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

Okay. Great. Good morning. Welcome to the continuation of day 3 of the Barclays Global Healthcare Conference. I'm Steven Valiquette, Managing Director and health care services analyst here at Barclays. Our next session will be with Healthpeak. The company is going through the final stages of a property portfolio transformation that we think should lead to substantially better NOI growth trends for the company going forward. So I'm definitely looking forward to diving in deeper on this as well as several other topics in today's session. With us from the company, we have a full lineup here from management. We have Tom Herzog, the company's Chief Executive Officer. Tom Klaritch, the company's Chief Development and Operating Officer; also Pete Scott, the CFO; and Andrew Johns, who has multiple roles at the company but recently took over, again, the Investor Relations role at the company as well. So this will be kind of a hybrid session, mainly a fireside chat. But we'll also have some opening remarks and a few slides from Tom as well. So let me turn it over to Tom to get things started. Tom?

Thanks, Steve. So I'm going to share my screen for a moment. We put out a deck on Monday of some recent events that have occurred since our February 10 earnings call, and I'll start with that briefly. But for those of you that are less familiar with Healthpeak, we're a $23 billion health care REIT that specializes in 3 core segments of life science, medical office and senior housing. So just to bring you up to speed in case you've been following the company as to what's taken place over the last month, since February 10, we have initiated 2 new development projects, 1 in San Diego and 1 in San Francisco. We completed the debt repayment project that we had spoken to in conjunction with our restructuring with proceeds from senior housing. We did get an improvement to our credit rating with Moody's, moving from negative outlook to stable, that occurred the day of the earnings call. And just an operational update since February 10 or for the month of February, I should say, medical office and life science are functioning extremely well and CCRCs, which is 10% of our business, showed an uptick of 20 basis points in January, a downtick of 55 basis points of occupancy in February, which was not unexpected for us as the last month of the quarter is usually when the vast majority of the activity occurs. So everything is on track in all 3 businesses. The couple of developments -- and I'll do these very quickly. This is the one that we have in San Francisco, Nexus on Grand, 140,000 square foot project. We expect a 6.5% yield. Just to give you a look at our South San Francisco portfolio, everything you see in gold is what we own. We are the leader in South San Francisco life science. Everything up from Brisbane, San Francisco would be up north. We've got The Cove coming down to the project we just announced, along with our land bank that we will develop out over the next decade. And the big Pointe Grand campus, which we'll do a lot of densification on over the next decade as well. Callan Ridge is a project that we call densification in San Diego. And with that, yields can be higher because the land we already own. And this would be an outmoded 90,000 square-foot building that we would be developing to 170,000 feet at an 8.25% yield, it should be quite strong. This is the Torrey Pines submarket of San Diego. It's the #1 life science submarket in San Diego. And the Torrey Pines science park campus is where the Callan Ridge development resides. If I flip to the -- what Steve started the discussion with is that we've been a company that's been under transformation. That's almost an understatement. In the last 5 years, we have taken a $30 billion portfolio and sold $18 billion. Sold, spun or traded $18 billion of that portfolio. So you can imagine the 40% that we kept, we really like. And so here's what we used to look like, skilled, senior housing and a small amount of life science MOBs, a little bit of CCRCs. Here's what we look like today after we finish the final sales over the next probably 4, 5, 6 months maybe of senior housing that we've been exiting, that everything is under contract, either hard or soft. Here's what we'll look like as that transformation is complete. So it's a company that will be almost half life science, about 40% MOBs and 10% CCRCs. We also did a lot of heavy blasting in the balance sheet, improved the net debt-to-EBITDA by 1.5 turns, lengthened out our maturities, improved our credit ratings. And importantly, we've massively increased our development pipeline, bringing it to about $500 million of spend per year and it'll probably become larger than that over the next 3 to 5 years because we have so many opportunities. And that work was done at an 8% yield. So very accretive, and we do have a $7-plus billion land bank and densification opportunity in front of us, which should create a great trajectory of growth as we go forward. This slide shows the 4 different -- or 3 different businesses plus development, which is where our future growth will come from. We do focus completely on the 3 hot bed markets in San Francisco, Boston and San Diego. We don't deviate from that. We've got large clustered campuses within those markets, which creates a high barrier to entry. In medical office, we're primarily on-campus, 84%; and 97% on-campus and affiliated. HCA is our biggest anchor hospital system and so an irreplaceable portfolio in MOBs. And CCRCS, although small at 10%, 15 properties is almost impossible to create new supply as it's an 8- to 10-year inception to development period and produces a very nice yield that's primarily controlled by not-for-profits, but we happen to have built scale and a nice portfolio. And of course, we've already talked about development. Just -- I think I'm going to skip over these slides. We've had a lot of great acquisitions over the last 3, 4 years. Trophy acquisitions, if you were to study these. Same thing on development. This is $3 billion of acquisitions just on 1 page. This is $2 billion of expenditure on developments, all on a single page. We have others, of course, but these are the trophy properties. We spent $2 billion on this, average cap -- or average yield, 7.5% in 4% and 5% cap rate markets, producing about $1 billion of value over the last 5 years. And as far as our densification, the land bank opportunities, you can see that they're spread throughout the country. The ones in gold, and they are size-based based on the size of the dot, those are our life science opportunities in the 3 markets that I mentioned. The green would be MOB and the blue would be CCRC opportunities for densification that is already embedded in our portfolio. So Steve, I'm going to stop the share here and turn it over to you for questions.

