Good morning, and welcome to the Health Peak Properties, Inc. third quarter 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then 1. 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.
Today's conference call can turn forward-looking statements. Although we believe expectations reflected in any forward-looking statements are based on reasonable assumptions, These statements are subject to risk and uncertainties that may cause actual results to differ materially from our expectations. Discussion of risk and risk factors is included in our press release and detailed in our filings of 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 an exhibit to the 8K refers to the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with regulatory requirements. The exhibit is also available at our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker.
Thank you, Andrew, and welcome to HealthPeaks' third quarter 2025 earnings call. Joining me for prepared remarks is our CFO, Kelvin Moses. The past 60 days or so signal a turning point in our business. Leading indicators in life science are turning positive, and private market values for outpatient medical are strengthening. As a premier scaled owner in both businesses, we see significant value and upside when we look at our stock price today. Two years ago, against a backdrop of raging inflation, the outpatient sector was out of favor in both the public and private markets. We saw a sector with good fundamentals that were getting even better and seized an opportunity to grow our portfolio by $5 billion in a strategic merger with Physicians Realty Trust. In doing so, we established the best portfolio and platform in the outpatient sector. The merger also accelerated the strategic goal I described three years ago to get closer to our real estate and our tenants. We've now internalized property management on 39 million square feet with line of sight on another 3 million square feet. We now own the tenant relationship and the local market knowledge. The internalization also allows us to deploy technology at the property level quickly and at scale. With the addition of JT, Mark, and team, we deepened our relationships across the outpatient ecosystem, creating proprietary growth opportunities, including accretive new development projects. Flash forward to today, as inflation has come down, there's a deep pool of buyers for outpatient medical. It's a great time for us to sell less core real estate and to recap some assets. We're in various stages of negotiation and execution on transactions that have the potential to generate proceeds of $1 billion or more. We see an exciting window to recycle outpatient sale proceeds into higher return lab opportunities, where the leading indicators are starting to turn positive. Increased M&A, less regulatory noise, lower interest rates, positive data readouts, solid FDA approvals and priority reviews, and recent biotech outperformance in the stock market. The real estate market will obviously lag, but the building blocks for a recovery in demand are encouraging our leasing pipeline today is roughly two times the pipeline at the start of the year we're also seeing some vacant development projects across the sector get absorbed by alternative uses which will help accelerate a return to more balanced supply and demand important to note that purpose-built lab buildings are highly flexible and can support many alternative uses i'll repeat that our occupancy will decline for the next few months due to expirations and terminations, but we're now gaining more confidence that will be the bottom on occupancy. At that point, we'll have more than 2 million square feet of available space in good submarkets to lease up and recapture NOI. We recently welcomed Dennis Sullivan to our team. He'll play a pivotal role in our life science business and investment strategy. Dennis spent 14 years at Biomed, including time as CFO and CIO. We have exceptional local market leaders in the Bay Area with Natalia DeMichel, with Dennis in San Diego, and with Claire Brown in Boston, all rolling up to Scott Bohn, our segment leader. We believe we have the footprint, people, and balance sheet to capture market share as the sector recovers. Our CCRC business is performing at a high level. Six years ago, we bought out the 51% interest in the portfolio held by our joint venture partner, and we installed a new operator. Since then, NOI is up more than 50%, including double-digit growth this year. We believed then and now that the entry-free product is very attractive to seniors on fixed incomes who are looking for a lower monthly rent payment. The continuum of care we offer is viewed favorably by seniors and their families because it creates peace of mind they won't need to move again in the future, and that's very important at that stage of life. Sequential occupancy in the portfolio is up 70 basis points, and we expect continued growth in the fourth quarter. I'll wrap up with our technology initiatives, which are already paying off with efficiency gains. Our G&A this year is projected at $90 million, which is less overhead than we had five years ago, despite significant inflation across the economy and closing a $5 billion merger. But the cost efficiencies are only part of the story. We intend to create a tech-enabled platform to streamline our operations, differentiate our property management and leasing platforms, and expand tenant services to drive new revenue opportunities. We'll have more details to share in the coming quarters. Let me turn it to Kelvin.
