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Good morning, and welcome to the Healthpeak Properties, Inc., First Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Andrew Johns, Vice President, Corporate Finance and Investor Relations. Please go ahead.
Thank you, and welcome to Healthcare's First Quarter 2021 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 included in our press release are 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 this call. In an exhibit that the 8-K we furnished with the SEC yesterday, 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, Andrew, and good morning, everyone. On the call with me today are Scott Brinker, our President and CIO; and Pete Scott, our CFO. Also on the line and available for the Q&A portion of the call are Tom Klaritch, our COO; and Troy McHenry, our Chief Legal Officer and General Counsel.
We had a strong start to the year and continued executing on all aspects of the plan we communicated over the past few quarters. Let me hit the high points. Our operations across all three of our core businesses were ahead of expectations. We closed on an additional $1 billion of rental senior housing sales and have over $400 million of additional sales under hard or soft contract.
We completed proprietary acquisitions of $422 million of on-campus or affiliated MOBs with another $150 million under fixed price purchase option. Also, we have a strong pipeline for additional off-market acquisitions. Our development pipeline progress and projected deliveries and pre-leasing remained favorable. And as we previously announced, we added one new developed from our land bank in South San Francisco and a densification development start in Torrey Pines, San Diego, and are already seeing strong leasing in interest in both.
As we alluded to last quarter, yesterday, we announced an additional tender for $550 million of bonds. Our decade-long ESG commitment continues to produce notable achievements. Later this month, we look forward to publishing our tenth annual ESG report. And given our operational progress, transaction timing and stronger-than-expected trends, we raised our FFO as adjusted guidance by a couple of pennies at the midpoint and same-store guidance by 25 basis points at the midpoint. Everything is progressing very well.
Brinker and Pete will provide the details. With that, I'll turn it over to Scott Brinker.
Thank you, Tom. I'll start with operating results then provide an update on senior housing sales and with investments. In Life Science, we're very well positioned with our footprint, relationships and strong industry fundamentals. We reported 8.5% same-store cash NOI growth in the first quarter, driven by rent escalators, higher occupancy and mark-to-market on renewals.
The results were above our internal expectations as we saw an acceleration of leasing activity and rental rates across the Bay Area, San Diego and Boston, which comprise 97% of our Life Science NOI. Our momentum continued into April as we signed 290,000 square feet of leases with another 310,000 currently under letter of intent.
Turning to medical office. Same-store cash NOI grew 2.1% in the first quarter, driven by rent escalators, 2% cash mark-to-market on renewals and favorable expenses. The results exceeded our internal forecast for the quarter. Leasing demand remains robust.
Over 615,000 square feet of leases commenced in the first quarter, including more than 500,000 square feet on renewals, contributing to a trailing 12-month retention rate of 80%. We're seeing the benefit of our digital marketing initiatives as MOB virtual tours have increased dramatically. Our digital tour technology in all three business segments will benefit the platform long after COVID is behind us.
Turning to CCRCs. The inflection point occurred sooner than we expected as occupancy across the portfolio increased 10 basis points from December to March and an additional 40 basis points in April. The trends are encouraging, especially at LCS, where the first quarter exceeded 2019 levels and tours increased by nearly 70%, driven in part by our digital marketing initiatives.
Entry fee sales are up 80% from the low point in 2Q '20. The effective vaccine rollout and a strong housing market support continued improvement. Same-store cash NOI growth was negative 16.5% for the quarter driven by year-over-year occupancy declines from COVID. The first quarter pool consists of just two properties, which limits the usefulness of the metric. As the LCS properties entered the pool starting in 2Q and a quarterly same-store result will become more representative. The fiscal year pool will remain just the two Sunrise properties in 2021.
Moving to senior housing dispositions. We closed on an additional $1 billion since our last earnings call. We signed purchase agreements or letters of intent on all of our remaining SHOP and triple-net properties with the closing time lines driven by licensure and debt assumption. The majorities are under hard contracts with money at risk, and we continue to evaluate our sovereign wealth joint venture alongside our partners.
Overall pricing remains in line with previous disclosures. The most recent $1 billion of SHOP assets were sold a 2.6% cap rate on annualized trailing three-month NOI, excluding CARES Act revenue, and a 4.9% cap rate on pre-COVID NOI. With the vast majority of the asset sales now behind us, we're able to shift nearly 100% of our transaction focus to strategic investments in our three core business segments, and advancing our densification opportunities.
For example, with our Life Science occupancy in the high 90s, we announced in March the commencement of the $159 million Nexus development in South San Francisco and the $135 million Callan Ridge densification in Torrey Pines. Both projects have generated significant interest from tenants before we started to dig foundations. We also completed development at 75 Hayden and Lexington, the campus sits strategically at the intersection of Route 128 and two and now totals more than 600,000 square feet across three buildings that are 100% leased. We continue to advance our shadow development and densification pipeline.
In April, we closed on the first phase of the previously announced acquisition of land on Forbes Boulevard in the heart of South San Francisco. The remaining parcels of that acquisition should close later this year. Combined with our existing holdings, we branded the 20-acre site under the new name of Vantage. The project will become a highly prominent phased development totaling 1 million square feet or more.
Demand in South San Francisco remains robust, and we hold a dominant position in the submarket, controlling nearly 50% of the landlord owned lab inventory. We have the ability to double our footprint in the submarket over time through our existing land bank and densification opportunities. Moving to acquisitions, we've been active in medical office, finding attractive opportunities to redeploy senior housing sale proceeds. All of the acquisitions I'll describe today were done on a proprietary basis through relationships.
