Healthpeak Properties, Inc. (NYSE:PEAK) Q3 2023 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:PEAK) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Good morning, and welcome to the Healthpeak Properties and Physicians Realty Trust Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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.

Andrew Johns: Thank you. Good morning, everyone. If you have not yet downloaded the press release or merger presentation related to this call, they are available on the Healthpeak and Physicians Realty’s Web site, under Investor Relations. This morning, you’ll hear from Scott Brinker, President and CEO of Healthpeak; Peter Scott, CFO of Healthpeak; and John Thomas, President and CEO of Physicians Realty Trust. Today’s conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations.

A real estate investor inspecting a property, illustrating the bank’s portfolio of mortgages and real estate investments.

Factors that could cause the actual results to differ, including, but are not limited to, the potential benefit of the proposed merger and the expected timing and likelihood of completion of the transaction including the ability to obtain the requisite approval of Healthpeak and Physicians Realty shareholders form the risks that the closing conditions are not ratified. Please refer to the forward-looking statement notice in Healthpeak’s and Physicians Realty’s 10-K and other SEC filings for information. Finally, this call contains [certain] (ph) financial measures. In accordance with Reg G, the company provides a reconciliation in their respective earnings packages. And with that, I’ll turn the call over to Scott Brinker.

Scott Brinker: Thank you, Andrew, and good morning, everyone. Very excited to be here with John to discuss the merger we announced this morning, and the significant benefits to both companies. This combination will create the leading real estate platform dedicated to healthcare discovery and delivery, a large an attractive playing field with strong secular growth. We also announced strong 3Q earnings, including another increase to both same-store and earnings guidance. I’m going to ask Pete to summarize our results. Then John will do the same for DOC, who also announced 3Q results this morning. Then I’ll be back on with John to discuss the merger. Pete?

Peter Scott: Thanks, Scott. Despite the challenging capital markets environment, we continue to put up solid operating and financial results. I will be brief so we can get back to the merger we announced. For the third quarter, we reported FFO as Adjusted of $0.45 per share, AFFO of $0.40 per share, and total portfolio same-store growth of 6%. Some additional color on segment performance, starting with Outpatient Medical, same-store growth was a solid 3.4%. During the quarter, we signed 2.2 million square feet of leases, including a 20-year extension at our Medical City Dallas campus, and 143,000 square feet of leases in Philadelphia. Shifting to Lab, same-store growth was a strong 3.3%. During the quarter, we executed 211,000 square feet of leases, including converting all 196,000 square feet of previously announced LOIs into leases.

The significant deals included a 101,000 square foot lease with Pliant Therapeutics to backfill a 2023 Amgen lease expiration at our Oyster Point campus, a 61,000 square foot lease with Voyager Therapeutics to expand at our Hayden campus, in Boston, and a 23,000 square foot lease with Astellas with Vantage development, bringing that project to 52% pre-leased. All three tenants were existing tenants in our portfolio, and underscores the superior competitive advantage that incumbent landlords have. Finishing with CCRCs, our strategic and operational initiatives are producing strong results. Same-store growth for the quarter was an exceptional 32.1%, driven by occupancy gains, reduced labor costs, and margin improvement. Turning now to our 2023 guidance, we are increasing our FFO as Adjusted and AFFO guidance by two pennies at the midpoints to $1.77 and $1.53 respectively.

Additionally, we are increasing our full-year blended same-store guidance range by 75 basis points to 4.75% at the midpoint. Please refer to page 38 of our supplemental for additional detail on our guidance. With that, let me turn the call to John.

John Thomas: Thank you, Pete. Before discussing the merger, I want to take a few moments to discuss Physicians Realty Trust performance during the third quarter of 2023. During this quarter, Physicians Realty Trust generated Normalized Funds From Operations of $61.2 million or $0.25 per share. Our normalized funds available for distribution were $60.1 million or $0.24 per share. We paid our third quarter dividend of $0.23 per share on October 18, which represented a payout ratio of 96%. We ended the quarter with the balance sheet in great shape, our consolidated net debt to EBITDA ratio of 5.3 times, and less than 5% of our debt case in variable rate interest rate. Of our $2 billion of consolidated debt, only about $85 million or 4% matures before 2026.

Our revolving on a credit is completely undrawn, providing us with $1.2 billion of near-term liquidity when combined with our nearly $200 million of cash on the balance sheet. Operations remained strong, with the leasing team achieving positive absorption of 26,000 square feet, and renewal spreads of 6.7%, outpatient medical same-store cash NOI grew 1.5% year-over-year, an improvement from prior quarters as the team works to re-lease the incremental vacancy incurred earlier in the year. New investments were modest at $16.8 million, including the funding of previous loan commitments on outpatient medical facilities under construction. We also remain on track within G&A guidance of $41 million to $43 million. Our construction team is also managing to the guidance of $24 million to $26 million for recurring capital projects.

And we don’t expect any surprises there. We’re also excited to report that Physicians Realty Trust earned a score of 78 out of 100, representing a 4% year-over-year increase, and a Green Star designation in the 2023 GRESB Real Estate Assessment for sustainability reporting. I’ll now pass it over to Scott to discuss the merger.

