Healthpeak Properties Inc (PEAK) 2022 Q1 法說會逐字稿

Good morning, and welcome to the Healthpeak Properties' First Quarter Conference Call. (Operator Instructions) Please note that this event is being recorded.

Now I'd like to turn the call over to Mr. Andrew Johns, Senior Vice President, Investor Relations. Please go ahead, sir.

Welcome to Healthpeak's First Quarter 2022 Financial Results Conference Call.

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, 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 on this call. In exhibit to the 8-K we furnished with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com.

I will now turn the call over to our Chief Executive Officer, Tom Herzog.

Thank you, A.J., and good morning, everyone.

With me today are Scott Brinker, our President and Chief Investment Officer; and Pete Scott, our Chief Financial Officer. Also here and available for the Q&A portion of the call are Tom Klaritch, our Chief Operating Officer; and Troy McHenry, our Chief Legal Officer and General Counsel.

First, a few highlights from the quarter. Our operating results were ahead of our initial expectations. We delivered 500,000 square feet of new development, including 3 new 100% leased Class A life science buildings representing an investment of $262 million, along with 3 HCA on-campus MOBs, representing an investment of $68 million. Leasing momentum remains strong across our Life Science and MOB businesses, and CCRC entry fees had another strong quarter with cash sales volumes up 42% year-over-year.

We continue to advance a number of growth initiatives, including future developments, densifications and entitlements in our 3 core life science markets and in our HCA development pipeline.

As to our current competitive positioning, starting with our life science business, we are focused almost exclusively on large campuses in Class A markets and submarkets, providing us with depth and competitive advantage versus new life science entrants and owners of conversion of one-off buildings. While life science new supply has increased and public biotech markets have been choppy, occupancy and absorption within our portfolio has remained strong and rate has continued to grow.

NIH funding is at an all-time high and Venture capital continues to support biotech growth. We believe new technologies and scientific advancements will continue to drive strong long-term demand for purpose-built life science space.

Today, we estimate the mark-to-market opportunity within our life science portfolio is roughly 25%, supporting our organic rent growth over time.

Our MOBs are very well-positioned and located primarily on campus with #1 or #2 hospitals in their respective markets with high concentrations of specialist physicians. New competition of on-campus properties is constrained as each project requires an invitation from a hospital or health care system.

The majority of our MOB growth is currently through our HCA development program. CCRCs are benefiting from strong demand and supportive housing values, with almost no new competition as CCRCs require 8 to 10 years from predevelopment through stabilization, and our portfolio's replacement cost would be at least 3x our cost basis. Additionally, the yield for our irreplaceable CCRC portfolio is incredibly strong on a risk-adjusted basis.

Turning to the impact of higher inflation on our development program. We estimate that construction costs are up 10% to 20% over the last year, depending on the type of building, location and other factors and land is up significantly more than that. Fortunately, we have GMAX contracts in place on our entire $1.3 billion of active development projects. This pipeline is fully-funded within our plan and is already 71% pre-leased, and we are seeing very strong interest in the remaining available space.

With the rapid rise in land values, the value of our sizable land and densification opportunities has increased significantly. As a reminder, we have roughly $11 billion of embedded future development opportunities over the next 10 to 15 years. Going forward, we would expect higher land and construction costs to dampen new supply as certain life science projects being contemplated by new entrants will no longer pencil, but we'll see how that plays out.

Turning to our balance sheet. Our current net debt-to-EBITDA is 5.1x, and we have $2 billion of liquidity. We have no bond maturities until 2025, and our floating rate debt is at 17%, in line with our long-term target of about 15%. Although higher short-term rates will weigh a bit on our near-term earnings, we believe our percentage of fixed floating debt provides appropriate match funding to our portfolio and also lower average costs through the cycles. Given we are well below our net debt-to-EBITDA target of mid- to high 5s, we have plenty of dry powder.

Finally, board changes we announced yesterday. Last week, Kathy Sandstrom was appointed by the Board as independent Vice Chair and Chair of the Nominating and Corporate Governance Committee.

In Kathy's new role as Vice Chair, she'll work closely with Brian Cartwright, our Chairman, on various Board matters. And in her role as Chairman of Nominating and Corporate Governance Committee, Kathy will assist in planning for future board leadership roles and succession. As many of you know, Kathy spent 2 decades at Heitman, ultimately running a number of domestic and international businesses in addition to leadership of their REIT investment team.