Thank you, Scott. I'll expand a little bit on the technology initiatives that Scott just mentioned. We're advancing our strategic plan to strengthen our capabilities as an AI-enabled real estate owner with a leading investment management platform designed to meet our clients' needs across geographies and asset types. Operationally, internalizing property management now gives us end-to-end control of our workflows and establishes a consistent foundation to deploy technology across the property. Technology adoption of real estate has historically lagged other industries, and we see advantages to moving now. We're focusing our initial efforts where data and automation can offer more time in the field, and that starts with improving property operations, facilities engineering, and accounting. We've partnered with a leading enterprise technology firm to help us drive this shift. Our automation initiatives are building a stronger foundation for our data architecture that will enhance connectivity across internal systems and reduce manual work. Our approach allows us to make measured investments and preserve long-term flexibility as commercial tools evolve. These fresh perspectives from outside of traditional real estate will also help us innovate faster. We see every part of our business as an opportunity. Now moving into the third quarter result. Financial and operating performance was in line with our forecast. We reported FFOs adjusted of $0.46 per share, AFFO of $0.42 per share, and year-to-date portfolio same-store growth of 3.8%. Starting with CCRC, our portfolio delivered another strong quarter driven by continued pricing power, modest expense growth, and 150 basis points of year-over-year occupancy gain. Cash NOI increased by 9.4% for the quarter. We remain focused on these key indicators of performance as each flow through to NOI, and ultimately earnings growth for the platform. Our product offering and value proposition continues to resonate with consumers, and we remain well-positioned to benefit from healthy demographic trends that support long-term growth moving outpatient medical fundamental supporting leasing demand for outpatient continues to be favorable during the quarter we executed 1.2 million square feet of leases achieved three percent escalators or above on executions and positive cash releasing spreads of 5.4 percent with ti's also below historical averages year-to-date leasing volumes totaled 3.2 million square feet, and we ended the quarter with total occupancy up 10 basis points at 91%. New leasing comprised of 270,000 square feet, with Q3 representing the highest quarter of new leasing starts in the combined company's history. PIs on renewals were only $1.41 per square foot per year, and year-to-date leasing commissions were approximately $0.87 per square foot per year. Additionally, we executed another 123,000 square feet of leases in October, and we have another 895,000 square feet under LOI. We are pleased to recognize our property management team, whose sector-leading Kingsley client satisfaction results reinforced the consistent strength of our tenant retention and helped ensure efficient operations for our clients. Thank you to the entire property management team across the organization for their collective efforts. The combination of consistent operating performance, favorable sector fundamentals, and deep tenant relationships positioned the portfolio for sustained growth and continued excellence in execution. And turning to lab. During the quarter, we executed 339,000 square feet of leases, of which 45% were new. And on renewals, we achieved a positive 5% re-leasing spread. Year-to-date leasing volumes totaled 1.1 million square feet, and we ended the quarter with total occupancy of 81 percent. We continue to see escalators on executed leases between 3 percent and 3.5 percent, which supports sustainable long-term growth. Tenant improvement allowances on renewals declined to $1.30 per square foot per year, while corresponding rents rose to $65 dollars per square foot given space conditions for new leases pi's averaged approximately 15 dollars and 73 cents per square foot per year which when excluding two development leases was approximately five dollars and fifty cents per square foot per year in october month to date we executed 22 000 square feet of leases and have an additional 291 000 square feet under loi forward-looking indicators of demand continue to improve since q1 the pipeline has doubled to 1.8 million square feet about half are evaluating our current unleashed availabilities each of our core markets is experiencing a similar uptick in demand we have a healthy mix of discovery stage clinical stage and commercial stage tenants and some incremental We are encouraged by the strengthening demand profile as we move toward an occupancy bottom and ultimate recovery. The decline in occupancy we experience in 2025 will flow through to earnings in 2026. Recent leasing, together with the conversion of our active pipeline, is expected to contribute to occupancy and earnings starting in late 2026 and thereafter. Moving on to the balance sheet. In August, we issued $500 million of senior unsecured notes at 4.75%. We achieved a spread of 92 basis points with no new-issued concessions. This execution represents one of the tightest investment-grade REITs seven-year spreads year-to-date. We ended the third quarter at 5.3 times net debt to adjusted EBITDA and $2.7 billion of liquidity. We continue to prioritize balance sheet management and discipline capital allocation to maintain maximum flexibility to pursue strategic investments and fund portfolio growth. Now turning to guidance. We are reaffirming our FFOs adjusted and same-store expectations within our original guidance range. We continue to outperform in CCRC and outpatient medical at or above the high end of our initial segment guidance. In addition, we reduced our interest expense and G&A guidance by a total of $10 million. This reflects better than anticipated pricing on our senior notes' issuances, technology-enabled productivity gains, and additional synergies related to the merger, as well as timing of certain investments and higher dispositions. Moving to sources and uses. Year-to-date, we've completed $158 million of asset sales and loan repayments. We have an additional $204 million of disposition under a purchase and sale agreement as we take advantage of a strong private market in outpatient. These transactions could close in the fourth quarter or early 2026. And with that, operator, we can move into questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then one. So that everyone may have a chance to participate, we ask that participants limit their questions to one and a related follow-up. If you have additional questions, please re-cue. At this time, we will pause momentarily to assemble our roster. Your first question comes from Ronald Camden with Morgan Stanley.
