Healthpeak Properties, Inc. (NYSE:PEAK) Q4 2022 Earnings Call Transcript February 8, 2023
Operator: Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. All participants will be in listen-only mode . 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.
Andrew Johns: Welcome to Healthpeak’s fourth quarter 2022 financial results conference call. 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, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on the call. In an exhibit of the 8-K furnished with 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.
Scott Brinker: Thanks, Andrew. Good morning, and welcome to Healthpeak’s fourth quarter earnings call. Joining me today for prepared remarks are Pete Scott, our CFO; and Scott Bohn, our CDO. Senior team will be available for Q&A. Through all economic cycles, our business is driven by two fundamentals: The aging population, and the desire for improved health. Demand for our real estate led to an estimated 17 million visits to our MOBs last year. Our buildings are critical to outpatient healthcare delivery in Dallas, Houston, Denver and Nashville and many other attractive markets. Biotech tenants are producing life changing therapeutics, for cancer, heart disease, sickle cell and many other diseases. To clear, our buildings have an impact, not often seen in real estate, and we expect that impact to grow, driven by the ongoing push to outpatient care and exciting advances in personalized medicine and drug discovery.
Certainly, there will be periods of belt tightening in biotech, but Healthpeak is in great shape with only a modest amount of space to lease both this year and next. Our new developments are fully funded and 78% pre-leased. We didn’t chase non-core submarkets or conversions and kept our pipeline in check. Most important, we finished the quarter at 99% occupancy and continue to sign leases, when we do have availability often with existing relationships. Our significant scale in each of our submarkets is a competitive advantage against small landlords and second tier product. And in recent weeks, there has been positive momentum in the public markets for biotech. A sustained improvement could lead to reacceleration in demand. Moving to operating results, which were strong across the company.
Full year same-store NOI grew 5.1% in Life Science and 4% in medical office. We achieved those results despite difficult comps as we had best in sector, same-store growth in 2020 and ’21 in both segments. Our fourth quarter results exceeded the full year growth rates, a positive way to close out 2022. Last quarter, we increased earnings guidance by $0.02, and we finished the year at the high end of that new range. We’re projecting another solid year of operations and development deliveries in 2023. Offset by the change in interest rates and some non-economic timing issues that Pete will cover. The underlying business is strong and the NOI growth opportunity that we described in our November investor presentation is unchanged. We’re in great shape from both a leverage and liquidity standpoint.
The attractive spread on our January bond issuance reflects our strong balance sheet and support in the credit markets. The $113 million sale of two R&D buildings in Durham for a 5 cap is a good transaction comp in an otherwise quiet market. The price was negotiated in December, enclosed last week to an unlevered buyer. Also, the rents are at market, whereas most life science sales comps have below market rents that make the cap rate less relevant. The sale was opportunistic given we recently signed a long-term lease extension and had maximized the value creation. For progressing entitlements across our core markets, but it’s possible for the first time in several years that risk adjusted returns on acquisitions will be more attractive than development.
This could impact capital allocation in 2023. We’ll have to see where cap rates and cost of capital settle and what happens with construction costs as the economy slows. Either way, our balance sheet allows us to be opportunistic and the land bank provides optionality. In South San Francisco, our sovereign wealth partner has agreed to allow Health Peak to continue owning 100% of the Vantage Development campus. A lot has changed since the agreements were signed a few quarters ago, including a 2x increase in the allowable density, and less clarity around the timing of commencement given the environment. As a result, it made more sense for Healthpeak to own 100% of the project. Nothing has changed from the standpoint that will utilize third party capital if and when it makes sense for our shareholders.
Depending conversion to an upgrade announced yesterday aligned us with peers and will provide a more flexible structure to grow the company through acquisitions. I would like to congratulate Ankit Patadia, who was promoted to our executive team. Ankit is a 13-year veteran of Healthpeak and runs Treasury and FP&A with great skill and leadership. He’ll continue to report to Pete Scott. We have a strong bench and continue to promote from within. Finally, we’re advancing sustainability initiatives across the portfolio and are proud of our ESG recognition, that includes being named as CDP’s Leadership Band for the 10th consecutive year and being named a best managed company by the Wall Street Journal. I’ll turn it to Scott Bohn to expand on life science results and fundamentals.
