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Good morning, everyone, and welcome to the Healthpeak Properties Inc. Second 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 that, 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.
Welcome to Healthpeak's second quarter 2021 financial results conference call. Today's conference call will contain certain forward-looking statements. Although, we believe 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 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 this call and exhibit to the 8-K refreshed to the SEC yesterday. We have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. This exhibit is also mailed on our website at healthpeak.com.
I'll 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've maintained our strong start to the year. Our life science MOB and CCRC businesses continue to perform well. Our balance sheet is in great shape. Our exit from rental senior housing is substantially complete, and we are having good success redeploying excess sales proceeds, and have built a strong acquisition pipeline.
Let me hit the high points. Operating results across all three of our core businesses were ahead of our expectations. We're down to the final $150 million of rental senior housing sales, which are all under binding contracts. This leaves us with our interest in the sovereign wealth JV, which we will continue to evaluate with our partner. We acquired $425 million of MOBs in Q2, and another $205 million in July, and which combined with our first quarter activity brings our year-to-date MOB acquisitions to $640 million, all of which were done on an off-market basis.
On the development side, life science market dynamics, projected deliveries, and pre-leasing all remain favorable. During the second quarter, we signed a full campus lease for our Callan Ridge densification project. And yesterday, announced Sorrento Gateway is also fully spoken for, bringing our active life science development pipeline to 73% pre-leased or committed.
Earlier this month, we issued $450 million of senior unsecured bonds, due in 2027, in our inaugural green bond offering. Given our operational progress, we raised our FFO adjusted guidance by $0.01 at the midpoint, and same-store guidance by 50 basis points at the midpoint.
Finally in July, we published our tenth annual ESG report. Our ESG program continues to produce meaningful results and received industry and global recognition. Our team at Healthpeak is very pleased with the progress we've made over the last decade and are continuing to pursue and invest in initiatives that improve our overall ESG performance and support our long-term goals. So everything is progressing very well.
With that, I'll turn it over to Scott Brinker.
Thank you, Tom. I'll begin with operating results then provide an update on our development and investment activities. Starting with life science. 2020 saw record-setting biotech capital raising. 2021 is on pace to exceed those records. Capital inflows are fueling scientific breakthroughs and leading to accelerating real estate fundamentals. Demand continues to exceed supply and vacancies are at all-time lows driving market rent growth of 10% or more over the past year.
During the quarter, we signed 233000 feet of renewals at a 22% cash mark-to-market plus 121,000 feet of new leases. We've already exceeded our full year internal leasing budget and 3Q is off to a strong start. In July we signed 90,000 feet of new leases and we currently have a large pipeline under signed letters of intent including 345,000 feet of renewals, 70,000 feet of new leasing and 415,000 feet on new developments.
Same-store NOI growth for the quarter was 7.4% and bringing year-to-date growth to 7.9%. The results were driven by in-place escalators, leasing activity, mark-to-market on renewals and burn off of free rent from the prior year. As discussed on the last call we do expect same-store growth to moderate in the second half of the year due to difficult comps and proactive early terminations that will benefit future years.
Moving to medical office. Same-store NOI growth this quarter was 4.1% driven by leasing activity ad rents strong collections and parking income. Hospital inpatient and outpatient volumes have returned to pre-COVID levels benefiting our unique on-campus portfolio. Leasing activity continues to outperform. We had more than 800,000 feet of commencements in the quarter which is 200,000 feet ahead of plan. Retention is strong at 78% for the trailing 12 months including 93% in June.
Year-to-date we've already completed 90% of our full year internal leasing budget. Note that total portfolio occupancy declined a bit last quarter. This was driven by recently completed development and redevelopment properties entering the portfolio that are still in lease-up, plus a few recent acquisitions lease-up opportunity. This gives us more NOI to capture in the future. Finishing with CCRCs where performance continues to recover. Occupancy was up 90 basis points from March to June. Entry fee cash receipts were $24 million representing the highest level since 2019 and leading indicators are now in line with 2019 levels.