In some cases, we effectively executed asset swaps and with the same counterparty, trading senior housing assets for life science and medical office, which eliminated our risk around execution, timing and tax on more than $2 billion of transactions. In April, we acquired a 14-property MOB portfolio with 833,000 square feet for $371 million. The portfolio is 100% on campus or affiliated with a seven-year weighted average lease term.
The acquisition expands and/or creates relationships with leading regional health systems, including Bon Secours in Virginia; Inova in Washington, D.C.; North Shore in Chicago; HCA in Los Angeles and Fairview in Minneapolis. The year one cash cap rate is 5.2%. There's occupancy upside at several other properties, so the stabilized cap rate is in the high 5s.
Stepping back, one unique aspect of Healthpeak across all three business segments is our campus model, where we have significant scale in a single location, and we're strategically adding to three of our most important MOB campuses. You'll recall that we recently acquired a 5.4 acre parcel at Medical City Dallas that will support up to 1 million square feet of expansion, which is on top of the existing 2.1 million square feet that we already own.
And in February, we acquired a 6% stabilized cap rate, a 48,000 square foot MOB on the Centennial Campus in Nashville, including our development that delivers in the fourth quarter, helped people own 830,000 square feet across nine MOBs on this market-leading campus.
And most recently, in April, we acquired for a 5.5% stabilized cap rate, a recently developed 80,000 square foot MOB located on the market-leading Sky Ridge Hospital campus in Denver. This brings our ownership at the campus to 420,000 square feet. Our acquisition pipeline is sizable as well, including an option agreement for $150 million of MOBs with strong health system affiliation.
We're in a good position to capitalize on these opportunities, which is a good segue to cover financial results and the balance sheet.
Thanks, Scott. I'll start today with a review of our financial results, provide an update on our recent balance sheet activity and finish with a discussion of our 2021 guidance. Starting with our financial results, the first quarter, we reported FFO as adjusted of $0.40 per share and blended same-store growth of 4.3%. In addition, on April 29, our Board declared a dividend of $0.30 per share, representing a payout ratio of approximately 88% for the first quarter.
Turning to our balance sheet, we ended the quarter with net debt to adjusted EBITDA of 5.4 times, in line with our expectations. As previously announced, we intended to use a portion of our senior housing disposition proceeds to repay near-term debt. As such, during the first quarter, we completed the repayment of $1.45 billion of bonds maturing in 2023 and 2024. Yesterday, we announced the tender offer to purchase up to $550 million of 2025 bonds, allowing us to minimize dilution from sitting on debt cash and further improve our balance sheet.
Pro forma for the $550 million repayment, our weighted average maturity improves to 6.5 years. With our senior housing dispositions now largely complete, we are not planning any further bond repayments beyond the $2 billion that has been completed or announced.
Turning to our guidance, as Tom and Scott mentioned, we have started the year on a strong note with all of our segments performing above our initial expectations. As a result, we have made the decision to increase our guidance as follows: FFO adjusted revised from $1.50 to $1.60 per share to $1.53 to $1.61 per share, an increase of $0.02 at the midpoint.
Blended same-store NOI growth revised from 1.5% to 3% to 1.75% to 3.25%, an increase of 25 basis points at the midpoint. Let me spend a minute level setting all the major components of our revised guidance. First, we see an increase in FFO of roughly $0.01 to $0.02 from improved performance across all three of our segments, which impact both the low and high end of our guidance range.
In Life Science, as Scott mentioned, we had a very strong first quarter. As a result, we have increased our full year same-store range to 4.5% to 5.5%, an increase of 50 basis points. We do expect some modest deceleration as the year progresses, plus we proactively terminated an 80,000 square foot lease at our Redwood City campus to allow an existing tenant to grow within our portfolio.
The positive rent mark-to-market is over 40%, but as a result of downtime, it will negatively impact 2021 same-store results by 75 basis points. However, it provides a significant earnings and same-store benefit to 2022 and beyond. In medical office, we have started the year with stronger-than-expected leasing with demand for outpatient elective procedures continuing to improve. We had originally expected a more challenging first quarter due to a difficult year-over-year comp. Based on the first quarter performance exceeding our forecast, we have increased our full year same-store range to 1.75% to 2.75%, an increase of 25 basis points.
In CCRCs, with the success of the vaccine rollout and 100% of our properties open to new we are beginning to see improved performance. Recent occupancy trends are favorable, expenses have moderated, and we are seeing an uptick in entrance fees.
As a result, we have increased the midpoint of our LCS portfolio guidance range by $7.5 million and tightened the range. While there are still a lot of moving pieces, if the trends we are seeing continue to ramp at the current pace, perhaps we are still a bit conservative with our forecast, and we will assess as the year progresses.
Second, we see an increase in FFO roughly $0.01 to $0.02 from the timing and amount of acquisition activity from the reinvestment of sale proceeds. We have increased the lower end of our acquisition guidance to $700 million, an increase of $550 million.
As a reminder, our plan assumed funding all acquisition activity with newly issued debt, bringing net debt to EBITDA back to our target of 5.5 times at the high end. For now, we have kept the high end of our acquisition assumptions unchanged, although our pipeline has been building, so stay tuned.
Third, Interest rates have ticked up a bit, so we have increased our expected issuance rate to 2.75%, an increase of 25 basis points from our prior assumption. One last item before Q&A, with our portfolio repositioning winding down, we completed a comprehensive review of our supplemental and realigned our disclosures to the current portfolio. On Page 40 of the supplemental, we have provided a table summarizing the key additions.
With that, operator, let's open the line for Q&A.