With that, let me turn it to Scott.

Thanks, Tom. I'll cover first quarter operating results, starting with life science.

Year-to-date, we've signed 311,000 square feet of leases, and we have an additional 610,000 square feet under letters of intent. The leasing activity includes new development, renewals and expansions with existing tenants. Note that our leasing volume will naturally be lower this year because we simply don't have much space available to lease. The operating portfolio is now 99% occupied. We have very few maturities this year, and our development pipeline is 71% pre-leased. Important to note that we're still seeing strong demand for the very limited space we do have available.

Same-store NOI growth in the quarter was 5.2% and exceeded expectations. Growth rate was driven by contractual rent steps, mark-to-market and a 30 basis point increase in occupancy. We had a 100,000 square foot tenant cease operations in mid-April. We immediately received several inbound calls from tenants wanting the space. We've already signed an LOI with an existing tenant on half the space, and we have significant interest in the remainder. The existing rents were signed in 2018 and '19 and were, therefore, well below market.

The earnings impact in 2022 is roughly $0.01 because of downtime as we reposition the space for heavier lab tenants. More important, we expect to realize a $3 million annual earnings improvement in 2023 and beyond in comparison to the prior run rate.

Moving to medical office. Leasing is off to a great start with 870,000 square feet of commencements in the quarter, above our budget. Mark-to-market on renewals was 3.7%, and retention was strong at over 80%. Same-store cash NOI grew 3.6% in the first quarter and exceeded expectations. The drivers were broad-based, including occupancy, mark-to-market, parking income, ad rent at Medical City Dallas and lower bad debt. Same-store for the full year is currently trending at the high end of guidance.

In March through a relationship-based transaction that's been in process for the past 6 months or so, we acquired 2 MOBs for $43 million. The buildings are on the campus of HCA Clear Lake, the #1 hospital in Webster, Texas, a suburb of Houston, which is our second largest MOB market. The initial cash yield is 5% with roughly 3% rent bumps. One of the buildings is LEED Platinum.

Finishing with CCRCs. First quarter results exceeded our expectations, and we're trending above the high end of full year same-store guidance. Occupancy was up 120 basis points sequentially. Forward-looking indicators, including leads and tours, exceed 2019 levels and are trending favorably.

Entry fee cash receipts totaled $21 million during the quarter, exceeding the amortization amount we recognized in earnings by $2 million. That gap has now occurred in 4 straight quarters, and we expect it to continue, which is a positive sign for future earnings growth.

We continue to have strong pricing power with little or no discounting. Our average entry fee sale price increased 18% year-over-year and RevPOR increased nearly 5% year-over-year. Given the uncertainty in the labor market, we're choosing to be conservative for now and not adjust same-store guidance yet.

With that, I'll turn it to Pete to cover financial results and the balance sheet.

Thanks, Scott.

Starting with our financial results. For the first quarter, we reported FFO as adjusted of $0.43 per share and total portfolio same-store growth of 5.6%. Excluding the one-time CARES Act grants received during the quarter, our pro forma total portfolio same-store growth was 3.2%. Our same-store results reflect the strong industry fundamentals across all of our business segments. Last item under financial results. For the first quarter, our Board declared a dividend of $0.30 per share.

Turning to our balance sheet. As Tom mentioned, we ended the quarter with a 5.1x net debt-to-EBITDA, floating rate debt of 17% and over $2 billion of liquidity, providing us ample dry powder. Our floating rate debt percentage takes into account $313 million of equity forwards, which remain outstanding. A portion of our floating rate debt also helps to hedge certain variable rate seller financing loans we provided during 2021.

Turning now to our guidance. We are reaffirming our FFO as adjusted guidance of $1.68 per share to $1.74 per share and our blended same-store guidance of 3.25% to 4.75%. As you can see from our first quarter results, our segments are performing very well and are tracking at the higher end of our guidance range for the year. However, interest rates have increased faster than the forward curve implied when setting our initial guidance, which offsets our improved segment performance. Please refer to Page 35 of our supplemental for additional detail on our reaffirmed guidance.