Hey, great. Just going to the lab leasing pipeline, it sounds like you said it's doubled since the beginning of the year. I was just hoping we could just double-click sort of what's changed, what's the mix of those tenants, and any sort of qualitative trends that you can highlight. Thanks. Yeah, it's a broad mix of tenants. Good morning, Ron. It's got from early stage to clinical stage to commercial stage. So the quantum is doubled, but equally important, the mix of new and renewal is much more favorable year to date. It's been a lot of renewals, which is great. But obviously it takes new leasing to drive occupancy and a good portion of that pipeline now is new leasing. And that's clearly being driven by the improved sentiment in the sector, improved capital raising. There's been a lot of good data in the sector, and that's being rewarded in the capital markets by the FDA. And that virtuous cycle is starting to build, but all starting with great data as the science proves out. So we're encouraged. It's roughly 60 days of activity. Obviously, that needs to continue for that pipeline to turn into executions and then to refill the pipeline, but the trajectory, the momentum is very positive. Great, and then my follow-up is just on, you know, thinking about the capital recycling billion out of potentially outpatient medical, because maybe can you talk a little bit more about sort of the buy side in terms of what potential opportunities you think out there, sort of any financial metrics we should be thinking about in terms of what you're going to be going into?
Yeah, you know, outpatient's been a great business for 20 years. It's one of the few subsectors in all of real estate that's had positive NOI growth every year for two decades. Great financial crisis. Whatever's happening in the economy, it doesn't matter. That sector still has positive growth because it's a need-driven business, and there's a tremendous push to move things to an outpatient setting. That isn't changing. So we love the business. We think we have not only the biggest, but the best platform in the sector, the deepest relationships, which is key given most of the tenants are health systems. So that was one reason we did the merger two years ago. We love the outlook for the business. Scale does matter, especially in local markets, which we have. But not all of our portfolio is in concentrated core markets. We still have a few geographic outliers. And this is a great time in the cycle to take advantage of strong demand for the assets and sell some of those assets that are not as strategic for us, but can still draw great pricing from a pretty deep pool of buyers. It's mostly institutional for the types of assets we own, but it's broad-based and it's a deep pool. And I think they're attracted to the strong fundamentals. And obviously, as inflation and interest rates have come down, that sector looks a lot more attractive. Maybe the growth of the economy is a little bit more questionable today, and outpatient starts to look a lot more attractive in that environment. So I think all of those things are driving the demand. We have roughly $130 million under signed contract at a really strong cap rate. We're working on a lot. We feel like it's an opportune time to take advantage of that buyer interest, especially in light of where the stock is trading, in light of the outpatient development opportunities we have through our relationships, and then the potential for opportunities in the life science business. But we have a great balance sheet already. We see a lot of advantages to having even more liquidity as we head into 2026, especially if we can get great pricing. Thanks so much.
Your next question comes from Nick Uliko with Scotiabank.
Thanks. Good morning. In terms of the lab portfolio, I wanted to see if there was any Any way to get a feel for, you know, like where your – if your leased rate is higher than your occupied rates? I know you guys quote that 81% occupancy and lab in the sub. You talked about some of the, you know, sort of leasing that happened and even in the works is addressing vacancy. So, any feel for just, like, you know, where the leased rate on assets would be versus in-place occupancy?
Yeah. Nick, this is Kelvin. I would say that our total occupancy today in labs at 81 percent is largely in line with the occupied rate. We have certain instances where there are tenants that are probably in more space than they need, so the occupancy is a little bit lower physically. But generally speaking, the total occupancy is in line with the physical occupancy.
Okay. And then the second question is on, you know, the impairment for the lab JV. Was that, you know, what triggered that this quarter? And then was it also some sort of decision or functioning of, you know, how leasing is actually going for those assets?
Hey, Nick, it's Kelvin again. So, typically, you'll see companies take impairments like this when they sell assets. These are assets that we have high confidence in, will continue to own long term. but specifically for the unconsolidated JV accounting rule, there are rather specific requirements that you have to evaluate on a quarterly basis. Simplistically, if you have carrying values that fall below fair values for more than a temporary period of time, you're required to take the charge. And this quarter, we determined that that was the case. Specifically, the impairment's not cash, it doesn't impact FFO. So, but we thought it was prudent to do so this quarter, given all the facts and circumstances around these ventures.
Nick, I would just add, Scott and the team have done a great job leasing up the campus. We're at roughly 60% leased. It's 400,000 feet across seven buildings. The buildings that have been redeveloped are, for the most part, leased. And there's a couple of buildings that are yet to be redeveloped. We're waiting for leases to burn off, and that work is now underway, and we're confident will be able to lease them up once they open. So, it's not a matter of leasing. It's a matter of where are the rents, where are the cap rates versus when we did that deal three and a half years ago and obviously marked up the portfolio to the price that we got when we sold it.
Okay. Got it. Thanks, guys. Very helpful.
Your next question comes from Farrell Granite with Bank of America.
Hi. Good morning. Thank you. I was curious if you could outline your tenant risk list and how that compares to the beginning of the year, and specifically, if you can touch on if tenants have been adding in or are names finally dropping off as you've been seeing a shift in sentiment.
