Healthpeak Properties, Inc. 2026 Q2 Earnings Call

Please go ahead. Welcome. Today's conference call contains certain forward-looking statements.

Although we believe the expectations reflected on any forward-looking statements are based on reasonable assumptions, these statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risk 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 measures will be discussed on this call. In an 8-K that we filed with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with regulatory requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker.

Thanks, AJ, and welcome to Healthpeak's second quarter earnings call. WE CARE is the acronym we use for our core values, with the W representing our winning mindset. That's easy to do when demand exceeds supply and fundamentals are in your favor. Everyone's happy and looks really smart. It's a lot harder to do when supply exceeds demand, but that's exactly when a winning mindset is needed the most. As the life science pendulum finally starts to swing back in our favor, I want to say thank you to the team here who live up to our core values and maintained a winning mindset these past four years. It absolutely paid off, and we're stronger because of it. The downturn also provided a window to redefine our company and reset the competitive landscape. We were bold and strategic, including a $5 billion merger and a $1 billion IPO.

Today, we're a bigger and better company because of those decisive actions. Even more important, we added capabilities, including strategic new hires and internalizing property management in much of our renewal leasing. Now we're in the process of rolling out our agentic operating platform. This modern version of Healthpeak is an on-the-ground operator who generates superior results with our people and platform. We're already seeing a payoff from the strategy. In the past two quarters, two of the largest and most respected real estate investors in the world chose Healthpeak as their operating partner. Neither Blackstone nor Brookfield had any meaningful prior exposure to the outpatient medical sector. Both joint ventures allow us to maintain control of strategic buildings and tenant relationships while providing an alternative source of equity capital. We're excited to grow both of those partnerships in the future. Our balance sheet is stronger than it's ever been.

Leverage is below five times, and we have flexibility to pursue a number of capital allocation alternatives. We're funding highly pre-leased outpatient development projects sourced directly through our relationships, such as the project in Atlanta that we announced last evening. We can also do outpatient acquisitions in our joint ventures with Blackstone and Brookfield, where the deal structures generate additional returns to Healthpeak as the operating partner. We also see a unique opportunity in life science to create value via acquisition. Life science has been a development game for the past decade, but for the next few years it will be an acquisition game, and we have the platform and balance sheet to capitalize on the opportunity. We can also do stock buybacks, if and when the stock price is well below intrinsic value.

Today, that's less attractive, but we did buy back $100 million in April at a 10+% FFO yield when the stock was less than $17 per share. Finally, we could maintain leverage below our five and a half times long-term target, given the cost of debt today isn't much lower than the fair market cap rate of our real estate. This is not the right environment to have elevated leverage. With our strong balance sheet, we can afford to be patient and utilize our dry powder when it's most impactful. A few comments on operating results and the underlying environment. The strong fundamentals in outpatient medical that we spoke to with the merger announcement three years ago continue to be validated. Last quarter, we had +5% cash re-leasing spreads and modest TIs that continue to be materially lower than peers.

Total occupancy increased 20 basis points sequentially, and our leasing pipeline suggests that an internal growth in the outpatient portfolio will accelerate in 2027. In life science, public capital raising last quarter was the highest since 2Q21. The IPO market is healthy but measured, with 13 later-stage companies raising more than $5 billion in proceeds in the first half of the year. This week alone, we could see five biotechs price IPOs. M&A has been record-breaking, with more than $250 billion of announcements in the last three quarters, which recycles capital back into the ecosystem. Most important, the science continues to advance, year-to-date FDA approvals are above the five-year trend. The building blocks are in place for occupancy in the sector to inflect, led by Healthpeak.

In senior housing, we'll provide all the details on the Janus Living call, but happy to report that same-store portfolio had 260 basis points of occupancy growth and 19% NOI growth. We have an active and accretive acquisition pipeline sourced through our deep relationships in the sector, including $1.8 billion closed since January 1. Our senior housing portfolio will essentially double in size this year, and the number of operating partners will increase from two to more than 10. We're on pace to accomplish a three-year business plan in 12 months. Janus Living's success is also driving earnings growth at Healthpeak, given our unique and creative deal structure that aligns the interests of both companies. I'll turn it to Kelvin.

Thank you, Scott. We continue to execute our plan and have made tremendous progress year to date in our leasing and capital allocation objectives. I'll take a moment on our outpatient medical recapitalization with Brookfield. We're pleased to complete this strategic partnership as the proceeds raised exceed our capital recycling target for the year in a single transaction. With the leadership from our investments team, we've demonstrated our ability to execute scale transactions and partner with leading institutional investment managers. From a structure perspective, Healthpeak will retain a 51% ownership interest in a 5.6 million square foot outpatient medical portfolio and raise $1 billion of cash proceeds. We will utilize our best in class platform and expertise to provide asset management, property management, and leasing services, maintaining day-to-day control of the real estate and preserving our client relationships.

Economically, the transaction represents a trailing cash cap rate of 5.9%, and after seven years, we'll have a finite number of call rights to repurchase the non-controlling interest at a price sufficient to provide Brookfield a 6.5% unlevered rate of return. Most importantly, this partnership expands our access to alternative sources of equity capital with a framework we can replicate to pursue growth opportunities across our business. Now turning to the second quarter results. We reported FFOs adjusted of $0.46 per share and net debt to EBITDA of 4.7 times. Now starting with outpatient medical, we had another strong quarter of leasing as we continued to see demand for our real estate. For the quarter, we executed 1.2 million sq ft of leases, including approximately 327,000 sq ft of new leasing, bringing our year to date total to 2.3 million sq ft.

We achieved 80% tenant retention and cash re-leasing spreads of 5%, which is in line with our average of 5% over the last 10 quarters and above our pre-Physicians Realty Trust merger averages of 2%-3%. We ended the quarter with total occupancy up 20 basis points sequentially to 90.7%. Since July 1st, we have an additional 204,000 sq ft of lease executions and approximately 882,000 sq ft under LOI. I'd like to highlight our partnership with Northside in Atlanta, as it's proven to be a source of strategic growth for our outpatient portfolio. We have now entered into another development agreement for the ground up construction of a new outpatient medical project to support their expansion in Atlanta, where we have number 1 market share. This will be the fifth development project with Northside, totaling approximately 565,000 sq ft.

Moving to lab, we continue to make progress towards net absorption and total occupancy capture through year end. For the quarter, we executed 381,000 sq ft of leases, of which approximately 60% was new leasing and 30% on vacant space. We ended the quarter with total occupancy increasing by 80 basis points sequentially to 78.5%. That is 140 basis points increase since year end 2025. Since July, we've entered into approximately 20,000 sq ft of leases and have another 480,000 sq ft under LOI. As a result of this activity, we anticipate a modest improvement in total occupancy by year end from where we stand as of June 30th. These results reflect our focus on driving leasing volumes at our properties, which I would like to highlight by sharing our progress in Torrey Pines, the premier lab submarket in San Diego.

The activity we've seen in Torrey is a testament to our team on the ground and our high quality portfolio as tenants are seeking core assets and core locations with experienced landlords. This is allowing us to capture an outsized share of the deal volume. When accounting for executed leases and LOIs, our leased percentage in the sub-market increases to 97% from approximately 65% at year end 2025. Ending with senior housing, Healthpeak's ownership interest in Janus Living is now 74%, which represents approximately $6.5 billion of equity value. For the second quarter, Janus Living delivered total revenue growth of 45%, adjusted EBITDA growth of 34%, and ended the period with cash on the balance sheet and no outstanding debt. Now moving to the balance sheet. We had significant activity during the second quarter into the third quarter against a backdrop of elevated borrowing costs.