One last item before turning to Q&A. We had a few large adjustments in our FFO walk this quarter. We incurred a $14 million nonrecurring loss resulting from tenant relocation and demolition costs in a medical office building we and our MedCap predecessor have owned for 20-plus years.

As we began opening up walls during the initial phases of our redevelopment late last year, we discovered some structural items that we, along with our structural engineers, concluded represent potential life safety issues and determined it appropriate to demolish and rebuild as opposed to redevelop.

We recorded a $17 million impairment on the real estate during the fourth quarter of 2021. Additionally, we recorded a $23 million gain on sale from our Frye hospital disposition. Since this asset was classified as a direct financing lease, it is included in NAREIT FFO, but backed out from FFO as adjusted.

With that, operator, let's open the line for Q&A.

(Operator Instructions) First question comes from Nick Joseph with Citi.

This is Michael Griffin on for Nick. I'm curious on the leasing side. I know Brinker touched on it a bit, but is there more of a push to tie future leases to some kind of CPI-based system?

Michael, I'll cover that, and then I'll ask Klaritch to talk about medical office as well. So at least for life science, I mean, we're generally in fixed escalator markets. We tend to get 3.5% in the Bay Area, more in the 3% range in San Diego and Boston. Obviously, we and a number of other landlords in those markets have been able to push market rates quite a bit on new leases and renewals. But to date, we haven't seen any change in the actual escalator.

Tom Klaritch, do you want to cover medical office?

Yes. In medical office, we've been pretty successful over the years getting, for the most part, 3% increases. We are trying to push those, and we're having some success right now, pushing to 3.25%, sometimes 3.5%. The market is really not accepting a push to CPI for most of our markets, at least, a push to CPI-based leases. If we do get them, the doctor typically wants a collar and that collar can be pretty low on the low end. If we get into really implementing CPI increases, we want to collar more on the -- with the 3% on the low end and maybe 5% to 6% on upper end. And right now, we just wouldn't get that. So for the time being, at least, we're just going to continue to push for higher fixed bumps. And we think that's the way to go right now.

Got you. And then I know Herzog touched on the kind of embedded growth within the development pipeline. I'm curious how you view the land bank size relative to sort of the total active development pipeline now? And where you could see that may be growing in the future?

From the land bank perspective, including densification, we've got about $11 billion of future development activity, which we would expect to occur over the next 10 to 15 years. When we're looking at just pure development spend, right now, it's in that $600 million range per year, maybe slightly less. We have a $1.3 billion development pipeline in place. We have a number of projects on deck, and we do intend to continue to have a fulsome pipeline but with a long runway for future development.

The next question come from Nick Yulico, Deutsche Bank (sic) [Scotiabank].

So I guess just following up on the future development pipeline. Some of that is just land held for development, some of it's the upzoning of projects. I mean do you have an update you might be able to give us on -- in terms of the kind of value of -- fair market value of that land, that opportunity that's not captured in the supplemental? Just as we're thinking about -- you talked about market value for land going up a lot. Any additional thoughts there would be pretty helpful.

Nick, it's Scott. Let me start on that one. When you look at the 6-plus million square feet of land bank in the life science portfolio alone, just under half of it represents vacant land like Vantage in South San Francisco or excess land on properties that we acquired in the past few years like The Post or the Towers in South San Francisco. The balance, which is a little bit more than half of that 6-plus million square feet, represents densification where we have a 1- or 2-story building or a campus that, through upzoning, as you noted, could turn into substantially more square footage over time as leases roll over. So that's the general breakdown of the 6-plus million square feet.

And then in terms of value, if you look at the vacant land, most of it has been on our balance sheet for a number of years. In the case of Vantage, some of it was 10-plus years, in other cases, we bought land 2 and 3 years ago. And certainly, land values have escalated massively in the interim. Even over the past year in South San Francisco, they're probably up somewhere in the 50% to 100% range, probably even more, in some cases. And then for the land on operating assets where the land literally just came as part of the portfolio, like at The Post or the Towers, I mean the land is virtually on our balance sheet for nothing. So as we go through the zoning process and the entitlement process, which is underway now, that land will become significantly more valuable than it is on our balance sheet today. I don't want to put a number on it because we haven't gotten through the entitlements yet, but it's meaningful.

