic and financial success. Next month, we internalize 2 million square feet in Boston and 1 million square feet in Texas. One of my strategic goals has been to bring us closer to our real estate. And I love the fact that our own employees are now interacting with our tenants on a daily basis. We've been able to remove layers of oversight bureaucracy, generate profit and augment relationships with our tenants. Last week, we received our most recent tenant satisfaction scores, which showed year-over-year improvement and are well above industry averages. Our focus on customer service helps drive high retention rates and re-leasing spreads. I'd like to give some color on second quarter results in each of our business segments, starting with outpatient medical. Same-store growth, retention and re-leasing spreads were all near record levels. The aging population and consumer preference for convenient lower-cost settings is driving demand for our buildings. Meanwhile, new supply is at the lowest levels we've seen in 2 decades. That dynamic is favorable for Healthpeak with the largest footprint in the sector and industry-leading tenant relationships. By design, we have significant concentration in markets like Dallas, Houston, Nashville, Atlanta, Phoenix and Denver. We'll continue to grow in these core markets deepening our competitive advantage in geographies with the highest potential for internal and external growth. To that point, we recently closed on 2 large outpatient development projects in Atlanta, representing $150 million of projected spend. Atlanta is one of our biggest and most important outpatient markets, supported by our relationship with Northside Hospital, a fast-growing and highly successful regional health systems. And new developments are anchored by Northside, outpatient services and physicians and/or 78% pre-leased before commencement of construction, with a strong leasing pipeline behind that. We expect to achieve a mid-7s return on cost, generating significant shareholder value relative to acquisition cap rates on such high-quality assets. In our lab R&D business, we're beginning to see at least a few leading indicators turn positive. Spec new supply is quickly going to 0 and should remain there for quite some time. A recent broker report showed more than 4 million square feet of inventory being removed from the supply pipeline, as certain landlords who lack scale and expertise to pursue an alternative use. On the regulatory front, new leadership at the FDA are making changes to promote innovation and modernization. That amount of change creates a bumpy transition, but the landing point should be positive for the biopharma sector. In particular, the cost in time to bring a drug to market in the U.S. could come down, improving the return on cost or R&D taking place in our lab buildings. We've also seen a couple of $10 billion M&A deals recently, which allows capital to be recycled back into the ecosystem. Those M&A exits along with political and regulatory stability should help jump start public and private capital raising, which is the key to an improvement in new leasing. Moving to our CCRC business, which experienced record leasing volumes last quarter. Our strategic decision to increase affordability with our unique entry fee structure, broadened our demand pool and differentiated our product. The CCRC portfolio is residential housing for independent seniors with significant amenities and a continuum of care available on site. Our net entry fee is just 60% of the local median home value, representing a strong value proposition for our residents. The portfolio is now generating approximately $200 million of annual NOI, including cash entry fees, which incredibly is 50% higher than in 2019 before the pandemic. Our decision to bring in LCS as the operator has been an important part of that spike in performance. And with current occupancy at 86%, we have more upside to capture. Okay. Let me turn it to Kelvin for financial results and the balance sheet.

