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

So welcome to Citi's Global Property CEO Conference. I'm Michael Bilerman with Nick Joseph. We're pleased to have with us Healthpeak and CEO, Tom Herzog. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining online, to ask management a question, simply type it into the box, and those will come directly to me and to Nick. So Tom, I'm going to turn it over to you to introduce Healthpeak and any members of the management team that are with you. And if you can answer the following question. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are the 3 reasons why they should invest in Healthpeak?

Got it. I'm going to start with introduction of the people on the screen, starting with Scott Brinker, our President and Chief Investment Officer. Scott, you got to wave. And then we've got Pete Scott, our Chief Financial Officer; Tom Klaritch, our Chief Development and Chief Operating Officer. So, that's the senior team that will be presenting to you. Michael, to your question. So what would be the 3 reasons that if they could -- if investors would only invest in one REIT, why us? Well, I would summarize it this way. We've spent 5 years repositioning our portfolio and our company. And we have created what we believe to be a truly differentiated REIT focused on non-commoditized real estate where we benefit from our scale and expertise, creating a sustainable competitive advantage. Our 3 vital, irreplaceable high barrier-to-entry businesses combined with our development and densification upside supported by our strong balance sheet offers multiple avenues of growth and gives investors a way to benefit from the baby boomer demographic tailwinds across all 3 of our businesses. So Michael, I'll start from there. Did you want me to go into my opening remarks?

Yes. That would be great.