We will now begin the question-and-answer session. [Operator Instructions] The first question will be from Nick Yulico of Scotiabank.
Just first question is on the development, particularly the lab space development, hoping to get bit of an update on what you're seeing in your markets. And then also how you're thinking about in terms of achieving a stabilized yield on the life science land projects underway.
Scott here, I'll cover that, and Tom may have something to add. But the two most recent additions to our development pipeline from the land bank, Callan Ridge, which is really a densification as well. We're underwriting an eight-plus percent yield on that. Now that's helped by the fact that we've owned the land for a long time and are able to significantly densify that site, I mean, at current market value for the land, the return on cost is probably 4% to 6% range, just realistically from trades we've seen recently.
And that project will start probably in the third quarter of this year. We still have a couple of tenants in the existing building through June. The second project that we recently announced is Nexus in South San Francisco and the underwritten yield there is a little bit lower, although certainly still higher than what we would achieve if we had to pay current market value for the land. In that project, we had the strength in existing building. So that's now complete.
We'll start construction soon. It's obviously shovel-ready site now and should deliver probably early first or second quarter of 2023. So we feel really good about both projects given the supply/demand dynamics. And if anything, there's probably some upside in the yields versus what we've disclosed today, we're giving a lot of interest on both sides. And then in terms of what could come next, the land bank intensification opportunity exceeds 5 million square feet on land that we already control.
The two highest priorities are probably the two shovel-ready land sites, one in South San Francisco, one in Sorrento Mesa in San Diego. That totals about 500,000 square feet. Both of those sites are essentially shovel-ready. And we could start those really at our discretion. And if we start seeing significant momentum on the other projects that we just commenced, it may be that We go ahead and start those as well, but we haven't made any final decisions. Tom, anything you'd add?
Scott, yes, a couple of things Nick, assuming that land is that market, we would say that spread is probably in that 150 or probably closer to 200 basis point range relative to cap rates in those markets. And that's land at market, which has become very competitive, as I think everybody knows. But regardless how we think about it is we can certainly make money at 150 basis point plus spread, it produces a couple of hundred basis points spread to our year one funding costs.
It's probably 25% to 30% accretive to NAV when you think about the yields versus the cap rates in those markets. But you really need that to compensate for the drag and the risk that's encountered with development. But the significant advantage that we have is we've got a good-sized land bank and even a much bigger densification pipeline that will create really strong land in very well-positioned locations in the three core markets over the next decade.
Okay. That's helpful. Just one other question is on the balance sheet, maybe for Pete. I just want to make sure we're understanding this correctly in terms of the second quarter activity. The bond tender, the dispositions, your plan, the acquisitions, we get to that and netting to about $225 million of cash. But then you're also, I think, expecting to get some of your seller financing paid off later this year. So just trying to understand kind of where you guys are at right now based on everything that was announced in terms of a cash position to go and do more acquisition and development funding. I know you also mentioned taking up your debt as well. Thanks.
Yes, there's a few items in there. I think what I would say with regards to getting back to our 5.5 times net debt to EBITDA, there's still, call it, about $800 million of acquisitions, which is built into the high end of our guidance. When you think about our current revolver balance, we ended the quarter at about $1 billion. That's actually come down today. That's at around $775 million. And we've got some other transactions that we'll close plus we've got the bond tenders you just mentioned.
So I would say from a revolver perspective, we feel quite good about where we are from a floating rate debt and the amount that's outstanding on the revolver. And like I said, we have some dry powder built in with our leverage because that tender will take us down into the low 5s, around 5 times. So about $800 million of capacity from an acquisition perspective, so hopefully, that's helpful. And happy to take it off line, I don't know if you have any additional questions on that.
The next question will be from Jordan Sadler of KeyBanc Capital Markets.
Thanks, good morning. I wanted to touch base on the acquisition pipeline. You guys got off to a pretty good start early in the year. It looks like MOBs seemed to be a pretty good opportunity. Just curious what the rest of this pipeline looks like you, Tom, flagged in your prepared remarks?
Yes, Jordan, a few thoughts on that. So we're currently seeing transaction opportunities in both of the major sectors of life science and MOBs. The market for purpose-built lab and well-located land in the core markets for life science has been driving very strong pricing, as I'm sure you've all seen, which has caused us to stand down on a lot of the auction deals or maybe all the auction deals that we've looked at.
However, this is in our view, plus for us is, we have the embedded densification opportunities given our premium land locations. So that just really increases the value of those opportunities in that land given we've got about a decade run on that side. Well, if I look to MOBs for the high-quality MOBs, it's also been quite competitive and challenging, especially in the auction markets.
But all the completed deals that we have done have been off-market as of the past several months. And our acquisition pipeline is entirely relationship driven. So we feel quite good on that front. So yes, there's a lot of competition out there, Jordan, but I think we've got a position where when we think about build versus buy in each of our three major segments with life science being primarily build given our land bank and the value-add opportunities that we have.
MOBs, it's a blend of buy and build, as long as their relationship-based deals where the health service companies value our partnership to help them achieve their objectives, which has been building on that for 30 years. And then CCRCs, it's more generally buy versus build given the typical 8- to 10-year from inception development and stabilization period.
We're a natural counterparty for those that are capital constrained and want to find a capital partner and it creates a great yield for us. And we've also got some densification in our CCRC campuses that sum up to about $0.5 billion over time, where the delivery is reduced to probably about three years in the land free. So if I was to just summarize all those components in one remark that, that would probably be it.
