Healthpeak Properties, Inc. (DOC) Earnings Call Transcript & Summary

Good morning, and welcome to the Healthpeak Properties, Inc. Second Quarter 2026 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, Investor Relations. Please go ahead.

Welcome. Today's conference call contains 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. A discussion of risk 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 measures will be discussed on this call. In an 8-K that we filed with SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with [indiscernible] requirements. This 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.

Thanks, A.J., and welcome to Healthpeak's second quarter earnings call. We care is the acronym we use for our core values with the W representing our winning mindset. That's easy to do when demand exceeds supply and fundamentals are in your favor. Everyone's happy and looks really smart. It's a lot harder to do when supply exceeds demand, but that's exactly when a winning mindset is needed the most. As the life science pendulum finally starts to swing back in our favor, I want to say thank you to the team here who live up to our core values and maintain a winning mindset these past four years. It absolutely paid off and we're stronger because of it. The downturn also provided a window to redefine our company and reset the competitive landscape. We were bold and strategic, including a $5 billion merger and $1 billion IPO. Today, we're a bigger and better company because of those decisive actions. Even more important, we added capabilities, including strategic new hires and internalizing property management in much of our renewal leasing. Now we're in the process of rolling out our agentic operating platform. This modern version of Healthpeak is an on-the-ground operator generates superior results with our people and platform. We're already seeing a payoff from this strategy. In the past two quarters, two of the largest and most respected real estate investors in the world chose Healthpeak as their operating partner. Neither Blackstone or Brookfield had any meaningful prior exposure to the outpatient medical sector. Both joint ventures allow us to maintain control of strategic buildings and tenant relationships, while providing an alternative source of equity capital. We're excited to grow both of those partnerships in the future. Our balance sheet is stronger than it's ever been. Leverage is below 5x, and we have flexibility to pursue a number of capital allocation alternatives. We're funding highly pre-leased outpatient development projects sourced directly through our relationships such as the project in Atlanta that we announced last evening. We can also do outpatient acquisitions in our joint ventures with Blackstone and Brookfield where the deal structures generate additional returns to Healthpeak as the operating partner. We also see a unique opportunity in life science to create value via acquisition. Life science has been a development game for the past decade, but for the next few years, it will be an acquisition game, and we have the platform and balance sheet to capitalize on the opportunity. We can also do stock buybacks if and when the stock price is well below intrinsic value. Today, that's less attractive, but we did buy back $100 million in April at a 10-plus percent FFO yield when the stock was less than $17 per share. And finally, we could maintain leverage below our 5.5x long-term target given the cost of debt today isn't much lower than the fair market cap rate of our real estate. This is not the right environment to have elevated leverage. With our strong balance sheet, we can afford to be patient and utilize our dry powder when it's most impactful. A few comments on operating results and the underlying environment. The strong fundamentals in outpatient medical that we spoke to with the merger announcement 3 years ago continued to be validated. Last quarter, we had plus 5% cash re-leasing spreads and modest TIs that continue to be materially lower than peers. Total occupancy increased 20 basis points sequentially, and our leasing pipeline suggests that an internal growth in the outpatient portfolio will accelerate in 2027. In life science, public capital raising last quarter was the highest since 2Q '21. The IPO market is healthy but measured with 13 later-stage companies raising more than $5 billion in proceeds in the first half of the year. This week alone, we could see 5 biotech price IPOs. M&A has been record-breaking with more than $250 billion of announcements in the last 3 quarters, which recycles capital back into the ecosystem. Most important, the science continues to advance and year-to-date FDA approvals are above the 5-year trend. The building blocks are in place for occupancy in the sector to inflect, led by Healthpeak. In Senior Housing, we'll provide all the details on the Janus Living call, but happy to report that same-store portfolio had 260 basis points of occupancy growth and 19% NOI growth. We have an active and accretive acquisition pipeline sourced through our deep relationships in the sector, including $1.8 billion closed since January 1. Our senior housing portfolio will essentially double in size this year. and the number of operating partners will increase from 2 to more than 10. We're on pace to accomplish a 3-year business plan in 12 months. Janus Living success is also driving earnings growth at Healthpeak, given our unique and creative deal structure that aligns the interest of both companies. I'll turn it to Kelvin.