Scott Brinker: Okay, thank you, Pete and John. From day 1, the discussion with John focused on whether both companies will be better together than as standalone entities. That was the only transaction either side was willing to do. And we accomplished that goal as the merger is expected to be accretive to both companies from every important angle; scale, earnings, balance sheet, capabilities, team, and relationships. John and I will touch on each of these items. One of the benefits of this transaction that is most exciting to John and me is that we can combine the complementary strengths of the two companies, including DOC’s internal property management and PEAK’s redevelopment and development expertise, just to name two. We expect this deal to fundamentally change the power of the combined platform, and therefore our mutual growth opportunity.

For the past year, since taking on this role at Healthpeak, I talked about several initiatives we were focused on, including having a larger playing field given the evolving nature of healthcare delivery, getting closer to our real estate, deepening our relationships and streamlining our operations. This transaction accelerates every item on that list. There’s an investor presentation on both company Web sites, but let me quickly describe the basics. This is a 100% stock merger based on the closing share price of each company as of Friday. Each DOC share will be converted into 0.674 shares of newly issued Healthpeak stock. The ownership split will be approximately 77% Healthpeak shareholders and 23% Physicians Realty shareholders. The company’s name will be Healthpeak Properties, headquartered in Denver, with the ticker symbol DOC or DOC.

We expect to maintain our dividend at $1.20 per share, resulting in an AFFO payout ratio of 80% or below. Closing is expected to occur in the first-half of 2024 subject to typical closing conditions, including shareholder votes. Let me clarify, this is not a sale for either company. There is no cash changing hands. This is a relative value trade that we believe is beneficial to both companies. And our transaction structure allows all shareholders to carry forward and participate in the immediate and future value creation. Let me touch on the financial highlights. There is immediate and compelling value creation opportunity that will grow over time. The year-one run rate synergies should be at least $40 million, with the potential to reach $60 million by the end of year-two.

Any increase in occupancy or rate will be upside to those numbers. We expect the combination to be accretive to standalone year-one AFFO for both companies. We also expect FFO accretion though that number is subject to GAAP accounting adjustments that will be finalized just prior to closing. We are even more excited about the strategic benefits. First, we have already spent a huge amount of time thinking about the team and platform from top to bottom, with a joint mindset that the status quo was never good enough. Both companies have already been operating at a high level. This is an opportunity to quickly go to the next level combining the complimentary talent and strengths of each company. Second, broader and deeper relationships, together we’ll have relationships with each of the 10 largest health systems in the country.

The vast majority of the world’s largest biopharmas and exciting mix of innovative biotechs and regional health systems. Those relationships are the intangibles that drives our performance. Third is increased operating scale with combined $40 million square feet of outpatient medical real estate including concentration in high growth markets like Dallas, Houston, Nashville, Pheonix, and many others. The combined footprint will deepen our competitive advantage in local markets. And, we haven’t included any of this potential upside in our numbers. Four, we will retain DOC’s internal property management platform and expect to internalize certain markets in our medical and lab portfolios. This will deepen our relationships and augment our local market knowledge.

The internalization will also be accretive. And we have included those profits in our synergy numbers. Five, improved tenant diversification; the top 10 tenants will represent just 21% of annual base rent. And seven of those 10 are investment grade credits. Only two tenants will represent more than 1% of our combined base rent. HCA will be our biggest tenant at 9%. And they are the largest for-profit health system in the country. It’s also a highly strategic relationship that goes back more than two decades. CommonSpirit will move from 15% of DOC’s standalone, down to 4% of the combined company. CommonSpirit is the largest not-for-profit system in the country and rated A minus by S&P. We look forward to supporting the mission of these two organizations and many others in the sector in a broader way than we could as standalone companies.

Six, this transaction will help accelerate the integration of our medical and lab operations. Independent of this merger, we are already moving toward a single operating platform as the daily blocking and tackling of property management, leasing, CapEx, forecasting, and accounting has enormous overlap between the two segments. We also see more and more of our health systems doing some level of R&D where we can be a high value-add partner given our capabilities. Seven, increased scale and liquidity for equity investors as both companies will benefit from a larger market cap. Eight is a bigger, more liquid balance sheet with leverage-expected to be in the low 5s at closing, and well-staggered debt maturities. The balance sheet will be a competitive advantage as we move forward, positioning the company to go on offence when highly levered owners are searching for answers in this new environment.

Nine, lower cost of capital through more efficient G&A and enhanced liquidity, making external growth more accretive. And 10, we will use the larger portfolio to become more active in recycling capital for our pipeline opportunities whether through outright sales or private capital joint ventures. Medical and lab remain attractive asset classes to institutional investors. And, no company will be better positioned to capitalize on their desire for exposure to the sector. Moving to the team and governance, John Thomas will join our Board as Vice Chair. And, have an active role in strategy, business development, and relationship, areas where I have seen first-hand that he excels. John has proved himself time and again as a leading voice in the sector.

And, was a driving force for growth at both Healthcare REIT and Physicians Realty. In addition, we are excited to retain the vast majority of the DOC operations and property management teams. Many of whom are reimbursed by the tenants. Kathy Sandstrom will continue to be our chairperson. And, the Healthpeak Board will be expanded to include five directors from Physicians Realty, including John and the former U.S. Secretary of Health and Human Services, Tommy G. Thompson. After closing, outpatient medical will represent approximately 50% of the combined company’s NOI. Demand exceeds supply in the outpatient sector today. And, we expect that dynamic to continue given senior population growth and high cost of new construction. We are also starting to see market rental rates catch-up to inflation, which is a positive sign for future NOI growth.