All right. Great. Thanks, Tom. So yes, a couple of things to dive into here. For the life sciences portfolio, you mentioned in one of the -- I think that very first slide, cash receipts over 99% in both January and February, and you're continuing to see significant demand and rent growth in all 3 markets. And maybe just to confirm whether or not these trends are correlating with what you'd be expecting to see at this stage just in the context of your full year 2021 guidance of 4% to 5% same-store cash NOI growth for life sciences.

Yes. Maybe, Tom, you start with MOBs, just briefly. And Pete, you can speak to the same-store growth that we're seeing in life science and the activity.

Sure. On the MOB side, really, the biggest pushback on our earnings for the year is going to be in the parking area. A lot of our hospitals still have restrictions on visitation. So our parking revenue has been down since the pandemic begun. It started to pick up. But it is a 90 basis point impact. That's why our guidance was kind of at the lower end of where we normally expect to be. But as we saw in January and February, that's picked up a little bit, and we might be able to improve on those results. But other than that, leasing has been above our expectations and expenses have been in line. So we actually started the year with occupancy a little ahead of where we expected. So I think we're in pretty good shape right now.

Well, I'd like to just mention, for MOBs, for the people that don't follow us as closely, that's been a 2% to 3% rent bump business in the leases for the last 15 years. It almost never deviates from that. So it's been a very steady business, especially with our portfolio being primarily on campus. A lot of our growth in that business comes from development that we do on a proprietary basis with HCA and other major hospitals, which do produce more in the 7.5% yield range. But those are on an invitation-only basis. So that's where some of our growth comes there. Pete, on life science?

Yes. Steve, on life sciences, last year, we guided prepandemic 4% to 5%, and we ended up north of 6%. So life sciences has actually been a beneficiary of COVID. There's not a lot of beneficiaries out there, but it's been one of the segments that has benefited from it. We guided 4% to 5% this year. Our occupancy is in the very, very high 90s. We've got rent escalators in the low 3% range. And we've got this mark-to-market opportunity where, as leases roll, we're able to mark them to a substantially higher rental rate. So everything we're seeing so far year-to-date, as Tom mentioned with the quick operational update is, we feel good about the 4% to 5%. And hopefully, we're -- we can get lucky and outperform. But where we are right now, we feel very comfortable with the 4% to 5% range.

