Healthpeak Properties [PEAK] Conference call transcript for 2022 q3
2022-11-02 15:17:03
Fiscal: 2022 q3
Operator: Good morning, and welcome to the Healthpeak Properties, Inc. Third Quarter Conference Call. . Please note this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.
Andrew Johns: Welcome to Healthpeak's Third 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 financial measures will be discussed on the call In an exhibit of the 8-K 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'll now turn the call over to our President and Chief Executive Officer, Scott Brinker.
Scott Brinker: Thanks, Andrew. Good morning, and welcome to Healthpeak's Third Quarter Earnings Call. Joining me today for prepared remarks are Pete Scott, our Chief Financial Officer; and Scott Bohn, our Chief Development Officer. The senior team will be available for Q&A. First, on behalf of the company, I want to thank Tom for his significant contributions over the past 6 years to position the company for future success. The challenges we faced were significant, and we needed every bit of his energy and attention to detail. I also want to thank the Board for this opportunity and my teammates for their strong support. I cannot have picked a better market backdrop as tough conditions bring a unique opportunity to be your best. Financial results in the third quarter were very solid. We increased full year guidance for both earnings and same-store. Pete will provide the details. Let's talk about the future Healthpeak. 10 years from now, I want to look back and say that I was part of an entrepreneurial and collegial team with an intense focus on value creation activities and the related earnings growth. We'll be a real estate company at heart, immersing the underlying businesses that support our portfolio. And I want us to enjoy the journey. I believe that mindset will produce strong returns for shareholders and be a rewarding experience for our team and both are important to me. As for our strategy, this team was side-by-side and all the key decisions in the past several years. So don't expect any major changes. We'll focus on life science and medical office, where we have the scale and expertise to maximize value creation while minimizing risk. These are both high-margin businesses that are aligned with the modern economy. Our real estate is and will be dedicated to human health, a highly valued asset now more than ever. Life Science in the U.S. is a unique public-private partnership that leads the world in biotech innovation, with more than $200 billion per year spent on drug research and accelerating science, we expect a long-term virtuous cycle that will support demand for our buildings. Meanwhile, the need for cost-effective and convenient health care will drive demand for our MOBs, especially as the population ages. There's strong continuity from our talented team, and we enjoy working together. The Board's succession plan is thoughtful and disciplined and has now been implemented. Pete Scott is excited to continue as CFO and will have an even bigger role going forward as we streamline our approach to Investor Relations and the capital markets. We'll continue the transparent communication that you've come to expect from us. Tom Klaritch has been running medical office for 2 decades and will continue to do so. There's no one in the MOB sector more knowledgeable than Tom. Scott Bohn and Mike Dorris have been running their portfolios for over a decade and will continue to do so as Co-Heads of Life Science. They know every square inch of their local markets and have the support of the local tenant base. Scott Bohn is also taking on the role of Chief Development Officer, having established a strong track record for creativity and execution in that important value driver of our business. Adam Mabry has been a critical member of our transaction team in the past 5 years as we sold, acquired and developed more than $15 billion of real estate. I'm excited to see him grow as our CIO. Jeff Miller stepped into the General Counsel role having served in that function for a decade of success at HCN. Our critical support functions like accounting, finance, tax and HR will continue with existing leadership, which includes tenured members of the executive team such as Lisa Alonso and Shawn Johnston. We've built out best-in-class process and procedure the past 6 years. We play in niche real estate sectors where operational expertise drives value, so that will remain a vital part of our strategy. The business segments will continue to report to me. This has worked well the past 3 years and allowed me to remain tightly connected to what we're seeing on the ground. In fact, I plan to spend even more of my own time out in the market, understanding trends and assessing opportunities. We remain committed to a strong investment-grade balance sheet and prioritize liquidity. Pete and the team have turned that into a competitive advantage and we'll carry that forward. We do expect near-term G&A savings given the streamlined management team. Moving to capital allocation. Very purposefully, we were not aggressive on acquisitions or new development starts in the past 18 months. In particular, we grew Life Science from 15% of our NOI in 2016 to 50% today through strategic acquisitions and highly accretive development well before real estate values peaked. As a result, the balance sheet is in great shape, and our funding commitments are manageable. We have no need to issue dilutive equity or to sell assets at the wrong time in the cycle. In fact, we're in a position to be opportunistic when the capital markets start to reopen, which is the best time to go on offense. To that end, we're advancing entitlements across all 3 of our life science markets. We expect to have the next wave of development ready to commence in the second half of 2023, though any decision to proceed will depend on market conditions at the time. Both life science and medical office benefit from having scale in a local market, and we have deep relationships to source opportunities. But we can't always control the timing. So my view is that we need a flexible funding plan. Our preference is to raise public equity at accretive prices and own assets 100%, but that approach isn't always available. At the same time, there are large and more consistent private capital flows, including sovereigns and pension funds, looking to partner with premier operators like Healthpeak. So will be dynamic in our capital planning and consider third-party capital when appropriate, but always with the goal of benefiting peak shareholders. We also expect to have a little bit bigger box to play going forward, but still within our 2 core segments. An example is in medical office, where we benefited from our on-campus concentration. That being said, we appreciate the convenience provided by certain off-campus buildings. So we'll be less dogmatic in our approach and open-minded to off-campus assets provided a strong health system affiliation. We also see the potential for additional synergies between the 2 segments as some of our health system partners are doing medical R&D in their local market. Turning to the CCRC portfolio. You might recall that in 2019, we dramatically reduced our Brookdale concentration when we traded triple net senior housing for their 51% interest in the CCRCs. That trade gave us full strategic control of the portfolio and a strong operating partner in LCS. Our capital allocation priorities are focused on life science and medical office. So we'll be opportunistic about our CCRC position. In the interim, that business has favorable supply and demand fundamentals, and we own high-quality assets concentrated in Florida, an attractive destination for seniors. To wrap up, I've been fortunate to learn under CEOs with unique skill sets, one for creative growth and another for operational excellence. My goal is to carry forward the best of both and create a company with best-in-class internal and external growth. Turn it to Pete to cover financial results and the balance sheet.