That been said, we do not have fix portfolio allocation targets moving forward. We will allocate capital based on opportunity and risk-adjusted returns. And, we do expect the opportunity set to be significant driven by four major buckets and in no particular order. First is outpatient medical acquisitions from capital-constrained owners or health systems. Second is new development with leading health systems. Third is distressed acquisition opportunities in life science driven by refinancing challenges or delayed lease up. And fourth is activating a 5 million square foot life science land bank when fundamentals are favorable. I am excited for JT to provide his thoughts and the opportunity in front of us.

John Thomas: Thank you, Scott. When John Sweet and Mark Theine asked me to join him just over 10 years ago to create a new public company focused on outpatient medical investment, I was intrigued by the opportunity to work with them to build a new kind of organization with an intense focus on serving the current, but more importantly the future needs of healthcare providers and their patients as care continued to move from the inpatient setting to the patient setting. We didn’t have an objective then or now to build a portfolio and sell it. But rather to build an organization built to last for the long term. One that grow and evolve with clinical science, the needs of an aging U.S. population, and resilient to macro and micro capital market conditions.

We wanted a culture to drive those goals. And over time to capture that culture in the acronym CARE. We communicate and collaborate. We act with integrity. We respect the relationship. And, we execute consistently. I have had the privilege to know and work with Scott since 2009 when we both had the opportunity to work together under a genuine mentor to both of us, George Chapman. We worked for Pete since his days at Barclays and collaborated with him since he joined Healthpeak. We’ve had the opportunity over the past 10 years to get to know the Healthpeak team. And more in recent weeks, we have common and consistent missions, goals, and more importantly culture. Scott has articulated, defined, achievable, measurable, and objective metrics we can and will achieve together.

We are committed to this combination not only furthers our long-term objectives from our humble beginning 15 years ago, but provides the best-in-class scale and operating platform to achieve together for our combined providers and the patients they serve far more than we can deliver separately. We are here to serve the best interest of our shareholders and stakeholders. And, we believe with all our analysis and discussions that one plus one in this context is not only more than three, but has the potential to be much more. In addition to Scott’s earlier comments, there is an additional benefit to DOC’s existing shareholders as we are merging with the best-in-class lab portfolio with large footprints and lab investment platforms in Cambridge, South San Francisco, and San Diego at an incredibly great valuation and time for investment in the existing lab platform is what we believe is an outsized ROI for years to come.

Healthpeak’s Class A lab facilities are incredible real estate hosting some of world’s leading scientists, clinicians, and discovery sponsored by and backed by leading pharma, venture capital, and academic proximity and involvement. The combination of Healthpeak’s lab teams and DOC’s operational platform further enhances the value of these assets and relationships. A true Healthpeak’s best-in-class lab and markets and shares a vision for the development of existing land owned by Healthpeak in Cambridge, in South San Francisco that should generate outsized growth of years to come, focus on lab and community development but also outpatient medical access. Scott and I led under George Chapman’s leadership, a large investment at Cambridge in 2010.

And working together learnt real estate investment, development, and operations together. Result of that investments speak for themselves. Obviously, Scott has taken that experience and executed consistently as Healthpeak’s leader. I am very excited to partner with him and collective team to further the combined company’s future opportunities in lab, and of course, outpatient medical. In conclusion, DOC is not selling an outpatient medical portfolio to Healthpeak. Healthpeak is not selling lab or outpatient facility to DOC. Rather, we believe we are combining the best of both organizations in an all-stock merger of equals that we believe will benefit both shareholder bases and continues the mission, vision, and culture of each organization as one.

This combination furthers each of our goals to have and build an organization both to last for the long term. One that grow and evolve with clinical science, the needs of an aging U.S. population, and resilient in macro and micro capital market conditions. We believe this combination meets and exceeds all of those objectives. I look forward to working with Scott and our collective team and Board. And as we say at DOC, this is an opportunity to invest in better as Healthpeak. And you will be able to find us at the New York Stock Exchange under the stock symbol DOC. Thank you. We’ll now be happy to take your questions.

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Q&A Session

Operator: Certainly. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Michael Griffin with Citigroup. Your line is open.

Michael Griffin: Great, thanks. I’m curious if you can elaborate, maybe Scott, just on the on versus off-campus of the combined company. PEAK historically has been more on-campus-focused, DOC has been more off-campus. So, is there going to be a strategy shift in terms of preference there?

Scott Brinker: Yes, I would just say that the portfolios are really complementary. I mean there’s a lot of overlap in the markets themselves, something in the range of 70% market overlap, they have huge concentration in a lot of our big markets, like Dallas and Houston, and Phoenix, it’s a pretty long list, as well as some new markets, like Atlanta. We are higher on-campus, that’s been a good strategy over the years, it’s produced good results. But I think DOC has high-quality assets in kind of a different and complementary way. Certainly healthcare is moving more off-campus, doesn’t mean it’s completely moving off-campus. Our hospitals are still busy; those on-campus MOBs are still performing. But if you think about the trend in delivery, progressive health systems today have 10 or more outpatient assets for every one hospital in their system with, often times, a strategic plan to move more towards a 20:1 ratio.

And just, almost by default, most of those new assets are off campus, trying to make care more convenient, more assessable, and more affordable. So, we still like on-campus real estate, but we think we have to complement it and serve our health system partners more comprehensively, and off-campus just has to be part of that strategy. If you look at the segment or the sector in the aggregate, it’s probably only 30% on-campus. So, it’s just not realistic to think that you can do a true partner of choice with health systems if you’re only serving that 30% of the real estate footprint.