Hey, Farrell, this is Kelvin. I'll start. Maybe just to give context to our earlier points, we continue to be encouraged by the pipeline that's been building over the course of the last 60-plus days. And our existing tenant base continues to access the capital markets as it's opened back up, and we're seeing a number of folks that, you know, perhaps were a little bit more in focus before that are out of focus today given they're extending their cash runways and they're working towards their next clinical milestone. So, the exposure in our portfolio has come down, I would say, pretty meaningfully over the last 60 days, but we still have tenants that we are actively monitoring. The quantum of that, I don't have an accurate number to give you, but, you know, I think, again, it's directionally has come down since the start of the year.
Let me add, there's really two parts to your question that are relevant. There's the size of the watch list. That's part one. Kellen just addressed that. But the equally important part in our view is, do those companies have a good chance of raising money? Because there's always going to be tenants in the portfolio that have less than 12 months of cash that we're keeping a close eye on and today we feel a lot more confident that those companies can raise money the challenge the first nine months of the year had been we have this group of companies that needs to raise capital it's normal normal course business and it was just a very very difficult environment for them to raise it um so that that second half of the question i think is equally important and that has improved pretty dramatically in the last 60 days and obviously we hope that continues.
Great, thank you. And I also just wanted to touch on, I've seen some recent headlines about the influx of demand for the AI companies, especially when it comes to lab spaces and those even converting back to an office. I was curious if you could just add a few comments on how that may impact the supply picture, and do you see Doc participating in any of that conversion?
Yeah, well, there's just pure AI tech companies, and certainly that's helping the supply-demand dynamic in the Bay Area in particular, but there's also AI native biotech research, and that's been very much a positive for our portfolio. We've done a fair amount of leasing with companies that would fit that description, particularly in the Bay Area. In the last year, the pipeline includes them as well, and the notion that they only need office space is just not correct. Generally speaking, the 50-50 type mix of wet lab and office continues to hold for those companies as well. So we view it very positively. They're more likely to raise money, the companies that can attach that to their business profile right now. So we're taking advantage of that. But more generally and longer term, the ability of AI to improve the speed, efficiency, accuracy of drug research is pretty exciting. And taking drugs from discovery to IND, meaning clinical stage trials in one year instead of five to seven years, I mean, that has the potential to have enormous positive impact on the business.
Thank you so much. Your next question comes from Austin Werfschmidt with T-Bank Capital Markets.
Hey, good morning, everybody. Scott, I'm just curious, how should we think about the near-term earnings impact from recycling the outpatient medical proceeds from the strategic initiatives, and then just that timeline around the earnings ramp from reinvesting those proceeds given development does have kind of a little bit of a longer timeline to it, and then maybe a sense of what the opportunistic lab investments you're considering today. Is it development?
Is it sort of lease-up opportunities versus you know more stabilized deals yeah and um the the billion dollars that we've referred to um you know keep in mind only 200 of that is under contract so hopefully we move move forward with the balance it's really strong pricing um uh if that proceeds um keep in mind that pricing is going to be significantly better than our implied stock price so i mean it has the potential depending on use of proceeds to be immediately accretive. We're also looking at opportunities and outpatient development as well as life science opportunistic investments that we think have the potential to have returns far in excess of the returns we'd be selling at in terms of those outpatient sales.
So one way or another, we're doing this with an expectation that it's going to create pretty meaningful accretion, whether it's day one or day one in a combination of you know year two three but obviously that is the expectation and intention here that's helpful and then can you just give a little bit more detail around the average size of tenants in the pipeline for for lab the lab leasing pipeline and whether you're seeing sort of any larger space requirements in the market today I know previously you had talked about kind of 30 30 plus thousand square feet was the sweet spot but but anything larger out there today Thanks.
Yeah. Hey, Austin. I think that 30,000-square-foot marker is still accurate in terms of the pipeline and the opportunities we're seeing. So, with the 1.8 million-square-foot pipeline, there's a lot more activity from new potential clients that are exploring our assets.
Yeah. Hey, Austin. Let me give you one additional piece of color on the acquisitions that we're looking at in life science, as well as outpatient development, you can't really look at those just in isolation either. When you think about our investment model, it's very much focused in both businesses on doing things in scale in local markets. There's really an ecosystem benefit as well. Like when we do a new development with a health system, that project is accretive, but it also deepens the relationship with that health system and draws or drives additional leasing with that tenant over time. and that's an important part of the consideration for us that's obviously true in life science where we've built a 12 million square foot portfolio that's essentially in five sub markets and we want to continue to go deeper in those markets because we think there's great demand and tenant desire to be in those locations and the more scale we have there it's proven to have material advantages in terms of winning leasing deals what's sort of the average yield on the outpatient medical developments that you're evaluating today uh seven plus percent mostly uh you know highly
produced and and compare contrast that with selling assets that are in 2025 years old at 100 basis points or more inside of that so you know pretty compelling yeah that's helpful thank you your next question comes from seth burgy with city group uh thanks for taking my question i guess my first question is kind of of the billion dollars, you know, how do you view that in terms of how much of that should we expect to be life science versus outpatient medical versus Sherry purchases?