Thank you, Scott. I'll begin with a brief update on how we're positioning the operating platform to lead in this next phase of execution for Healthpeak. Today, we are a very different company than we were 3 years ago, but more than 60% of our team now directly engaged with our tenants and focused on delivering a differentiated customer experience across our properties. Our entire company is committed to enhancing our client service model, laying a strong foundation for sustained long-term value creation through operational excellence. With the internalization of property management largely complete, we shifted focus to scaling our real estate operations capabilities. We are implementing a strategic plan that enhances operating procedures, refines lease documents, strengthens, training and support programs and elevates brand service standards to deliver a best-in-class experience for our clients and tenants. This commitment to operational excellence will further set Healthpeak apart from competitors and positions the platform to capture investment and leasing opportunities not available to the broader market. We are also well underway in advancing a near-term action plan to deploy artificial intelligence tools designed to optimize daily operations and enhance visibility and passive performance. These tools will empower our team with real-time insights and will allow us to implement solutions that ensure consistent performance, deliver practical efficiencies and streamline processes. We look forward to sharing relevant updates on progress on future calls. Now moving into our second quarter results. We had another overall strong quarter of financial and operating results. We reported FFO as adjusted of $0.46 per share, AFFO of $0.44 per share in total portfolio same-store growth of 3.5%. In our CCRC business, we reported same-store growth of 8.6% driven by rate growth of 5% in higher entrance fee sales. We continue to be pleased with the execution by our operating partners, the strength of our team and the performance of our high-quality portfolio of assets. Moving to outpatient medical. Our results this quarter reflect the focus that our leadership team is placed on positioning our portfolio for success, cultivating the strongest tenant relationships in the sector and capitalizing on the continued strength in fundamentals, we are seeing across the business. This quarter, we achieved 85% tenant retention, delivered a positive rent mark-to-market at 6% and reported same-store cash NOI growth of 3.9%. During the quarter, we executed over 1 million square feet of leases including approximately 200,000 square feet of new leasing. That represents 2 million square feet of execution through the first half of 2025 and a strong pipeline to follow. Additionally, we executed another 419,000 square feet of leases in July, and we have 682,000 square feet under LOI. And finally, lab. We continue to focus on capturing outside share of the available demand in the market. I'm converting our pipeline into executed leases. For the second quarter, we reported same-store growth of 1.5%, a positive rent mark-to-market of 6% and tenant retention of 87%. We executed 503,000 square feet of leases in the quarter, which included approximately 85% renewal leasing and brings our total lease execution for the first half of 2025 to approximately 780,000 square feet. Additionally, we executed another 55,000 square feet of leases in July, we were under LOI for another 250,000 square feet. Total occupancy declined by 150 basis points this quarter, primarily due to natural lease expiration and tenant departures following unsuccessful capital raises earlier in the year. On to the balance sheet. In June, we repaid $450 million of senior notes with proceeds from our commercial paper program. We ended the second quarter with net debt to adjusted EBITDA of 5.2x and nearly $2.3 billion of liquidity. As we look ahead to the remainder of the year, we will opportunistically monitor the bond market to refinance our commercial paper balances and further strengthen the balance sheet. Balance sheet discipline will continue to be a core long-term strategy, and we expect to preserve optionality to invest where we have identified opportunities that will enhance our portfolio quality and generate attractive returns. Before we move into Q&A, we wanted to briefly touch on guidance. Based on our strong overall performance in the first half, we are reaffirming our FFO as adjusted and same-store cash NOI expectations. Our CCRC portfolio continues to benefit from strong market fundamentals, and with year-to-date same-store growth of 12%, we are now on track to exceed the high end of our segment guidance. Outpatient medical, our largest business segment, continues to achieve strong tenant retention and re-leasing spreads, which were up to 6% in the second quarter. That performance is supported by a robust leasing pipeline that positions this portfolio to the high end of our initial segment guidance. We remain confident in the execution from our team and the balance of our diversified portfolio, which we expect to deliver results within our overall same-store growth range, despite what we are experiencing broadly in the lab sector. Over the coming months, I look forward to continuing to meet and engage with our equity and fixed income investors. And with that, operator, we can move into questions.

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

I guess first question is on the Lab segment and the same-store occupancy decline in the quarter. I was hoping you could just break it out a little bit more between the impact from as you said, expirations where there weren't renewals. I felt like the retention ratio might even lower than like your trailing 12-month number. And then versus the bad debt or tenant default issue that seems like it might have happened in the quarter?

Nick, this is Kelvin. So to give you a little bit of context there, over the quarter, we had about 280 basis points, 290 basis points of same-store occupancy decline. If you think about it from a total occupancy perspective, that breaks down to a component of that, about 1/3 of that impact was a result of space that we've reabsorbed due to tenants that have expiring leases. Another 1/3 of that was a result of some tenant migration that we did within the portfolio. We expanded some tenants, relocated some tenants and took certain space back in that process. And then the kind of remaining component of that would be attributable to tenants that were unsuccessful raising capital in the beginning of the year that ultimately, we had to work out of the portfolio. So it's probably 1/3, 1/3, 1/3 impact with respect to the occupancy.

Okay. And then second question maybe for Scott, is -- we just think about sort of the focus of the company. I mean you did launch some new developments and outpatient medical. How are you sort of thinking about using the balance sheet right now? I know you put on pause some of the debt investments or in lab. You were sort of waiting on some better opportunities maybe there from a pricing standpoint. The stock is weak today. You have stock buybacks as an option as well. Just kind of latest thoughts on capital allocation?

Yes. Nick, you cut out a little bit, hopefully, I caught the gist of your question, but maintaining a strong balance sheet is priority #1 on capital allocation. We have done that. We'll continue to do that. Sometimes that includes opportunistic asset sales. We did a lot of that last year. We could always consider that this year. I think the demand for outpatient medical in particular, remains really strong in the private market. So there's always things that we could do there. It's a very high-quality portfolio. That would be in demand. Buybacks, obviously, we've been active. We've done $300 million in the past, call it, 15 months. And we do that opportunistically. If we have the balance sheet capacity. It's something that we prioritize at a certain stock price, which you've seen historically, and you'll continue to see as an option. The 2 outpatient developments were extremely attractive, and that's one reason we try to maintain such a strong balance sheet, so that we have the capacity on our balance sheet to capitalize on those opportunities, and there's more of that in our pipeline. So those are interesting. And life science distress at the right time is going to be an enormous opportunity. We've built up a pretty big pipeline late in 2024 after a really solid year of leasing and it looks like fundamentals are moving in the right direction. Obviously, the regulatory environment the first 6 months of the year or so changed our outlook, our near-term outlook, but if anything, it just makes that opportunity set bigger and ultimately more attractive. So at the right time, that's going to be an enormous opportunity for us, but we'll be patient and thoughtful and disciplined in terms of when we turn our attention to the distress that we're seeing.

Your next question comes from the line of Farrell Granath with Bank of America.