With current occupancy at 80% we have significant upside to capture at least 500 basis points on the low end. Same-store cash NOI growth was negative 23% for the quarter driven by the CARES Act payments received in 2Q '20. Absent these onetime payments same-store growth was positive 23% this quarter.
Turning to our development pipeline. We've executed guaranteed maximum price contracts on all of our active development projects so we have very limited exposure to rising construction costs. Lease-up continues to exceed our underwriting on both rental rate and timing.
In June, we signed a full building lease on our Callan Ridge densification project in San Diego. We expect to deliver the $140 million project in the first half of 2023 with a yield on cost in the low 9s based on the book value of our land. In July, we signed a binding term sheet for the entire 163,000 square foot rental gateway development also in San Diego. We expect to deliver the $117 million project in the first half of 2023 with a yield on cost in the mid-8s based on the book value of our land.
Those yields are far above what's achievable at today's land prices. If we mark our land to market, the yield on cost in the core markets where we play is more in the 6% to 7% range at today's construction costs and rental rates.
Moving to investments. In July, we closed the off-market acquisition of three MOBs that are leased to Atlantic Health. The asset share a campus proximate to the Morristown Medical Center generally regarded as the number one hospital in New Jersey. The stabilized cash cap rate is in the mid-5s. The acquisition also included a land parcel on the same campus that can accommodate up to 80,000 square feet of medical office development. Also in July, we acquired a $50 million medical building in Wichita that's 100% leased to HCA. The price represents a 6.1% initial cash cap rate. This was an off-market acquisition and expands our existing presence in the market. In June, we acquired a $16 million MOB located on the campus of HCA's Westside hospital in Fort Lauderdale. The initial cash cap rate is 5.5%. Again, this was an off-market acquisition and expand our existing presence on this campus.
Looking forward, we have a strategic acquisition and development pipeline across our business segments. Against the backdrop of compressing cap rates, we remain focused on using our relationships to create opportunities not available to the broader market. We also continue to advance densification opportunities across all three of our business segments, which will be a source of growth for the next decade plus on land we already own. Finally, we're balancing acquisitions that are immediately accretive with value-creating development opportunities that naturally come with short-term earnings track. As a result, our acquisition pipeline is a mix of stabilized assets, lease-up properties and covered land plays. The blended initial yield will depend on the relative mix of opportunities that ultimately proceed.
With that, I'll turn it to Pete.
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. For the second quarter, we reported FFO as adjusted of $0.40 per share and blended same-store growth of 1.2%. Two notable same-store items. First, our 13 LCS operated CCRCs entered the quarterly same-store pool in the second quarter and accounted for 12% of the overall pool. Second, as Scott mentioned, our CCRCs were significantly impacted by the onetime CARES Act grant we received in the second quarter of 2020. Adjusting for CARES Act grants pro forma blended second quarter same-store growth across the portfolio was 7.6%. Until the LCS operated CCRCs enter the full year same-store pool in 2022, we believe our quarterly same-store results are more reflective of how our overall portfolio is performing. Last item within financial results. On July 29, our Board declared a dividend of $0.30 per share representing an AFFO payout ratio of approximately 86% for the second quarter.
Turning to our balance sheet. Since our last earnings call, we continue to improve upon our fortress balance sheet. We completed the repayment of $550 million of bonds maturing in 2025. We issued $450 million of five-year green bond at a rate of 1.35%. We completed the repayment of our $250 million term loan maturing in 2024 and we received $246 million of seller financing early repayments.
As a result of our balance sheet activity, we ended the quarter with a net debt to adjusted EBITDA of 4.6 times, providing us with dry powder for acquisitions. We have no significant debt maturities until February 2025 and we have ample open maturity slots in 2028, 2032 and beyond, allowing us to fund near-term transactions with five-year and 10-year debt.
Turning to our guidance. We are increasing our guidance as follows: FFO's adjusted revised from $1.53 to $1.61 per share; two $1.55 to $1.61 per share, an increase of $0.01 at the midpoint. Blended same-store NOI growth, revised from 1.75% to 3.25% to 2.25% to 3.75%, an increase of 50 basis points at the midpoint.