Okay. And then as it relates to the LCS guidance tweak for the year, Pete or maybe Scott, your thoughts on sort of what you're assuming in the upward revisions to sort of the NOI expectation in terms of maybe occupancy from here? So what's embedded?
I can start with that. Pete, you may have something to add. But if you look at the first quarter, Jordan, and just annualized the NOI that we reported, you come up to about $82 million. Our new guide is $70 million to $90 million. And we do expect occupancy to increase fairly materially through year-end. The range we gave is 79% to 87%. Today, we're just above 79%. And we are expecting that the improvement that we saw in the first quarter, but then in particular, in April, will continue. So that might lead you to believe that there's a lot of upside in the NOI and maybe there is.
But in the first quarter, we did have some expenses that were quite a bit lower than we thought, including bad debt and insurance and even labor. So we wanted to maintain a little bit of conservatism just to make sure we understood exactly how expenses would shake out the balance of the year. And the other thing is that the merit increases for the workers tends to be on April 1. So that number is obviously meaningful and that will impact the balance of the year in 2021. So hopefully, that helps.
The next question is from Amanda Sweitzer of Baird.
Thanks, good morning. On your life science segment and thinking about your outlook beyond the voluntary terminations, where are the biggest areas of uncertainty that are made in that outlook today? And are there any aspects as you're underwriting that you think could prove conservative?
I can start with that. We always underwrite some level of that debt, and there could be some upside in that, number that would allow us to exceed our guidance. We've achieved a good portion of the speculative leasing in the 2021 budget. So anything we do from here on out should be upside as we've pretty close to achieve their full year leasing already, especially if we can convert those existing LOIs and to sign leases.
On the credit quality of the tenant side, there's a lot less risk today than there would have been a couple of years ago, for sure, given how much money has been raised in the sector, number. Watch list tenants from the past and are no longer on the watch list, which is great. It's a very, very small number today. It doesn't mean we're not actively managing the portfolio, of course, but just very few tenants that we're actually concerned about.
So those are probably the biggest variables. And for sure, we feel really good about the environment. The bigger challenge when you look at the reported same-store growth over the next three quarters this year is that we're just coming up against a very strong comp. We were up on average 7% in 2020 from 2Q to 4Q. So that's a very difficult comparable quarter that we'll be up against. And Tom may have in addition?
I don't want -- but we do have Scott on the line for questions. I think you know that there are two co-leader of life science and have been for the last quarter plus. Any color, Scott, for San Francisco, Boston, just briefly, and then Mike for San Diego on things that you're seeing that would add color.
Go ahead, Mike.
Sure. I'm happy to For San Diego, we're certainly seeing even increased velocity from a market standpoint in terms of market rent. And all those leading indicators that we talked about a lot in terms of venture capital raises, net absorption based on the first quarter that we just hit, we had records last year and are on track to potentially do so again if the So we feel really good about the fundamentals down here in San Diego. Scott, I'll let you talk about San Francisco and Boston.
No, I would agree. I would just follow on that, those same comments for San Francisco and Boston. I mean I think the tenant demand continues to be at record levels, and you're seeing significant fundraising as well to go along with it. So I think we do have some upside certainly in the numbers we're showing today.
That's helpful. And then finally, seller financing was a bit slower to be repaid than I think you guys initially expected. Is there any change in your view of collectability of those seller financing amount of stocks in?
No, I can cover that. We have one big prepayment that's still in process, and we still expect to receive it. There are two properties in that pool that got held up for licensure purposes. They still haven't closed. And once that gets done, we do expect a pretty material repayment or prepayment of a lot of that seller financing. So the current balance today is in the just under $800 million. It wouldn't surprise us if about half of that got repaid by year-end based on current discussions.
The next question is from Rich Anderson with SMBC.
So on life science, can you talk a little bit about the early renewal process in your leasing activity. How much of the total is coming to you early because tenants perhaps feel nervous about the growth of rents and want to kind of lock in before it gets worse for them?
Rich, it's Scott. Most of the renewals in 1Q were, in fact, early renewals. It wasn't driven as much by what you just described and more so by two tenants that wanted more space. So, we did an expansion plus a renewal at mark-to-markets on both of those. So that's really more what's driving early renewals, we don't have as many come to us for just a standalone early renewal.
Okay. And then the second question for me is on the kind of the lingering SHOP exposure through the JV, is that probably something you just keep for a long time? Or is there an opportunity to come to some sort of terms with your partner to sell that as well?
Rich, it's something that is currently under assessment. It's a very good partner. We're working with them to identify a solution that works for both them and for us. We're happy to hold that long term if that's what makes the most sense, but also happy to do something different. So probably not a whole lot more I can say on that right at this moment.
The next question is from Juan Sanabria of BMO Capital Markets.
Just hoping to talk a little bit more about the life science acquisition opportunity set. And just your appetite to either explore new markets, whether it's research triangle in New York City and/or look at the university-based business, just given how tight cap rates are in kind of the three markets you're in from an acquisition perspective?
Juan, Scott speaking. And Tom and the team may have more. But we have done almost $2 billion of acquisitions over the past two years in life science. So we feel particularly good about those. Those types of transactions really aren't available today and certainly not at the pricing that we pay. Now we hope we can find more of those. They tended to be relationship-driven, and we're active on a couple of fronts.
But for sure, the oxygen market has gotten pretty pricey. Not a surprise. The fundamentals in the business are really strong, and there aren't that many areas or partners to play in life science. So it's not a surprise to see the valuations increase so dramatically. So we are spending more of our time in life science, thinking about development in densification, but we're certainly active and looking for acquisitions too because we may find one that makes sense. Tom, is there anything you'd add to that?