Peter Scott: Thanks, Scott. Starting with our financial results. For the third quarter, we reported FFO as adjusted of $0.43 per share and total portfolio same-store growth of 5.1%. Despite a more challenging economic backdrop, our segments continued to deliver excellent operating results. In Life Sciences, same-store growth was a very solid 5.4%, and we finished the quarter with an occupancy rate of 99%. Our cash mark-to-market on renewals was a positive 30%. Our tenant retention rate remained strong at 64% and rent collections exceeded 99%. Scott Bohn will expand on our Life Science results and industry fundamentals in a bit. Turning to medical office. We had another fantastic quarter with same-store growth of 4.9%. We finished with total occupancy of 90%, a sequential increase of 10 basis points. Also, during the third quarter, we commenced 1.3 million square feet of leases, including approximately 250,000 square feet of new leases. This was by far the strongest quarter of leasing we have experienced year-to-date. As you would expect, given our on-campus focus, our tenant retention rate remains very high at 82%. Our same-store results did benefit from a very strong quarter at Medical City Dallas. This trophy campus contributes over 7% of our medical office same-store NOI and it is a combination of base rent and percent rent. The percent rent can be lumpy and more challenging to forecast. In the third quarter, revenues at the hospital exceeded our forecast, which contributed to the segment out performance. Finishing with CCRCs. Same-store growth for the third quarter increased 4.1%. Our results were driven by a 110 basis point increase in occupancy at our IL, AL and memory care units. This is the strongest quarter of occupancy gains in our IAM units since COVID. Cash and rent receipts for the third quarter were $24 million, once again outpacing our quarterly NREF amortization of $20 million. While top line revenue trends are encouraging, expense pressures remain a challenge, including labor, food and insurance. We did have $900,000 of onetime legacy insurance settlement in September, which negatively impacted our results this quarter. In addition, while labor challenges are easing from the highs experienced earlier this year, it remains elevated relative to historical levels. Last item under financial results. For the third quarter, our Board declared a dividend of $0.30 per share. A quick update on the impact of Hurricane Ian. Thankfully, and most importantly, there was no loss of life or major injuries to our residents or staff at any of our assets. We did experience some modest property damage. We have insurance coverage on all of our impacted properties and expect the maximum exposure to Healthpeak to be approximately $5 million when factoring in deductibles, which per our policy, has been added back to FFO as adjusted this quarter. We do anticipate temporarily lower occupancy and NREF sales at the CCRC properties impacted by the hurricane. We have factored this into our revised guidance for the segment, which I will cover in a bit. Turning to our balance sheet. The capital markets have clearly turned more volatile over the course of 2022. The good news is our balance sheet continues to be a competitive advantage. A couple of key statistics. We ended the third quarter with a net debt to EBITDA of 5.3x, below our target range of 5.5x to 6x. We have no bonds maturing until 2025, which substantially reduces capital markets risk. And we have $2.4 billion of liquidity, which provides us with ample runway to complete our active development and redevelopment pipeline. A few important balance sheet assumptions. First, 2 days ago, we drew down the full $500 million of delayed draw term loans. As a reminder, we swapped these term loans to a fixed 3.5% interest rate through initial maturities. Second, we anticipate settling the remaining approximate $310 million of equity forwards at year-end. The blended gross issuance price of these equity forwards was per share. The net proceeds from these 2 transactions will be used to substantially reduce our floating rate debt balances. Turning now to our 2022 guidance. We are increasing the midpoint of our FFO as adjusted guidance by $0.02 to $1.73, and we have tightened the guidance range to $1.72 to $1.74. Additionally, we are increasing the midpoint of our blended same-store guidance by 75 basis points, and we have tightened the guidance range to 4.5% to 5.5%. The major components driving the increase in our guidance are as follows: we increased the midpoint of our medical office same-store guidance by 100 basis points. We increased the midpoint of our Life Science same-store guidance by 50 basis points. We reduced the midpoint of our CCRC same-store guidance by 200 basis points, and we see about a $0.05 benefit to FFO in 2022 from G&A savings related to our management transition. Please refer to Page 38 of our supplemental for additional details on our guidance. With that, let me turn the call over to Scott Bohn.
Scott Bohn: Thanks, Pete. I'll start with an update on our Life Science portfolio. We had a great quarter on the leasing front with over 500,000 square feet of leases executed across the portfolio, with 87% coming in the form of new leases versus renewals. This included a 155,000 square foot lease advantage Phase I and 120,000 square foot lease at Oyster Point. Additionally, we executed a 55,000 square foot full building lease at one of our Pointe Grand redevelopment building. The Oyster Point lease is with an existing subtenant that will go direct following Amgen's lease expiration at the end of 2023. The Vantage lease was with an existing tenant, which tripled in size. The Pointe Grand lease was with an existing tenant growing from a 12,000 square foot space, we put them in less than 1 year ago. These deals again highlight the benefit and competitive advantage of our local scale and ability to provide pathways to growth for these fast-growing life science companies. It's important to note that we have very few lease maturities in the portfolio through year-end 2024. Our Boston and San Diego portfolios are especially well-positioned from a lease rollover perspective. In Boston, we only have 122,000 square foot space rolling within that window. In San Diego, we have executed up leases or LOIs of over 50% of our 2023 expirations and a minimal lease rollover in 2024. In South San Francisco, we've been successful in backfilling the Amgen leases as they come back to us and are off to a great start at our Pointe Grand redevelopment with the previously mentioned lease execution and strong activity in other spaces. While we do have some leasing to do in South San Francisco, we view that market as the most favorable from a supply and demand perspective, so we are confident in our ability to execute. Additionally, we continue to capture significant growth from tenants within our portfolio. Of the 1.2 million square feet of leasing done this year, 91% has done with our existing tenant base. In South San Francisco alone, of the 2 million square feet of new development space we have leased in recent years, nearly 80% has been with existing portfolio tenants. Our mark-to-market opportunity across the Life Science portfolio remains quite favorable at 26%, and our tenant credit profile continues to be resilient with over 99% net collections for the quarter, in line with historical averages. This quarter, our tenant credit profile was strengthened further as a result of the high credit lease we completed at Vantage and some large M&A deals. In South San Francisco, Global Blood Therapeutics, which started as a 76,000 square foot tenant at the and later grew to take a full 165,000 square foot building, was acquired by Pfizer for $5.4 billion. In San Diego, Turning Point Therapeutics, which executed a lease for 185,000 square feet at our Callan Ridge Development, which is set to deliver in mid-'23, was acquired for $4.1 billion by Bristol-Myers Squibb. Now looking at rent growth demand and new supply. In South San Francisco, we've seen rental rates up in the mid-single digits year-to-date with approximately 2 million square feet of active demand. San Diego market rents are up low to mid-single digits for the year and active demand is 1 million square feet. Market rents are up mid-single digits in Boston with active demand of approximately 2.2 million square feet. While the demand numbers have come off their record highs over the past few years, they are in line when comparing to pre-pandemic levels and the markets remained strong with low single-digit vacancy rates. Even more so when the markets tightened, Healthpeak and the other incumbent life science landlords will continue to capture outsized percentages of the leasing activity due to having scale and tenant relationships that new entrants are unable to match. On the supply side, we're seeing ground-up and conversion projects being delayed or put on hold as a result of higher development costs and potentially more impactful the significant interest rate increases that have made many levered projects economically infeasible. As we discussed, our team tracks every ongoing and proposed project within our clusters and the competitive supply we're tracking over the next 3-plus years is lower today than it was 6 months ago. Next, I'll touch on the life science lending environment. We've seen a number of tenants raised capital via secondary equity offerings, debt offerings and private placements. We've also seen our tenants enter into partnerships or license agreements with pharma as well as some large M&A transactions, as I mentioned earlier. VC funding during the third quarter has already surpassed 2018 and 2019 full year levels and is on pace to match full year 2020. Public biopharma R&D spending through the first half of the year was $77 billion, which is 8% higher than the first half of last year and is on pace to challenge 2021 as the highest R&D spending year ever. Now turning to development. Our $1 billion active life science developments are 81% pre-leased and continue to progress on time and on budget with a blended yield of approximately 7.5%. Once stabilized, we expect an incremental $75 million of cash NOI from these projects. All developments are fully bought out under GMP, effectively locking in our yields. In South San Francisco, the general plan was passed by the City Council in October. The new general plan includes the ability to develop higher densities in certain parts of the city, including our Vantage land. With the revised zoning, we expect to entitle the balance of our Vantage project for upwards of 1.3 million square feet, which, coupled with our 343,000 square foot Phase I that is currently under construction will bring the total project to nearly 1.7 million square feet upon completion, allowing us to build on our #1 market share in South San Francisco. Lastly, an update on construction costs. The extreme pricing volatility that the market has seen recently is beginning to calm. We're seeing above-average price increases on some materials, but overall escalations have come back down to the low teens year-over-year, well below the 20% year-over-year numbers we discussed in prior quarters. Looking forward, we expect to see cost increases to be more in the 6% to 8% range over the next 12 months. We continue to see long and, at times, unpredictable lead times for items like generators and mechanical equipment, but our teams have done an excellent job procuring these long lead materials early and managing supply chain challenges to ensure projects are being delivered on time and on budget. To wrap up, while the overall economic backdrop has caused demand to return to more normalized levels, our Life Science portfolio remains extremely well-positioned to post strong internal growth, given our minimal near-term maturities, continued focus on the core markets and strong mark-to-market opportunities across the portfolio. With that, operator, let's open up the line for Q&A.