Let me spend a minute level-setting all the major components of our revised guidance. Starting with FFO, as adjusted. We have had a strong start to the year, with $0.80 per share FFO as adjusted, inclusive of $0.01 of non-recurring CARES Act grants. As a result, we have increased the midpoint of guidance by $0.03 per share compared to our original 2021 guidance. While we are trending towards the higher end of our revised guidance range, we feel it is prudent to maintain some conservatism, given the uncertain market conditions.
Turning to acquisitions. We have increased the low end of our acquisition guidance to $800 million, an increase of $100 million to account for our recent closed transaction. We will update our guidance further as transactions firm up and we get a better sense for timing and pricing. As a reminder, we intend to fund acquisitions with debt until we hit our target leverage of 5.5 times.
Turning to CCRC. We are reaffirming the $70 million to $90 million NOI range for the LCS CCRCs. While performance has been strong year-to-date, we have determined it is too early to adjust guidance, given the uncertainty of the COVID Delta variant and increased labor costs.
One last item on CARES Act grants. We have reduced our guidance for CARES Act grants from $9 million to $6 million, which represent all the grants we have received year-to-date. Any additional CARES Act funding we could potentially receive for the balance of the year would be upside to guidance.
With that, operator, let's open the line for Q&A.
Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Nick Yulico with Scotiabank. Please go ahead.
Hey, everyone. So just first question on life science. The re-leasing spreads improved this quarter. I know you also, I guess, raised guidance for that segment. Can you just talk a little bit about what drove that? Is it a mix issue? Are you just pushing rents a lot more? And maybe you can give us a feel for an expectation on how you think life science rents can grow over the next year.
Hey, Nick. Scott, here. Yes, over the last couple of years our mark-to-market on renewals has been plus or minus in the 10% to 20% range. It obviously varies from quarter-to-quarter, depending upon which leases are renewing, just given that there is a spread across the portfolio some are bigger than others.
This quarter we were at 22%. Year-to-date, we're in the high-teens. And that's probably reflective of where the portfolio is overall. If we look across the 10-plus years that the current leases maturity is going to bounce around. But that's our best guess as to our mark-to-market across the whole portfolio.
But with rents growing at 10-plus percent in all three core markets over the past year obviously, that mark-to-market could continue to grow. We do see demand continuing to exceed supply at least in the foreseeable future. So we would expect to have continued success on that metric.
Okay, thanks, Scott. I guess just second question is on acquisitions. I mean, obviously, you guys have done a very good job of setting up the balance sheet to hit your guidance this year, you're getting acquisitions done.
How should we think about the opportunity behind what's in your guidance, meaning, your comfort range on looking at portfolios, if any of those opportunities are coming up, how you would think about maybe as well raising equity above and beyond, your near-term pipeline, as a way to expand the portfolio even further into the segments, that you're interested in right now?
Yeah. Hey Nick its Tom. We've obviously seen a number of different acquisition opportunities through our relationships and scale. And have driven off-market transactions. I think as I've expressed in the past, our goal has been to hit a lot of singles and doubles and an occasional triple.
We do continue to see quite a lot of activity in the floor business. We would expect to continue to grow as long as we're trading at a premium to NAV. We've got plus or minus $700 million to put out that would be funded exclusively with debt to get back to our 5.5 times net debt to EBITDA. And I think the other part of your comment was a question at least probably alluded to M&A opportunities that are out there.
I guess, I would describe that this way. I think you guys know we look at everything that transacts or could transact within our three core businesses. We're always aware of everything that is coming to market or could come to market. But just because we look at something, doesn't mean that we'll actually pursue it. And our primary focus is on floor business and on development.
Okay. I appreciate. Thanks Tom.
You bet. Thanks Nick.
And our next question will come from Juan Sanabria with BMO Capital Markets. Please go ahead.