Okay. Just second question, Pete, on the balance sheet, the floating rate debt exposure, it just sounds like the guidance contemplates some of the forward equity paying down the commercial paper program. I think the number in supplements is like over $300 million. But just trying to understand in terms of that commercial paper, there's still a balance there of about $1 billion left. And is the plan to just continue to let that be floating rate, have that exposure to higher rates over the next year? How should we think about that?

Nick, it's Pete here. That's a good question. As you think about our floating rate exposure, we do target right around 15%, and that's as a percentage of total debt. We do adjust for the equity forwards. I did mention in my prepared remarks as well, we do adjust a little bit for the variable rate loan receivables that we have, which is just an offset to our floating rate liability.

When you factor that in, that's about $175 million. We're right at that 15% target. And we like that because we try to match as best as we can, our weighted average lease term with our weighted average debt maturity and our weighted average lease term is around 5 years, weighted average debt maturity is around 6 years. We look at floating rate debt as a very efficient way to fund our developments, and we'll term the floating rate debt out as projects deliver.

We also look at floating rate debt over many cycles, and we think that it creates some lower average cost relative to fixed rate debt, and it provides us with some prepayment flexibility. So we'll be right around that 15% target. We did include in our guidance for the year, some higher-end increases. So we're still within our guidance from an interest expense perspective, I'd say we're probably towards the higher end today, given where the forward curve has trended, but we've seen improvements in our operating portfolio segment performance to offset that. So that's probably about as much as I want to say on the floating rate side.

Our next call comes from Austin Wurschmidt of KeyBanc.

Just wanted to touch on the CCRCs a bit and see if you could provide some additional detail around the assumptions regarding both the recovery in that portfolio. It sounds like you've seen some...

Austin we just lost you, it's your phone muted. Operator, maybe we need to go to the next question then we can requeue Austin.

Next question is from Michael Carroll, RBC Capital Markets.

Scott, I was wondering if you could walk through your -- how you kind of analyze the tenant credits within your life science segment kind of given what we're seeing in the public and the private markets there? And I believe you mentioned a specific issue already this quarter.

Yes, I'm actually going to also ask Mike Dorris to comment on that, and then maybe I'll come in at the end. Mike, do you want to start with it?

Sure. Happy to talk a little bit about how we look at kind of the -- evaluate the risk of any lease transaction. And we really kind of look at it on 2 dimensions. One of those is kind of the creditworthiness of the tenant itself, but we're also considering the nature and the magnitude of the landlord investment that is required for the deal. So when we kind of focus on the tenant itself, we're really looking at both quantitative and qualitative metrics.

So on the quantitative side, you would look at things like cash on hand and the cash burn rate. Is -- we're looking at, is this a company that's got less than 12 months of cash here? Or is this a company that's raised a significant amount of money that's going to carry them through the next 3 to 4 years?

We'd also consider market cap. Obviously, if it's a public company, this can give a sense of the likely ability to be able to raise cash if necessary. We'll also look at more qualitative measures, things like the experience of the management team. Is this a team that has built companies in the past and brought them to an exit successfully? Or is it a group that's on kind of the first rodeo.

We also consider the quality of the financial partners. Is it backed by friends and family? Or is it backed by quality VC firms, obviously, experienced VC firm is not only known for sort of competency in being able to evaluate the investment prospects but also for providing managerial wise and oversight, which obviously helps mitigate the risk from the landlord perspective.

We also consider things like the breadth of the portfolio. Obviously, all things being equal, we prefer tenants to have more shots on goal, so to speak. Obviously, having several paths to profitability helps to mitigate that risk of insolvency.

So that's -- those are all the things we kind of focus on from a tenant creditworthiness perspective. And we're really focusing, and I think your question is more a pre-revenue tenants. But we also look at the nature of the magnitude of landlord investment is -- are we looking at a deal where someone is going to take the space as is? Obviously, we'd be willing to accept a little bit less creditworthiness, if it's somebody is taking as is deal, we're not putting any more money into it as opposed to a tenant that's looking for a heavier investment from the landlord.