Operator: . And our first question will come from Austin Wurschmidt with KeyBanc Capital Markets.
Austin Wurschmidt: I wanted to kick off with questions on Life Science. You guys talked about the demand pipeline remaining strong, but certainly coming in a bit. And at the same time, you've seen projects on the supply front put on hold. And I'm just curious how you see that balance sort of shaking out and what it could mean for market rents over the next few years?
Scott Bohn: Sure, Austin, Scott Bohn. I can take that one. So I think from a demand perspective, as we noted, this demand is obviously off the record highs, but back in line with historical. When you look at each market individually, and I think the Boston has probably come down the most of the highs over the past few years. But our portfolio out there is 100% leased with -- or excuse me, 1 space, 20,000 square feet and no other maturities in the next 2 years. So we feel really good about that market. San Francisco, the supply-demand ratio, our balance here is really strong. I mean, it's quite favorable versus the other 2 markets. In San Diego, we've seen demand coming down quite a bit from the peak, about 2.8 million square feet down to 1 million square foot, but 1 million of those square feet were 2 of the large deals that got executed earlier this year. So looking at demand, we feel pretty solid about where things are compared to historical levels again. With respect to the supply, we are seeing projects getting put on hold. As I mentioned in the prepared remarks, the interest rates are certainly having an impact on levered projects, making them infeasible and people are -- some of the new entrants are putting projects on hold as well. So we think that the over the next 18 to 24 months, some of these supply we were previously forecasting will decline. But overall, we think that our portfolio was very minimal rollover. I mean 99% leased across the portfolio will perform very well in those markets. What was the last question you asked there on the market rent, sorry?
Austin Wurschmidt: Correct. Just how does that sort of stack up? And what's your thought in terms of how the supply-demand backdrop sets up for market rent growth? And then maybe just add on to that, if you've seen any increase in sublease space coming on to the market more recently?
Scott Bohn: Yes. So from a market rent perspective, I mean, all 3 markets have been in the low to mid-single digits year-to-date, depending on the submarket. So we're still seeing rent growth there. Some of that is coming from some additional capital coming in from landlords as far as some of these tenants, especially the smaller ones are looking to outlay less cash in the initial deal. So there's some additional capital allocation from the landlord, which is driving up rents as well. But we're still in a 1% market effectively across the board. Boston's little bit higher, but a lot of that is -- some of the fringe space out in the outer bands of the market. So very little space to lease. So we think that market rent will continue to grow, albeit not at the torrid pace of '21 and 2020 when they were in the upper teens kind of back to more normalized levels in the mid- to high single digits over time. From a sublease perspective, we have seen that pick up across all 3 markets, I think there's been more sublease space come on the market in Boston versus San Francisco and San Diego. Again, we feel really well-positioned there with very little rollover virtually no rollover through 2024. So very minimal impact to us. A lot of the sublease space as well that we've seen come out of the market has been partial space. So it's been less tenants coming out with putting their full space on the market -- sublease market for the full-term more -- as an example, somebody has 100,000 square feet, maybe they're subleasing 25,000 square feet for 2 to 3 years. And that's really a cash preservation and extending the cash runway versus them bowing out of the market or going under. I think it's not -- hasn't been greatly impactful for us. And again, I think that with our 99% leased, it's -- we can ride out any sublease space that comes to market in the near-term.
Austin Wurschmidt: That's helpful And then just last one for me is I'm just curious where you're seeing to the extent trades are taking place, life science cap rates today and then how you're thinking about the appropriate risk premium for development and the attractiveness of the pipeline that you've got today versus kind of where your cost of capital is currently?
Scott Brinker: Austin, Scott Brinker here. I'll take the acquisition cap rate question. That's a hard one to answer today. I think life science just in general, it's hard to be too precise because each deal is so unique, whether it's the different submarket, the tenant profile, the quality of the building. But even more important, the mark-to-market can just have a dramatic impact their buildings that trade with a near 100% mark-to-market, right? versus a building that maybe the lease was just signed. So we always like to look more from an IRR perspective that we look at the price paid per foot versus the current market rents just to understand kind of what the stabilized yield might look like. So we kind of try to approach it from a number of different angles that reported cap rate can be pretty misleading in life science unless you have a full understanding of all those dynamics. But in all the conversations that we have with all the investors in that space, whether it's REITs, pension funds, private equity, the list goes on and on, obviously, we have an ongoing dialogue with most of them. It does feel like unlevered IRR is no surprise have increased. I'd say at least 100 basis points in the last 6 months. And I don't know that anybody today is super active just given the chaos in the capital markets. Obviously, that won't last forever, but there's still interest in the space. And for sure, the higher quality submarkets in buildings with good tenants have been less impacted and maybe more of the fringe products. So that's our view on cap rates. On return on cost for development, our current pipeline of $1 billion is like a . And it's pretty well locked in given our GMP contracts and pre-leasing. Harder to comment on what future returns look like, at least for us, each project is unique. We are making good progress on entitlements across all 3 of our core markets. But realistically, we won't have permitting done on any of them until the second half of '23. It's kind of the expected timeline. So until we know exactly how much we can build and get better pricing, and we'll see what market rents look like 9 to 12 months from now, we'll have a better sense of what our next round of development would look like from a return perspective. And at that time, we'll just have to decide if the premium versus our cost of capital and versus acquisition cap rates is sufficient. So it's a little early for us to comment on development returns.
Operator: Our next question will come from Steve Sakwa with Evercore ISI.
Stephen Sakwa: Scott, you made a comment, I just wanted to make sure I understood. When you talked about CCRCs in your opening comment, you said you'd be opportunistic with this position. So I just wanted to make sure, does that mean that you could potentially exit CCRCs over time if the pricing was right? Or did I sort of misread into what you were saying?
Scott Brinker: Yes. I think you heard exactly correct. We like that business. It's performing pretty well. We have good real estate. We have a really good operating partner, and we've got a good internal team to manage it. So we're happy to hold it. At the same time, we realize it's not a perfect fit for Healthpeak. So if at any point, there was an opportunity that made sense for our shareholders, then our view is we'd have to be open-minded about that. So it's not on the market for sale, but it is something that we'll continue to evaluate. Obviously, today isn't a great time to sell anything for cash. That point is not lost on us, obviously. But we ended up exiting the Shop business with $4 billion of sales in 2020 and 2021. And some of those were done for cash, but a lot of those were done in a more creative way, whether it's asset swaps or otherwise. So I think the broader point is that you're going to see us be more open-minded in creative about how to utilize the assets that we have and hopefully create a story in a business plan that investors can really get excited about. So does that help, Steve?