Actually, there probably is when we think, one, about looking at some of these secondary markets outside of our three core markets, we're always looking at various new supply, heavy competition coming in and whether we have competitive advantage. We clearly have competitive advantage in the three markets. If we break into a new market, we don't. We get to slug it out with everybody else.
I think an interesting fact is that the majority of our new leasing as we develop new properties are our existing tenants. And then Brinker, I think I had seen something that you had written up that it is in the 80s or maybe it was that wrote it up, that somewhere in the 80% plus range if the amount of new space that is leased from growing biotech tenants within our space. Is that accurate? Do I have that stat right?
Yes, it's in the mid-80s, Tom.
Yes. So one, you can, at that point, probably appreciate that when we've got a big -- a good-sized land bank that will keep us busy for a while and then the densification that will keep us busy for a lot longer in these markets where we have huge scale. It's a pretty competitive advantage for others that are trying to break in. So we're highly focused there.
Great. And then second question just on the MOB portfolio, if I look at the geographic footprint. There's a bunch of markets where you have one or two assets. Would the long-term goal be to increase local scale? And how are you thinking about approaching that because most of the markets are not quite as dense as some of your top three or four markets, so just curious on your long-term vision there.
Yes. So we'll turn it to Rich. But the bottom line is for decades as he formed MidCap and carried it forward was to be with number one or number two hospital systems in each market, they need to be strong markets. But that has a massive impact on how we think about it strategically. So Tom, maybe you could give some color.
Sure. Juan. Typically, our markets are driven by our relationships with the health systems and how we've acquired buildings over the years. And normally, if you look at our portfolio, we're at 97% either on-campus or affiliated, and we maintain those relationships on those markets. So we typically are not going to sell those. We would love to expand to them, and we do look for opportunities on a market-type basis. Probably I could see us expanding in some of those as we move forward over the next year or two, but we -- if they're good markets and with a good system, we're likely not going to exit them.
The next question is from Nick Joseph of Citi.
You talked about the MOB deals that you've done and having the pipeline being mostly off market. So I'm wondering, what sort of yield premium do you get off market versus if those assets have hit the open market?
Yes. It's hard to say, Nick, because they end up not going to an auction. So I think it's reasonable to say that we're buying from sophisticated sellers who aren't going to accept a big discount. I know we wouldn't if we were on the opposite side of the table. So I don't know that the valuation is some material discount to fair market value. The way we think about it more is that you're able to create a transaction and customize it in a way that really makes sense for both parties.
We're able to ensure that there's a relationship going forward with the particular health system, in the case of medical office buildings. So maybe at the margin, there's a slight valuation difference between an auction and an off-market transaction, I think it's more of the softer points that ultimately are probably more important than the hard points on an acquisition that really drive, in our view, the differences between doing things on a proprietary basis versus an auction.
And then just on densification. You talked about the opportunity at the CCRCs. As we look at the recovery there, how do you think about actually executing on that opportunity?
Yes. I mean Nick, it's Scott again. We have more than 700 acres across those 15 properties. There's at least 100 acres on those campuses that could be densified, five or six occasions or campuses, we've done some level of planning around what could actually be done. So we've done at least that first level of underwriting.
But I would view that more as an opportunity over the next decade, some of which could be in the next year or two that we would look to densify particularly successful campuses. In some cases, it's building more independent cottages or high-rise. In some cases, it's actually building out a full continuum of care if a particular campus happens to lack assisted living or lack memory care. So it's a combination of things across. It's probably 8 to 10 campuses that are good candidates over time.
The next question is from Steven Valiquette of Barclays.
A couple of things here. First, congrats on the results on the strength in life science and MOBs and just a question on CCRCs, recognizing it's only a small part of the overall NOI. But I guess I was curious with that guidance and the supplement for the inflection point in occupancy to occur in either 2Q or 3Q this year, it does seem to be a quarter or so behind some of the peers who saw the inflection in point already late in the first quarter. Just curious what the drivers are for that slightly longer time line within CCRCs, whether it's just longer closing time for move-ins because of a larger upfront payment, maybe some other factors with the component. Just curious to hear your quick thoughts around that.
Yes, it's Scott. And there probably is some conservatism in the outlook because in the December to March time frame, our CCRC occupancy is actually up 10 basis points. So the inflection point was actually well ahead of rental senior housing, and then we were up another 40 basis points in April. So hopefully, that trajectory continues.
Pete, Scott, maybe you could just take a moment as you're looking at guidance and how you were thinking about CCRCs?
Yes. Steve, just to touch on what Scott just mentioned. If you annualize our first quarter results, we're actually performing quite well relative to guidance. Perhaps there's some CFO conservatism in those numbers. But when you think about the occupancy, we didn't touch the occupancy that's in our supplemental on Page 42, just because it's a little hard to predict, although I would say we're tracking on the inflection in the high end is this upcoming quarter.
So as Brinker just said, we're doing a bit better than that. And again, a lot of that big beat as well in the first quarter was expenses moderating. And that actually is a big driver as we look at the rest of the year, seeing expenses moderate. So again, maybe some CFO conservatism in there, but we feel quite good about what's in the guidance right now.
Okay. One other real quick question, potentially a final question around the senior housing asset sales before the entire process moves into the rearview mirror. I guess, I was curious whether there was ever any consideration on your part to negotiate any earn-outs that would come back to you from these assets to at least have some participation in the potential recovery of senior housing occupancy? Or was there just more of a mindset just to completely wash your hands of this to just move on other than your CCRCs, of course.