So my first question is about, you just mentioned the 1/3 of unsuccessful capital raising for those tenants, just trying to think about going forward for the second half of the year, how much foresight maybe left over impacts from those -- that specific bucket, would you expect to maybe weigh on the occupancy?

Yes. Maybe I'll start with a little bit of context from Scott's earlier points. I think we've -- for the beginning of the year, we saw a little bit of a slowdown in the capital markets for life science, but there's been a number of positive events that are encouraging that have happened as of late. The M&A activity has been strong. You've seen some great prints there from Merck and Sanofi. You've also seen the secondary market open back up for tenants. So we think it's important to highlight those kind of positive signs that we're seeing in the capital recycling. But no doubt, it's been a bit challenging for tenants to raise capital, and we have some tenants in our portfolio, a small number of them that are relying upon raising capital at any given time. So those tenants could fail as a result of failed science, that could fail as a result of inability to access the capital markets and disproportionately, so the capital markets were largely unavailable for a period of time. So we'll have some headwinds for the balance of the year from an occupancy perspective, but to quantify that at this point would be challenging.

Farrell, let me give one additional perspective on this topic because the overall ABR from the company, including the CCRCs, I mean you're talking about $1.6 billion, $1.7 billion. The vast majority of that is credit tenants. When you really look at the portion of the portfolio that would be more at risk, you have to monitor its small-cap biotech in certain of our private tenants. It's 10% of the portfolio to look at the top 20 in our supplemental, the vast majority of those are credit tenants, whether they're health systems or global biopharmaceutical companies. So it's a very well-diversified portfolio. This smaller biotech companies are clearly part of our business. There's a huge list of success stories there that start out at 10,000 feet, 20,000 feet Series A type companies that now have 200,000, 300,000, 400,000 feet in the portfolio. But they're cyclical. They're very dependent on capital raising and obviously, scientific outcomes. It's been a tough capital market for the last 6 months, and that's had an impact. We get the benefit of that when the capital markets are strong. And I think you saw that in 2024, the first 6 months of this year, we're the opposite. And obviously, that's flowing through. But keep in mind, the diversified portfolio, and we just maintained our earnings guidance. So I think we just want to keep in mind the broader perspective. This is a point in time. That same portfolio base of small and private biotech tenants could become very valuable to us once the capital markets turn in our favor, and that obviously will inevitably happen. The last 30 days have been a lot more positive. We just reported second quarter results, which is April 1 to June 30. The month of July has been a lot more favorable, whether it's the reconciliation bill, the XBI has traded more favorably. The commentary out of the FDA has been more favorable, a couple of very, very large M&A deals. It allows capital to be recycled into the sector, those are all really positive leading indicators. That doesn't translate into second quarter results, obviously, but we feel a lot better about some of the building blocks that we're seeing in the business today than we did 3 months ago.

Definitely. But I -- and then also, I guess, then the other part of your portfolio, the MOBs, similar with how you maybe broke out what kind of was going on in the life science occupancy decline. Can you just speak a little bit more on the MOBs and maybe some of the tenants such as not or at least the type of tenant that chose to not renew?

Farrell, this is Mark Theine. Our occupancy across the outpatient medical portfolio, 91%, 92% is a very strong occupancy. We typically have 80% retention. And the type of tenants don't renew, sometimes it's tenants that -- I mean, we physically can't accommodate their growth because of the occupancy of the building. There's just some retirements here or there across the building, but there's not any one particular type of nonrenewal tenant across the portfolio. Our hospital retention is fantastic. And we're really focused on our leasing results, keeping strong retention, lease renewal spreads and continue to see great occupancy as we fill up the portfolio.

The next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

All right. Just going back to lab a little bit, and Scott Brinker. I guess, trying to sum it all up, I mean, how much of these issues that you saw this quarter, the credit issues at hand, do you view is backward looking and kind of will continue to work its way through the credit screen, if you will, versus there could continue to be challenges for that 10% of the portfolio that you flagged if capital market volatility picks up again and leasing new space just isn't really a top priority versus preserving capital?

Yes. The interesting thing about the tenants that didn't make it is that they weren't new companies. The average age of the companies that had early terminations was 15 years. That was the median age as well. So this wasn't a bunch of start-ups that were funded and should not have been in 2020 during the COVID boom. These were companies that had very significant backing from brand name venture capital or kind of the billionaire tech backing, very well-known names that have raised capital 5, 6, 7x in their lifespan during that 15 years. And in many cases, the technology itself was purchased out of the bankruptcy, meaning that it wasn't a failure of technology, truly rescaling the business starting over from a lower cost basis. So when companies fail, either the science fails, and that does happen no matter what the capital markets are or they can't raise the money. And across the board, what we saw year-to-date is that the companies just couldn't raise the money. So you can point directly to the capital raising environment. And obviously, that could change quickly. There's still companies that we're monitoring. It's not going to go to 0 overnight. But if the last 30 days that we've seen the sentiment turning more positive, if that continues, that would be obviously hugely important to reducing the amount of bad debt in the portfolio, but more importantly, to turn the direction on new leasing. That will happen. It's a matter of time, but the last 30 days have been a lot more favorable and optimistic.