Hi. Good morning. Just a question on the Life Science acquisition market, obviously very competitive, cap rates are low a tremendous amount of capital chasing that.
Have you guys thought about, looking at a fund strategy or a joint venture to where you could allocate capital to the sector for stabilized kind of lower cap rate type assets?
Hey Juan again, Tom again. Yeah, we've had these conversations frankly through the years. We're believers that, you don't want too many JVs out there, it complicates the organization. And if an investment is a strong investment we prefer typically to own it on balance sheet -- 100% on balance sheet. So the fund aspect to us doesn't light us up all that much.
As to JVs we felt differently in Boston where we needed to build the business get our foot-in. There was a lot of expertise there with King Street, Bulfinch that we tapped into. And we would consider continuing that in Boston. There's an element with JVs and life science within clusters where joint ventures really are disadvantageous because the objective is to allow biotechs to grow and easily move between our properties within clusters. And joint ventures, obviously, create other interest from partners that can stand in the way of smooth transactions in that respect. So that's not something that we're looking to do a lot of on the life science side.
On the MOB side those are relationship driven deals, and we typically prefer -- almost, always prefer to own 100%. Of those deals, the time when it can occur where a joint venture might make sense is if we're doing a development deal with a player that has lots of contacts, they're identifying the business. They use their relationships. We come in with the money. They get some, kind of, a promote on the back end, and we ultimately own the real estate those are attractive to us as well. So that's how we think about JVs and funds are not something that we would consider.
Okay, great. And then just a question on the MOB strategy, and with regards to the internalization of management there. I guess just how do you guys think about, why not manage your own portfolio? I mean, I get it that maybe the cost savings aren't that great if you can just outsource it and you don't have to have the headcount. But at the end of the day wouldn't you want to own the management and the relationship with those customers. And just curious if you've begun to think about that as you now exited seniors housing and you're essentially a pure-play office company split between two asset types. But just curious on your latest thinking on that?
Yeah. One, I'm glad you ask. It's something that we've -- and I'm going to start and then turn it to Tom K who's -- Tom Klaritch who's the real expert. It's something we've looked at a number of times and Tom Klaritch in his many years has done it both ways at least a couple of times. And we have -- in a fairly extensive study we did about 1.5 years ago, we concluded that there really is not much profitability in it, and then you end up managing masses of people within a system that causes a lot of distraction that just doesn't have a lot of profit.
But Tom you've done this for a long time. Maybe you could give a bit of color on how you've looked at it historically along with the analysis you did.
Yeah. Well, Juan as you said, there's really not a lot of profit in it. So that's really not a big factor in how we look at it. We talked about the relationships. We really -- we manage our properties in two levels. You have the property management, companies on the ground that are dealing with things on a day-to-day basis. And then we have an asset management team and a leasing team that oversees the property managers and the leasing agents out in the field. Those guys are out meeting with hospitals meeting with major tenants really weekly. They travel as much as 50% to 60% of the time and they're maintaining the relationships at the hospital level. So we really don't lose that aspect of it.
And then obviously on the system side, we have our VPs, myself are dealing with the major systems. So I don't really see it as a real negative to relationships. We maintain those pretty well. And having that structure just allows us to move in and out of markets really easily.
If you look at the, the two larger acquisitions we did in the past couple of months the Midwest portfolio and Harrison Street, we very easily moved into those markets, took over management and literally overnight we're managing those properties, without having to deal with all of the personnel issues that you would have to if you internalize it. So, I've always just like the third-party approach and we'll continue to manage that way.
Thanks and that's helpful color.
Thanks, Juan.
Our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.
Yeah. Thanks. Tom or Scott, I know the team has done a great job, breaking ground on new life science development projects. But can you talk a little bit about what you could break out on ground next?
Would you be willing to start another project in South San Francisco maybe on the Vantage site, or would you need to have some leasing on Nexus on Grand to be able to do that?
Well, the bottom-line is that we like to see some activity in Nexus on grand. Scott Bohn is working that real hard. We've had progress. And the simple answer is, as we anchor that asset.