We talked about for a moment and we recognize that if we're going to have an exit -- to have a clean exit so that we could move forward with our business plan in the three core businesses and grow those, manage the balance sheet and change the on the Company and the growth trajectory. So no, we did not want to hang on modify pricing, complicate deals, potentially they don't get done in order to try to hang on to some kind of an upside.
The next question is from Vikram Malhotra of Morgan Stanley.
Just maybe two bigger picture ones. First, on the MOB side, some of your peers who've also focused on on-campus have recently started dabbling more on what I'd call off-campus or off-campus. Some have done it through more JVs or looking at them more selectively. So just wanted to get your sense about potential to grow the MOB base even further and specially looking more at off-campus or why not? And then second, just on life science, the results just seem to improve every quarter. And given kind of tight demand supply, I would envision the near term remains strong. But If one would -- if you were -- could you give us some color on how you're thinking kind of three years out, what's the sustainable kind of trajectory for this business on a same-store NOI basis?
Let's start with MOBs. And Klaritch, why don't -- will you start on that one, your view on that.
Yes. Thinking about on-campus has obviously been our strategy over the years. We had that -- when we started our predecessor company, MedCap back in the 2000 time period, we always wanted to focus on on-campus with the top number one or two hospital in the country.
Obviously, as part of that, as you develop relationships, you also end up with adjacent and affiliated off-campus, which quite frankly, we like, but we want to make sure when we look at those, that they have a heavy hospital presence in them, either certainly employed physicians, but also hospital outpatient departments such as imaging or cancer treatment or whatever might fit into the building and the surrounding service area.
And then if you look, quite frankly, on-campus has always outperformed off-campus in a number of our key growth metrics. We did a study recently, looked at over 300 of our properties over a 10-year period, and it was pretty consistent, that on-campus outperformed. Off-campus adjacent, which are fairly close to the hospital, also did quite well. But off-campus affiliated, while not as good as on-campus, they certainly perform better than just unaffiliated off-campus. So we certainly look at that classification assets, and we'll continue to do that as we move forward.
I would add to that, that we do intend to go to NAREIT, and we're going to provide some summary of some studies that we've done over a very prolonged period of time with a a group of clean assets, of, call it, 300 assets in the portfolio on-campus, off-campus, affiliated and unaffiliated and show you some real results in a very strict structure in how these were measured. You don't get the biases of assets that go vacant and are pulled out of the pools and whatnot. And I think that you're going to find that the results are just what you would think.
The on-campus has been much more steady has produced better results. Off-campus affiliated a second and unaffiliated is third. But we'll bring those results in areas. So stay tuned on that one. The second question you had was around life science and that as we look forward for the next couple of years, the demand supply looks quite strong, Vikram, as I think you're pointing out, but how do we think about it three years out, if I captured your question correctly. And if so, I'll turn that one to Brinker.
Vikram, yes, I mean our occupancy today is in the high 90s. So arguably, there's not a ton of upside there, although with the leases being so big with an average size of 50,000 feet, it's certainly higher to -- easier to run a high occupancy. There's just less frictional vacancy than, say, in the medical office business.
The rent escalator is the primary, most consistent source of growth. We're in the low 3s today. So that should continue. The mark-to-market in the portfolio is somewhere in the 15% range. That's probably a bit conservative given how much rents have continued to run.
And with current vacancy across all three markets being so low, it's certainly possible that rents will continue growing much faster than our escalator, which they have for, I don't know, at least five years in a row. So that's probably the building blocks. Most of the leases are triple-net, so we don't have a ton of exposure to operating expenses anyway.
The next question is from Michael Carroll of RBC Capital Markets.
I want to talk a little bit about the life science developments that you have going on. How many are you willing to start in any one particular market? I know you have one spec project in each of your three main clusters. Are you willing to break ground on a second one in either of those clusters? I mean do you have to have some leasing activity done at some of those new projects? Or do you just need to see an uptick in overall activity?
Michael, we've done some of both. Sometimes we come out with something spec after do to their heavy-duty work on demand and supply and all the touch points they have in the market and feel quite convinced that they can get these things leased. We find when we come out spec, at least in the current market that before we can put a shovel in the ground that the pre-leasing begins.
We have a couple more projects and probably even a third one that would have a little bit longer lead time on up in Boston or really where we could pick up build-to-suits or heavy pre-leasing. And we could be ready to go anytime on what was previously called Forbes and now Vantage and Directors Place.
We're all set to go as soon as we feel that the leasing looks strong, and that's actually quite a good outcome for us. So yes, we will pull the trigger on a couple more because the dilution from it or the drag from it will be quite small as long as they're pre-leased. That produces a great outcome for us.
Okay. Great. And I guess last one for me. Can we talk a little bit about the $150 million of MOBs that are subject to a purchase option? I mean, is that a big risk that those health systems are going to exercise that option and you might lose those deals? Or how should we think about that?
I mean there's always a risk that something could happen. It's more contingent upon leases being signed with the health system. So until there's 100% clarity there, I guess we can't count on it, but we're certainly expecting that we're going to have the opportunity to purchase those assets.
The next question is from Steve Sakwa of Evercore ISI.
I guess two quick questions. One on sort of the conversion of traditional office into life science, what sort of concerns do you have in any of your markets around the growing discussions we're hearing both from public companies and private office owners about the life science conversion?
Why don't we start with Brinker and then we'll go to who have done a fair amount of this in the past. But Scott, why don't you go ahead and kick that off?
Steve, we certainly study new supply carefully across all three markets. We do include any conversions or major redevelopments in those numbers. So we don't ignore the projects and yet some are more competitive than others. I mean in any event, you're going to end up with a somewhat compromised product for the most part. It's just a matter of how compromised.