That makes sense. I guess it's just trying to kind of ring-fence the companies that have maybe yet to see a credit issue pop up. But like you said, you're still monitoring how significant of that 10% is that figure and kind of the time line that they have 3, 6 months until they need to be able to raise capital. And then separately, I'm just focusing on that new leasing within lab, the 503,000 square feet, I think you said 85% was renewal activity, which implies about 75,000 square feet of new leasing. So for the bucket of renewals, which I think is about 425,000 square feet or so, how much of that was early renewal activity? And are those full or partial lease renewals for the out years?

Yes, it's Scott Bohn. On the renewals, they're probably about a little more heavily weighted to in-place renewals that are happening near the end of the expiration. We did do some a little bit further out where we had tenants who are -- who were looking to grow. We're able to expand them within campuses in the portfolio, take additional space and extend their existing lease term.

Part of it depends how you define early. I mean I think you see in our supplemental, we give a lot of information on the maturity profile for each business segment by year and the '26, '27, '28 maturities all came down this quarter in life science because we addressed a number of those early, which is good portfolio management. Obviously, we get better terms on a renewal. So it's just, I think, good proactive asset management, portfolio management on those early renewals.

Yes, those early renewals tend to come with very low capital as well.

How significant was the expansions that you saw? And I guess, were there any space givebacks? What's kind of the net impact of that? I'm just trying to understand, does that show up in the new leasing that 75,000 square feet because it is an expansion? Or do you bucket that within the 85%?

The expansion space will show up in the new leasing. Correct.

The next question comes from the line of Seth Bergey with Citi.

It's Nick Joseph here, Scott. Scott, you mentioned a few leading indicators turning positive for life science. One of those was supply coming offline. Did you deem that space as competitive? Or was this more space that maybe was being marketed towards life science that your leasing team wouldn't have considered competitive for tenants that you're going after?

Mostly space that was less competitive. We haven't seen any directly competitive space go offline, but we have seen some directly competitive space start to market towards alternative uses, whether they ultimately go in that direction, we'll see. But there's a much larger number than $4 million that could ultimately go a different direction than lab.

And then just on MOBs, you mentioned the strong interest in the private market. You talked about the stabilized yields that you're expecting. But where are you seeing cap rates kind of across different quality levels within MOBs today?

Most of the transactions for the types of assets we own will be in the 6% to 7% range. There may be some that breakthrough 6%. The vast majority of what we own are good quality assets. So that would be the range of, I think, cap rates, stabilized cap rates for assets in our portfolio. Life science is a lot harder to pin down, as we said for a couple of years now. Certainly, long-term leases with credit tenants in a locations are still in demand, and there's a buyer for that. And there's a buyer for upside opportunities, empty buildings, someone willing to take some risk and pursue a higher return. Everything else in between, there just haven't been nearly as many trades. It's a lot harder to specify a cap rate for something like that.

The next question comes from the line of Juan Sanabria with BMO Capital Markets.

I was just hoping you could talk a little bit about the development pipeline. It looks like you lost a couple of pre-leases of directors, Science Park and Pointe Grand. Just looking for a little bit of color there. And as part of that, if you could talk about how we should think about capitalized interest going into next year?

Pes. On the Directors Place project, we've been working with a tenant that's been in our portfolio for about 15-plus years that was in the process of raising capital, and we were planning alongside of that capital raise to relocate them to Directors, which was a lower cost space for them, supporting their business, and they ultimately were unsuccessful raising capital for reasons that we described earlier. So that resulted in the pre-leasing come down for that project.

And at Pointe Grand, I mean the tick down there is we delivered 2 assets out of redevelopment there that were 100% leased.

And any comment on capitalized interest and how that should trend going forward, just given the moving pieces? Do you think it's fairly substantial this year?

Yes. As the projects come online, it will trend down, and some of that's going to be offset by the leasing activity that we've had in the portfolio, but it will certainly start to trend down as some of these projects get started and come online. We're in the process of entitling Vantage and Cambridge Point in Alewife. And those are obviously large projects that are in the early stages of entitlement and design. So as those commence over time, specifically as we get Hines to start working through the residential component of the Cambridge Point development that will help start to reduce the capitalized interest.

And then just one other quick question on CCRCs. It looks like the occupancy on a same-store basis dipped sequentially. Was there anything to call out there is a bit behind some of the broader NIC data. So just curious on the driver of that.

Nothing unusual, just typical seasonality. I mean all the profits from that business come from the independent assisted memory care components, but the continuum of care that we offer does include a skilled nursing component. It's a small number of units. But it is seasonal. And we really don't do Medicaid. It's almost exclusively private pay in Medicare, about half and half. And the Medicare business is obviously seasonal, and short term in nature for the patients in terms of how long they stay. And every second quarter, we have a sequential decline. So there's nothing unusual there. That business just continues to perform exceptionally well. And our independent census was actually up quarter-over-quarter, it was up year-over-year. So the leasing momentum there is still really strong, good pricing power, good expense control. So I wouldn't read anything into the occupancy quarter-over-quarter other than typical seasonality and great performance with a lot more upside to capture in that business.