Michael Griffin: Got you, that’s helpful. And then, I’m just curious if you could maybe give us a little color on how these talks came to be, the merger of equals? Over time, how did things evolve or anything there would be pretty helpful?

Scott Brinker: Yes, we’ll put out proxy with all of that background information in the next month or two mark. But I’ll probably defer that answer until that’s made public.

Michael Griffin: Okay. Well, that’s it for me. Thanks for the time.

Scott Brinker: Yes, thanks.

Operator: Our next question comes from the line of Austin Wurschmidt with KeyBanc. Your line is open.

Austin Wurschmidt: Thanks. Good morning, everyone. I was hoping you could provide some additional detail around the synergy components within the $40 million to $60 million that you flagged? And do you expect it will be accretive immediately upon closing? And can you give us a sense about the magnitude of accretion you expect in the first year?

Peter Scott: Yes, hey, Austin, it’s Pete here. Good question. As we said, we do expect the transaction to be accretive to both AFFO and FFO per share. I will note, and I think everybody knows this at this point, but FFO has a lot of accounting adjustments, including a mark-to-market of the debt, and that won’t be finalized until the deal closes. But everything I’ve just said is based on our best estimates as of today. And importantly, those accounting adjustments do not impact AFFO. The accretion of $40 million to $60 million, I think that the biggest component of that are compensation savings. There will be some redundancies within both organizations. There’s also corporate overhead savings, notably some significant professional fee savings from having one public company as opposed to two, and then the increased NOI from internalizing property management across the portfolio.

So, those are the biggest pieces. But to answer your initial part of the question, we do expect it to be accretive in year-one.

Austin Wurschmidt: No, that’s helpful. And then, I’m just curious, so with the combined company, the PEAK team has highlighted the potential mark-to-market growth opportunity, I think it’s in 2025 with the lab space segment. And DOC has talked about, I think it’s ’26 when you’ve got the significant maturities with an attractive mark-to-market as well. I’m just curious how you thought about how this would dilute that growth in the years ahead and then how you backfill that through some of the other opportunities that you’ve discussed in LA?

Scott Brinker: Yes, hey, Austin, I’ll take a shot at that. Pete and John may have comments as well. But overall, we view this transaction as augmenting our internal growth profile, certainly making it less volatile and more predictable. But in addition to just the initial synergies that Pete just described, our capabilities in serving our clients is going to increase pretty materially, whether it’s our development and redevelopment capabilities, internal property management, the additional scale in the local markets, it just brings us closer to the real estate, closer to our tenants. That should drive better economics. And if you think about the last 10 years in lab versus the last 10 years in medical, it’s not necessarily going to repeat itself.

From where we sit, our medical growth over the past decade has been in the mid 2% range, so slightly above inflation. But we have five to six-year lease terms on average, and we are starting to see market rental rates catch up to inflation. There’s obviously a lag given that weighted average lease term, but we are starting to see some pretty significant rental rate growth. And DOC has been reporting the same. So, I think if you look at the go-forward, we’re pretty optimistic about the growth rate within outpatient medical. We see demand exceeding supply really across the entire industry, including in our local market. So, should be a pretty compelling future growth rate that might look different than the last 10 years in that medical business.

Austin Wurschmidt: And that’s very helpful. Thank you.

Operator: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Your line is open.

Juan Sanabria: Hey, guys, congrats on getting the deal done. Just a question on asset management, I guess for Scott Brinker. You guys had tremendous scale, particularly in the lab markets. And just curious on why the change of strategy about embracing the internal property management, and if you could dive a little bit into it, how should we think about how much NOI that business generates just from a synergy or accretion perspective?

Scott Brinker: Yes, happy to take that one, Juan. Really, in the last year, one of the major initiatives that we’ve been pushing as a leadership team is to bring our company closer to our real estate, closer to our buildings, local markets and relationships. And having the internal property management allows us to be that much closer to our tenants in our buildings. And we feel like we’re a little bit redundant, maybe one step removed in some cases with third-party property managers. And we think we can eliminate that, improve the relationship, improve our local market knowledge. And doing it off the back of DOC’s existing platform just allows us to do it faster. It’s less execution risk, and it will have a higher margin just given we don’t have to start from scratch.

So, it’s a pretty significant part of the synergy number that Pete described. Some of that comes immediately because there are a number of markets that we’ve already identified that we can internalize right away. And then, over time, depending upon how it goes, we could increase that number. So, it’s one of the really interesting and intriguing parts of this merger, that it’s not only financially accretive in a pretty meaningful way, but it’s strategically important in that it brings us that much closer to our real estate.

John Thomas: Yes, Juan, this is JT. Yes, just to add to that, in the six largest overlapping markets for outpatient medical, PEAK’s always had a great high-performing team and organizational structure and approach to boots-on-the-ground operation property management. We have DOC team members in each of those large markets already, so there’s just a lot of synergy and scale that’s already — we can put in place day-one, and we’ll be working during the process towards closing to get that plan in place, and assume those responsibilities together day-one. And then, there’s many more markets to come. So, just a lot of upside opportunity, both financially, but also as Scott said, to get people just connected to the real estate.

Juan Sanabria: And then just a follow-up, maybe a little two-parter here, is the exchange ratio fixed or is that variable? And then is there any planned dispositions or exit of any markets with the combined companies?

