Healthpeak Properties, Inc. (NYSE:DOC) Q1 2024 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:DOC) Q1 2024 Earnings Call Transcript April 26, 2024

Healthpeak Properties, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Healthpeak Properties to report First Quarter 2024 Financial Results and Host Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

Andrew Johns: Welcome to Healthpeak's first quarter 2024 financial results conference call. Today's conference call contains certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions. Our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on this call. In an exhibit of the 8-K we furnished with the SEC yesterday, we have reconciled our non-GAAP financial measures to most directly comparable GAAP measures in accordance with Reg G requirements.

The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President and Chief Executive Officer, Scott Brinker?

Scott Brinker: Okay. Thanks, Andrew. Good morning, and welcome to Healthpeak's first quarter earnings call. Joining me today for prepared remarks is Pete Scott, our CFO; and the senior team is available for Q&A. We are extremely pleased with our first quarter results and our momentum is positive on every key metric. We increased our 2024 earnings guidance by $0.02 at the midpoint, driven by same-store results, outperformance on merger synergies and accretive stock buybacks. The merger has proven to be a meaningful positive catalyst for the company and the integration is exceeding our expectations. Many public company mergers are done through auctions, which delays the ability to integrate the two companies. Our transaction was completely different.

Neither company would have proceeded with the merger without high confidence in our ability to put the teams and platforms together in a way that one plus one can equal three. That meant having extensive conversations on people, process, systems and capabilities before we agree to proceed. Our integration planning was underway before we even announced the transaction. In the six months since that announcement, our combined team has done an exceptional job integrating every aspect of our business. The continuity and buy-in from JT and the senior team who joined Healthpeak has been critical to the integration, including key health system relationships. Property management internalization has been a huge success to date and is a good example of the merger augmenting our platform.

Strategically, it was important to me that our own employees are interacting with our tenants every day. And financially, we're now capturing additional profit that flows through property level NOI. To date, we've internalized 10 markets, covering 17 million square feet. We chose to accelerate the rollout given our success to date, and we expect to internalize an additional 4 million square feet by year-end. Significant upside remains to be captured. We're evaluating 10-plus million square feet for internalization in 2025 and '26, which in aggregate will allow us to internalize more than 70% of our total footprint. The positive feedback from the property managers on the ground and our tenants further validates the strategic decision to internalize.

Let me take a minute on the value proposition in our stock today, which we think is compelling. The baseline is a strong balance sheet, a high-quality portfolio with 3% to 5% same-store growth and a mid-6% dividend yield with a conservative payout ratio. Beyond that baseline, we've identified $80 million of NOI upside potential none of which is included in our 2024 guidance from additional merger synergies and leasing up our active life science dev readout pipeline. We also see 30% upside by recapturing our discount to consensus NAV, which we expect to do through consistent earnings growth and smart capital allocation. Industry headlines notwithstanding. Over the past two years, we grew FFO per share by 13% and we expect to continue growing earnings moving forward.

Moving to our outpatient business. The fundamentals have never been stronger. Patient volumes are increasing, absorption is accelerated and new development remains low. That's driving strong re-leasing spreads, retention and NOI growth. In addition, progressive health systems have a strategic focus to grow their outpatient revenue. It's less expensive for payers, more convenient for consumers and more profitable for the providers. We have the premier platform and relationships to capture this outpatient growth, whether on-campus or off-campus at both locations are necessary to capture demand. We expect new supply to remain low given the cost of construction. Today, our triple net equivalent rents are in the low 20s while most new developments are $35 to $40 per foot.

Turning to our Life Science business. IPO and venture capital funding have improved recently, which is driving demand for space. Our leasing pipeline today is up 80% from last quarter, we're increasingly optimistic that pipeline will generate lease executions for the balance of 2024 and into 2025. Roughly 70% of our pipeline is existing tenants many of which are deals that don't come to the broader market, again, providing us a big advantage versus the new entrants who can't tap into an existing portfolio of recurring tenants. We're also seeing a massive reduction in new construction starts that should extend for multiple years, creating a far more favorable leasing environment for landlords. Let me close with capital allocation. The strategic merger with Physicians Realty closed on March 1 and is accretive to our earnings, balance sheet, and platform.