Thank you, Scott. We continue to execute our plan and have made tremendous progress year-to-date in our leasing and capital allocation objectives. I'll take a moment on our outpatient medical recapitalization with Brookfield. We're pleased to complete this strategic partnership as the proceeds raised exceed our capital recycling target for the year in a single transaction. With the leadership from our investment team, we have demonstrated our ability to execute scale transactions and partner with leading institutional investment managers. From a structure perspective, Healthpeak retain a 51% ownership interest in a 5.6 million square foot outpatient [Audio gap] and raised $1 billion of cash proceeds. We will devise our best-in-class platform and expertise to provide asset management, property management and leasing services maintaining day-to-day control of the real estate and preserving our client relationship. Economically, the transaction represents a trailing cash cap rate of 5.9% and after 7 years, we'll have a finite number of call rights to repurchase the noncontrolling interest at a price sufficient to provide Brookfield a 6.5% unlevered rate of return. Most importantly, this partnership expands our access to alternative sources of equity capital with a framework we can replicate to pursue growth opportunities across our business. Now turning to the second quarter results. We reported FFO as adjusted of $0.46 per share and net debt-to-EBITDA of 4.7x. Now starting with outpatient medical. We had another strong quarter of leasing as we continue to see demand for our real estate. For the quarter, we executed 1.2 million square feet of leases, including approximately 327,000 square feet of new leasing bringing our year-to-date total to 2.3 million square feet. We achieved 80% tenant retention and cash re-leasing spreads of 5%, which is in line with our average of 5% over the last 10 quarters and above our pre physicians Realty merger averages of 2% to 3%. We ended the quarter with total occupancy up 20 basis points sequentially to 90.7%. Since July 1, we have an additional 204,000 square feet of lease execution and approximately 882,000 square feet under LOI. I'd like to highlight our partnership with Northside and Atlanta as it's proven to be a source of strategic growth of our allocation portfolio. We have now entered into another development agreement for the ground up construction of a new outpatient medical project to support their expansion in Atlanta, where we have #1 market share. This will be the fifth development project with this side totaling approximately 565,000 square feet. Moving to lab. We continue to make progress towards net absorption and total occupancy capture through year-end. For the quarter, we executed 381,000 square feet of leases, of which approximately 60% was new leasing and 50% on vacant base. We ended the quarter with total occupancy increasing by 80 basis points sequentially to 78.5%. That is a 140 basis points increase since year-end 2025. And since July, we've entered into approximately 20,000 square feet of leases and have another 480,000 square feet under LOI. As a result of this activity, we anticipate a modest improvement in total occupancy by year-end from where we stand as of June 30. These results reflect our focus on driving leasing going at our properties, which I would like to highlight is sharing our progress in Torrey Pines, the premier lab submarket in San Diego. The activity we've seen in Torrey is a testament to our team on the ground and our high-quality portfolio as [ Tensor seeking core assets ] and core locations would experience landlords. This is allowing us to capture an outsized share of the deal volume. When accounting for executed leases and LOIs, our lease percentage in the submarket increased to 97% from approximately 65% at year-end 2025. And [Audio gap] with Senior Housing. Healthy ownership interest in [ Janus ] Living is now 74%, which represents approximately $6.5 billion of equity value. For the second quarter, Janus Living delivered total revenue growth of 45%, adjusted EBITDA growth of 34% and ended the period with cash on the balance sheet and no outstanding debt. Now moving to the balance sheet. We had significant activity during the second quarter into the third quarter against the backdrop of elevated borrowing costs. We have taken prudent steps to manage our debt purities and maintain flexibility in accessing the capital markets. Through year-end, we now expect to generate $1.9 billion of gross proceeds from capital recycling initiatives, and to date, we have completed $1 billion of acquisitions and buybacks. [Audio gap] August 4, we have repaid $900 million of debt, including $650 million of senior unsecured notes in July. We ended the second quarter with net debt to adjusted EBITDA of 4.7x and $4.1 billion of available liquidity. And quickly ending with guidance before we open up for Q&A. We raised our FFO's adjusted guidance range by [ $0.02 ] to $1.73 to $1.77 per share. The rate was driven by a 75 basis point increase in total same-store NOI from midpoint which includes a 200 basis points increase in both lab and senior housing and the recognition of the low market interest amortization related to the $400 million seller note repayment. To recap, we've made significant progress across the business through the first half of the year, and our balance sheet has never been stronger. We have ample capacity available to deploy into new investments as we find opportunities. And with that, operator, please open the line for questions.