I can do it. Okay. So good morning, everybody, and thanks for joining us. We put out an investor presentation this morning early. And I'm going to -- I guess I have my screen shared right now. I'd like to take you through several important items in the deck that I think you'll find interesting. And the first thing I would mention is you all know that we've been in the process of exiting our rental senior housing business. So the first questions that we got in every meeting that we started early this morning is, what's the status? And the bottom line is, we've continued to make progress in each of our different transactions, and that's a sum total of 15 different transactions, summing up to $1.5 billion. And nothing has fallen away, but we have nothing new to report as actual closings at the current date. So we'll save that for an upcoming meeting. So I'm going to start on the Slide 3, and this is actually from our deck that you can pull off of our website. These are the things that have transpired since our February 10 earnings call. And the first one is we did announce 2 new development densification opportunities, and the first one is Nexus on Grand; and the second one is Callan Ridge. We had 600,000 square feet of active development pipeline in San Francisco and San Diego that are now 95% pre-leased. And we've had plenty of demand from our existing tenant base. So we now thought was the right time to engage in these 2 projects. :one's in South San Francisco; and the other in Torrey Pines. Further down of the slide, you can see that we've got development repayment that we spoke to on our earnings call, and that continues to be on track along with improved debt metrics. And we did get our negative outlook removed from Moody's. So now we're simply at BBB+ and Baa1 across our 3 rating agencies. And then finally, at the bottom of the screen, we give operational updates across each of our 3 businesses. It's rather simple, medical office and life science continue to perform very, very well -- and across all fronts. And CCRCs, which were up a tick in January were down just a little bit in February, but that was not unexpected for us as the third month of the quarter is always where we capture the majority of our occupancy. So things are going fine on the CCRC front and the vaccine progress has been good. And we do think that Q1 will probably be a trough for that particular business. I'm going to give you a couple of visuals on the 2 development projects that I just mentioned. This first one, Nexus on Grand Development, you might have known that previously as BML3. We've renamed it. It's 140,000 square foot property or will be estimated spend of $160 million. It will be completed in the first quarter of 2023, and the yield on cost is at about 6.5%. Here's an area to give you some perspective. This is South San Francisco itself. And everything in gold we own or are developing. So here's The Shore up closer towards San Francisco. There's The Cove, Oyster Point. We come down to our development campus here. Here's Forbes, whereas BML3, now Nexus on Grand, and they're fully entitled. This is the one that we just announced that we're commencing on. This was the Gallo site that we just very recently purchased. And this sits contiguous with Pointe Grand, a 640,000 or 650,000 square foot campus that we have, that sit on 1 and 2 story properties with tons of open space parking with lots of upside to densification opportunities. Then we have modular labs and other properties in this particular area. So just an absolutely fabulous location right in the heart of South San Francisco. This is Callan Ridge, just a rendering, but we took a -- this is a densification project. We took a 90,000-foot outmoded property, and we are developing 170,000-square foot Class A property in its place with spend of $135 million. It's in Torrey Pines. We expect development to be completed in the fourth quarter of 2022 at an estimated yield on cost of 8.25%. I must mention 8.25% is partially due to a low land base. But again, this is a densification project, meaning that we already own the land. And this will be the first of many densification projects you see Healthpeak take on over the next decade. This is a visual. Everything in gold, we own. This is the Callan Ridge densification project right here. It sits on our Torrey Pines Science Park campus. And this is The Boardwalk, a project that we just completed. It's not even -- while I say we just completed, we're completing it now. It's 100% leased and ready to go. So we've got great success in Torrey Pines and looking to expand that. This next slide, I'm going to bring it to us. Too many words on it to be helpful, but I will just point out a couple of things. For people that know Healthpeak, they know that we have been in a massive repositioning for the last 5 years. We have worked to have ownership of noncommoditized real estate that's less subject to new supply, where we have scale and expertise, and we can create competitive advantage. This is an interesting fact. So if you roll back 5 years ago, we had a $30 billion portfolio. And we sold $18 billion -- sold, spun or traded $18 billion of that portfolio to create the business that we have today. We recycled those proceeds into our 3 core businesses and paid down a lot of debt. And in the meantime, we also -- so that -- by the way, that created a business that I'll show you in the next slide is 97% life science, MOB and CCRCs. And along with a big embedded densification in land bank within our business. I'll go to the next slide. This is the before and after. 5 years ago, this is what we looked like, a lot of skill, a lot of senior housing, rental senior housing, 39% life science, MOB, CCRC. We are now 97% or soon we'll be. We have $1.5 billion remaining to sell that's under contract [indiscernible]. We expect to be completed on or around the first half of 2021. So in the next of 4, 5 months or so, and this is what we'll look like at that point. We've cut 1 turn to 1.5% turn off of our leverage, which is great, extended our weighted average maturity. We've bumped up our credit ratings with all 3 rating agencies. We have gone to -- from a $0.7 billion 5-year cumulative spend. And in the last 5 years, it's been $2.4 billion. By the way, at an 8% yield on spend. We hope to replicate that. But that was a fabulous return that we received, and we massively increased the size of our land bank and densification opportunities as we feel this is critical to our future growth of our company as we go forward under our new portfolio. I'm going to flip to our avenues of growth, which obviously becomes vital as we've repositioned our company and our portfolio from what we had at HCP to the new portfolio in Healthpeak. Really, there are 4 ways that we grow. One is through organic cash flow growth or same-store growth, which we think is going to be very strong in life science. It's going to be strong and steady in MOBs, and we think we're going to get a good pickup in CCRCs, which is very much a specialty product, quite a bit different product than rental senior housing, which I'm sure we'll talk more about in this call. We did talk about our development pipeline. It's still very sizable. This is active pipeline of $1.3 billion, estimating a 7% yield. Our densification of land bank, like I said, is a $7 billion opportunity, we'll take advantage of over the next decade. And of course, we'll always take advantage of accretive acquisitions when we're trading at a premium to NAV. So we do hope to be aggressive on that front. In fact, a growth in all 4 of these different avenues over the coming months and years. I'll very quickly take you through some of our strategic acquisitions and developments. And I say quickly because the main point here is, well, we've been busy selling $18 billion of real estate over 5 years. Over the last 4 years or so, we have acquired or developed $10.5 billion of real estate. That includes the $1 billion or so that we will complete out 2021 with as we recycle the proceeds from our sales of senior housing. But just on this one slide alone, we are showing $3 billion of acquisitions of all trophy properties that you'd recognize the names of. Cambridge Discovery Park, The Post in Waltham, a couple of big MOB portfolios, the CCRC portfolio, Hayden in Lexington, 35 Cambridge in West Cambridge, and of course, we had The Towers at The Shore. So that's $3 billion worth of acquisitions at an average 6.5% cap rate -- cash cap rate. Our developments, again, you'll recognize the names of a lot of these trophies, The Cove in South San Francisco, The Shore in Brisbane, Hayden in Lexington, The Boardwalk in Torrey Pines, a number of different HCA development projects in MOB. This was about $2 billion of spend over the last 3 to 4 years, call it, 4 years. Really, I guess, The Cove, we'd have to date back to 5 years and that $2 billion of spend has turned into somewhere in the vicinity of $8 billion of value. The cap rates on this stuff for cash flow yields on spend have been anywhere from 6.5% to mid 8s. Most of it in the mid-7s, and that did create $2 billion of spend, $1 billion of incremental value for our shareholders. So I thought that was important to point out that we've been busy on both fronts, both sales and in building our portfolios in our core disciplines. And if you want to see what our densification pipeline looks like, here's a map of it: the life science in gold, MOB in green, CCRC in blue. And these dots, by the way, do describe the size of the opportunity. So lots of it in South San Francisco. San Diego, we've got some. Boston some. We've got some pretty sizable opportunities in CCRCs, and in the green, you see the medical office. And then we give some stats on each one of those, but all very much value-creating activity or so. So if we never buy another piece of land for the next 10 years, which I'm absolutely certain that we will do that, too, we've got a runway of the next 10 years of growth inside of this company. And then we do have 1 million-plus square foot land bank that's entitled and ready to go. So with that said, my final remarks are, we having come through this restructuring and having built quite a portfolio balance sheet and development pipeline and machine, we feel that we're ready to grow and do so aggressively as it's done accretively and safely. Nick, Mike, I'm going to turn it back over to you guys then for Q&A.