Stephen Sakwa: Yes, I do. I mean I guess it would be probably challenging to sell that and redeploy it without taking some dilution. So I guess you're -- even if you could put it into development at 7.5%. I would suspect that -- I believe those cap rates have kind of been north of 8%, maybe pushing 10%.
Scott Brinker: Yes. I mean it's hard to say. We feel like we got unusually strong return when we bought those assets in 2019. But even then, it wasn't done for cash. It was really an asset swap for triple net assets. They don't trade often. So it's hard to say for sure where cap rates are, but there's quite a bit of upside in that portfolio as well. So it's unclear what kind of cap rate that business would sell for. Yes, we decided to sell it. So yes, I don't want you to overinterpret the comment. It was more that we would be opportunistic and open-minded if there was ever a good opportunity to exit and redeploy.
Stephen Sakwa: Okay. And I realize you spent a bunch of time talking about the next wave of entitlements and not really being able to start anything before the second half. Can you maybe just sort of frame out for us kind of where the priorities are in terms of getting entitlements for the next round of developments, which markets, which projects and maybe some of the challenges that you're trying to overcome and getting entitlements in some of the bigger, more near-term projects?
Scott Brinker: Yes I might let Scott go and run through that as our Chief Development Officer, and then I can add in where needed. Scott?
Scott Bohn: Sure. Steve, so from the entitlement perspective, we have entitlements going on in all 3 core markets. Obviously, in Boston, we're working on our Alewife project there where the City Council put together a working group with various stakeholders, which we participate on. We're going through that process and hope to present in collectively being the working group revised owning a proposal to the City Council early in 2023. So that process is going very well out there. In the Bay Area, we're working on a couple of different entitlements, but our Towers project in Brisbane as well as our Vantage projects that I mentioned earlier there. And so with the revised general plan that got approved by the City Council, we have much more clarity into what we think we'll be able to achieve with that project. So I hope some entitlements there are first half of 2023 and all that's going very well as well. And we've one project that we're entitling done in San Diego as well.
Operator: Our next question will come from Juan Sanabria with BMO Capital Markets.
Juan Sanabria: I just wanted to maybe a little bit more on the comment you made, Scott, at the beginning about an intersection between life science and MOBs and how big that market opportunity could be. And if you'd look or entertain university-based opportunities?
Scott Brinker: Yes. Thanks for the question. One, I would say that the 3 core markets have the greatest depth of demand by far. We have the relationships and the scale to have a competitive advantage. So that's our near-term priority for sure. And we've got a big land bank with entitlements progressing. At the same time, it's not lost on us that R&D is an enormous business. We talked about $200 billion a year of R&D. It could be more. It's hard to be precise on that number, but it's significant, obviously. So the big three markets are priority, but we would at least be open-minded to considering ways that we could create more synergies between our 2 office businesses. And we have had, even in the past quarter, a couple of our health system partners reach out because they're doing R&D on their campus. Not as much with the for-profit systems, but a lot of the not-for-profit systems, especially being more academic medical center types. And we have a long-standing business plan and MOBs that we're always partnering with the #1 or #2 local health system and a lot of them tend to have some level of clinical trials, et cetera, that are happening, and they're doing a lot of the research on their own. So we do view that as an opportunity down the road. I'm not sure if we'll end up doing it or not in today's capital markets. It's not like we're making a bunch of new commitments, but it is an opportunity that we see going forward. It would utilize the skill sets from both of our 2 core businesses in a unique way. And as it relates to the university R&D, certainly, the NIH funding at $50 billion a year, a lot of that is going to the universities, and that's proven to be a very successful business. So it's not exactly the same as what we do in the 3 core markets and marketing to biotech and pharma. But it capitalizes on the same underlying capital flows into medical research that it's certainly an interesting business that's done very well. So yes, I mean that one is interesting, too.
Juan Sanabria: Great. And then just -- I don't know if you would have this, but do you have any sense of in your life science or biotech exposure the rough split between the companies that have marketed versus nonmarketed drugs?
Scott Brinker: If I understand your question correctly, I might ask Scott Bohn to comment as well. But if you're asking how many are in clinical trials versus having a product on the market, is that what you're asking?
Juan Sanabria: Correct. Much more eloquent.
Scott Brinker: Yes, I believe it's around 60% have a product on the market, but Scott Bohn may correct me. I know that percentage with that are in kind of preclinical trials is quite low, less than 5%. Bohn, do you know off hand?
Scott Bohn: Yes, that's right. About 60% of our tenants are -- have revenues, so about 40% of pre-revenue, which is what you typically deemed as not having a product in the market. And then only about, as you mentioned, 5% of our tenants are exclusively preclinical.
Scott Brinker: Yes.
Operator: Our next question will come from Rich Anderson with SMBC.
Richard Anderson: My apologies. Can you hear me now?
Scott Brinker: Yes.
Richard Anderson: Okay. Great. So congrats to everyone, positively impacted by the recent changes there and looking forward to the future. Scott, you mentioned the outset, no major changes, perhaps the operative word there is major. And you talked about being more open-minded and perhaps opportunistic on CCRCs. My question -- my first question is on a lot of your assets tied up in long-term projects that span 10, 15 years to see full build out. I'm not sure if those types of investments, while very interesting align themselves as well with the immediate gratification mentality of the stock market. So you did say, well, at some point, our balance sheet becomes a competitive advantage and that you might go on offense. Do you see yourselves when you say go on offense, is it more of a development through the entitlement effort you're talking about? Or do you think it could be more real-time sort of immediate cash flow type of opportunities that sometimes the stock market prefers not that you should let the tail wag the dog, but I'm just curious how you feel about that?
Scott Brinker: Yes. Hopefully, it's a combination of both. I mean we have an attractive pipeline in both MOB and life science for development. But as you mentioned, some of them are long lead time projects. We do like the campus model. It's been quite successful for us, but we usually do it in phases so that you're not waiting 10 years for at least the initial accretion, right? You might have to wait 10 years for the final accretion, but it's incremental. But acquisitions when the market was pricing life science at 4%, plus or minus and MOBs at 5%, it's harder to envision a scenario where you're making a lot of money for shareholders in that kind of an environment. So you didn't see us be very active on the acquisition front. But things have changed. It's unclear what the next 6 to 12 months are going to look like. It does feel like those companies with strong balance sheets and access to capital probably will have opportunities over the next year that maybe didn't exist in 2020 and 2021, but we'll see. I mean, it's hard to predict. But it feels like there's at least a pretty good opportunity or chance that we will see an environment like that, and we'd love to be able to create more immediate accretion, utilizing our scale and operational expertise. So we're certainly trying to prepare ourselves if those situations do become available, Rich.
Richard Anderson: Okay. Fair enough. And then the second question is on senior housing more generally, okay? So we went through a process, we get the point that perhaps Brookdale is in your wheelhouse, if anything does happen there. But what in your mind has changed with senior housing over the past 5 or 7 years since your former SHOP where that was kind of the focal point? Do you feel like something about the business has changed in a way that doesn't fit well into a REIT model? Or is it just that it doesn't fit well into the PEAK model that you don't think there's anything perhaps wrong or incrementally wrong with the business, but it's just -- it just doesn't fit with PEAK. Is that a fair way to say it?