The next question comes from the line of Vikram Malhotra with Mizuho.

I guess just bigger picture. You mentioned the 10% of at risk. I'm not sure if that's after the kind of 1/3 you've already seen impacted. But I guess the question is like, if you assume you see another quarter of a similar amount of credit risk, what do you need to see in the MOB side to keep sort of the overall guide intact for this year?

I mean the guidance range that we just reaffirmed includes the bookends of where we see potential outcomes for this year. Outpatient in CCRC continue to outperform. Hopefully, there's more upside to capture in life science, obviously, still has some downside risk, but it also has upside opportunity. We've got a fair amount of space that's ready for occupancy that could commence fairly quickly if the capital markets turnaround, and there are some tenants that we're still watching carefully that could go the wrong direction if they don't raise the capital. But the guidance range we reaffirm does include the 2 bookends for the potential outcomes we see.

Got it. That's helpful. Just on the 500,000-plus leasing on the life sciences side, I guess like how much is new leasing versus sort of renewal and early -- or future renewals or early renewals? And do you mind like is there a way you can give us some sense of how the pipeline looks?

Yes, Vikram, I'll take this one. I think in the prepared remarks, you may have missed that 85% of that 503,000 square feet of leasing was actually renewal leasing. And it's followed up by a very strong leasing pipeline. And Scott, you're welcome to give some color on that pipeline. But we have 55,000 square feet of leases that we executed to start the month of July and another 253,000 square feet under LOI and a pipeline of activity to follow that. So we think given the number of green shoots that we've seen, that continues to be promising. But Scott, anything to add?

Yes. And I would add on the LOI side, I mean, probably favors new deals over renewals in contrast to kind of what we did this quarter.

Okay. Great. And sorry, just one classification. I don't know if you can give us some -- you mentioned the bookends of the guide I think create kind of the -- have the upside, downside. Just on the lower end, are you able to sort of give us a rough sense of how much more occupancy loss would have to happen to hit that low end in the Life Science segment?

Well, let me just say first on occupancy. We have started giving a total occupancy number because that's the number that we spend the most time on. Same-store is kind of an industry requirement and standard. But in our life science portfolio, we have a fairly large development redevelopment portfolio as a percentage, and that's really what moves the needle for earnings. We could see some additional deterioration through year-end. If you just look at the disclosure, we've got 500,000 feet left in the year for 2025 expirations and roughly 100,000 of that is either under LOI or in negotiation. So there's 400,000 that probably comes out. We do have some signed, but not yet occupied leases that will get the benefit of through the balance of the year, and then the tenants that we're monitoring and how many of those make it versus don't will depend on the next 6 months in the capital market environment. So those are the moving pieces, but we probably will see a bit more occupancy deterioration through year-end, Vikram.

The next question comes from the line of James Feldman with Wells Fargo.

Great. Filling in for John here. So I guess just to start, going back to some of your comments at the outset of the call, you talked about a software upgrade and improving your AI capabilities. Can you talk more about how you think AI can -- what the impact of AI could be on your business over the years to come. What will change as the result across your business lines?

Yes. I'll start on this one. No surprise that we're all experiencing the evolution of AI real time, and it's evolving very quickly every day. What we're seeking to do as a company is to ensure that we are building our business alongside of that evolution of AI. And we think about it in 2 ways. One, how do we create practical efficiencies for the team and empower the team through more proximate access to data and enhance decision-making through data analysis. And where we are today, I'd say relative to many other of our peers, we've invested considerably over the years in our technology, and we're certainly not starting from 0 to take this next step. And we've been deploying very recently some of the commercially available artificial intelligence applications throughout our organization, including ChatGPT and Copilot, and we've built a strategic road map that will help us really utilize our kind of structured data and accelerate our platform with access to that data. So we're building upon what's commercially available, and we think that's going to allow us as a company to get closer to our tenants to be more efficient team-by-team, but also to enhance our capabilities. So there's more to come on that as we make progress. But we're very early on in that kind of execution of that plan.

Jamie, coming to the life science -- sorry, go-ahead Jamie.

I'd say is there a way to quantify operating margins or revenue opportunities? It sounds like you're...

There certainly could be some revenue opportunities. Yes, I think it's a little bit too soon to quantify those on this call, but certainly something that we'll follow back up on. We think there's tremendous opportunity to leverage AI throughout our business.

Okay. And then you kind of rattled off a laundry list of regulatory update mostly positive. So can you just talk about if there's any way to quantify what you think the opportunity could be, whether it's a shift in the business you focus on or just better revenue. I think you sounded most upbeat about the inpatient-only list from CMS. If you could talk about that. And then the changes drug pricing for rare diseases and the favorable tax treatment for research and manufacturing. And then also, we know that we're still waiting on Trump to announce the most favored nation list for prescription drug pricing. So how do you think about the potential pressure from that on your business and life science investing?