And then, you know, I guess, you know, on top of that, do you have like a target percentage of, you know, how much of the business you would like to be outpatient medical life science and the ccrc uh we do not have fixed allocations and we're going to be opportunistic so we're going to protect our balance sheet number one it's the competitive advantage gives us a lot of flexibility and these sales will give us even more flexibility but it could be any of those three that you mentioned in any combination um so no we're not going to have a fixed allocation of what we're looking at will be opportunistic okay and then just my second one
you know you talked about the strength of the outpatient medical business um what type of spread are you kind of looking for to compensate you just given you touched on the early shoots of uh the life science recovery but mentioned the real estate um is still expected to lag for a little bit so just any color you can um provide on what what accretion kind of spread you're looking for there yeah thanks um the the underwritten returns on any life science distress obviously each project is going to be unique in terms of size as well as the lease up that needs to occur but we'd be looking for certainly double digit unlevered irrs for those types of projects
so that would be the criteria there for outpatient i think i already covered it at seven plus percent So a nice spread to not only disposition cap rates, but also acquisition cap rates. So, yeah, that's how we're thinking about spreads or relative returns. And obviously, we have to keep in mind the implied cap rate of our stock prices. We think about the assets that we're selling relative to buying back stock in an accretive way. So we're really looking at all three of those alternatives and all three of those metrics in terms of relative returns. Great. Thanks.
Your next question comes from John Kieliszewski with Wells Fargo.
Hi. Good morning. Maybe if we could start just talking about the Trump administration. We've had, you know, there's been tariffs on branded therapies, but there's also been a major surge in commitments by multinational pharma companies back in the U.S., especially as it relates to R&D. Can you talk to, you know, a lot of that's on the manufacturing side, but are you seeing some of that, you know, translate into lab space and then a leasing?
Well, certainly the regulatory chaos and uncertainty that existed in the first six to eight months of 2025 had a big impact on sentiment in the sector. Obviously, investors making capital commitments are looking for certainty in terms of the environment that they're investing into. And we just didn't have that for the first half of the year. There's been a lot of positive news coming out of Washington and the FDA in terms of making that process more efficient. Our tenants are taking advantage of that. We've had 10 tenants in the portfolio that have received various forms of fast track or regulatory priority reviews, which is a huge positive coming out of this administration. But overall, I think you've seen a lot less negative headlines coming from D.C. on the biopharma sector, including some positives, like the agreements with Pfizer and AstraZeneca, and that's been a big part of the change in sentiment. So, yeah, it's been very positive.
Got it. Thank you. And then I know this may be a little early to ask, but I'll give it a shot. I don't know if we can discuss maybe the building blocks for 26 earnings here, especially as you have talked about a potential near-term bottoming in occupancy. Maybe what's realistic for occupancy gains next year, how you're thinking about pricing power, and then maybe on top of that, the addition of, you know, we've seen some G&A savings this year with your, you know, your AI platform, you know, what's the opportunity for that to generate even further savings in the next year?
Yeah, I mean, obviously, we'll wait to February to give guidance. But I mean, the basic building blocks are two thirds of the portfolio are doing really well. With outpatient and CCRC, life science, obviously, the occupancy loss, and there's a bit more to come, as we've described, will bleed into 2026. That will have an impact. We've disclosed some purchase options and seller financing that will have an impact, refinancing. I mean, those are the basic building blocks. There's no new surprises there, but I'll just reiterate the obvious. But obviously, we'll give full guidance in February of 2026.
Very helpful. Thanks, Scott.
Your next question comes from Juan Sanabria with BMO Capital Markets.