Scott Brinker: So, the exchange ratio is fixed. And in terms of dispositions, it would only be opportunistic. The balance sheet’s in great shape today for both companies. It will be even stronger post-closing. We have a very high-quality portfolio. We toured the vast majority of DOC portfolio and feel the same. So, anything we do would be opportunistic. There’s no forced sales as a part of this transaction, given the strength of the balance sheet. But I did make comments in my prepared remarks that we would expect to be more active in capital recycling. So, doing things opportunistically, whether it’s outright sales or recaps with joint venture partners, we do think that we’ll be a partner of choice to the private capital community as well.

We already have a number of those relationships, and we think we could have more as we see a significant pipeline opportunity, as I described, really across the lab and medical business. And if the stock is not trading at a creative level, we could certainly look to recycle assets to capitalize that growth pipeline.

Juan Sanabria: Thank you.

Operator: Our next question comes from a line of Vikram Malhotra with Mizuho. Your line is open.

Vikram Malhotra: Thanks for taking the question and congrats on the deal. I guess this first one, when two of your peers merged, one of the theses was that this creates a much larger acquisition opportunity set, and theoretically the AFFO FAD growth is higher. I think there was a 500, 600 basis point number at that time. Is that part of the rationale here? Do you see a bigger acquisition set and just ultimately higher — you said steadier growth, but I’m curious if you also see higher growth?

Scott Brinker: Yes. Well, certainly on the external growth front, we do think that our balance sheet will be even more attractive to lenders, so our cost of capital should benefit. Clearly, our G&A as a percentage of assets will go down, so our cost of capital should improve. Hopefully, the market responds to the strategic benefits of this transaction and our cost of equity improves as well, so certainly we would expect that the external growth opportunity will be more attractive given the DOC relationships and the Healthpeak relationships on top of that improved cost of capital, but that’s not part of any of the accretion or synergy numbers that we’ve outlined. That would be all upside.

Vikram Malhotra: Okay. That’s helpful. I guess just one more, just following up on the whole, I guess the off versus on campus, part of what you mentioned is that the strategy, the consumer, the hospitals are going more off campus, but I guess that could be — that has been going on for a while, so I’m just sort of wondering why today, and as part of this, do you still see, you mentioned disposition, so do you still see a path where more of the dispositions are off-campus weighted?

Scott Brinker: No, it would just be opportunistic. Vikram, it’s not going to be by design, but I think really from day one, 12 months ago, this management team has described the desire to have a wider playing field. If we’re not servicing our tenants and health system partners in the medical business, we’re not going to be — we’re not going to find maximum success, and just given the emphasis of their strategy and growth plans, we have to be a participant in that.

Vikram Malhotra: Okay. So, I guess just to clarify, the dispositions would then still be like more broad-based, including potentially the CCRC that you’ve always had on that list?

Scott Brinker: Yes, I would put CCRCs in a totally different bucket. That’s a business that is performing well. We think it’s a great asset class. We’ve got a great portfolio and internal team running it, as well as a great third-party property manager in LCS, so the feedback and strategy on that portfolio hasn’t really changed. When the financing markets make sense and we get a fair price, that’s one that we’d be willing to sell and recapitalize or recycle into our core businesses, but on your specific point about on versus off-campus or lab, that will just be completely opportunistic. Wherever we get the best pricing is where we would look to try that.

Vikram Malhotra: Okay, great. Thanks again, you and John and both teams.

Scott Brinker: Thanks, Vikram.

Peter Scott: Thanks, Vikram.

Operator: Our next question comes from the line of Rich Anderson with Wedbush. Your line is open.

Rich Anderson: Hey, good morning. So, congrats to everybody. You’re making it clear no one’s buying the other and so on, but the fact is Healthpeak is issuing, if my math is right, 168 million shares. If I’m also doing my math right, the implied cap rate on DOC is in the quarter low to mid-sevens, and so if you do a cost of equity, if you just do an inverse of your AFFO multiple to keep it simple, it’s kind of nine-ish. So, I guess the question is, you need that 40 million of synergies to be able to talk about accretion. Without it, it is at least marginally diluted out of the gate to Healthpeak earnings. Is that a fair mathematical approach?

Peter Scott: I’m not sure. There was a lot there, Rich.

Rich Anderson: I’ll do it again, if you want. 168 million shares, implied cap rate on DOC of 7.25, 7.50 something like that. So, based on those two forces, it’s diluted without the synergies, correct?

Peter Scott: Yes. Well, they’re very different portfolios. I mean, we’re not a pure play medical portfolio today. We have the CCRCs, we have lab, and NOI is one metric you could think about. It’s certainly one that real estate investors tend to point to, but it’s certainly not the only metric. I mean, when you think about CapEx and volatility of earnings, but CapEx in particular, DOC, given the nature of their portfolio, just has a very low CapEx burden relative to ours. So, that certainly drives a lot of the accretion as well on an AFFO basis, which feels more like a cash economics analysis to us. And I’m not sure that I would agree with your point in terms of AFFO, kind of the true economics of the deal. I think there’s probably some accretion even without other synergies, Rich.

Operator: Our next question comes from the line of Tayo Okusanya with Deutsche Bank. Your line is open.

Tayo Okusanya: Yes. Can you all hear me?

Scott Brinker: Yes.

Peter Scott: Yes.