And then as much as the magnitude of that investment is important, it's also important to sort of evaluate the nature of it, the reusability of those tenant improvements and the investment that's required to be made. So obviously, more residual value to the landlord obviously helps mitigate any risk, things like manufacturing, vivariums, chemistry spaces, they tend to be a little bit less reusable than basic biology space. But the reusability of even those spaces can be improved with thoughtful design and space configuration.

So you take all these factors together, and we kind of mitigate this risk by one, I think we have excellent real estate located in top locations, top markets, but we're obviously going to assess that credit of the tenants, both on the quantitative side and the qualitative metrics and also be mindful of the TI's, reusability and the magnitude that we're having to invest. So I think it's a high level summary of how we kind of look at these tenants going into a lease transaction.

I don't know, Scott, do you have more to add there?

No. That's comprehensive, Mike.

And then can you talk about your watch list maybe? Is there anybody else on your watch list? I mean, should we be concerned about another issue popping up over the next few quarters?

I can take with that one, Michael. I mean we always have a watch list. I mean, it's a portfolio with approaching $600 million per year of NOI. So that's a lot of tenants. And clearly, in the biotech business, you've got at least some percentage that are always going to be pre revenue. We have a very small percentage that's preclinical. I don't think we'd ever want that percentage to be 0. Those companies end up, at least a number of them, needing a lot of space, and you want to be their incumbent landlord, but it's not a high percentage, less than 5%, but certainly not 100% investment-grade tenants. It's closer to the 40% range.

So it's something that we spend a ton of time on from a portfolio management standpoint. We always have a credit watch list. It shrunk over the past (technical difficulty) and at least over time, we've had very little bad debt in the (technical difficulty) that watch list shrink over the past couple of years, in the last quarter, certainly because of the capital markets -- public markets, in particular, there are more companies that we're starting to watch more carefully, but certainly feel good for a couple of reasons. One, the quality of the real estate and locations and then the fact that we have such a significant mark-to-market opportunity that if one tenant doesn't make it, at least today, we're seeing significant demand to backfill that space very quickly, like what happened in Boston, in many cases at a very significant mark-to-market.

Next call is from Rich Hill, Morgan Stanley.

I want to talk about the MOB portfolio, just real quickly. There seems to be some renewed interest in the public markets for medical office. The private markets, I think, are really attractive as it's a nice surrogate for traditional fixed income. Have you thought about maybe using -- selling your MOB portfolio, reducing your MOB portfolio? And I think about this in context of your life sciences, which seems like a really attractive growth engine.

Yes, Rich, I'll take that one. We -- first, we like our MOB business and expect it to deliver above average and more consistent returns over time than the typical portfolio in MOB due to the high on-campus percentage and the trophy campuses that we literally took decades to build and could never be replicated today. We also have the accretive development program, the proprietary program with HCA, which we like a lot. And we think that's a stable and growing MOB cash flows give us the ability to be more aggressive on our life science development program.

And then on top of that, there are just a whole lot of synergies that we have with our life science business due to the robust platform we have in place, the vast majority of our corporate back-office transaction, CapEx development functions are shared resources, as is leasing and data analysis systems and other areas. So we do like the MOB business. We believe it's irreplaceable. Through the cycles, it is a very good business to have matched up against life science and also creates for us G&A synergies and cost of capital efficiencies. So we very much like having the MOB portfolio as a part of our diversified play at Healthpeak.

Got it. That's helpful, guys. And maybe just going back to the prior question about CPI bumps for the medical office. Do you -- I recognize that maybe you're not getting those right now, but it would seem like in an environment where the world has certainly changed over the past 3 to 4 months that maybe tenants would be more open to that. Is that just a naive way of thinking about it? Or do you think at some point in the future as the market becomes more accustomed to an inflationary environment that there might be a way to negotiate leases that have a little bit more growth kicker in them?

Yes. I mean if you look at the last 10 years in medical office, our re-leasing spreads were in the mid-2s. Our NOI growth was in the mid-2s in era or a decade where CPI was below 2%. So MOBs have, I think, a good reputation for stability, but at least for our portfolio, we also have a decade of history where our growth rate exceeded CPI.