[Operator Instructions] Your first question is from the line of Ronald Kamdem from Morgan Stanley.

A, just wanted to add about the lab portfolio. Looked like occupancy picked up as you mentioned sequentially and still expecting sort of improvement in the back half of the year. I guess I'm just curious, as you're sort of putting it all together with the environment, with the leasing pipeline when do you think you'll have line of sight to be able to see sort of same-store inflect to the positive.

Hi, Ron, this is Kelvin. I'll start there. I mean I think what's most important that we've been really focused on is capturing more than our share of the demand in the market and driving net absorption through the portfolio. And we've been able to do that through the first half of the year. We started a 77% occupancy coming into the year and now, we're at 78.5% total occupancy we just think is a testament to the team doing a really phenomenal job on the ground to capture that demand and it will certainly translate. We improved our same-store guidance for lab by 200 basis points at the midpoint, and that's certainly trending in the right direction. That's driven by the improvement in occupancy and just the overall health that we're seeing in the sector. So I think it's probably a little too soon to predict exactly which quarter we'll see that in collection, but we're certainly trending in the right direction.

Ron, I just want to add, same-store is less relevant. The real key is total occupancy and loving NOI in that segment higher. That's what generates earnings growth and ultimately share price. So that's all we talk about internally. That's the number we're reporting on. We report same-store because we have to. That's not the number we focus on. The key is we're growing total occupancy, and that's going to grow total NOI and ultimately earnings. So we're making progress already in the first half of this year.

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

Just on the lab and the competitive environment for leasing, you obviously have different players out there with different motivations highly motivated to push up leasing as you guys are. But just curious if anything has changed with regards to the rate environment, free rent, build-out costs, et cetera? And maybe as part of that, if you can comment on any changes in the size of tenants out there, small, medium, large and where the improvements have been?

Hi, Juan, this is Kevin. I'll start there. What I'd say is the pipeline continues to be fairly robust. We've seen since September 25, strong demand just continue in the portfolio. We've had a 2 million square foot leasing pipeline. And we've been capturing that demand and translating it into executed LOIs and leases. So as of the earnings call, we had 500,000 square feet under LOI, which is within our 2 million square feet of pipeline. And I'd say the characteristics of that pipeline hasn't changed dramatically. It's disproportionately wet lab space. It's biotech tenants that are really attracted to core assets in core locations. So we're certainly a recipient of all of the positive momentum we've seen in the biotech sector from a rates and concession standpoint, I'd say that the rates continue to be in line generally with our portfolio averages. Free rent has trended to be 1 month per year up to 2 months per year of lease term. And that's been fairly consistent. So it's really -- it's use dependent. It's a condition of the quality of the space, how much capital needs to be invested that's really driving the economics around these deals. And each situation is fairly unique. But most importantly, our portfolio can accommodate a wide variety of uses, and we've seen the benefit of that in our results. We've had fairly low capital deployed to capture that occupancy, just given the quality of our spaces for second-generation leases. And in certain instances where we have redevelopments, CapEx could be more elevated as we have to improved spaces that have been occupied for multiple decades by a single tenant. So I think the pipeline continues to be strong, and the team is doing a phenomenal job converting it.

