The firm’s LSRE portfolio is 98.9 percent occupied and leasing remains active
By Murray W. Wolf
During Q4, Healthpeak completed work on a 142,000 square foot lab space building at 101 Cambridgepark Drive in Cambridge, Mass. (Photo courtesy of Healthpeak)
Healthpeak Properties Inc. (NYSE: PEAK) reported Tuesday (Feb. 7) that its fourth quarter (Q4) earnings decreased from the same period last year, missing analysts’ expectations. However, executives of the Denver-based real estate investment trust (REIT) say the firm’s operating results were strong, particularly in its two core sectors: life sciences and medical office.
Granted, Healthpeak’s Q4 earnings came in at $6.39 million, or $0.01 per share, while analysts had expected the REIT to earn $0.11 per share, based on the average of the estimates compiled by Thomson Reuters. That was also down from revenues of $28.49 million, or $0.05 per share, during Q4 2021.
However, the firm’s Q4 2022 revenues were $524.47 million, up 8.5 percent from the $483.21 million recorded during the same quarter in 2021.
“Most importantly, we finished the quarter at 99 percent occupancy and continue to sign leases when we do have availability, often with existing relationships,” Healthpeak President and CEO Scott Brinker told securities analysts Wednesday (Feb. 8) during the firm’s Q4 earnings conference call.
“Our significant scale in each of our submarkets is a competitive advantage against small landlords and second-tier product,” he added. “And, in recent weeks, there has been positive momentum in the public markets for biotech. A sustained improvement could lead to reacceleration in demand.”
Mr. Brinker also pointed out that Healthpeak delivered full-year, same-store operating income (NOI) growth of 5.1 percent in the life sciences segment and 4 percent in medical office.
“We achieved those results despite difficult comps as we had best in sector, same-store growth in 2020 and ‘21 in both segments,” he noted. “Our fourth quarter results exceeded the full year growth rates – a positive way to close out 2022.”
Driven by two fundamentals
Unlike Alexandria Real Estate Equities Inc. (NYSE: ARE), the REIT we spotlighted in last week’s edition of BREI, Healthpeak is not 100 percent focused on life sciences and technology real estate. But the firm – which changed its name from Healthcare Property Investors Inc. in 2007 – has for many years been steadily adding to its life sciences real estate (LSRE) portfolio while culling assets from less profitable sectors, particularly senior housing, post-acute and skilled nursing.
Last year, life sciences drove about 49.1 percent of Healthpeak’s portfolio income last year. The rest was driven by medical office buildings (MOBs) at 37.6 percent, continuing care retirement communities (CCRCs) at 9.7 percent and “other “ at 3.6 percent. That represents a significant strategic shift from 2013, when operating income was driven primarily by senior housing (36 percent) and post-acute and skilled nursing (32 percent). At that time, life sciences accounted for only 14 percent of income, with medical office at 13 percent and hospitals at 5 percent.
“Through all economic cycles, our business is driven by two fundamentals: The aging population and the desire for improved health,” Mr. Brinker said during the earnings call. “Demand for our real estate led to an estimated 17 million visits to our MOBs last year. Our buildings are critical to outpatient healthcare delivery in Dallas, Houston, Denver and Nashville and many other attractive markets. Biotech tenants are producing life-changing therapeutics – for cancer, heart disease, sickle cell and many other diseases.”
Given current market conditions, Healthpeak did not do much on the acquisitions front last year. However, the firm did acquire a total of 2.2 acres of land in the Alewife submarket of Cambridge, Mass., for $27 million in December 2022 and January 2023. The parcels are adjacent to the REIT’s current holdings on Mooney Street and Concord Avenue, “and have the potential to advance the community’s open space, traffic mitigation and pedestrian connectivity goals, while providing Healthpeak the ability to transfer density across its other Alewife properties.”
The REIT also disclosed that sold two assets in the Research Triangle, N.C., market in January, subsequent to Q4.