Scott Bohn: Thanks, Scott. This morning I’ll provide some color on life science sector fundamentals, an update on our life science portfolio and close with an update on our development and redevelopment project. I’ll start with a life science industry update. Overall, the industry remains healthy. There’s been a slowdown in demand from the toward levels of 2021 and 2022, but there are a number of tenants actively seeking space, and we’ve captured more than our share of that demand. From a funding perspective, pharma has been active on the partnership and licensing front and continues to funnel cash into biotech R&D, and the secondary equity market has been open for companies with solid data. Just last week, a long time tentative of ours in South San Francisco, Client Therapeutics closed a $288 million secondary offering on the heels of positive interim data in its Phase 2A study in idiopathic pulmonary fibrosis Also, last week, we saw a successful $161 million biotech IPO, and there was another nearly $200 million IPO scheduled for later this week, so hopefully a sign that the IPO market is beginning to reopen.
VC fundraising of $25 billion, while trailing 2021’s record of $41 billion with about 50% higher than 2019, than record high. DCs will continue to invest these funds in the new company formation and B&C rounds of existing companies. The 2023 NIH budget was approved at $49 billion, a 6% year over year increase, which will continue to provide scientific discovery and at the academic and early stage levels. Public company R&D spend through the third quarter of 2022 was $115 billion and is on pace to be the highest year ever when year-end numbers are reported. Now I’ll move to our life science portfolio. We had a great year on the leasing front with over 1.4 million square feet of leases executed across the portfolio, 68% of which were new leases.
Photo by Zac Gudakov on Unsplash
This amounted to 186% of our leasing budget for the year and included a 35% cash re-leasing spread on renewals. Additionally, 79% of the executed leases were done with existing tenants, again, highlighting the importance of our scale and deep relationships within our core markets. 2023 is off to a great start with an additional 143,000 square feet currently under LOI. Year-end portfolio occupancy remains strong at 98.9% and rent collections exceeded 99% in the fourth quarter. Mark to market within our portfolio remains strong at approximately 25%, and our watch list remains consistent with prior quarters. We have very modest leasing exposure in both San Diego and Boston in 2023, and even though we have some work to be done in South San Francisco on our redevelopments as Lisa’s role, we’ve had great success on those projects to date and look to continue that momentum into the New Year.
Shifting to our developments and Redevelopments. Healthpeak nearly $900 million life science development pipeline is 78% pre-leased and is 100% under GMP contracts, locking in our costs and estimated returns. In the fourth quarter, we delivered 142,000 square feet, a fully leased class A lab space at 101 Cambridge Park Drive, bringing our total life science ownership in greater Boston to 2.6 million square feet. Our sole remaining availability is at our Vantage campus in South San Francisco, where we remain confident in our lease of success based on our dominant market position with approximately 40% market share, and deep, long-lasting tenant relationships and what we see as the most favorable near term supply demand dynamics of the three core markets.
Moving to our point, grand redevelopment. We converted 100,000 square feet of LOIs to leases during the quarter and now have an additional 29,000 square feet under LOI. Of the 245,000 square feet that went into redevelopment in 2022, we have 76% already leased or committed. It’s been an outstanding start to this redevelopment and we look forward to continued success as more spaces roll this year. We also continue to advance our entitlements. In Cambridge, we’ve made great progress on the rezoning efforts in our LOI project. Since June, we’ve been part of a city and community led working group tasked with recommending zoning for the district. This first step in our entitlement process comes to an end this week, culminating in a zoning proposal that will be brought to the city council.
We’re very pleased with the relationships we developed and are excited about the vision and direction that city staff, local residents, other property owners and Healthpeak collaborated on for this zoning recommendation. We look forward to working with the council in the coming months. With that’ll, turn it over to Pete to cover financial results and guidance.
Peter Scott: Thanks, Scott. Starting with our financial results. We finished the year on a strong note, delivering excellent operating results. For the fourth quarter, we reported FFO as adjusted of $0.44 per share and total portfolio of same-store growth of 6.6%. For the full year, we’ve reported FFO as adjusted of $1.74 per share and total portfolio same-store growth of 5%. Let me provide a little more color on segment performance. In Life Sciences, as Scott Bohn mentioned, same-store growth for quarter with a very solid 5.7% and we finished the year 99% occupied in each of our major markets. Turning to Medical Office, we had another fantastic quarter with same-store growth of 5.4%. For the full year, we commenced 3.6 million feet of new and renewal leases, the highest year on record for Healthpeak.