Tayo Okusanya: Excellent. So, question just around the transaction. I mean, summer of 2022, we have the HR, HCA transaction go down, a lot of questions around someone who’s primarily on campus buying someone who has a lot of off-campus. A lot of questions around someone who has a higher same-store NOI growth for the MOB portfolio, buying someone who has a lower same-store NOI growth profile, a lot of questions around pricing. Again, your implied cap rate today is higher than the implied cap rate for DOC. A lot of questions around, again, someone who has managed their portfolio externally, buying someone who’s managing it internally, it just seems like there’s a lot of similarities a year-and-a-half ago when people were kind of struggling with the HCA, HR deal.

How do you convince shareholders this time around that the DOC Healthpeak transaction is different, especially when, again, it seems to be taking away a little bit from the lab science theory that you guys have been trying to tell for the past few years?

John Thomas: Yes. Hey, Tayo, it’s JT. We couldn’t be more excited about this opportunity, and Scott and Pete and our teams sat down and kind of evaluated the opportunity. We looked at it as really combining the best parts of both organizations and kind of the different strategies. Everything was on the table to evaluate what was the best go-forward strategy for all the questions you just asked is I’ve talked about a lot. This question has come up a lot today. DOC’s always had the reputation as the off-campus outpatient medical read. We’re 50% on and 50% off. The assets we’ve helped finance to develop over the last five years have been off-campus and have won awards and are full and at least the best health systems in the country.

Pete’s been doing the same thing, so it’s really not a difference in strategy. It is adding relationships, adding, in a lot of cases, mutual. HonorHealth is a great mutual client of ours in Scottsdale, and we’re doing more growth with them on and off-campus, so it’s really what meets the needs of the providers and the patients that they’re serving and during the pandemic, you’ve heard me talk about this a lot. We did a survey, and people didn’t want to go anywhere near a hospital for their routine care if they didn’t have COVID and that really has driven a lot of health systems to evaluate their strategies. I mentioned before 10 off-campus outpatient facilities for every hospital, and that just continues to grow, and the pandemic showed the need for even more of that.

So, it’s not so much as changing one strategy to the other. It’s about looking at each other’s strategies and maximizing the combined opportunities that we have in front of us. So, it’s a — we’re not going to — don’t really need to talk about other transactions. I would just say very different structures, very different way to put the companies together, very different strategies. This opportunity makes sense for all of us without leasing one more foot because we effectively are 95% leased already. The outpatient, or excuse me, the lab business is highly leased as well, so it’s a great opportunity for the DOC shareholders to work with the — invest in one of the best lab businesses and portfolios in the world and opportunity for the peak shareholders to get the combined strengths of both teams.

Tayo Okusanya: Okay.

Operator: Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Your line is open.

Adam Kramer: Hey, guys. It’s Adam Kramer on for Ron. Congrats on the deal. Congrats to everyone involved here. Look, it’s been covered a little bit, but maybe I’ll ask it a little bit of a different way, which is, look, obviously, this deal is focused on outpatient medical. Wondering what read-throughs we should have, if any, towards the legacy peak life science business?

Scott Brinker: Yes. It’s completely independent of the lab business, which our confidence in that platform and portfolio and segment has never been stronger. This was just a unique opportunity to make the company better in pretty much every important way, balance sheet, capabilities, relationships, scale. It’s a pretty long list, so I wouldn’t have — I wouldn’t make any read-through to the lab business. This is just something that made sense independently. It was a unique opportunity that, fortunately, because of our balance sheet and relationships, we were able to put together and execute, so no read-through at all to the lab business.

Adam Kramer: Got it. That’s helpful. And then, just on the go-forward financing kind of growth plan, how do you think through your cost of capital in terms of the combined entity, or is this more of a capital recycling story, bigger asset base now, and you focus more on capital recycling versus a cost of capital accretion plan?

Peter Scott: Yes. I think one of the things we haven’t talked about yet that’s a very big competitive rationale for doing this was the combination of our two balance sheets. DOC has a great balance sheet. We think we have a sector-leading balance sheet as well. We’re not levering up to do this. In fact if anything, we’re modestly deleveraging with the synergies, so we have a little bit of dry powder. But when you look at a combined basis, we’ve got a weighted average interest rate of less than 4%. We’ve got a weighted average debt maturity of greater than 5 years, almost no secured debt, liquidity of approximately $3 billion. We did put a new term loan in place, which enhances the liquidity of the pro forma combined company, and our net debt EBITDAs in the low fives.

And as Scott mentioned, we’ve got less G&A, improved cost to capital. So, from a balance sheet perspective, from a cost of capital perspective, this is a big win for both companies and for shareholders and for our bondholders as well.

Adam Kramer: Great. Thanks so much for the time, and congrats again.

Operator: Our next question comes from the line of Jim Kammert from Evercore. Your line is open.

Jim Kammert: Thank you. Good morning. I appreciate all the color regarding the potential synergies on the OEM side, but I was just wondering, could you help me walk through the map a little bit? I mean, Peak just reported third quarter, I think 3.4% same-store NOI growth from the medical office, and I believe DOC just reported about 1.5% for the third quarter. So, on a pro forma basis, are you suggesting that the overall combined portfolio could be at peaks operating performance level or greater? I’m just trying to understand how the synergies work through and what you’re quantifying, what that impact is.