Yes, that was a long [indiscernible] try to remember those, Jamie. Those are good questions. They're all very important. On most favored nations, we'll see. That's a complex topic. We have the benefit and occurs here of a health care system that's more capitalism- based model. That's not the case necessarily overseas. That has pluses and minuses. But the reality is Americans do pay more for their health care, including drugs and therapeutics than overseas countries, even though most of the innovation is happening here, that probably isn't completely fair. And if there's a better allocation of the profits moving forward, that should be beneficial to U.S. consumers and perhaps even for the biopharma companies. But the details of ultimately where that lands, that's a very complicated dynamic that it's too early to speculate. But some better cost sharing of the revenue and the profit generation between the U.S. and overseas, I think, would be healthy for the U.S. and for the ecosystem. So that feels like there's some upside there, but highly complicated and would take some time. The R&D expenses, I mean, think about the $400 billion a year of capital that is invested into research and development. That's a rough number. There's a pretty big impact between a 1-year depreciation schedule and a 5-year depreciation schedule for cash flow- based investors. So that's huge. And the same is true of manufacturing. You've seen hundreds of billions of dollars of announcements from numerous companies announcing plans to build manufacturing here in the U.S. And obviously, those tax incentives are an important part of those plans. So that all feels positive in the growth and stability of the biopharma business here in the U.S., all that should be beneficial for us. On the inpatient-only rule, when you change the default option, that does make a difference. That does have an impact. And that's exactly what our portfolio was built for. We don't invest in strip centers with primary care physicians or dentist offices. I mean, no offense to those businesses. Those are necessary parts of our health system, but we've really made a strategic focus on higher acuity scaled outpatient centers with imaging and surgery and higher acuity procedures, and that's exactly what the inpatient-only list is targeted towards. So we've seen orthopedics make a massive push towards an outpatient setting over the past 5 years, really driven by COVID. Then everybody found out, well, actually, this is more efficient. It's lower cost. Patients prefer it. The outcomes are better. And now the vast, vast majority of outpatient care accommodates all the orthopedic procedures. And there will be additional items added to that list. Cardiology is probably the next major category that moves into an outpatient setting, which is perfect for us.

All right. Great. That was super helpful. And sorry, just a follow-up on the R&D piece. I know there's a bunch of projects, but regionally, marketwise, like where do you think the -- where do you think the puck is going if you had to make like regional or even MSA bets and where you'll see the most R&D construction?

R&D or manufacturing, just to be clear.

I guess both. [indiscernible].

Yes, manufacturing, most of that probably goes to lower-cost geographies. Those tend to be highly specialized buildouts. I'm not sure how much that construction really matches up with our business, but that's commercial scale manufacturing. You also have clinical scale manufacturing and that could be an important part of our business that's more likely to reside within or near the R&D headquarters, which is the 3 core markets. We've already seen a pickup in activity there. So that does feel like an opportunity where there's manufacturing, but it's not clinical -- it's clinical scale. It's much smaller versus the millions of square feet of commercial scale manufacturing. We have a few of those, but I wouldn't say that our business plan is to start developing how we specialized commercial scale manufacturing in the middle of Indiana. I mean no offense, to Indiana, I love the Midwest, but that's just not probably where we're taking our business in life science. The R&D, we love our market position in the 3 core markets given the increasing interconnection between technology, including AI and science and biology. Most of that talent is -- happens to be in the 3 core markets. The Bay Area, in particular, the Boston secondarily and probably San Diego as well. Those become inseparable as the business moves forward in the amount of talent in the Bay Area, in particular, to help accelerate the biotech business, I think, will prove to be a huge strategic advantage.

The next question comes from the line of Michael Carroll with RBC Capital Markets.

Scott, I wanted to touch on your comments that many of your tenants in the life science space that defaulted during the quarter, they had their technology bought. I guess if this was the case, how did they get out of your lease? I mean, does this happen in a bankruptcy scenario, so they could reject the lease? Or just did it coincide with the lease expiration?

No, they either went through the bankruptcy process or the ABC process. So I mean, there's not much explanation other than that. That's just the way our system works, you can essentially start over as a company from a liability standpoint, and even asset standpoint, they're just buying specific assets out of the bankruptcy process. No more complicated than that.

Okay. And I know it's hard to quantify the potential credit headwinds that you guys might have in the second half of this year. But can you help us understand, I guess, what are the gives or takes here? I mean how long have the tenants that you're watching been trying to raise capital? And I guess, what's the reason that they will or won't be able to do it? I mean is it really driven by an improving macro backdrop and things loosening up? Or is it more company specific that they need to hit certain milestones and have certain data for people wanting to give the money?

I would say it probably has more to do with the macro backdrop. These companies are out there currently in the process of seeking to raise the capital. And if interest rates move in favor of the market, and we continue to see the public equity market respond the way that it has over the last couple of weeks that could create opportunity for folks to raise capital, but I think it's more of a market-driven exercise than it is specific milestones in their business.

And then just last one for me. I guess, what's the quality of the space that you're getting back from these move-outs? I mean, are you going to have to put money in or put these in the redevelopment to kind of position them to release them to another tenant? And then I guess, Kelvin, correct me if I'm wrong, isn't there like a 275,000 square foot space that's identified redevelopment? Is that included in the 489,000 of expirations you have left in 2025?