Our tenant retention rate during 2022 was a strong 82%, reflecting not only the competitive advantage of our largely on-campus portfolio, but also our deep relationships, high-quality team and industry-leading platform. Finishing with CCRCs, same-store growth for the quarter increased 15%, bringing full year growth to the midpoint of our 8% guidance. During 2022, we recovered 340 basis points in total occupancy and generated NREF cash collections of approximately $101 million exceeding our NREP amortization by $22 million. Last item under financial results, for the fourth quarter, our Board declared a dividend of $0.30 per share. Turning to our balance sheet, which continues to be a competitive advantage. A quick update on recent activity. First, in late October, we settled the $500 million of five year delayed draw term loans that we opportunistically swapped to a 3.5% fixed rate through maturity.
Second, in late December, we settled the remaining $308 million of equity forward at a weighted average price of $34 per share, based on the net issuance price, the blended FFO yield was 5%. Third, in early January, we successfully issued $400 million a 5.25% fixed rate 10-year bond. In a challenging capital markets environment, the deal was 6 times oversubscribed and priced with no new issued concession. Credit market clearly sees the differentiated nature of our high-quality portfolio and ascribes a premium value to our bond spreads. Fourth, in late January, we closed on the $113 million sale of our Durham asset at a 5% cap rate, allowing us to further improve our balance sheet metrics. All-in, these four transactions represent over $1.3 billion of capital raise at a blended yield of 4.5%.
The net proceeds from these transactions allowed us to reduce floating rate debt exposure to approximately 5%. In addition, we currently have a net debt-to-EBITDA of 5.3 times, $2.5 billion of liquidity, no bonds maturing until 2025 and our development pipeline is fully funded, eliminating any capital markets risk in 2023. Turning now to our 2023 guidance. We are forecasting FFO adjusted of a $1.70 per share to a $1.76 per share, and we are forecasting blended cash, same-store NOI growth of 2.75% to 4.25%. The major components of our same-store guidance are as follows. In life sciences, we expect same-store growth to range from 3% to 4.5%. Portfolio occupancy is 99% and we have very modest lease maturities in the same store pool giving us less of a positive rent mark to market benefit.
As a result, growth this year is primarily driven by contractual rent escalators in the low 3% area. Medical office we expect same store growth to range from 2% to 3%. Our portfolio produced outside same store growth of 4% during 2022, and we expect 2023 growth right in line with our historical average despite the difficult year-over-year comp, and in CRCs, we expect same store growth to range from 5% to 10% excluding CARES Act grants. I did want to spend a moment expanding on some important items underlying our guidance. First, the midpoint of our guidance assumes $1.17 billion of cash NOI an increase of $65 million compared to 2022. The increase in cash NOI is driven by same-store growth and the earning of some key development projects, including the Shore, Boardwalk and 101 Cambridge Park Drive.
Second, the midpoint of our guidance assumes $205 million of interest expense. The assumed average interest rate in 2023 for floating rate debt is 5.5%, up over 300 basis points compared to 2022. The average line of credit balance during 2023 is expected to be approximately $750 million. Third FFO is adjusted is negatively impacted by $0.03 of deferred revenue recognition. We have two large life science leases, one at Callan Ridge and one at 65 Hayden that were delayed due to tenant M&A. However, cash and NOI and AFFO are not impacted. We have included an AFFO per share range on our guidance supplemental page, which is a better measurement of year-over-year growth. Fourth, we assume no CARES ACT grants in our guidance. As a reminder, we did receive approximately $8 million or 1.5 pennies of FFO from CARES Act grants in 2022.
Fifth, we have included a high-level sources and uses on our supplemental guidance page. Our guidance assumes $600 million of development and redevelopment spend, up modestly from 2022. This does not assume any new development starts and its spend associated with completing our active pipeline. We also do not assume any speculative acquisition activity. Any accretive acquisition activity that could occur throughout the remainder of the year would be additive to our guidance range. Please refer to Page 39 of our supplemental for additional detail on our guidance. Finally, let me quickly comment on the UPREIT conversion. We anticipate closing the UPREIT conversion on February 10, because of the conversion, we need to file an updated shelf registration statement and other various documents, including an ATM prospectus.
Over the course of the following days, you should expect to see some administrative 8-K items get filed. With that, operator, let’s open the line for Q&A.
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