Hi, thanks for the time. Just wanted to see if you could maybe help investors in how you're thinking about how much dilution you're willing to take and how you're going to try to manage that. I mean, I think maybe there's a little bit of a concern that the MLBs, the billion dollars of dispositions will be plowed largely into lab opportunities that may have great growth long term, but maybe way on growth near term. so I guess how do you think about balancing some of that potential dilution with buybacks and or other opportunities and is it the intention that you know you're going to try to manage earnings somewhat so to speak as a result of that or how are you thinking about weighing those uh pros and cons yeah well we're not looking to manage earnings I heard you say that that
certainly isn't um anywhere on the priority list we're looking to create value I think when we did the merger two years ago, there were concerns. It's turned out to be a huge value creator for the company, not only the synergies, but the recognition of the strength of the outpatient business and the flexibility that that's providing us right now. So that has turned out to be a huge positive in terms of the capital allocation around that transaction at a time when that sector was pretty out of favor in the public and private markets. Obviously, that dynamic is flipped very much in our favor two years later. And we see the building blocks of that dynamic changing for the life science business. You know, it wasn't that long ago when certain investors couldn't get enough of the sectors, one of the best performing subsectors in all of real estate for 10 years. Obviously, there's been too much supply. We've had some demand issues because of the regulatory environment. We, as we've described, see a lot of that starting to flip in our favor. It's not going to happen overnight, but we do see a window here to come in at a time when nobody else wants to invest that's usually a pretty good time to do it we have the balance sheet to do it the platform to create value um but it might end up being zero we're very focused on basis and sub market and price and return opportunity and i can't guarantee that we're going to find anything that meets our thresholds but i'm optimistic that we will there's a big opportunity set there and it's an awfully good time to invest in our view but again at the right price in the right sub market in terms of dilution you know it's a 25 billion dollar denominator so even a billion dollars is not a significant number in comparison to uh the entire company that i don't expect there to be
meaningful dilution in any event even if we plowed the entire thing into vacant lab buildings which is not our plan by the way got it thank you and then just the second question um for the balance of the year and maybe into the first quarter you talked about maybe some slippage and occupancy from some known moveouts and maybe some of the watchlist tenants. Is there a way to put any brackets around how big the further slippage could be before that starts to recover? I think you mentioned the second half of 26 before the earnings start to benefit from some of that occupancy coming back. But just, like, what's the risk from here to the trough, I guess, and the components therein?
KELVIN ELSTARDE Yeah. No, this is Kelvin. I'll start but you know again we continue to be encouraged by the pipeline um and the activity that we're seeing but we recognize that there are still some headwinds within the portfolio that we have to work through um we're gaining confidence with these weeding indicators and the explorations and non-renewals that we have for the balance of the year and and going into 2026 with our general kind of 75 to 85 percent retention, we'll likely have some occupancy slowdown over the next couple quarters. And then from there, we'll be able to pick back up again. Occupancy could trend down somewhere in the high 70s before it starts to pick back up again. So, I think we're going to be very mindful of the next few quarters in terms of where that goes.
But that'll be, you know, the inflection point that we believe we can start to grow back from thank you your next question comes from the line of richard anderson with cantor fitzgerald hey good morning everyone um so if i could just sort of get uh a pacing or cadence of what you're seeing out of life science you talked about i can see you know bottoming um turning on the distress purchasing engine and then ultimately pricing power. When do you, if you had a hazard guess, when do you think those three important, you know, points in the life cycle going forward in life science are going to happen? Is the bottoming an early 26 event? Is the distress purchasing sort of on top of that and pricing power maybe 2027 timeframe? Is that the way we should all be thinking about it?
Hey, Rich, it's Scott here. And some of it is I'd call opportunistic. It's not all distress, which is, you know, empty building. There may be some of that. So I, that's an important distinction though. Some of it is just opportunistic, um, and, and, and therefore a different profile than true, uh, distress, but it's not going to play out over a three month window. I think this is a 12 to 24 month window as the sector finds a bottom and truly starts the recovery. Um, so it's not like this window is going away. If, if, you know, we do this earnings call in February and we haven't purchased anything yet, that's okay. It's not like the window is going to close next February. It's going to take a little time for the sector to fully recover. I do think the core submarkets are going to come first. I think the big incumbent landlords, and there's only a couple, are going to recover faster. Those things I'm quite confident in. But maybe just to underscore the point that we made here, that the sentiment that the fundamentals are starting to turn in our favor during this conference call alone we've had one tenant get acquired by eli lily that's now public uh if we had another tenant uh report very favorable phase three data and i think their stock's up 60 or something so you know to have the point is we continue to get positive surprises um after a couple years of a lot of negative surprises we've had a a very different change in tone over the last 60 days. And that's continued here into the first 30 minutes of our earnings call. So that's great to see.
Excellent. I love real-time stuff. And in terms of selling outpatient medical, I still call it MOBs, but that's me. You're not alone in this movement. We're hearing about others that are potentially going to be selling big chunks of MOBs. What would you call, how would you characterize the buyer pool in terms of, you know, where all this might go? Is it going back in the hands of the systems or, you know, private equity? You know, how would you describe your audience there? Thanks.
All of the above. There are some health systems looking to buy back certain assets, private equity, for sure. It's institutional, high-quality buyers, big, sophisticated, that are the counterparties, at least on the projects we're working on. I can't comment on the others.
Okay, great. Thanks, everyone.
Your next question comes from Michael Carroll with RBC Capital Markets.
Yeah, thanks. I want to circle back on the life science leasing pipeline, the 1.8 million square of feet. I mean, can you talk about the timing of where those transactions are within that pipeline? I mean, how close are they to be signed? And when they sign, how long does it take for them to actually commence?