Great. Thanks, Tom. That was very helpful overview. Maybe just starting, I recognize the transition [Audio Gap]

Yes. Nick, no delays it's 15-or-more separate transactions. There are 2 that have a little bit of size to them, but those are both progressing. The other 13-plus are progressing as well. We'll probably have material announcements around the next earnings call, so call it 2 months. We've got a number that are scheduled for that. April's probably a key date. There might be some that get pushed back into the May-June time frame just because of license transfers. But we think that we'd be on track for a good portion of that $1.5 billion, around -- by around the next earnings call is kind of the time line that we're tracking right now.

And from a pricing perspective, obviously, the underlying fundamentals have changed. Any retrading or any changes from a pricing perspective?

No. No changes. We were under contract on all of those properties as of the last earnings call about a month ago. So the pricing has held throughout. Certainly, in November, December, there were a lot of well adverse hum things happening in the business in terms of the impact on occupancy and COVID trends. And at the same time, the news of the vaccine was an intermediate to longer-term positive. And those 2, for the most part, offset one another. There's always a little bit of back and forth on a transaction, particularly in an environment that's as chaotic is this one. But for the most part, we were able to hold pricing on transactions, by and large, and we had a couple at the margin that got trimmed. But we're really pleased with the outcome of the process that we undertook starting certainly last June, hard to believe.

That's great. And then just on the seller financing side, I know, I think $250 million of the $620 million was supposed to be repaid in the near term. Has any been repaid? And what's the expected timing on that?