Okay. Great. Maybe 1 or 2 quick follow-ups for Tom Klaritch in particular. So Tom, just to confirm, so that with the MOB cash receipts going from 99% to 98%. That's just the parking, nothing else. Just want to confirm that. Sort of sound like that...

Yes. That's pretty typical with how our collections run. We tend -- it's kind of a bell curve. Prior to the month, beginning of the month, we usually get a little bit of cash receipts. The bulk come in kind of from the first to the 10th and then there's some stragglers that -- you always have some issue at a hospital or a physician practice where somebody left, you have a new personnel, a check doesn't get sent on time. Last month, we actually had the winter storms that hit across a lot of our portfolio and really across the country. So February, though, still came in at about 98%, which is typical by the end of the month. And as of this morning, we're north of 99%. So that's just how our collections run historically.

Okay. And then as a follow-up, do you actually get patient visit data from your MOB tenants as part of your diligence just to sort of track what's going on within the operations of the tenants? Or do you not get access to data like that?

We don't get specific data from the tenants, but we get kind of volume information just by our normal discussions with our tenants and affiliated hospitals, our property managers and leasing agents on the ground at all of our facilities are in constant contact with our tenants as well as the affiliated hospital. And then our employee leasing directors and asset managers also are in daily contact across our portfolio with tenants and the hospital administration. So we get a good feel for what's going on with volumes, COVID impacts, things along those lines. We also use some third-party sources, Definitive Healthcare has a lot of good industry information. And then we look at local news sources too for a lot of that information. But the bulk of it really comes directly from the hospitals and the tenants. But there is no requirement in our leases that we get specific volume information from the facility.

Okay. All right. Great. And then just to kind of stick with that topic for a moment. So from our overall Barclays Healthcare Conference here over the past 3 days, one of the clear messages is that telehealth is definitely here to stay and virtual doctor visits will continue to replace in-person visits wherever possible, just given the fairly obvious medical cost savings. So I guess, just as a sanity check around this because we get questions on this from investors from time to time. Have there been any anecdotes at all from any of your MOB tenants that they may be rethinking the size of their square footage needs, specifically in relation to this trend around telehealth and virtual visits? And the good news is that they still got to keep some office, I got to believe, and the revenue coming in from that still pays rent at the end of the day. But just curious if there's been any data points that would suggest that there's been any sort of reduction in square footage demand on the back of this.

No, we've had no request at all for any kind of reductions in square footage related to telehealth. In fact, many of our tenants across our portfolio have been expanding. We've had a number of those happening in many of our buildings. When you look at telehealth and -- before the pandemic, it was about 2% to 3% of patient visits kind of in the April to June range, maybe a little before that, it jumped to 60%, which is a significant amount, obviously, and then it fell back and kind of settled in around 20% of patient visits. Primarily, a lot of the services performed by telehealth are with primary care physicians. Our portfolio, since it's 84% on-campus, 90% when you count in the adjacent buildings. And we have mostly specialists in our properties as a result of that. The specialists haven't been hit as hard from telehealth. And even with that, I think it's actually made them more efficient. They can take the less acute cases kind of over the phone. It makes their practice more efficient in taking the more serious cases in person. And we actually think there's a possibility that we could increase square footage in that physician practices may start hiring more physician assistants and nurse practitioners to handle the telehealth calls, while they're freed up to see the actual severe cases in their office.

Okay. All right. Great. That's certainly helpful to hear that. Shifting gears here a little bit to some of the development projects. I've got a few questions around this. I guess for any of you guys that want to take these questions. So I guess, first, with new development projects like Nexus on Grand and Callan Ridge that you mentioned earlier, there weren't any disclosures around pre-leased activity. So I guess I'm just curious, as you embark on projects like this, would you normally have some visibility on pre-leased activity at this stage and before the shovel even hits the ground? Or you just rely more on the general supply-demand imbalance that you're extremely close to, just given your presence in these cluster areas? Just to give you the confidence to forge ahead with these projects, even if there is hypothetically no pre-leased activity at this stage. Just curious to get more color around all that.