Not specifically sure which space you're referring to, but maybe to hit on your first question, it's really a mix of spaces. We have space that's ready to be released when we get it back in great condition, and there's others that tend to have been in for 10, 15, 20 years that's going to require some capital investment. So it's really a mix on that front.

Almost exclusively core submarkets, mostly on campuses. So it -- I think the comment Kelvin makes that would apply to the interior build-out, but the submarket itself, these are high-quality assets. I mean, I think you all know we didn't stay out into the tertiary areas or do a bunch of conversions even at the market peak. So it's a high-quality portfolio. It will re-lease. Some will require some capital, but it's not 2 million square feet of availability that we can go lease up.

Michael, I want to go back to your second question on the tenant funding and the milestones. I mean one thing that's important to remember, too, is we have a lot of tenants who have been able to raise capital. We had 2 fundraises or 1 fundraise and a partnership that were announced yesterday within the portfolio. So a lot of these tenants are -- whether it be milestone-based or partnerships with pharma are actually are raising the capital they need to continue to run their business as well.

The next question comes from the line of Wes Golladay with Baird.

Are you seeing much in the way of AI leasing demand in your submarkets that's taken out competitive supply?

Yes, I can take that. Wes, it's Scott Bohn. Obviously, leasing our #1 focus. Our focus is leasing our buildings to lab tenants that are going to utilize the robust infrastructure. That said, we've cast a wide net. So if there is an office user, whether it be AI or traditional office and they have the appropriate credit and we can -- if the economics are accretive, it's a deal we'll certainly look at. I think as a percentage of the total demand in our core markets, the material amount of demand coming from AI or traditional office is pretty low. I would say our buildings -- in the building infrastructure we have also works very well for other R&D uses with less traditional lab or R&D use in R&D. And we're actively in discussions with users in those categories as well, where it's more dry lab robotics type of uses, but less AI within our core markets.

It is sucking up some of the vacant space in the Bay Area in particular, though. I mean, our South City portfolio would have competed with Mission Bay. Historically, a lot of that "lab availability is being sucked up by AI demand." So that should be a net positive for our South San Francisco portfolio in particular.

Okay. And then I want to go back to that comment about the potential enormous opportunity in lab acquisitions. Would there be any market that you're looking to add scale to gain better efficiency? And would you look to target recent developments or older assets?

A bias towards newer assets in a bias towards our core submarkets. We have a very concentrated portfolio that's allowed us to gain a competitive advantage versus competition over the years. We'd like to deepen that advantage. The local scale has enormous benefits in the business as long as you're in the right submarket, obviously, which we think we are, so they would likely, if not exclusively be in markets that we're already in.

And just a quick follow-up on that. Would it be more like lean in more on Tory, East Cambridge or anything more specific?

Well, we're pretty concentrated in the markets that we're in. I mean I think we're in 6 submarkets essentially, even within the 3 core markets. So I mean, those are the submarkets where we're going to spend most of our time.

The next question comes from the line of Ronald Kamdem with Morgan Stanley.

Just had 2 quick ones. Just staying on some of the submarket commentary. I think all the things that you mentioned are positive for life science leasing demand. Just curious, are there any submarkets that you would expect to recover first? And which submarkets would have just overall the biggest upside? So just trying to understand which recovers first and which potentially has the biggest upside from sort of the commentary you mentioned earlier.

Sure. I can talk a little bit about kind of how we view each of the submarkets or markets in general. In the Bay Area, we've seen generally stable demand. I think there, obviously, we have the most -- the biggest magnitude of portfolio, and we continue to capitalize on that, which brings us deals that we aren't otherwise marketed. For Bay Area, South San Francisco, especially within our portfolio has been pretty healthy and continues to be. San Diego, we've seen an uptick in the past 30 days, certainly in tour activity. The bulk of that has been sub-25,000 feet or roughly. I think that we talked about the barbell demand going back the past several quarters. I think San Diego has the biggest barbell of demand. There's been several large deals in that market. One obviously got executed recently. But I think our vacancy in that portfolio in that market tends to be in the sub-25,000 square foot range from a suite perspective. So I think we're in a good spot there. And then Boston generally continues to be low overall, but the top-tier submarkets of Cambridge and Lexington, where our portfolio has certainly seen the greatest demand. So what's going to recover first and fastest, hard to tell. But I think the submarkets that we're in and the core submarkets are going to certainly recover faster and see more demand than the kind of secondary and tertiary submarkets within those broader regions.

Super helpful. My second one was just going back, you provided some really helpful commentary on the 489,000 square feet coming due this year. I guess I was just curious about the 413 coming due next year. Is there any early -- is there any known vacates or any market SKU? Like any color on that 413 coming due next year that you know now that could be helpful.

Yes. Sure. Yes, I think on that, we're certainly working on the ones that are coming in the earlier half of the year. The bulk of that tends to fall in the back half of the year. So it's a little bit early on that. So working on it, probably a little too early to give real great guidance on it, though.