Scott Brinker: Yes. I think we’ll bring the same-store growth rate more in line over time. I mean, there’s a couple of differences. We do have a higher base escalator than DOC. We’re in the high twos. They’re more in the mid twos, just given the nature of their portfolio. But over time, as we restrike leases, we’d expect to bring those escalators more in line. They have had better releasing spreads than us in part because they have the lower escalator. So, there’s just a bigger mark-to-market opportunity. Those things usually go together, obviously. But we do have the redevelopment capabilities as some of their older properties mature. We would expect that we would bring our redevelopment capabilities to this portfolio as well, which means that they’re really not part of the same-store pool, either on the downside or the upside.

And DOC just has a different model. So, I think that that will change as well. And then, clearly the internalization of the property management should be a benefit to the portfolio as well. So, I do think you’ll see those two numbers look more in line and consistent among the two portfolios over time, Jim.

Jim Kammert: Okay, great. Thank you. And I could a second one. I think you’ve touched upon this in different aspects on the call. But is there not potentially more distress, if you will, evaluation-wise in lab? And just trying to figure out how the company came to the decision to maybe just the opportunity to present itself, but pivot a little bit incremental exposure to OM. And my perception is that the distress component is less so in OM versus lab, just curious why now to make that kind of allocation.

Scott Brinker: There’s going to be opportunities in both segments. I think having a bigger balance sheet and cost of capital just allows us to be better positioned to take advantage of those opportunities, whether it’s in lab or medical. But no question, in lab, we will start to see distressed opportunities, whether it’s from refinancing, risk, or delayed lease up. So, that hasn’t started in earnest yet, but I would expect over the next 12 to 24 months that there will be quite a bit of opportunity. And I just don’t see any way that our company isn’t better positioned to capitalize on those opportunities as a result of this deal, just given the balance sheet, the improved G&A, improved liquidity. So, I believe this is a positive step in positioning ourselves for that distress, which I think is coming, but we haven’t really seen much of it yet.

And then, in medical, I wouldn’t call it operational distress, but there will be plenty of refinancing related risk in the coming years in that sector, just given what’s happened with interest rates and cap rates, it was harder for us to compete or DOC to compete for that matter when secured financing rates were in the 3% to 4% range and LTVs were at 70%. But guess what, like that world is long gone and a lot of the private market has in place financing with those exact terms and it’s not going to look like that even remotely when they refinance. So, I think you’ll see a lot of opportunity there as well, but more driven by refinancing than operational distress. So, Jim, we’re going to be opportunistic across the whole portfolio. I would view it as one or the other.

Hopefully we’ll position ourselves to do both.

Jim Kammert: Terrific, thank you.

Operator: Our next question comes from the line of Nick Yulico with Scotiabank. Your line is open.

Nicholas Yulico: Thanks, yes. Just first question is on the Healthpeak side related to just the existing portfolio. I was hoping to get update on just Oyster Point, if you could remind us how much square footage is still, you have to lease there and how you’re thinking about rents on that space. And then, also for Sorrento, if you have any update on outcome you’re expecting from the bankruptcy and then also any activity you’re seeing on the development asset there?

Scott Brinker: Yes, maybe Nick, I’ll head on Sorrento first and then I’ll have Scott Bohn touch on Oyster Point. On Sorrento, we got our rents paid in October. No update yet since it’s still October on November rents. But no matter what happens on that outcome, we’re prepared to release those assets and we have a plan and we think the rents are still below market on those operating assets. So, at this point in time, we’ve received our rents but no additional update beyond that. Obviously, we did announce a nice lease at our Oyster Point campus, 100,000 square feet leased. With Pliant Therapeutics, I’ll turn it to Scott, he can talk about what else is going on, on that campus.

Scott Bohn: Yes, hi Nick. Yes, I mean with the lease with Pliant on the campus, we took another 100,000 square feet off the table there. So, the 940,000 square foot campus, we’ve now completed lease on about 70% of that. We’ve got the 70,000 square foot building that’s currently in Redev that we got back at the end of last year. And now we have two buildings, a total of about 189,000 square feet that we’ll get back in January of ’24. But both those buildings will go into a relatively extensive Redev, nine to 12 months. So, we’re talking about not leasing out until 2025, so some time there.

Nicholas Yulico: All right, thanks guys. Second question is just again on the Healthpeak side, if you could tell us a little bit more about, how the board thought about this decision to do M&A right now versus whether there were other options considered, right like to maximize shareholder value. I mean, in these situations where spot price has been impacted, were there other considerations about maybe trying to sell your company or selling assets, doing something else besides this M&A as a way to kind of address the future of the company? Thanks.

Scott Brinker: Yes, we’ve already had some asset sales this year. We have other things that are potentially in process. So, certainly with the stock trading where it’s at, capital recycling has been on the list of priorities. It’s not a highly liquid market today, just given the financing environment. But neither company is viewing this as a sale. This is just a combination based on relative value that made sense in and of itself. It’s a unique opportunity. So, no, this isn’t a situation where we’re considering a broad range of options. We just thought this was highly compelling for all the reasons that we mentioned, both strategically and financially, Nick.

Nicholas Yulico: Thanks, Scott.

Operator: Our next question comes from Jon Petersen with Jefferies. Your line is open.

Jon Petersen: Great, thanks. As we do these merger models, we have to deal with some annoying GAAP accounting rules. So, I realize this isn’t cash, but I know we’re going to have to mark-to-market DOC’s debt. If you have any thoughts on what the interest rate there might be, it seems to me like it would be probably very high sixes today. And then, I was just curious on the revenue side, are those rents below market? Do we think there would be any significant revenue mark-to-market that we would have to think about from a GAAP accounting perspective? Again, I realize this is not cash.