Scott Brinker: Yes, that's a complicated question. You talked about the tail wagging the dog in the capital markets, and that's probably a fair analogy. We felt like we had a really strong portfolio and competitive advantage in life science and medical office, that's still true, by the way. But in senior housing, we didn't have the scale, we didn't have the portfolio. We're trying to build out the team, but it takes time. You don't do that overnight. You don't even do that in the course of the year. That takes a lot of time. So we're in the process of doing that, and we ultimately chose to go down a different path. Certainly, we did see that the industry was going to have a more difficult time. Dream COVID, I mean as it turns out, it's probably been an even more difficult time than we ever would have expected. It just -- COVID lasted a long time. So as it turns out, we feel like we got -- at the time we thought we got good pricing as it turns out, maybe we got really good pricing on that exit. But there's plenty of ways for investors to play in senior housing and some really good companies, and that led into our thinking as well. So I wouldn't read into so much that we had some negative view on the business. It was really just do we have a story that is marketable to investors? I mean, that's ultimately what we're trying to do here is create a stock price that rewards our shareholders, and we just didn't feel like senior housing was going to help us do that.
Operator: Our next question will come from Michael Griffin with Citi.
Michael Griffin: Maybe going back to Life Science for a second. Bohn, I'm curious in the conversations that you're having with both current and prospective tenants, have you noticed any changes in sort of what they're asking for maybe in terms of spatial needs, in terms of concessions on TIs or anything like that? Any additional color there would be great.
Scott Bohn: Sure. Michael, it's Scott Bohn. I would say, if anything, as I mentioned, they are more looking for larger TIs, frankly, coming out of pocket less and allocating less of their capital towards real estate just from a capital improvement perspective. So I think that they are willing to pay a higher rent day 1 and having us put in the cash. I think we look at that as we're also protecting ourselves on that capital by making sure those improvements are highly reusable in the space and also requiring higher letters of credit and security deposits and getting even more stringent on underwriting of their financials and drug development pipeline there. But I mean, I think that would be the biggest change. I think people are pushing for shorter terms, so we haven't seen us having to give that to date yet, but it's mainly in the TI.
Michael Griffin: Why do you think it is that people would be pushing for shorter terms?
Scott Bohn: Just capital, just bring up a smaller headline number when you're talking about a full lease package to the Board.
Michael Griffin: Got you. That's helpful. And I'm curious, on the Pointe Grand redev, I mean, you described it as an A+ location and it's a great opportunity. So I understand you have relationships with your JV capital partners. But just if there is -- the upside that it seems like there is an opportunity like this. I guess, why does it make sense for this to be joint venture versus wholly owned?
Scott Brinker: Yes. I mean there is good upside in that project, but we felt like the price that was paid, ultimately, we were able to capture a good portion of that upside. Even at the time, which was 3 or 4 months ago, the project was being underwritten to a mid- to high 5s, stabilized return. And that's -- it could be 3 to 4 years from now. So it's a great project, and it's one that the sovereign wealth partner will be happy to own for a long time alongside of us. But we did feel like we got adequate value for the 30% that we gave up, and they are paying fees and potentially promotes along the way in addition to that kind of preferred position in the waterfall for Healthpeak that when you add it all together, we felt like that was a solid move. It does help us offset some of the redevelopment capital that we'll need to spend as well. So it's a trade-off, right? There's no free lunch. We did potentially give up some upside. But for all the factors I mentioned, we felt like it was a good trade and a fantastic partner that we think could be helpful looking forward for Healthpeak as well. It's always easier to grow an existing relationship than it is to establish a new one. And that's a partner that we have a lot of confidence in and what buyer side is as we move this company forward.
Operator: Our next question will come from Steven Valiquette with Barclays.
Steven Valiquette: Let me offer my congrats to both the Scotts on the new roles and titles. I guess for us, a couple of things. There were some pretty interesting data coming out of a life science office, industry trade conference a few weeks ago, specifically related to the future supply-demand dynamics for life science across the big 3 markets. And the punch line, it seemed like there was a lot of construction across 3 -- the markets, but it's in lockstep with demand. So there was no real expectation of a negative supply/demand imbalance anytime soon. Something you probably share that view. But I guess the first question, I just want to confirm that you shared that view for life science across the 3 major markets as far as construction and supply-demand correlation. And then really, the second question on the related topic here. Just in your own forced ranking of the big 3 life science market, this sounded like you still rank South San Francisco as the best market of the 3 for Healthpeak currently. And I guess just to simplify the message, can you just reinforce for everyone what the single most critical positive variable is in San Francisco for Healthpeak that's maybe just not quite as strong in the other 2 markets?
Scott Brinker: Yes. Steve, it's Scott Brinker. I'll start with it, and then I'll probably ask Scott Bohn to comment as well. But as it relates to the 3 markets and comparing them, I mean, they're all strong, low single digit, vacancy, a lot of the development pipeline is pre-leased. I would say that the purpose-built products, especially if it's being delivered by the big incumbents that have the relationships and local scale, I feel good with the host, including our pipeline. I think some of the more fringed product, some of the redevelopment or office conversions, maybe new entrants, those I'm not sure about. We'll see. It wouldn't surprise us if overall market occupancy declined a little bit in the coming years, just given how much supply is coming online. But as it relates to the specific supply-demand dynamic across the 3 markets, we do feel the most comfortable with South San Francisco. There's just less new supply coming into that market relative to the others. But it also helps that we have #1 market share. And therefore, the largest number of relationships and tenants, and Scott Bohn mentioned it, 80% of our development has been leased up by existing tenants. That's a huge advantage. So that plays a role in why of the 3 markets we feel the best about South San Francisco today. And then maybe more broadly, to get to the first question that you asked, I thought it might be helpful just to kind of lay out how we've been thinking about supply and demand and life science investment over the past really 18 to 24 months, which was things are almost too good to be true. The rental rate growth, the amount of capital coming into the business, we were a huge beneficiary of that is one of the largest players in the business, and we certainly capitalized on that with huge rate growth and 99% market occupancy and basically pre-leasing all of our development pipeline, but no business grows to the sky, and having experienced the sector in my past where maybe it was underappreciated by investors for a period of time and then the incumbent started to make a lot of money in that business and a huge wave of new supply comes, right? All the new investors like the returns, they like the supply/demand fundamentals and all of a sudden, the business can go upside down. And -- for us, we were never worried about the demand side. We didn't think it would stay at the 2021 levels forever, but we do think that demand is going to be solid in that business for decades to come. We were always more concerned with the supply. Even though we like our competitive advantage as a large incumbent, it was something that we were mindful of and the impact it might have on occupancy and rental rates. So we've been pretty defensive in allocating capital to that business over at least the last 12 months, really with no acquisitions, no new development starts, that at the end of the day, we actually feel better about the outlook for that business 2 to 3 years from now today than we might have at the market peak, call it, late 2021, right, where everybody is raising new money, debt capital is super easy, everybody's building. At some point, supply just outweighs demand. And we saw that as a potential threat. Today, you see a lot of projects being delayed, probably canceled, returns might not make sense, debt financing is hard to get, that we actually feel like the supply/demand fundamentals looking out 2 to 3 years today might be in a better spot than we would have been able to say objectively 9, 12 months ago. So we actually feel like we're in a good spot. And with essentially very little lease maturities over the next 2 years across our 3 markets, we don't have a whole lot of exposure if the market slows down a bit. And then we'll be in a position to have our next wave of development ready to deliver, call it, 2024, 2025 and thereafter when hopefully, fundamentals are in a favorable spot. So some maybe broader thoughts on how we're approaching the marketplace.
Operator: Our next question will come from Nick Yulico with Scotiabank.