But yes, we would consider another development structure based on the demand and supply fundamentals that we're seeing. So I think you'll -- there'll be more to come on that. Brinker, anything you'd like to add?
No. I'd just reiterate that the momentum is very strong, at the remaining space at the shore as well as at Nexus. And keep in mind, Nexus doesn't open for another 18 months or more. So we're pretty pleased with the activity.
To-date and we are shovel-ready on 350,000 feet in the first phase of Vantage, while we seek entitlements on the balance of that site well increased entitlements. So yeah, we really like our market position there. And look forward to building it.
We've also got Scott Bohn, Mike Dorris on the call with us. Scott Bohn, you're working this thing 24/7 for the last -- longer than a decade.
What's your read on just generally demand supply how you feel about where we're at in the status of this? I think people should hear from you directly.
Sure. Thanks Tom. So in the Bay Area, we continue to see record levels of demand. And on the supply side really are looking at everything that's coming between now and call it end of 2022 early 2023 is probably 60% pre-leased.
And the balance of that the 40% that's still not released has a significant amount of activity or LOIs on it. So we feel really good about the supply/demand characteristics in the Bay Area and looking forward.
Yeah. And I would say that Scott Bohn one of the issues he deals with is just to be able to satisfy all the new tenant demand from our huge tenant base in South San Francisco. So we're always looking to make sure that we've got product that's going to be coming to market to meet that demand.
Great. And then can you maybe highlight some of the land sites that you have available in San Diego and/or Boston that you can break ground on?
Or do you need to buy new sites to be able to support new developments? And if that's the case, are there anything that you're working on that you can kind of provide some maybe general views that -- to the market?
There are a lot of things that we're working on that we won't speak to obviously just yet. Maybe wait for the next conference on that. But Scott Brinker, maybe you could just provide some insights into some of the – in addition to the Vantage site, which is obvious, some of the different adjacent land parcels that we've been doing a lot of work on.
Yes, exactly. I mean one example is in the Route 128 submarket in Waltham, a purchase that we did about two years ago. It came with a lot of excess land, either totally unimproved or surface parking that when we made the acquisition, we always had in mind that if demand continues to be strong there could be the opportunity to utilize some of that excess land on the campus for more density. It does require entitlements. So that process is underway at a couple of our sites.
Similar example at our West Cambridge campus, the Discovery Park, where the purchase came with some vacant land and excess FAR. In terms of the purchase price, we like the deal on a standalone basis. The cap rate made a lot of sense. The geography made sense. But this added benefit of having excess land on the campus that could be densified with additional entitlements over time was pretty intriguing to us.
So we do have examples like that in the portfolio and we're in the middle of that entitlement process now. So that's attractive and that land across the three core markets is trading for probably at least $200 per developable foot. And if you're able to build new properties without purchasing land that obviously makes the economics much more accretive.
Great. Thank you.
Thanks, Michael.
And our next question will come from Nick Joseph with Citi. Please go ahead.
Tom, I understand that you guys obviously look at everything and you've been through a long repositioning process and have the company where you want it. So when you do look at any M&A opportunities, what are the most important factors for you? Is it financial, strategic? I'm sure it's a blend of everything. But just can you walk through how you think about those opportunities?
Yes. Nick very fair question. So when one looks at M&A obviously, it's always enticing because you can grow your company very quickly. But one of the things that we have the advantage of is we already have huge scale. And just adding more huge scale just for the sake of getting bigger is not what we're about. We're seeking to grow our earnings on a consistent basis. And singles and doubles and occasional triples allow us to look at each transaction one by one to ensure that we believe that those are individually good decisions.
When you take a whole company down and I've done that a few times in my career, there's always a group of assets that you're really like maybe some that you like a little and maybe some of you really wish you didn't have to deal with. So that is one thing when you do M&A that does come to mind. Oftentimes, it gets very competitive in the process as we all know. And by the time you end up being the winning better if you are, you're almost at that point where you're not sure if you wish you won the deal or didn't.