“The $113 million sale of two R&D (research and development) buildings in Durham for a 5 cap (capitalization rate) is a good transaction comp in an otherwise quiet market,” Mr. Brinker said. “The price was negotiated in December, and closed last week to an unlevered buyer. Also, the rents are at market, whereas most life science sales comps have below-market rents that make the cap rate less relevant. The sale was opportunistic given we recently signed a long-term lease extension and had maximized the value creation.”
The firm continues to pursue development projects “across our core markets,” he said, “but it’s possible for the first time in several years that risk-adjusted returns on acquisitions will be more attractive than development. This could impact capital allocation in 2023. We’ll have to see where cap rates and cost of capital settle and what happens with construction costs as the economy slows. Either way, our balance sheet allows us to be opportunistic and the land bank provides optionality.”
Mr. Brinker added, “In South San Francisco, our sovereign wealth partner has agreed to allow Healthpeak to continue owning 100 percent of the Vantage development campus.” Announced in November 2021 as a $393 million, two-building, 342,000 square foot, build-to-suit campus, Vantage is to be developed at 480 and 490 Forbes Blvd.
“A lot has changed since the agreements were signed a few quarters ago” for the Vantage project, he noted, “including a 2x increase in the allowable density and less clarity around the timing of commencement given the environment. As a result, it made more sense for Healthpeak to own 100 percent of the project.” Healthpeak formed a joint venture (JV) with an undisclosed sovereign wealth fund (SWF) during Q2 2022.
Mr. Brinker continued, “Nothing has changed from the standpoint that we will utilize third-party capital if and when it makes sense for our shareholders.”
During the question and answer (Q&A) session at the end of the earnings call, Mr. Brinker was asked about the outlook for acquisitions.
“I’d say the likelihood of doing acquisitions is higher today than it would have been six months ago or 12 months ago,” he responded. “The fourth quarter was really quiet, really not much happened. So a lot of the feedback is more anecdotal, obviously, given just how much cost of capital has changed for public and private companies in the last six to 12 months.”
98.9 percent occupancy
As for existing properties, Scott Bohn, Healthpeak’s chief development officer and co-head of its life sciences unit, was upbeat about the company’s 2022 leasing levels.
“We had a great year on the leasing front with over 1.4 million square feet of leases executed across the portfolio, 68 percent of which were new leases…,” he said during the earnings call. “Additionally, 79 percent of the executed leases were done with existing tenants – again highlighting the importance of our scale and deep relationships within our core markets. 2023 is off to a great start with an additional 143,000 square feet currently under LOI (letters of intent).”
Perhaps most impressively, Mr. Bohn reported, “Year-end portfolio occupancy remains strong at 98.9 percent and rent collections exceeded 99 percent in the fourth quarter… We have very modest leasing exposure in both San Diego and Boston in 2023, and even though we have some work to be done in South San Francisco on our redevelopments … we’ve had great success on those projects to date and look to continue that momentum into the new year.”
He noted that Healthpeak converted about 100,000 square feet of LOIs to leases during Q4 and now has an additional 29,000 square feet under LOI.
Moving on to the firm’s Pointe Grand redevelopment in South San Francisco, he added, “Of the 245,000 square feet that went into redevelopment in 2022,” he said, “we have 76 percent already leased or committed. It’s been an outstanding start to this redevelopment and we look forward to continued success as more spaces roll this year.”
Mr. Brinker noted, “Our sole remaining availability is at our Vantage campus in South San Francisco, where we remain confident in our lease of success based on our dominant market position with approximately 40 percent market share, and deep, long-lasting tenant relationships and what we see as the most favorable near term supply demand dynamics of the three core markets.”
During the Q&A portion of the earnings call, Mr. Brinker responded to an analyst’s query about the life sciences leasing environment for the two-building Vantage project specifically and South San Francisco in general.
“As you know, we pre-leased 45 percent of it the first building to a global pharma tenant, and they should be taking occupancy later this year; they started the TIs (tenant improvements) this past month. That group is an existing Healthpeak portfolio tenant.