Year-to-date, we sold $363 million of fully stabilized assets at a 5.8% cap rate, plus $69 million of loan repayments. The most recent sale was an R&D flex office portfolio in Powai, East of San Diego that we sold to an affiliate of the tenant in an all-cash deal for $180 million, which was a 6% cap rate. We have additional asset sales in various stages of negotiation and execution, but given the environment, we'll provide details if and when they close. We took advantage of the disconnect in our stock price and repurchased $100 million of stocks at average price just above $17 per share, which represents an implied cap rate of 8%. The year-to-date asset sales are more than 200 basis points inside that level, delivering immediate value to shareholders.

Our remaining authorization today is roughly $350 million, and we'll continue to pursue buybacks as priority number one on capital allocation, obviously, depending on our stock price and the arbitrage opportunity from asset sales. Priority two for capital is new outpatient medical development with key health system partners, provided their strong pre-leasing and a positive spread to our asset sales. This capital recycling would be accretive to asset quality and stabilized earnings. We do have an attractive pipeline of such projects today in the $200-plus million range. Priority three is distressed opportunities in life science, which we are starting to see, especially development projects, lacking capital and/or leasing traction. These would be purely opportunistic and could be done on balance sheet or via joint ventures.

Most of the distress won't be interesting to us, as we'll focus on our own core submarkets where we can use our scale and relationships to drive outperformance. I'll turn it to Pete for financial results and guidance.

Peter Scott: Thanks, Scott. 2024 is off to a great start. For the first quarter, we reported FFO as adjusted of $0.45 per share, AFFO of $0.41 per share and total portfolio same-store growth of 4.5%. Let me briefly touch on segment performance. Starting with outpatient medical. We reported same-store growth of 2.6%, driven by a positive 3.4% rent mark-to-market and an 84% retention rate. Our strong leasing activity continues. During the quarter, we signed nearly 1.5 million square feet of leases, and we have a backlog of 2.5 million square feet in active discussions, including 700,000 square feet under LOI. Importantly, we expect outpatient medical same-store growth to increase as the year progresses due to accelerating internalization and an increase in occupancy from continued leasing.

Turning to lab. We reported same-store growth of 2.7%, driven by 3% plus contractual rent escalators and a 2.6% positive rent mark-to-market partially offset by an anticipated tick down in occupancy. During the quarter, we signed approximately 150,000 square feet of leases and we have a robust leasing pipeline of nearly 2 million square feet. We have 455,000 square feet under LOI positioning the second quarter to be one of our best lab leasing quarters in recent years. In addition, we also expect lab same-store growth to accelerate for the balance of the year as free rent from some large lease commencements earns off. Finishing with CCRCs, we've reported same-store growth of positive 27%, driven by increased occupancy and rate growth. Occupancy in our CCRC portfolio ended the quarter at 85.2%, and we expect continued positive performance.

Shifting to the balance sheet. We had a very active quarter. We successfully completed the assumption of $1.9 billion of debt with a weighted average interest rate of 4%. We closed on our newly originated five year $750 million term loan, which we swapped to a fixed rate of 4.5% prior to the recent spike in interest rates. And as Scott mentioned, we opportunistically repurchased a $100 million of stock. Subsequent to quarter end, we fully repaid our commercial paper with proceeds from the [indiscernible] sale. Pro forma this transaction, our net debt to EBITDA is 5.2x. We have $3.1 billion of liquidity, no floating rate debt, an AFFO payout ratio of approximately 75% and nearly $350 million of authorization left on our stock buyback program.

Finishing now with guidance. We are increasing our FFO as adjusted guidance range by $0.02 and tightening the range to $1.76 to $1.80. We are increasing our AFFO guidance range by $0.02 and tightening the range to $1.53 to $1.57. Our increase in earnings guidance is driven by three items. First, we increased same-store guidance by 25 basis points to 2.5% to 4%. Second, merger synergies continue to exceed expectations and are now forecast to be $45 million in 2024. Third, we have bought back $100 million worth of stock at an FFO yield in excess of 10%. One last note before Q&A. We published a revamped supplemental alongside our earnings release. You may have noticed that we streamlined the document and modified it to more closely align with how we view the business.

We also added an NAV input page to assist with modeling, which we felt was important for our stakeholders. With that, operator, let's open the line for Q&A.

See also

12 Best Day Trading Tips for Beginners and

11 Best EV Penny Stocks to Buy.

To continue reading the Q&A session, please click here.