Yes. We look at pre-leased activity, for sure, in our current pipeline. Oftentimes, we'll have some activity around leasing just as we're introducing the project to the market, and we'll pay attention to that. We do demand-supply studies in each of our markets and submarkets. We make sure that we have an absolute clear line of sight to how the project would be funded, the amount of growth in our pipeline. So we understand the incremental drag, and so those are all things that we're doing. For instance, when we looked at adding these 2 projects that I just mentioned, we had $600 million of development underway in San Francisco and San Diego, and it was 95% pre-leased. We had the boardwalk that had been pre-leased almost from the time the shovel hit the ground. So these are all things that were taken into account. Boston, we've been a little bit more careful. We have the 101 Cambridge Park Drive development that will be completed well ahead of this surge of new supply that we see come in. And so then we'll take a bit of a breather in Boston. But the other thing that we do look to is the amount of demand that comes off of our biotech tenant base because we are 70% biotech, and those are companies that oftentimes have spun out of university or hospital research centers, and they were NIH-funded. They moved to VC funding, an initial public offering, secondary and then they grow. And as they grow, they want to grow with a landlord that has a strong cluster, and from that, it creates demand. So we found in San Francisco and San Diego that we're literally running out of space to be able to accommodate our existing tenant base, and that's why we added these 2 additional projects. We could probably handle some more as we go forward.

Yes. I would add on the MOB side, we're typically developing properties in conjunction with the health system. So those projects are normally 40% to 60% pre-leased prior to us even starting the project.

Okay. I was going to dive into that next, actually. I was curious to hear more about the kind of the dynamics around MOB development versus life science. I mean, obviously, the current development projects that you guys have are weighted more towards life science. What are some of the other factors that go into MOB development? You mentioned kind of having an anchor tenant, whether it's on-campus versus off-campus, that create challenges on just finding land or just available space to develop. And what are the other key factors? And also just as far as just overall ROI opportunity, is it just maybe a slightly less dynamic in MOB versus life science? Just curious to hear more thoughts around that overall comparison.

Really, the bulk of our MOB development in the past 2 years has been with our development program we have with HCA. We work with them. It's typically on-campus properties. They're ground-leased. They're on property that the hospital already owns. So we're not normally going out and having to buy land and have it entitled. It's already ready to go. And as I said earlier, those projects have been 40% to 60% pre-leased, depending on the facility. The returns on them have been in the 7% to 7.5% range, sometimes higher, sometimes lower, it depends on the market they're in, the amount of pre-leasing and the amount of activity in the market, but still pretty good returns there. We also have been working. We hired Justin Hill about a year -- a little over a year ago, as a business development person in our medical office segment, and he's been generating relationships with a lot of the local and regional developers around the country. If you look at MOBs outside of health system and hospital ownership, one of the largest owners in the space are actually local and regional developers that have generated relationships with local systems over the years, and they normally are building a facility for them. And they are also pre-leased by the system. And we've got a couple of potential opportunities through the relationships he's built in that program also.

All right. Great. So tying all this together, I think in the last supplement that you had for ending calendar 2020, you had 68% of your active development pipeline was pre-leased. I'm curious where that might shake out then for the next supplement at the end of 1Q, just given some of these actual development projects. Will that number change materially? Or we also just have to wait for that to come out before you're going to give us any color around that?

Well, the 2 projects that we just added may or may not have pre-leasing included by the time of the next supplement. So that obviously lowers the amount of pre-leased, and we've also added additional leasing in some of the other projects. So we'll hold off until the next supplement, but our leasing activity in life sciences has been very, very strong.

Yes. All right. Great. I got a few more questions here. Again, regarding the overall update around the divestitures on the senior housing portfolio, from the slide deck and from some of your comments, it sounds like there's really no unexpected delays in closing these deals and just the process generally remains on track. I just want to just confirm that that's a good characterization and maybe any other color you want to add to that overall process.