“With the other building … we do have activity for multiple prospects of varying size. It’s probably too early in the process to get the detail on those deals, but hopefully more to come there.
“Overall, we feel really good about our ability to execute given our market share and our tenant relationships and history of doing the leasing on our development deals with existing portfolio tenants in South San Francisco in general. We continue to feel good about the near-term supply and demand balance.”
Development opportunities
“Shifting to our developments and redevelopments, Mr. Bohn said, “Healthpeak’s nearly $900 million life science development pipeline is 78 percent pre-leased and is 100 percent under GMP (guaranteed maximum price) contracts, locking in our costs and estimated returns.
“In the fourth quarter, we delivered 142,000 square feet, a fully leased Class A lab space at 101 Cambridgepark Drive (in Cambridge), bringing our total life science ownership in Greater Boston to 2.6 million square feet.
“We also continue to advance our entitlements. In Cambridge, we’ve made great progress on the rezoning efforts in our LOI project. Since June, we’ve been part of a city and community-led working group tasked with recommending zoning for the district. This first step in our entitlement process comes to an end this week, culminating in a zoning proposal that will be brought to the city council.”
Asked during the Q&A session about Healthpeak’s near-term development prospects, Mr. Brinker responded, “Well, I mean the potential pipeline is pretty big and it’s really core submarkets within our three existing markets. So we’re advancing entitlements across all three of those markets so that we’re in a position to proceed if and when cost of capital and spread versus acquisition cap rates make sense.
“From where we sit today, we’d be less aggressive on development than we have been for the past five years when there was a pretty enormous spread between return on cost for development relative to acquisition cap rates, as well as our cost of capital we’ve had in the last year…
“But that’s a point in time. Development makes a lot of sense at certain points in the cycle, and then there are other points where it makes more sense to look more at acquisitions or value-add shorter turnaround time (projects). So, from where we sit today, we’d be less aggressive on new development starts, but that could change.
“There’s a lot of uncertainty about what development construction costs really look like. They’ve been escalating in the 10 percent to 15 percent range per year for a little while now. But we’re starting to see evidence, as well as anecdotal feedback, that that’s slowing down. So that would obviously make a pretty big difference.”
Positive signs for the life sciences industry
Healthpeak executives said they remain upbeat about the prospects for the life sciences industry and LSRE.
“Overall, the industry remains healthy,” Mr. Bohn said during the earnings call. “There’s been a slowdown in demand from the toward levels of 2021 and 2022, but there are a number of tenants actively seeking space, and we’ve captured more than our share of that demand.”
He noted that the pharmaceuticals industry remains active in terms of partnerships and licensing, “and continues to funnel cash into biotech R&D, and the secondary equity market has been open for companies with solid data.
“Just last week, a longtime tentative of ours in South San Francisco, Pliant Therapeutics (Nasdaq: PLRX), closed a $288 million secondary offering on the heels of positive interim data in its Phase 2A study in idiopathic pulmonary fibrosis. Also, last week, we saw a successful $161 million biotech IPO (Structure Therapeutics), and there was another nearly $200 million IPO scheduled for later this week (Adaptimmune Therapeutics plc). So, hopefully, that’s a sign that the IPO market is beginning to reopen.”
Mr. Bohn continued, “VC (venture capital) fundraising of $25 billion, while trailing 2021’s record of $41 billion, was about 50 percent higher than 2019, then a record high. VCs will continue to invest these funds in the new company formation and B and C rounds of existing companies.”
He also noted that the National Institutes of Health (NIH), the primary federal agency for conducting and supporting medical research, recently received approval for a $49 billion budget for 2023, an increase of 6 percent, “which will continue to provide scientific discovery at the academic and early-stage levels.”
Finally, Mr. Bohn said, “Public company R&D spend through the third quarter of 2022 was $115 billion and is on pace to be the highest year ever when year-end numbers are reported.”
All of that investment, of course, will eventually drive increased demand for a range of life sciences facilities.
News Release: Healthpeak Properties Reports Fourth Quarter and Year Ended 2022 Results
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