Yes. We're still -- not yet. It has not been repaid, but hopefully, that does happen soon. We provided about $600 million of seller financing on the first $2.5 billion. The $1.5 billion that remains that's under contract, there's really no material seller financing. So at the end of the day, if we end up with a couple of hundred million dollars on $4 billion in sales, it's a pretty remarkable outcome really much better than our expectations, just given the really low cash flow yield on current NOI that's in place, it just makes those assets much more difficult to finance. Finding the interested equity investors was, in some case, the easy part, but getting them financed was more challenging. So we had to step in on a couple of portfolios that we really wanted to get under contract soon and/or close, and that was a means to get that commitment.

What's the plan for the sovereign wealth senior housing JV?

Yes. Tom, I can take that or you want to?

I'm glad to take that one, Nick. That one we -- when you have an important partner like that, you have to make sure that what we do ends up working for both parties. And we could easily continue to manage that one along with our CCRC business. We have the infrastructure in place. We've got good people in place to manage it and are glad to do that. At the same time, if the pricing is right, and it's -- if it works well for our partner, we're glad to exit that one, too. So we're in discussions right now. We'll figure out what's best for both parties. We're flexible on it. It's not a big number for us, Nick. So it's pretty immaterial in the big equation right now.

Right. Maybe on the CCRCs, I appreciate the operating update. What makes it -- why is it that the third month is typically the best within a quarter for CCRCs?

Yes. I can take that, Tom. We've been owners of that CCRC business, Nick, for about 6 years now, and it's been a consistent trend. The sales cycle seems to be very focused on generating leads and getting tours in those first 2 months of every quarter. And then there's a push at quarter end from the local sales teams to generate the actual closings. That's particularly true at year-end, and it's partially tax driven. But even throughout the year, March, June, September, December, just are always the biggest month. They tend to account for between 50% and 60% of the total move-ins for any given quarter. So it's very heavily weighted and it's just been a consistent trend that we've seen in that business. Keep in mind that CCRCs, it's very much a lifestyle-driven decision unlike rental senior housing, where the move in is in most cases, by necessity, and it tends to happen quickly. They need a spot and they need it fairly urgently. CCRC is a different. The lead cycle from initial inquiry until moving could be 2 years. So there's much less sensitivity to the exact timing on the part of the resident.

How do you think about the recovery from an occupancy standpoint of CCRC? It's obviously been a big topic of conversation on the senior housing skill side. But how would you expect CCRCs to actually trend given those kind of different dynamics that drive it?

Yes. There are a couple of things I'd point out. For the last decade, these have had occupancy that exceeded rental senior housing by at least 300 basis points and [Audio Gap]

[Audio Gap] Obviously, the platform is built out in these 3 core cluster markets. There's a proliferation of other markets that are certainly being branded as life science or where additional growth is occurring. Should we expect you to expand into any of those markets in the near or medium term?

Nick, we've talked about that over the last year plus 2 years probably. And one of the things that we had considered strongly as we revamped our portfolio is let's identify those portfolios that they have very high barrier to entry and that we have competitive advantage. We've got huge competitive advantage in the 3 hot bed cluster markets where we have lots of land holdings, densification opportunities. It's where we're the massive workforce in the tech and biotech industry resides, where the research colleges and whatnot reside. And it's very difficult for new entrants to come in and compete. It's very difficult for entrants to come in and transition office or industrial properties into true lab use properties, and we're sitting on a gold mine of opportunities to densify very profitably. So it's been our view that despite the fact we could pick up an instant 50 basis points of yield in a lot of these secondary markets, we might face a whole lot of new competition from others in similar industries that choose to come in and develop and we've been seeing some of that. And it has been our conclusion that we will stick to the major markets where we have these huge competitive advantage is in a decade of work to do to continue to build those out.

How concerned are you on supply on life science for those markets? Or are these conversions?

I'd be real concerned if they weren't so land constrained. We've been around a long time, a lot longer than since 2007, we acquired Slough. Slough has been doing this a lot longer than that. And the ability to go in and convert properties was something that one could do at one time, and there were some easy pickings. It's only certain office or industrial properties that are good candidates to create something even close to being a purpose-built lab property. Most of those are gone, and they're very, very expensive to complete now making the economics quite poor, and they become effectively second class properties in the future, and the locations aren't as good. So the fact is, of course, there's always new competitive supply in any class of real estate. But it is very, very much mitigated inside of life science in these 3, 4 markets, and that's why we've stayed so close to them.