I think you summarized it very succinctly. The bottom line is everything remains on track. Just for the benefit of the people watching, we had sold $2.5 billion of a $4 billion portfolio and closed on that. Prior to our earnings call, we had another $1.5 billion that was under contract, either soft or hard. We've made progress across the board. The remaining transactions are 15 different transactions, 2 big portfolios and then a lot of smaller ones, and everything is completely tracking right now. So I would imagine we'll have lots to announce in our next earnings call.

All right. Great. Okay. And then tying in the divestitures with redeployment and what that means for the dividend, you mentioned that the stated dividend payout ratio is in the 80% range. That's your target going forward. To trim the dividend, obviously, temporarily here to be at an 80% payout in light of the divestitures. But as you do redeploy these proceeds, I mean, should we already assume preliminarily that there's a pretty good chance the dividend could go back up in 2022? Or is it too early to make that presumption right now?

I think it's too early to make that presumption. When we adjusted the dividend, we did it during a period of time where we're still completing the sale of assets, knowing that, that would take some time remaining in 2021 and then reinvest those proceeds in new investments, and we do have a pipeline of things that we're looking at. In addition, we would have some debt activity that would take place in repayment of nearer-term bond maturities and reissue of debt as we identified those acquisitions, so as not to sit on dead cash. So as we -- and then on top of that, we've got the CCRCs that probably trough, we'll see. It's hard to estimate that maybe they trough in Q2. And then we expect that with the full vaccinations having taken place, that we'll probably start to get a bump in CCRC activity and occupancy. So how fast we get to a stabilized earnings is yet to be seen. We -- the way we set the dividend, it will be in the high 80s to maybe 90% payout in 2021. And then we said, once stabilized, it will go to 80%, whether that ends up in -- for 2022 or sooner or later, that will be yet determined. Once that's completed, we have set the company up now for strong steady growth with 3 very stable and strong portfolios that should be seeing a lot of demand. So our intent would be to keep the payout ratio at 80%, grow our AFFO and then grow our dividend. That would be part of our model going forward.

Okay. Perfect. And we're running close to out of time here. One quick one, just to follow-up on one of the comments you made as far as the potential for when the trough might occur in occupancy and the CCRCs. I think normally, there'd be some seasonal uptick in occupancy just in the second quarter versus the first quarter. Correct me if that's not correct, but also -- so I guess the bottom line is, is there any chance that the first quarter of '21 could be the trough quarter in CCRC occupancy instead of 2Q being the trough, which would be the more conservative view, I guess, at this stage?

Yes. Pete, do you want to take that one?

Yes, sure. Steve, if you look at our guidance for the year, the high end, we said assumes an inflection point in occupancy starting in the second quarter of this year. The lower end assumes that inflection point in the third quarter. So on the high end, the answer to your question would be yes. The first quarter would be the trough quarter. On the low end, it's the second quarter. So those are our views. And a lot of it's predicated on the rollout of the vaccination, which is progressing quite well within the facility. So we're encouraged by that, but we'll see how this plays out as the year progresses.

All right. Great. With that, I think we're a couple of minutes into overtime here. So as we wrap up, just curious, Tom, if there's any other key messages you want to convey just, really, overall that we did not touch on today's session. If not, then we can wrap it up.

We really did touch on everything, but I would remind you that we've gone through a 5-year restructuring. That restructuring is now complete. We have some closings to complete that are under contract, some reinvestment to make that we've got a good pipeline. Our balance sheet is exactly where we want it now. And we have a really strong densification opportunity that will keep us busy for a solid decade with embedded opportunities. It is a differentiated REIT at this point. It's really hard to compare us directly to any other REIT. And I think it captures 3 vital areas of real estate that should be strong into the long foreseeable future. So we're quite optimistic on where things are going.

All right. Great. Well, with that, we're out of time. So I certainly want to thank everyone from Healthpeak for their time today, and everyone, enjoy the rest of the conference.

Thanks, Steve, and thank you, everybody.

Thanks.