Peter Scott: Yes, no problem, Jon. This is Pete. I’ll take that. First of all, we do have to re-straight line, the rents as of when we would anticipate this deal to close. I know DOC has some public disclosures out there that you guys could do your best to come up with some estimates there. But straightlining is almost always positive when you do it in these types of transactions. Second, the lease mark-to-market, where you do compare in place rents to market rents. And more often than not in these deals, there is a positive adjustment. We do think there will be a positive adjustment as part of this as well, although not as significant as perhaps the straightline rent adjustment. And then, the third one you mentioned, which works against you is the debt mark-to-market.

Importantly, though, you mark that to our cost of debt, not to DOC’s cost of debt. And I think we would be sort of in the 6.25 to 6.75 range depending upon the term. And again, that’s as of today. We will do that mark-to-market as of the date of the close. So, that will fluctuate between now and the closing date, but that’s probably the best guidance I can give you. And then, from an assumption perspective, I would say, our hope is to assume all of DOC’s debt, except for the private placement notes, there’s no ability to assume those, but our goal would be to assume all the bonds that are outstanding, absent the private placement notes, and then the term loan as well. And then, we take on the secured debt, a lot of that, which is encumbering the joint venture portfolio.

That’s it.

Jon Petersen: Very thorough, very helpful. Thank you.

Operator: Our next question is a follow-up from Rich Anderson with Wedbush. Your line is open.

Rich Anderson: Thanks. And I was going to say, Scott, I totally got you on the AFFO response to my previous question, but I got knocked off. I want to know if there was, what happens between now and closing? You mentioned just, Scott, you just went through some of these accounting adjustments, transaction costs break fee, what’s to stop a third-party to kind of come in and take a look? Or how would you respond to some of those potential events between now and closing?

John Thomas: Hey Rich, this is J.T. I think we’re going to be focused on again, integrating the team, integrating processes, taking, I don’t know if you heard, if you got knocked off, but we have six markets at overlap where we already have DOC and team on the ground. And we will put those markets all in our internal management going forward and be planning to do that; hopefully, day one or very early on, right after closing. So, besides that, we would be working through the process with the SEC and get our shareholder vote.

Scott Brinker: Yes, I think just on some of the specifics there, Rich, in addition to what J.T. just said, the merger agreement will get filed in a next couple of days. And then, you should expect a proxy to get filed probably late November, early December, you’ll get a lot of information in that our anticipated closing would be in the first-half of next year. We’d all prefer it to be the earlier part of the first-half of next year to help with the integration and to kick that off as quickly as possible. But I think the best guidance we can give right now is first-half of 2024.

Rich Anderson: Okay, sounds good. Thanks.

Scott Brinker: Yes.

Operator: Our final question comes from the line of Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa: Yes, thanks. Sorry to beat a dead horse in the synergies. I just want to be 100% clear. The $40 million to $60 million that you’re talking about is that cash savings and then anything on mark to market, FAS 141 and then the debt mark-to-market would be pluses and minuses on top of that.

Peter Scott: So, the GAAP adjustments are on top of the $40 million to $60 million, the vast majority of the $40 million to $60 million is cash. There’s a small non-cash comp component that would not flow into AFFO, but I’d say the $40 million to $60 million, all that would hit effectively FFO. Then you have the GAAP adjustments on top of that, and then the vast majority of those synergies hit AFFO. Does that makes sense, Steve?

Steve Sakwa: Yes, great. Yes, it does. Thanks. I know this is far in the future, just given the challenges we’re seeing in life sciences today, but you did get these approvals for the L-Life land and the upzoning. Is there any comments around that? What it might mean? Do you jumpstart anything with multifamily? Just what are the, I guess forward-look on that project now that you’ve gotten these new entitlements?

Scott Brinker: Yes, the team really did a fantastic job with the entitlement process to really become and establish a partnership with not only the City and the City Councilors, but a lot of the local stakeholders and neighborhood advocates, just really proud of what our team has done in a high barrier market like Cambridge, we think it’s a great outcome for the city in terms of the mixed use and infrastructure that will come into that sub-market and the residential housing in addition to the over time, lab opportunity. So, just a really, really great outcome, but now that the rezoning is done, that was the big discretionary entitlement that we needed. So, we would look sooner than later to recycle some of the multifamily parcels.

That’s obviously not our core business. We have no intention of being a multifamily developer. But there’s a lot of recent apartment development in that sub-market that’s been highly successful. So, we do think that there will be a long list of participants that are eager to participate.

Steve Sakwa: Sorry, and just one quick follow-up on that, Scott. Would you look to actually monetize those, or would you stay in as a joint venture partner, or just sell them outright?

Scott Brinker: The multi-family parcels we would sell outright, Steve.

Steve Sakwa: Okay, great. Thanks. That’s it for me.

Scott Brinker: Okay, thanks.

Operator: The Q&A session has now ended. We’ll now turn the call back over to our presenters for closing remarks.

Scott Brinker: All right. Well, thank you for your interest today. We’re really excited about this and look forward to speaking to you. If not this weekend next, then hopefully in Los Angeles at the conference here in mid-November. Have a great week.

Operator: This concludes today’s conference. We thank you for your participation. You may now disconnect.