Nicholas Yulico: I just wanted to follow up on South San Francisco and see if there's any activity you're able to talk about it, Vantage or a Pointe Grand, additional to the third quarter activity you got done in terms of letters of intent or any other sort of far along leasing discussions for your development -- redevelopment there.
Scott Bohn: Nick, it's Scott Bohn, I can take that one. So I think that there's certainly activity at the Pointe Grand campus as well as the second building at Vantage. Nothing in the -- far enough along, we're going to announce it today. But definitely, there's some big, larger requirements in the market looking for new space as well as a lot of activity in that 25,000 square foot range that kind of fits really well within our Pointe Grand redevelopment assets. So nothing really to announce today fully, but good activity, I would say, across the board there.
Nicholas Yulico: Okay. Great. And then I guess a question for Pete. I just want to make sure, in terms of the balance sheet, you made a lot of steps to reduce floating rate debt exposure. But you do still have about $500 million left on the existing development pipeline. Is the plan there basically -- I understand you have some free cash flow after the dividend, but is the plan there basically to just fund that on the line of credit over the next year? I mean, is there anything else we should be thinking about from a capital inflow to the portfolio? I know you have the Vantage next development joint venture, which could close next year. So I don't know if there's a dollar number you can talk about capital coming into the portfolio from that?
Peter Scott: Nick. It's Pete. When you think about our balance sheet and floating rate debt exposure, we will always have some floating rate debt exposure just purely as a result of the development and redevelopment spend that we have. When projects deliver, that is when we will look to put more permanent debt financing in place. If you think about our floating rate debt exposure, I'll just use gross numbers for a second. We were at around $1.5 billion at the end of this quarter. We did close on those term loans, which we swapped to a fixed rate, a very attractive fixed rate and then we also have those equity forward. So that will take our line balance down all the way to around $700 million just from the impact of those 2. So we certainly have the liquidity to fund the balance of our spend from a development and redevelopment perspective without really what I would say levering up from a net debt to EBITDA perspective because we don't have actually that NOI in our numbers right now from the projects coming online. So it doesn't actually lever us up from a net debt perspective. But certainly, it would take our floating rate debt up, and that's something that we are paying a lot of attention to. We're comfortable at the levels currently. But if we had to fund everything on the line, I think the levels would go to a number that, frankly, we just don't think is a good run rate and comfortable number for us creates more earnings volatility going forward. So at some point, we would certainly look to find other sources of capital that could include doing a bond deal or that could include additional asset sales. We've got a flexible funding strategy is the way we're thinking about it. I'm repeating some of Scott Brinker's words in his prepared remarks. But I think we have a good strategy as to how we're approaching it. We think our balance sheet is in great shape. And our projects right now are fully funded. It's just the sources of that may change based upon market conditions over the next year or so.
Nicholas Yulico: That's helpful, Pete. I guess just in terms of the Vantage next JV, I mean, is there any capital inflow to think about on that for early next year?
Peter Scott: Yes.
Nicholas Yulico: Is there an upfront payment does likely?
Peter Scott: There is an upfront payment. It's a little less than $150 million on that one that when we close on that transaction, monies would flow in. So there is a source there. And we also have another asset in held for sale. We haven't spent a lot of time talking about that. But we will selectively look to monetize noncore assets. We've talked about this in the past. We do have 1 asset in held for sale, not a whole lot more to expand on that. But that would certainly minimize the needs from a bond perspective or additional sources.
Operator: Our next question will come from Michael Carroll with RBC Capital Markets.
Michael Carroll: Just Pete, just on that asset that's held for sale, it does look like that you reduced the expected sale proceeds on that by about $10 million. Can you talk a little bit what's going on there? Is that just the overall market that has reduced that value?
Peter Scott: Yes. I wouldn't read much more into it other than that, Mike. We're just factoring in that cap rates have likely gone up since that asset went into held for sale. And so we've taken it down just a little bit, but there's not a whole lot more to add on that.
Michael Carroll: Okay. That makes sense. I guess, can you guys talk a little bit about your next development starts? I know you did a pretty good job of highlighting some of the entitlement. I mean, should we assume that Vantage Phase II and III once those entitlements get given in the beginning of the year and that JV closes? Meaning, will you break ground on those sites? Or do you have a little bit more leeway where you can see where the market kind of falls before you start pursuing those actual projects?
Scott Brinker: Michael, it's Scott Brinker. Vantage is when you talking about Phase II and III, those are separate phases, and they're both big. I mean, Scott mentioned 1.3 million square feet now in total. So call Phase II and Phase III roughly equal in the 600,000 to 700,000 foot range. So that's a lot of product to put in the market. We would do that over time, not all at once. But whether or not we would choose to proceed, we probably would be ready with permits by the second half of 2023, if all goes according to plan. But it's just to my point earlier -- it's just too early to comment on whether or not we would actually pull the trigger. Now we'll prepare ourselves, right? We'll keep doing the predevelopment work on the construction drawings, the bidding so that we're in a position to go forward if we choose to do so. But that's a decision that we'll be able to make in the second half of 2023 based on cost of capital and acquisition cap rates and all the other things that are relative to that decision, including supply and demand.
Operator: Our next question will come from Ronald Kamdem with Morgan Stanley.
Ronald Kamdem: A couple of quick ones. Congrats on the leadership changes. Just going through, I think the 8-K had said there was like a severance of $25 million to $30 million potentially being recognized. Just -- can you just comment more on what that is and what's going on there? And then sort of broader comments on with this sort of new leadership, is there any other changes? Or is everything sort of all done also in the place?
Peter Scott: Ronald, this is Pete here. That approximate $25 million to $30 million we previously disclosed, that was as a result of the leadership transition that we announced a couple of weeks ago. It's not in our numbers this quarter since that happened in early October. So you should expect to see that as we get towards the fourth quarter numbers that will be in those. With regards to any other leadership transition items that you asked about, we did promote Jeff Miller to our General Counsel role. So as we think about the fourth quarter number that we previously disclosed $25 million to $30 million, it will be approximately $30 million, and you'll see that in our Q, and that will incorporate both our General Counsel's departure as well as our CEO's departure.
Ronald Kamdem: Got it. So that -- so the charge will come through essentially in 4Q is sort of your point?
Peter Scott: Correct. You'll see that in the fourth quarter.
Ronald Kamdem: Okay. Helpful. And then just if I could sneak a quick one on the Life Sciences business. As we're thinking about sort of organic growth going forward, you sort of talked about look the guidance for this year is 5%, you have sort of the MOB at 4%. Is there anything specific unique to this year? Or should we think about just the long-term growth rate for those businesses as being at sort of those pretty high levels, if that makes sense?
Scott Brinker: Maybe I'll start with that, Scott Brinker here and let others comment. Medical office is more straightforward. This year was an exception, a positive exception. But in exception, I think the normalized run rate in that business is probably more in the 2.5% to 3% range, and then it will vary year by year depending upon lease roll and mark-to-market. Now that's above the industry average, but it's not a business that grows at 4-plus percent forever, right? I mean, I guess inflation stays at 8%, I might change my opinion. But I'm assuming that inflation comes back at some point to more normalized levels. And at that point, MOBs are probably more in a 2.5% to 3% same-store growth. Life science is more complicated. The average escalator in our portfolio is in the low 3s, and it's mostly fixed escalators with triple net leases. So that's your baseline growth rate. And then when you look at our mark-to-market across the entire portfolio, it's around 26% positive, but it varies by year. So one thing that we're likely to do at the upcoming NAREIT meeting is give more clarity and disclosure around the mark-to-market opportunity by year, because in '22, '23 and '24, we just don't have much maturing in terms of leases. So the impact of the mark-to-market for us is just lower, and then it should pick up in the years thereafter. But if you were to just straight-line that mark-to-market opportunity, it's in the range of 200 basis points a year on average. But not all of that will flow through same-store because some of it will be captured via redevelopment. But just to give you a rough estimate of the normalized growth rate for that business, that's probably a pretty decent estimate to start with our contractual escalator in the low 3s and then add in the mark-to-market over time. But then in any given year, you're going to have some things that could move that number up or down, whether it's bad debt, free rent that we give to tenants that it's a negative 1 year and then it's a positive to next year. So all those things can make a difference. And obviously, that assumes that we keep occupancy at the very high level that it is today to produce that kind of the same-store number.