Yeah, well, the LOI is obviously closest to a signed lease execution, and that's approaching 300,000 feet. So the odds of those getting done are obviously pretty high. The phase behind that are what we call proposals. So where you're actively negotiating terms, that's roughly half of the pipeline. So, you know, those are pretty far along. And then there's tours where, you know, you're starting to talk deal terms, they're looking at the space and space planning and all those things. And that's a pretty material part of the balance. And then there's just the inquiries, kind of the early stage stuff. So I'd say it's weighted towards kind of the second half of the process between an inquiry and a signed lease.
And then once they get signed, like, how should we think about the commencement timing? I'm i'm assuming obviously if it's a new lease or on a development or redevelopment the commencement is probably what 12 months out um and the renewals is pretty immediate so maybe can you talk about what is the split between new and renewals and the timing of those potential commencements if they do sign yeah um hey michael it's kelvin the i'll start with the last question but the The slip between new and renewal is roughly 50-50, I would say.
We actually are seeing an uptick in new potential clients that are entering our pipeline as well as a good positive. Generally speaking, from a timing standpoint, the second-generation spaces that we have available to lease are actually in quite good condition, so it's really dependent on the space in terms of how long it'll take to get a tenant in there and to commence the lease um you'll see in our executions from this quarter that you know we had limited ti's um and uh continued strength in our leasing volumes and a lot of that had to do with the quality of the space that we had available to lease so um you know it's really dependent on the space we have some spaces that we're getting back that we'll invest capital into and reposition so some of could be on that longer 12-month timeline that you've highlighted, but we could see some commencements happen sooner than that. Great. Thank you.
Your next question comes from Vikram Maholtra with Mizuho.
Morning. Thanks for the question. I guess, you know, I guess Kelvin or Scott, do you mind just sort of stepping back and giving us a little bit more detail or clarity on sort of this whole occupancy bottoming uh the risk near term into 4q but then really how much how much of the you know signed but not commenced leases you have to offset some of this because i was just really confused it sounded like you said occupancy and leased is the same but maybe if you just break up like leaving aside the development leaves up just the core portfolio um how much of a benefit is there from the losses you see versus the signed but not commenced leases.
Yeah, and maybe, Vic, just to kind of keep it at the higher level at this point, you know, we do see these leading indicators as favorable signs of the execution opportunities that we have within our portfolio. And where occupancy is trending over the next few months or a couple quarters is somewhere in the high 70s. And that will give us a base to build back from. I think that's important to know, and as we talked about with respect to the pipeline, depending on the quality of the space and the execution timeline of the team, we might be able to offset some of those near-term headwinds that we know are coming with some execution. So, there's a lot of moving parts there, but I think that's generally good guidance.
Sorry, just to clarify on that, I believe, like, if you just look at the core, the 93.2, there's some slippage from non-renewal, you know, potential tenant, et cetera, based on kind of our conversation. But then, you know, there's a benefit from sign but not commence.
So can we, are you able to just give us a little bit more color on how those two things interact just for the same store pool? yeah so maybe just for the the fourth quarter we have about 300 000 square feet of expirations you'll notice in the footnote in the supplemental we're putting 186 000 square feet of that into redevelopment um you know we'll largely offset um the redev component of that with new commencement and then we'll have um you know a portion of the expirations that will vacate. So that's kind of the Q4 component. Within that, there could be some additional reduction in occupancy as a result of early terminations or proactive downsizing of tenants as we're negotiating space needs and space planning. So hopefully that gives you a little bit more context.
Yeah, thanks, Sam. I'll follow up. Just as a case, you know, if you could expand, And I mean, I guess, Scott, you mentioned a lot of interesting events during the call in terms of, you know, Eli Lilly and fundraising and stuff. But just in the process of bottoming, assuming we have more M&A, maybe using the Eli Lilly as an example, like what does that mean for space needs in your mind? Like is the company that's being acquired, your tenant, do they keep the space? Is there a risk of them downsizing or maybe even expanding? Maybe just give us a sense of what the M&A piece means for your portfolio.
Yeah, I just saw the headlines. We haven't talked to the company yet. Each situation is different. There are times when the big pharma is buying a platform and they're looking to use that team and science to build a new business opportunity. And that tends to lead to demand for real space or more space. And there's times when they're just buying a drug, in which case they probably don't need the space anymore. And we've had, I don't know, 100 M&As in the course of the company's history, and it's about half and half in terms of the impact. Obviously, it's a credit upgrade either way. That's a fairly long-term lease, if I remember correctly, on a campus that's really full, and we've got some growing tenants. So who knows? It may end up being a positive in a lot of ways. But I think the important point is the M&A is just such a huge impact on the ecosystem and recycling capital, creating great exits for those existing investors to fall back into new companies. And the M&A year-to-date is something like 3x 2024, and it continues to grow. So that's just a huge benefit to the entire ecosystem that should drive more demand. Thank you.
Your next question comes from Wes Galladay with Baird.