Now certainly, with a 4- to 5-year average lease term, we're not repricing our contracts every day like some sectors, but it's not a super long lease term either at 4 to 5 years on average that if inflation continues at the pace that it has been and construction costs continue to increase, our expectation is that market rents would eventually reflect that rapid growth, and the same would be true with the escalator. So I think it's too early to start asking for CPI escalators at 6% ramp ups. But let's see if inflation continues at the pace that it is. And if so, I would expect that MOB rents would start to adjust.

One other thing I'd add is keep in mind that expense reimbursements are always a big part of any of these types of leases. And our portfolio over time has moved toward -- in MOBs has moved toward being a solid 2/3 triple-net, so as far as the expenses that are involved during an inflationary period, we're largely sheltered from them.

Next question comes from Juan Sanabria, BMO Capital Markets.

Juan, are you on the line?

Sorry, you would think I would have learned by now to unmute myself. Apologies. .

Just curious on the life science part of the business, what history would tell you on the stickiness or not of rents in a recessionary environment? And I guess a related question, any sense of a slowdown or apprehension as a result of an IPO market that's down significantly, maybe providing less liquidity to potential start-up tenants?

Yes. Juan, I can start with that and some of the team may have commentary as well. But rents are up over the past decade, 7% to 10% in our 3 core markets. They were up in the 15% to 20% range over the last 12 months. And I think you've probably heard us say repeatedly, we love that business, and we love our market position within it, but we're not underwriting that rents are going to grow at 10-plus percent forever.

So have things slowed down a bit? Yes, probably, although the funding sources into the R&D segment are quite diverse. Certainly, the public markets are part of it. But you have to think about NIH funding, which continues to escalate at about 6% per year. Venture capital funding continues to be strong, both the funds that are flowing into the venture capital firms for future investment as well as deploying the funds that they already have. And those volumes are still quite strong, certainly by historical standards.

And then you think about M&A as well as partnerships and collaborations that realistically slowed down a bit over the past 2 years because the valuations were so high. We would expect those to start to pick back up here in 2022 if the public equity markets remain weak. In terms of demand, we don't have much space available to lease. So that's a good thing. And yet we're still active in the marketplace, of course, and we're still having a ton of success, leasing the space that we do have available, whether it's development or within the operating and redevelopment portfolio. In terms of gross demand across the 3 markets that we're in. The numbers are maybe a bit softer in 1Q versus the prior quarter, but a big part of that is driven by the fact that some huge leases got signed. So those numbers came out of the active demand category, but they helped take up some of the new supply that was coming online.

So we're still feeling good about supply and demand in our 3 core markets, certainly for 2022 and really into 2023 as well. I mean if you think about our portfolio in terms of the development pipeline, it's 71% pre-leased, that's awfully strong with huge interest on the balance. Not a ton of lease rollover within our portfolio over the next 3 years. In Boston, it's almost 0. In San Diego, it's extremely modest. And in South San Francisco, we have a bit, but not significant. And some of those buildings will end up being redeveloped or torn down and densified. So we actually don't have a whole lot of lease rollover for the next 3 years if things do slow down a bit. So we're still feeling pretty confident.

And when we look at all the new supply, 2 things have emerged that I think are worth noting. And they're consistent with how we've talked about it for the past 2 years when we got a lot of questions about conversions coming to market as well as new entrants. And we really did kind of a deep dive on the new supply coming into our markets over the next 2 years. And what we found is 2 things that are important. One is that the purpose-built new developments are pre-leasing at a significantly higher level than conversions. So in the 55% range for newbuilds over the next 2 years versus less than 30% for conversions. And that's good because we're doing almost entirely new development of purpose-built assets.

And then the second thing that emerged from our analysis is that the incumbents like PEAK are pre-leasing at a far higher percentage than the new entrants, again, in the 60% range for incumbents like Healthpeak versus less than 30% for the new entrants. So none of that surprises us given the way that business functions, but I think worth passing along.

And then just as a follow-up. On the HCA development pipeline, I think the 61% pre-release on the new deliveries. What's the typical budgeted time frame to lease up that remaining space? And how have the other projects that have been delivered previously fared in terms of getting it to a kind of a 90%, 95%, which I presume would be your target?

Yes, typically, a lot of the interest from third-party tenants doesn't come until the building is physically completed. We see a lot more interest from doctors at that point. If you look at, for example, our -- the first building that was complete, which is Grand Strand in Myrtle Beach, that building is now effectively 100% leased. So it took about 1.5 years to get there. And that's kind of what we typically think of about 1.5 years to 2 years after initial opening, we get to a stabilized occupancy rate that could be anywhere from the upper 80s to upper 90s, depending on the market and size of the building and a number of other factors.