Some of the sub locations aren't great. They end up being a bit isolated and not in the core submarkets. In other cases, the physical plant ends up being pretty severely compromised, but some are better than others and some landlords are going to be better at it than others as well. So it's harder to make a black-and-white comment on conversions and the risk.
But certainly, the market commentary seems to be weighted towards maybe overemphasizing over emphasizing just how much those are competitive with the Class A locations and products that we end up bringing to the market, but I'll ask the guys to comment on their specific markets.
Yes. Thanks, Scott. This is Klaritch. So in terms of show in Boston, I think Boston, we've frankly seen more conversions actually being started. Still not as many, as I think there is -- you may read about out there. In the Bay Area, there's been a lot of talk of conversions, not a lot of action, frankly. I think a lot of -- there's been a lot of office flyers that have contained the words or life science, so to speak. But not a lot of actual buildings being truly converted and being from the market today.
And this is Mike. Yes, I would say for San Diego, we've probably seen a little bit more down here than up in the as Scott mentioned. We've done a couple of hundred thousand square feet ourselves. But in that market, has had a lot of sort of fuel for that. But in general, I think, Scott Brinker, you kind of hit all the points. You got to have the stars line in terms of a facility that sort of checks the boxes from a physical standpoint, the floor to floor heights, the structural integrity, being configured in such a way that you can get shipping and receiving in there. And if you can get all these things to align and buy it at a price where you can get appropriate yields, it can make a lot of sense and they represent opportunities for us. But you really have to add those lines, but it's certainly something that we're monitoring very closely.
Okay. And then second question, I guess, is really around inflation and rising material costs and how that might impact kind of future development yields? What are you seeing on things that you're currently underwriting? And what's the risk to yields going forward?
This is Tom Klaritch. It's been kind of an odd year with construction pricing due to the pandemic. Things were rolling along and then the pandemic hit and construction kind of ground to a halt, created an abundance of construction supplies out there, production ramp down. Pricing was actually relatively flat to down a little bit during the pandemic. And then at year-end, just as quickly things ramp back up, production had been shut down.
So what we're seeing is pretty high demand for certain of the basic materials out there, steel, lumber, all have had significant increases because of that. But we've had other cost categories that, quite frankly, have been relatively flat. Cement is around 1% increases. Lighting fixtures 1.4%. So it's kind of been a mixed bag. And if you look at our construction projects, probably the two biggest supply areas are steel, which obviously makes up the structure of the building, that's about 9%.
Still seeing a fairly significant increase of about 40% since last March to this March, and that's actually up pretty significantly from February. And then on the flip side, you've got cement products, which make up again, about 9% of the cost of a building, and those have been relatively flat. We're also seeing labor at this point, only at about 2.5%, although that may tick up as construction has been picking up, but for the -- both the MOB side and the life science side, it's been only about 2.5%.
And we really think a lot of the surge pricing, once production starts ramping up again and the kind of the supplies getting balanced, we'll see that kind of normalize. So we don't see it as a major impact to our yields. We're still on our projects, forecasting the same yields we did about a year ago. And quite frankly, in life science, the rate increases have kind of been matched any increase in construction. So we're pretty comfortable right now where those yields sit.
The next question is from Joshua Dennerlein of Bank of America.
Curious, how do you guys think about the governor on pulling forward some of the development projects in your pipeline or like 10-year pipeline rather?
Is the Governor of -- I'm sorry.
Yes, how do you guys think about the governor on pulling forward some of the life science development projects you have over the next 10 years as you work to densify your campus?
Movement and densification where they're offering the opportunity to pretty dramatically expand the densification of our some of the older properties, and if that's what you're referring to, how we feel about it is fantastic because it's a huge opportunity for us. We haven't had pressure to move forward more quickly than what we think makes economic sense. But certainly by creating this opportunity to further densify some of the best located land in South San Francisco, certain parts of Boston and San Diego, obviously, that's a windfall for us. Brinker, anything you'd add on that?
If the conversation is about the governor on doing more, I mean, in the last two months, we did announce 300,000 square feet of additional development with Can Ridge and Nexus and another 500,000 that shovel-ready between Vantage and Director's Place. Those are probably up next. On the densification, it really is probably 2023 is the soonest that, that could start in earnest just because we have existing leases. So there's a timing element that's also a bit outside of our control and driven by tenants and meeting their space. And in the interim that gives us plenty of time to seek entitlements and approvals.
Okay. Yes, I was curious on that -- you made a comment on the leasing. People would potentially have to move out before you could start any of these projects to knock the building down. So -- and then, Scott, I wanted to follow up on something you mentioned in your prepared remarks, you mentioned how all three asset classes you're invested in have kind of a campus cluster model. I understand the life science side, but how does that a cluster campus model help on the MOB side.
Yes. And I'll ask TK to add his thoughts as well. When you look at the performance over time with the 300-plus assets we've owned for, in some cases, two decades or more retention, mark-to-market, all the things that drive NOI and cash flow having a presence on particularly a strong hospital campus like a Medical City Dallas or a Sky Ridge or Centennial, those assets just outperformed. And if you are the only landlord in town, you certainly have greater flexibility around moving tenants around and certainly driving tenant satisfaction as well as rental rates when you're not competing against third party. TK, that?