Operator: Our next question will come from Joshua Dennerlein with Bank of America.
Joshua Dennerlein: Scott, I wanted to explore your comments you had in your opening remarks on earnings growth is a priority. I guess how are you thinking about balancing long-term and near-term growth? I think one of the kind of concerns I've heard from investors on the PEAK is just most of the growth is longer dated with your development pipeline. Just -- it'd be great to kind of hear your thoughts around this.
Scott Brinker: Yes. Well, we've got to find the right balance. So I tried to say -- and hopefully, I did say that there's going to be an intense focus on value creation activities and the related earnings growth. So it really is both certainly as a real estate investor, there has to be a long-term mindset, at least part of the mindset, but it's not lost on us. There's a public REIT. There's also a near-term mandate. Having done this 20 years public health care REIT, I've seen what works and what doesn't. And I feel like we need to find the right balance. I mean, certainly, if you're not making the right long-term real estate decisions, eventually, it catches up with you. So we do need to keep the long-term in mind. And in our 2 core businesses, Life Sciences, in particular, most of the value creation opportunity is naturally through development and redevelopment, which takes some time, at least in most markets, right, where cap rates are super low. But it's not lost on us to get that value creation for investors. We've also got to create the near-term earnings growth. So there is going to be a balance. It's a balance that sometimes it's relatively straightforward. And other times, it's more complicated. And that Pointe Grand redevelopment is a pretty good example of that, that the long-term value creation there, the question was asked earlier, and they're probably right. If you're not publicly traded, maybe you hold on to that entire development. But as a publicly traded REIT, it's also trying to create earnings growth for investors today, selling off the 30% stake allowed us to create an earnings outcome that was far preferable to the alternative of owning at 100%. So each project is unique, but our mindset is going to be finding a way to balance both the long-term value creation as well as the short-term earnings impact.
Joshua Dennerlein: Okay. I appreciate that color. And then I noticed it looks like on 20 years up on the development page, it looks like Vantage Phase 1 total cost to complete went up by $45 million. What was driving that?
Scott Bohn: Sure. This is Scott Bohn. So that's related to the amenities building facility that we're building there. When we got more clarity with the general plan being completed, we have sized that amenity is building an increase the scope to be able to service the full 1.7 million square feet in totality of that project.
Joshua Dennerlein: Okay. But that's not reflected in the square footage?
Scott Bohn: Correct.
Joshua Dennerlein: Okay. Is that revenue generating or just kind of an addition?
Scott Bohn: Yes. The tenants will pay the rent based on their square footage based on the overall campus build-out. There will be a return on that.
Joshua Dennerlein: Okay. So it sounds like the costs went up or maybe the return profile is the same. Is that a fair way to...
Scott Bohn: Correct.
Operator: Our next question will come from Dave Rodgers with Baird.
David Rodgers: Scott Brinker, I wanted to ask about the MOBs and your opening comment about doing more off-campus. I just -- again, I wanted clarity on whether that was a function of where you saw the intersection of life science and MOB happening? If that's a function of perhaps just doing more development off-campus? What kind of changed in the mindset? And if you had said it earlier, I missed it.
Scott Brinker: I'm happy to take that. I may ask Tom Klaritch to comment as well. But if you look at the inventory of medical office real estate around the country, about 30% of it is on-campus. So 30%, it's a pretty small number. And if you look at the new supply that gets built every year, it's also about 30% on-campus. So given the choice, our preference is to own on-campus real estate, especially if it's a leading health system. But our view is to ignore the 70% of the market, that's probably a bit too much. There are certainly some really good opportunities within that very large off-campus market provided you've got the strong health system affiliation. We're all health care consumers as well. And it's not lost on us that a lot of times when we need health care, we end up going to an off-campus setting. It's more convenient, which is helpful sometimes. So we just -- we're going to find a better balance. We still love on-campus real estate. I'm glad that we're at 81%. It's helped us produce the best same-store growth in the peer group for quite a while now, and we hope that continues. But we will at least be open-minded to select off-campus MOBs going forward, whether we're acquiring them or developing them. Klaritch, is there anything you'd add to that?
Thomas Klaritch: Yes. I mean I've always like certain off-campus properties. It really depends on the profile of the building. You want some higher acuity hospital outpatient departments in those buildings that tends to drive a lot of services. A patient can go to the off-campus facility and get a lot of the same services they can get on-campus. As Scott said, it's just a lot more convenient. So we like that type of project. Certainly, our core has always been on-campus. So we would continue to grow there, but there are a lot of nice off-campus projects that we would love to be involved.
David Rodgers: Great. That's helpful. And then maybe just a follow-up for me on stock buyback. Just with the change in leadership, Scott, your view on stock buyback. You did a little bit in the quarter. It wasn't aggressive. So I don't know, Pete or Scott, any thoughts on kind of where that might go in the future.
Peter Scott: Yes, I can. I think it's pretty straightforward. We prefer to preserve our cash right now for future opportunities, and we're going to prioritize funding our active development pipeline and reducing our floating rate debt. We think that's more important than the minimal accretion we could get from any type of buyback.
Operator: Our next question will come from Vikram Malhotra with Mizuho.
Vikram Malhotra: So just maybe first one on life sciences specifically. I think at June NAREIT, you talked about your watch list sort of being 4% to 5% within the life science bucket. And then I think last quarter, that came down. Can you just update us where your watch list stand? And what are the risks may be by market?
Scott Bohn: Vikram, it's Scott Bohn. We're currently still remaining sub-5% of our portfolio on the watch list in those spaces, about a 38% mark-to-market. The size hasn't really changed since last quarter, and it's still generally in line. But with historical levels, over the course of the quarter, we had a few tenants come off the watch list following M&A or funding events and some of those come on due to mainly the timing in their funding cycles, which is a normal part of the business. I think that when we look at our watch list, we're looking at cash balances, groups who are announcing layoffs or that's coupled with low cash balances, but those are general criteria. There's other factors were impacting -- that are impacting our analysis, and we do a company-specific assessment on top of that general screening. So short story is not a lot of change in the overall headline number on that watch list. I don't have the breakdown by market in front of me, but I can get that to you.
Vikram Malhotra: Okay. Great. And then just one, maybe just revisiting some of the questions and I want to get maybe more specific comments. Scott, in terms of -- you mentioned a couple of times some of the changes you'd like to get investors more excited. I'm wondering sort of how you balance that -- those growth aspects with maybe more risk? So for example, in medical office tilting more towards off-campus even a little bit. Your own data has shown off-campus has lower growth and lower retention. So I'm just -- if you can just balance kind of how do you achieve maybe more growth versus quality? And if you can break that out between sort of near-term and long-term?