The next question comes from the line of Michael Stroyeck with Green Street.

Maybe going back to tenant capital raising, I understand like 10% of your portfolios where tenants may be having trouble raising capital. But what percentage of that tenant base would you characterize as actually needing capital in the very near term, call it, maybe 3 to 6 months or so?

Yes. Good question. Yes, the 10% plus or minus, that's the percentage of small cap and private biotech. That's not our watch list. I mean there's a number of companies within that 10% that have a huge amount of cash on their balance sheet. So those are 2 very different things. So don't misinterpret. When I say 10% is roughly in small cap and in private, that doesn't mean they're all at risk far from it. So that's an important distinction. So I'm glad you asked the question. There's a handful within those 2 buckets that we're monitoring more carefully, just given the amount of cash that they have on hand.

Got it. Okay. And then just one question on rents. New lease signings in the quarter. Rents were decently below last quarter and last year's average. I guess how much of that is just a mix issue versus any real pressure on asking rents.

Yes. I think the new rents in the sub this quarter, the commencements, they were slightly lower than prior quarters. That's largely attributed to a larger deal we did with a robotics R&D tenant. So not necessarily wet lab space. It comes a little bit lower rent on that. That rent was a space where we did a proactive termination of another tenant to allow the expansion and the rent, we got on the new deal was a 15% increase over the in-place rent of the previous tenant.

The next question comes from the line of Omotayo Okusanya with Deutsche Bank.

Just a couple from me. Just sticking with the question around the tenant base that may be having some cash flow problems, could you just talk a little bit about when you're doing kind of assessing against some of these smaller private companies, again, how do you kind of take a look at cash burn percentage of cash they have on your books relative to cash burn? And how many of those tenants today, if quantifiable, actually have less than 1-year of cash burn as their cash balance?

This is Kelvin. The way that we tend to analyze cash runway for our tenants is based on data that we received directly from the tenant. We have a historical look, but we also communicated with them about a forward-looking estimate. So it's relatively granular. And then with respect to the component of the portfolio, there's not a specific number that I could give you, I think Scott kind of addressed it earlier. It's really a small subset, a handful of folks that we are focused on monitoring very closely at the moment. But we continue to be hopeful around the capital markets environment and these tenants' ability to raise capital for the balance of the year.

Got you. Okay. And then turning to the CCRC front, again, I'm trying to still understand the slowdown in cash same-store NOI growth this quarter, at least on a sequent on a quarter-over-quarter basis. Again, when I take a look at year-over-year, occupancy was actually up. RevPOR growth was still pretty good at 5.2%. So it sounds like maybe there was a big jump in operating expenses? Or just trying to understand a little bit more about why the slowdown to 8.6% versus 15-plus last quarter.

8.6% is pretty good. Nothing grows at 15% forever. We also have the burden of how we account for the entry fees for purposes of FFO and same-store. It's based on amortization of the entry fees on a true cash basis. The growth rate was something like 20%, 25%. We're having outstanding leasing results and cash flow generation in that business.

Got you. Okay. So I guess it's that piece of the math that kind of grew the amortization piece that grew meaningfully on a year-over- year basis. Okay. That's helpful. Then last one from me, kind of post 2Q leasing, both for the life sciences portfolio and the MOB portfolio. Could you give us a better sense of how much of that is new leasing versus renewals?

So on the lab portfolio, our leasing activity for the quarter was about 85% renewal and our pipeline continues to be strong with a disproportionate number of those leases on new space. So that mix is very good. And it's arguably probably comparable or 85% retention on the outpatient medical business is consistent. 80%, 85% has been kind of our normal average. So we have a heavier percentage of renewals on the outpatient side, but some great new leasing activity as well in the pipeline.

Okay. So if I could -- so for the lab space, in particular, the post Q2 leasing a lot of that is new leasing rather than renewal?

The pipeline skews more towards the new site.

The next question comes from the line of Michael Mueller with JPMorgan.

Just a quick one. Back at Nareit, I think you talked about sitting on the sidelines with acquisitions because you had a view that 6 months, 12 months or whatever it would be values are going to be falling and a lot more attractive. I guess based on what you're seeing, do you think that's been playing out? And do you think you're any closer to hitting the pivot point to really getting closer to deployment again?

Yes. I mean that was 2 months ago. So I think we're too much closer for sure. I mean, the thesis was -- this is challenging even for very well-established incumbents with large portfolios, strong track records, good balance sheets, great tenant rosters, a lot of credibility. If it's tough for us, it's infinitely tougher for the others, the new entrants that lack a lot of those attributes that tenants want. So that was the thesis in stepping back. I think it will prove to be the right thesis. It -- there aren't too many days or weeks to go by that if we don't get outreach from lenders, equity investors, et cetera, asking us to step in the situation. So the opportunity set is there.

And that concludes our question-and-answer session. I would like to turn it back to Scott Brinker for any closing remarks.

Thanks for your time, everyone. Hope you enjoy the last few weeks of the summer, reach out to Kelvin and Andrew and I with any follow-up questions. Take care.