Yes. I could give an example. For example, on our Centennial Campus in Nashville, we own -- now with the addition of the new building we just announced 100 square feet on that campus, and we're adding another 170,000 in a brand-new development, we have a major tenant in one of our buildings that needed additional space on the campus. They are moving into about 70,000 square feet in that new building, and that's allowed two tenants and several other buildings on the campus to expand into the space that they are vacating. So it's similar to life science and that campus model, you have the ability to move tenants around and let them expand and in some cases, contract, but most parts, they're expanding and moving into other buildings on campus, so similar type model.
The next question will be from Daniel Bernstein of Capital One.
I guess on I just wanted to follow up on inflation costs and development and just better understand how much the land is as a part of development costs? I think it seems to me that the land is you have on the books is kind of a natural hedge? And then maybe would you consider hedging other costs on the commodity side like steel, cement, everything else there?
Right, again, on the first question of land, plus or minus, it's 20% of the development budget. That will vary and it's probably the biggest variable because land prices tend to match up pretty well with what's happening with market rents and construction costs and developers are targeting a specific return, and land tends to move around pretty dramatically based upon where those return parameters are. So it is the biggest variable. It's the line item that we've seen the most fluctuation in over the last year, moving higher for sure. But 20% is probably a reasonable estimate for just a normal course environment?
Okay. And would you consider hedging other costs on the commodity side that are involved in development? I want you to be commodity traders, but just you have a lot of development on the line, so...
Yes. Dan, we're entering into GMP, guaranteed maximum price contracts on all of these projects. So we don't have a ton of exposure. In some cases, we've gone ahead in preordered steel when we were highly likely to proceed like we did at the Nexus project. But otherwise, it's not really our business than hedged commodities. We don't have that much construction activity.
Okay. And then one quick question, if I could -- go ahead, sorry.
I was going to say we actually did look into that several years ago, and it really -- it wasn't feasible. And things like steel, the type of steel we buy really wasn't one that you could hedge against, which is more of the rolled steel is what you can hedge against. So it really wasn't available to us in our construction.
And if I could just one kind of related question there as well, it looked to me like TI per square foot was up. And is that just a function of the length of the leases increasing, looked like it was increasing both in MOBs and life science? Or is there some inflation pushing into the CapEx side as well?
Yes, Dan, I'll speak to life science and ask TK to comment on medical office. But this quarter really was a bit of an outlier that TIs were higher than normal. We did sign some long leases on new leasing, but it was more driven by a couple of spaces that were currently more office that we go ahead and convert to life science So that's more what drove the life science number this quarter. Tom, do you want to comment on medical office?
Sure. Medical office, we typically offer TI on a per square foot per year basis, usually in kind of that 200 to 250 range for renewals and $4 to $5 range for new. This quarter, for renewals, we're a little higher than typical at $2.34. That was really because of three items. One, we had two large renewals that the tenant had a reconfigured space. So they did pay a little more in rent. We gave them a little bit more TI.
And then we had a renewal that was coupled with an expansion. So that drove the price of the TI even though it was all -- it was a combination of renewal, we called it renewal. If you take those two items out, we would have been in line with historical numbers. And the new leasing at $5.08 is pretty much where we've been for the past year or so. We averaged right around $5 in 2020. So we really weren't too far off there.
The next question is from Mike Mueller of JP Morgan.
If you look at the development -- redevelopment pipeline, it's about $1.1 billion, $1.2 billion right now. Do you think that number in process number changes materially, either up or down, say, over the next five years?
Mike, it's one of those questions where we have to see what plays out over the next four to five years. But I would think as the Company continues to grow, probably you see the development increase some, although carefully due to the densification opportunities. I don't think so -- I think that that's probably I'll call it maybe a $75 million year expenditure. We've got a lot of off-campus irreplaceable assets on these campuses, and these have, on average, its 22-, 23-year redevelopment lives, so they get a real IRR in the spend.
And so it's actually quite economical for us to time it when there are proper leases turning. We've coordinated it with the hospitals and have a really successful effort in MOBs. I think you'll see that every year. But yes, I think we'll probably see development grow slowly over time, but we're not going to double down and surprise you with all monsters development program because we're always looking at demand and supply. We like to make sure we know where the funding is coming from advance and that there's plenty of pre-leasing. And so we think we can grow it over time carefully that way.
The next question is from Lukas Hartwich of Green Street.
On the acquisition front, would you consider adding to your CCRC portfolio? Or is that off the table?
I'll start and then Brinker can pick it up. No, it's not off the table at all, Mike -- or excuse me, Lukas, apologize. It's not off the table at all. We have a competitive edge in that business in that it's so hard to start a CCRC business because it requires real scale, real infrastructure, real expertise and you really can't build it by development.
So what that means is that growth in that business really needs to occur through acquisition, and it can be fully stabilized properties or those that have some form of value-add, and there are plenty of not for profits that are mission-driven that might turn up short on funds, but want to retain their mission.
And we're the ideal candidate to be the capital partner with them, and we've got the best operator in the business in LCS to join forces with us on that. So we do see some annual activity that we're working toward that we'd like to see some growth. We're not going to make that an outsized business, probably no bigger on a percentage basis than it is today.
But every time we do a deal, it comes with a yield that is quite strong, stronger than what really would typically be the case other than the barrier to entry to enter that business is just so darn difficult.
And this concludes our question-and-answer session. I would now like to turn the conference back over to Tom Herzog for any closing remarks.
Well, everyone, thank you. First, thank you Klaritch, and thank you for joining us on the call today. We -- as I always appreciate your continued interest in Healthpeak. And do look forward to seeing many, if not all of you, at NAREIT virtually again on this particular NAREIT and some of the other industry events that are coming up in the coming months.
So we'll talk to you all soon. Thank you so much.
Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.