Scott Brinker: Yes. I mean, we would do it when capital markets make sense. So don't misinterpret any comments that were made to suggest we're going to go out and issue stock at $22 and buy a bunch of assets, that's not the plan, right? The economics need to make sense. Let me just make that clear. The second point is we do have relationships and operating expertise that allow us to reduce risk relative to what other investors may underwrite. So that, to me, is the key is we need to utilize the platform to our advantage and offset or underwrite risk in a different way than the general marketplace is able to do. So hopefully, that answers your question.
Vikram Malhotra: It does. And then just last one. I'm just trying to think about where eventually, whether it's 3 years, 5 years or longer-term, just where you anticipate this mix of on- and off-campus to trend? Some of your peers at 50-50. Others are more like 80-20. Just as a high-level view today, where do you think that mix ends up between on and off?
Scott Brinker: I mean, it's still heavily weighted towards on-campus. I mean we're at 25 million square feet, 81% on-campus and another 6% or 7% that's directly adjacent to campus. So that's a pretty high level. We have to do an awful development and acquisitions to materially move that number. So I would expect this to still be substantially on-campus moving forward. Again, we still think that is the right model. It's just with 70% of the inventory being off-campus, there are almost certainly select properties in that huge bucket that would make sense to own long-term and it would have favorable growth profiles to match on-campus real estate. .
Operator: Our next question will come from John Pawlowski with Green Street.
John Pawlowski: Just one question maybe for Tom Klaritch. There's a few health systems that you partner with in the MOB business on Page 31 that we're concerned about just the financial solvency. So could you just help us understand if a major health system goes bankrupt and an adjacent hospital needs to get retenanted, what type of occupancy impact would be reasonable to see in your medical office portfolio?
Thomas Klaritch: Yes, John. If you look, our strategy has always been to partner or be affiliated with the top 1 or 2 hospitals in the market. Typically, they're owned by some of the great systems out there. But when we underwrite a transaction, we're underwriting the health of the hospital more than the health of the system. Obviously, if we get a guarantee from the system, that's great, and we certainly look at that, and we monitor them. But we want to make sure that the actual hospital we're affiliated with has good market share, good margins, they're profitable. And it doesn't really matter who owns them in the long run. Those hospitals are going to continue to operate maybe under a different health system, but they'll continue to perform well. And I really wouldn't anticipate any drops in occupancy for any of those changes.
John Pawlowski: But does that hold in the near-term? Could we see a 2- to 3-year period if we get a community health systems go dark, do you see a near-term impact on occupancy?
Thomas Klaritch: No, not at all. In community health systems, we monitor those buildings we bought 4 or 5 years ago under that master lease program. Every 6 months, we get financial statements on them. Those hospitals they did when we bought them and they continue to perform at the high end of any of the CHS hospitals. Their margins are sometimes 2x to 3x higher than the corporate averages. So those hospitals will just continue to operate needs in those communities, and we wouldn't anticipate any near-term drop or a long-term drop in the operations of those facilities if there was a change in ownership.
Scott Brinker: Yes. John, just one final point on that because it's an important one is that -- in CHS, so I use that example as well, but they have a lot of corporate debt that's their issue. Their issue is not the profitability of these specific hospitals. So I have to imagine that in any bankruptcy, right, I have no insight whatsoever as to whether that's in the future or not, I'm just using it because that was your example. I would have to imagine that whoever owns CHS now or in the future would be doing everything they can hold on to these hospitals because they're highly profitable, okay? These are -- the hospitals are not their problem, it's the corporate level debt. So we have no exposure to that.
Operator: Our next question will come from Nikita Bely with JPMorgan.
Unidentified Analyst: Do you have any other significant percentage rent structures in the portfolio outside of Medical City Dallas, I believe that's where it? And second one is, you talked about the 81% pre-leasing on developments. What about the pre-leasing stats for your redevelopment pipeline like roughly $300 million or so?
Thomas Klaritch: This is Tom Klaritch. I'll take the percent rent question. We have 1 or 2 very small percent rent leases out there other than Medical City, but Medical City makes us probably 98%, 99% of our percent rents. And they're kind of odd structures to have in medical office. Scott, do you want to take the other question? Scott Bohn, do you want to take the pre-leasing on the redevelopment portfolio question?
Scott Bohn: Sure. So on the life science side, certainly, we are -- we're not going into those pre-leased. We've had some leasing success at Pointe Grand that I mentioned. We've got 1 of the . We've got some really good activity on the other buildings that we're working on. And then the MOB side, I don't know, TK, if you want to talk about any of those on the readout as far as pre-leasing goes.
Thomas Klaritch: The pre-leasing on the projects has always been in kind of that 40% to 60% range. We continue to see that. If you look at the project, we just put into the program. This quarter, it's 53% pre-leased, and there's always some discussions and potential LOIs behind that. But right now, if you look at the total HCA program, it's 68% pre-leased, probably another 8% under LOI or in active discussions.
Scott Bohn: Yes, just one more to follow on a couple more of in South San Francisco. We've got couple of readouts 1 at our Oyster Point campus and 1 at Towers where we're doing some conversions there. When we -- Oyster Point is 100% pre-leased. And in the Towers, 2 of the 3 floors there are pre-leased. And then in Boston at Hayden, that is a 100% pre-leased as well.
Operator: Our next question will come from Omotayo Okusanya with Credit Suisse.
Omotayo Okusanya: Two quick ones for me. On the MOB side, just a lot of really tough news coming out of the hospital space in general. Just curious if that is impacting kind of future demand for MOB development, whether that's impacting ability to kind of push rent? Just kind of curious what you're starting to hear from the hospital systems given the very tough fundamentals they're having right now.
Scott Brinker: Yes. I can speak to our development pipeline, we're in discussions with HCA about quite a few projects. Obviously, we're monitoring costs and potential returns on those before we commit to anything. But there hasn't been really any impact to us from a leasing standpoint. Our leasing for the year -- actually the past couple of years is significantly above where we expected it to be. And if you look at some of the issues, I'll take HCA as an example this quarter. Their actual lower admissions really wasn't the result of core operations. If you look back to 3Q '21, there was actually a surge in COVID admissions last year because of the Delta variant. Obviously, luckily, that didn't continue this year. And where 13% of their admissions last year were the result of COVID cases, this year was only 5%. So if you basically take that out, their core admissions were up 6.9%. So I think, as we move forward, we're going to see continued strong results out of many of our health systems. And you can see that with the CHS results, they actually were higher than anticipated, and their stock is up about 50% since they announced late last week.
Omotayo Okusanya: That's helpful. And then just on the life sciences side, again, I think good commentary It sounds like you remain optimistic about the overall space. But just curious how I overlay that versus pre-leasing and the development pipeline did really grew quarter-over-quarter. I don't know whether it's just a soft quarter in particular, and you're expecting to kind of improve over time? Or just any kind of comments you can provide around that?
Scott Bohn: It's Scott Bohn. Yes. I mean I think that we've maintained our 81% pre-leasing. But if you look at the list of developments, right, I mean there's only 1 development that has any space available. So it's just a matter of not getting lease on that 1 building. And so there's not a big sample size of available spaces within the development portfolio.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks. Mr. Brinker, your line might be muted.
Peter Scott: I think Scott's line might have been muted, but this is Pete. I think that concludes our call for today. And we actually really look forward to seeing all of you at NAREIT in the next couple of weeks and at our property tour and meetings after that. So thanks very much. Look forward to seeing you back. Bye.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