Our next question comes from Steven Valiquette of Barclays.

Couple of questions just on the medical office landscape. So just to throw it out there, obviously, since your last earnings call, there's been a major announcement or 2 regarding proposed M&A activity among some of your medical office REIT peers. Are you able to just at a high-level comment on any puts or takes implications for you when thinking about your own health system relationships and opportunities? Or those announcements not really changing anything for you one way or the other? I'll let you answer that, then I'll have another follow-up on a different topic on medical office.

Yes, Steven, Tom Herzog again. It's interesting, obviously, news over the last couple, 3 days. As we had indicated last quarter, we did not sign the NDA for HCA nor were we involved in any merger conversations with HR. To be clear, we were not Party F, Party C, Party D or any other party named in those filings nor are we providing any financing related to the deal, which are questions that have been asked of us, which we're able to now answer on this call.

Our strategy involves using our relationships and scale to drive one-off market transactions hitting lots of singles and doubles. That is where our focus remains on the acquisition side, we've been talking about that for quite a while, as well as our development, densification in life science primarily and with our HCA development program. So for us, it certainly has been interesting press. We'll see how it all plays out, but not a whole lot of impact on Healthpeak.

Okay. That's helpful to clarify that. The other question and just as we look at your current health system relationships on Page 29 of the supplement for medical office, with all the talk around elevated skilled labor costs, labor pressure, still a major variable for many health system operators so far in '22, particularly HCA with some of their own announcements. Are you seeing these labor dynamics really have any impact whatsoever on medical outpatient real estate expansion or reduction decisions among the health systems you have relationships with? Or is it just not really impacting this corner of real estate landscape right now from your own view?

This is Tom again. We haven't seen any kind of impact from the labor. Obviously, on the hospital side, HCA did report a little lower guidance for the year. But when you look at the results from the quarter, they actually had a fairly good quarter as far as the revenue side. Their admissions were up, surgeries were up. So from a business standpoint, they're doing great. I think they'll correct their expense issues. But we have not seen any kind of a problem in our facilities. In fact, sometimes it's a benefit because more and more acute services are now provided in the outpatient setting, and it's actually cheaper to provide those services in a building like ours. So if anything, it might boost the demand for space in our buildings as time moves forward.

Okay. That's great. Just wanted to check the box on that.

Next question comes from Mike Mueller of JPM.

I guess, Tom, given your comments about construction costs and land costs moving considerably higher, would you anticipate that your '23 and '24 development starts have somewhat lower returns than what's in place today? Or is it your expectation that market rents have kept up enough to keep those returns relatively stable?

Yes. Market rents have certainly helped, but costs have risen, land costs are obviously up dramatically. Fortunately, we hold, as you know, a massive amount of land through our land bank densification opportunities. But we've said for quite a while, we've been in the mid-7s as far as our yield on cost. We've said that that can't continue forever. And of course, it can't.

So we would be shaving the estimated yield on projects going forward, but not as much as most because we already own some of the best placed land that exists in some of the hottest markets in the country. So we would probably shave that back, what would you say, Brinker, somewhere in the 6.5% range if we were swagging it right now versus 7.5% yields in our current pipeline. Sound about right?

Yes, certainly, if you mark the land to market, that sounds right, Tom.

Yes. But at the same time, our returns may be higher than that because we've got that land that we're holding at historical costs. So we still feel quite good about the development program, and we're keeping a very close eye on demand and supply in all 3 markets and have taken that into account in each market separately as to how aggressive we get in each market on our development starts and our timing.

Got it. Okay. And then just a quick follow-up. In case I missed it, is there any update on Alewife and some potential starts just in terms of timing?

Yes. Scott, do you want to take that?

Yes, I can take that. Yes. I mean our team is engaged on a regular basis with the local stakeholders, creating alignment with what that neighborhood is going to become. We're pretty excited about it. Actually, the proposed policy order is still making its way through the legislative process. It's not something we're particularly focused on anyway. I mean it's ultimately just a mechanism to enact rezoning for that neighborhood, which is something we agree with. It does look like a working group will be put together to make recommendations on what the rezoning will look like, and we would expect to work closely with that group. So we're pleased with the progress to date in the interim continue to be happy with the yield that we're earning on that investment.