Hey, good morning, everyone. For the potential acquisition opportunities, do you see a bigger opportunity set for the outpatient medical developments or the opportunistic lab properties?
Yeah, opportunistic lab is exactly that, opportunistic, and those tend to be big projects, so they're chunky. So they can be big numbers or they could be zero. Our outpatient development is pretty normal course business. There's a number of health systems that we're quite close with and development partners that we work with. I'd say that's more of a normal course steady state business, a couple hundred million dollars a year that fit our criteria, which basically means pre-leased with good yields and good health systems in core markets. That's going to be less chunky and more just recurring normal course business. okay and then on the last quarter you talked about the potential change for the inpatient only rule are you seeing any uptick in leasing demand or development opportunities from this yeah the comment period closed we haven't seen the final rule yet so so nothing has happened there in terms of the inpatient only rule but i also said at the time that the the market forces are moving more of those services to an outpatient setting regardless of what cms does the cms rule would just accelerate that process but it's happening either way the payers prefer
it the health system usually prefer it and certainly the patients prefer it which is a pretty important voter in the process so it's happening either way it's just a matter of how quickly okay thank you your next question comes from mike muller with jp morgan yeah hi um i guess this is kind of a hypothetical question, but if your implied cap was 100, 125, 150 base points lower, do you think you'd still be looking to monetize parts of the outpatient medical portfolio today?
The asset sales, we're getting out of non-core markets or non-core health system relationships at great pricing, yes. We're also looking at some recaps today of core real estate where we're going to retain a meaningful economic interest, maintain the relationship, maintain the footprint. Those we would not do if the stock price was more favorable.
Got it. And I guess my second question, I think you answered part of it. It's going to ask the specific attributes of what you're specifically looking to sell.
It sounds like it's age and secondary markets or non-core markets. uh it's mostly market profile when you look at our um our outpatient footprint although it's a national portfolio we've got 10 to 12 markets that comprise two-thirds or more of our footprint we love those markets we have great health system relationships critical mass in a growing demographic market that we find attractive we're looking to do more in those areas dallas is an example, Denver, Nashville, other examples you see us do development there as well. So the profile of what we're selling tends to be in markets where we don't have that big critical mass or maybe we don't have the strongest health system relationship. Those tend to be the assets that we're looking to monetize and it's a good time in the cycle to do that. Got it.
Your next question comes from Michael Stroik with Green Street.
Thanks, and good morning. I appreciate that the step down in retention and outpatient was largely due to the common spirit leases no longer being included. What have retention rates in recent quarters been if you do back out common spirit, and has there been any sort of decline in retention as the company has pushed pricing maybe a bit harder relative to the sector's history?
Hey, Michael. No, we've been in the 75% to 85% range across the portfolio. We did have a couple of big non-renewals this quarter that we've known were coming for a long time, just legacy health peak assets that we've owned for years and years and years. But the leasing has been really phenomenal. So, like, step back for a minute and look at the actual leasing volume we've had among our highest quarters in the history of the combined companies. and the economics on the leasing are extremely attractive. We're getting better escalators, renewal spreads that are as strong as we've ever had, very little TI. The term of the leases is long. So, you know, same store, you know, investors like it. It's an easy number. It's one number. It's not the most important number. The economics and the cash flow are really driven by the things as I just mentioned. And those numbers continue to be very, very favorable. So Mark and the team are really doing a great job on leasing. And we expect that to continue given the fundamentals.
Got it. Understood. Has there been any sort of spread in pricing power between, call it your health system and non-health system tenants?
Uh, there's definitely a distribution in terms of, uh, releasing spreads and, and, you know, some are 10 plus percent, others are slightly negative. I'd say it's less focused on whether it's a health system or not, and more focused on the quality of the building, the uses that are inside that space, um, that tends to drive that dynamic more than whether it's a health system tenant or not.
Got it. Thanks for the time.
Your next question comes from John Peterson with Jeffries.
Oh, great. Thanks. Maybe just one for the sake of time here.
So since we're talking about selling properties, I know at times in the past you suggested that the CCRC portfolio might be something that could be sold at some point. So I'm just curious for an update on how you're thinking about that portfolio as a long-term hold on your balance sheet.
Yeah, we're happy we own it. We own 100% of it. Rather than 49% of it, LCS has done an incredible job. We've got a dedicated team that's worked side-by-side with them to drive value. They're doing an incredible job. Obviously, the fundamentals are good. We have put some money into the buildings that should pay dividends for years to come. Those buildings look great. Residents demand them. So we've never seen growth out of that business like we have over the last six years, even including the downturn our compounded growth rates around nine percent including the downturn i'll just repeat that it's an incredible performance by that portfolio that we think will continue so yeah we're happy to hold it um for the foreseeable future okay all right that's all for me thank you this concludes our question and answer session i would like to turn the conference back over to scott brinker for any closing remarks uh thanks for your time today everybody. Hope you have a great earnings season and hope to see you soon. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