Tom, last year, actually, right, I think it was about a little over a year ago, Alexandria and Boston Properties announced that joint venture in South San Francisco. How do you -- is there other -- are there opportunities for you with adjacent land owners? You put up that $7 billion densification slide. Is there further opportunities where you have an adjacent owner where you can bolster that pipeline even larger?

Michael, we could increase the velocity of our development pretty substantially. And we've had numerous, numerous offers to do so with major financial institutions. But our view has been, first of all, it's a massive gem within our portfolio. And second, we don't believe that having joint ventures inside of clustered hot bed markets is the best play for us. 70% of our tenants are biotech, with the majority of the rest of it being pharma with some research and development robotics and different things like that. But with biotech, the whole play is that they start out very small. Oftentimes, they're these genius professors and these research universities that peel out formal biotech, they go from NIH funding to venture capital fund and eventually, an IPO, a secondary, maybe someday taken out by a pharma. But in the process, they grew rapidly and you end up tearing up leases multiple times as they triple and quadruple their space. If we set these up with joint ventures, it limits our ability to take advantage of that in the area that we have focused our rarest attention, which is biotech. So the answer to your question is, yes, we could absolutely do that. We could have numerous different partner candidates that we could be doing the dance with and have chosen not to intentionally.

Tom, what are your top 3 priorities to improve your ESG score next year?

Well, I always have to start, Nick, by mentioning that ESG has been an enormous effort inside of this company and focus for the last decade. So this isn't something we're just getting started on. I can't take credit for. It was my predecessors, and I'm glad that they did but we've been a recognized leader across a whole bunch of prominent organizations that -- well, for instance, we were NAREIT Leader in the Light for 9 years running and Green Star rating from GRESB since 2011. But we do intend to keep the momentum. So there were 3 different things that we noted. We put together the diversity, equity and inclusion initiative specifically in the we stand together initiative, where we're seeking to enhance racial diversity, education and awareness throughout our company. So that's the first thing. The second thing, as we prepare to publish our 10th annual ESG report, we'll be seeking to expand on discussion around ESG risks and opportunities. And third, we adopted an ESG set of metrics into our executive cash comp program for 2021 to express the importance of the ESG inside of our company, but also to provide the right motivations for the senior executives.

Great. Well, we have our rapid fire to end the session. When we were sitting physically together in Florida a year from today, what will be the one thing that will surprise people the most about your business over the prior 12 months?

I think it's the size of the densification opportunity inside of our company and the profitability of it, considering the location of the land and the very low cost basis in the land. And we do intend to go out and provide a lot more information on them as we go forward.

What do you think your corporate travel budget will be in 2022 as a percentage of what you spent in 2019?

I'm going to have to whip something up off-the-cuff here, Nick, because it's hard to tell. I expect that we'll still do a certain amount of travel, certain amount of live visits. But I would say that to a number at 75%.

What would same-store NOI growth be, I guess, for the MOB and life science sectors overall. So not company-specific next year in 2022?

We're going to give it 4% to 5% for life science and 2% to 3% for medical office.

And finally, where will the 10-year treasury yield be a year from today? Today, it's at about 1.5%.

I hate to be uninteresting on this, and I do this to you every single year, but we felt -- we think predicting interest rates is impossible. So we always follow the forward curve and that's 2% or Pete reminds me, it's actually 1.9%, but we'll see where it plays out. Certainly, there's been a lot of noise about pickup of inflation. So we'll see where that falls out. But we're still looking at the rate curve.

Great. Well, thank you all for your time. Really enjoyed it, and hope everyone has a nice conference.

Yes. Thank you, guys. Thanks for coming in.