Juan, this is Scott. The only thing I'd add on that, too, is the from a size perspective, we have seen more in that 25,000 to 75,000 square foot range, both in the execution as well as the LOI and pipeline bucket. So I think that that size rate is normalizing as we see the funding environment continue to improve.

Your next question is from the line of John Kilichowski Wells Fargo.

Scott, in the opening remarks, you talked about the outlook for lab getting more attractive here. I'm curious, are we getting back into an entire network, the distressed lab opportunity is looking more attractive to you? And what's the opportunity set today there?

Yes. The building blocks for the sector recovery are definitely there, and we're starting to translate that into leading pipeline and leasing execution, growing occupancies. Things are definitely getting better. Obviously, there was some work that needed to be done with vacancy. So it's not going to happen overnight, but the trajectory is clearly positive. I think the incumbents like Healthpeak are definitely capturing market share. So we're focused on core markets, buildings we want to own long term and particularly situations where we think our platform can bring something to the table and lease up a building that's otherwise not doing very well. So I think we've got the team and the balance sheet and the credibility to do all those things. The pipeline is active. It may end up not doing anything. We'll see. These deals take time to play out. Sometimes they're quite complicated, lenders involved, et cetera. But we're working on a number of situations. We obviously did the one at Gateway over the new year. It's doing phenomenally well. Scott, Natalie and the team are leasing it up, signed something like 125,000 feet of leases or LOIs since that purchase and active discussions on another 200,000 feet or so. So like really making good progress on that at a great basis. So hopefully, it's situations like that that we're focused on course upmarket in a situation where we can really add value with our platform and balance sheet and relationships. So we're working on a number of them, but no promises that any of them get done, but I think we'll end up being a consolidator over the next 24 months, which should prove to be a great time to grow the portfolio.

Your next question is from the line of Austin Worshmith from KeyBanc Capital Markets.

Kelvin, I think you had said that about 30% of the new leasing in the second quarter was for vacant space. I'm just wondering if you can give us some sense about the difference between leased versus occupied today. and kind of how that's trended versus last quarter? And what kind of a commencement schedule looks like across those leases that have been signed and are expected to take occupancy over the next 6 months or so?

Yes. Thanks, Austin, for that question. Without giving very specific guidance in terms of occupancy in the forward quarters, what I can simply say is that we have commencements in the back half of the year that exceed our expirations, and we continue to expect a modest improvement in total occupancy for the lab portfolio. We've talked about the pipeline. It continues to be healthy. And these leases have the potential to commence starting in 2026 that are within our LOI bucket. I wouldn't say it's a substantial share of that 500,000 square feet that we mentioned, but we do have the potential for some of our recent executions to benefit 2026 and into 2027. So we continue to focus on just capturing demand. We're only midway through the year. So there's plenty of time, no pressure on the team here. to go out there and further improve the conversion of that pipeline that will drive incremental occupancy into 2027.

Your next question is from the line of Seth Bergey from Citi.

It sounds like the kind of activity in the market has certainly improved and you're seeing kind of more tenants. I'm just wondering that conversion time line kind of changed just given the amount of the available lab space? Are you seeing a pickup between kind of when tenants comes to market and getting across that finish line and signing the lease

Sure, Seth. It's Scott on. I mean we're still in an environment where folks that are a little cautious, right? I mean there's a little [ scar tissue ] out there. So I think people and groups are taking their time and doing the diligence they need to do, which they should in a lease process. So from initial tour to execution, you depending on the deal, it would be 3 months, it could be 9 months, right? There's a lot of factors at play size organization, things like that, but it's been relatively consistent over the past 12 months.

Your next question is from the line of Connor Mitchell from UBS.

You guys mentioned some CapEx that's required for second-generation leasing or spaces that have been occupied now turning over. Can you just expand on that a bit and maybe how much CapEx we should expect over the near or medium term just based on the known move-outs and the leasing pipeline?