(Operator Instructions) Our next question comes from John Pawlowski of Green Street.

Just one question for me. Pete, I apologize, I missed a few of your comments on the MOB demolition. Could you just give us a little bit more color in terms of age of the building, when was it acquired, and whether there's -- this could potentially trigger a more systemic review on certain vintages of MOB buildings across the portfolio?

Tom Klaritch, maybe you could take that one.

Sure. Yes, that building, we actually -- it was acquired as part of the MedCap transaction back in 2000. And as you may or may not know, health -- Healthpeak purchased MedCap in 2003, late 2003. So it's been in the portfolio for about 22 years. And I've been either on the hospital side or the MOB side been involved with medical office building and hospital operations and construction for almost 40 years. And it's the first time I've ever seen something like this. It was kind of an odd occurrence. We went to redevelop the building. It sits on a great campus.

As we said, it's an older building. It's 40 -- a little over 40 years old. When we started to take the facade off the building, the contractor noticed some irregularities in the floor plate, and we brought in a forensic engineer to check it out. It could have been fixed, but given the age of the building and design and the cost to fix it, we just thought it was more prudent to vacate the building and ultimately demolish, it probably happened in the third quarter. We were able to move all of the tenants. We're just moving some equipment out now.

We did check the other buildings that are on the campus that were -- at least one of them, I think, was built by the same contractor, and we did not have any of those issues in those other 2 buildings on campus. So I think it was just a fluke odd occurrence, and we don't expect that to be recurring throughout our portfolio.

I would add that it could have been fixed, but maybe not to the full standards of what it would have been built new. So we assessed it and said if there's any remaining life safety possibility that it is our preference to take the building down. We've relocated all of our tenants, did the right thing for those physicians and felt that that was the better answer. So it costs us a few bucks, but obviously, we would never take life safety risks. So that was our decision on that one.

(Operator Instructions) Next question comes from Rich Anderson, SMBC.

So Tom, you are clear about your lack of involvement in the HR, HTA, Welltower, et cetera, et cetera, saga, and we appreciate that. But as a company going back many years, as you know, pre-Healthpeak named, this was a consolidating type of entity and perhaps some mistakes were made along the way, but by and large, you are what you are today because of some of the major steps that were made 10, 15 years ago.

Has the tone of the company changed as a consolidator to the point where it's all about investing within developing and continuing with the relationships on the MOB and life science side? And boy, it's going to be really hard to imagine Healthpeak being involved in some type of M&A type of transaction on a go-forward basis. Is it almost hard to see something like that happening and that we should be thinking about a blocking and tackling type of mentality pretty much exclusively at this point?

Yes, that's a very interesting, insightful question, Rich. I would describe it this way, we spent half a dozen years moving our portfolio into a place where we had scrubbed down 3 businesses that will all represent vital businesses to society in the future. We eliminated all of our problem assets. We ended up with 3 businesses that are literally irreplaceable in today's environment and have opportunities in all 3 to expand. And the expansion potential that we have is so significant and we have such competitive advantage, it leaves us in a place as we sit here today, why would we go through the cost and effort and risk of taking on something very large when in fact it might produce an inferior outcome to what we consider to be an excellent strategy as we look forward over the next number of years where we do have competitive edge. We have land at low basis and densification opportunities and incredible relationships in MOBs and even in CCRCs, a business that can't be replicated.

So our view has continued to be, let's execute this strategy, let's not get distracted with something enormous, and that could be a winner, it could be a loser, and we're going to continue to execute going forward on the plan that we currently have.

That concludes our question-and-answer session. I'd like to turn the call back over to Mr. Tom Herzog for closing remarks. Please go ahead.

Yes. Thank you, operator. And thank you, everybody, for joining us today. We do appreciate your continued interest in Healthpeak and look forward to seeing many of you, hopefully all of you, at the upcoming industry events over the coming months.

So thank you so much, and we'll talk to you soon. Bye-bye.

The call is now concluded. Thank you for attending today's presentation. You may now disconnect.