Unless it's going to be clearly accretive, which in today's environment, MOBs are a hot commodity maybe they would maybe they wouldn't. And so oftentimes, you just be playing for synergies. We do have a tendency to look at the portfolio to see how strategic it is, how does it fit in, how much real estate really doesn't fit our profile that we would need to deal with.
And then there's always a social issues too. I mean there's a whole group of find people on the other side of this that are trying to figure out their path and their career as well. And then how does that fit in? So just a lot of different things to consider with M&A that, it seems so obvious that go out and get as big as you can and grow but it comes with pros and cons. And the scale of an advantage, but you got to recognize too, it's also a disadvantage. It's a lot easier to move the needle, with growth when you've got a smaller company than if you get huge. So I'm not saying that, we're forward or against it. In some cases, it would make sense. Some cases, it wouldn't, but those are the types of things we look at.
Thanks. That's very helpful. And then, if you think about just kind of operating synergies, right, either from an asset level or at a portfolio level. How do you think about kind of the value that you create when you add MOBs to your existing platform?
Well, if we add MOBs to the existing platform, we do have synergies between our businesses and yet – which provides benefits talking corporate back office transactions, CapEx, expertise, leasing, data analysis systems, all these different synergies exist between MOBs and life science. So there's some true benefit in addition to the fact that we just end up with bigger scale and lower cost of capital. As to your question specifically, our platform is fully built-out at this point. So we could easily grow that business without materially increasing our G&A load. So that's an advantage, when you look at the whole equation.
Thank you.
Yep. Thanks. Thanks, Nick.
And our next question will come from Amanda Sweitzer with Baird. Please go ahead.
Hi. Thanks. Good morning. Can you quantify how much those voluntary terminations in Redwood City and San Diego are impacting your second half life science guidance? And then, beyond those terminations, are there any other one-time items like bad debt that are holding back the life science guidance?
Yes. Hey, Amanda, it's Scott here. I'll start and then let Pete cover the other part of your question, but there are actually two proactive terminations one in Redwood City that you mentioned and then one in San Diego in the aggregate, it's about 125,000 feet. So these releases that were due to expire over the next one to four years, tenants that we're not going to renew and we had growth tenants in those local markets looking to expand. So from an economic standpoint, it's a very easy decision, to do those early terminations.
In both cases, we did get termination fees. So economically, we were made all for the balance of the year, until the new leases start. But obviously, we don't count that for cash NOI in terms of same-store and it also impacts occupancy. So the answer to your question is those two proactive terminations alone represent about 140 basis points of occupancy in the portfolio, and those are in same store.
And the impact on cash NOI in the second half of the year in the aggregate it's about 170, 180 basis points. So it's material to the second half of the year. Obviously, if we were managing the portfolio based on same-store NOI, we would not make those decisions, but we're not. We're managing it to make the best economic decisions over time. So it will be a drag in the second half of the year, but a long-term benefit. Unfortunately, we were still able to increase guidance now twice in a pretty material way due to the strength and the balance of the portfolio. Pete, anything you'd add?
Yeah. Amanda, you asked about bad debt. We do model some bad debt, when we set guidance at the beginning of the year in both life sciences and MOBs. Obviously, we haven't seen as much bad debt so far this year as perhaps we've modeled and that's been one of the reasons amongst many as to why we've been able to raise our guidance $0.03. And I will just reiterate, and as I said in the prepared remarks, we are trending towards the higher end of our revised guidance range. But given the uncertain market conditions as well as what's embedded within the high end of our guidance too is our transaction pipeline firming up. So as we factored all of those things into the equation we felt that a $0.01 increase in the midpoint made sense right now.
Yes. That makes sense and is helpful. And then following up on your comments in the prepared remarks about potential development or covered land acquisition opportunities. Can you expand more on, how you are thinking about balancing that potential dilution? And if there are any guardrails around the proportion of acquisition activity that you're willing to have come from development?
I mean we do have internal thresholds that we monitor when we think about how much exposure we have to development both from a capital standpoint but also just the business risk, given that these tend to be two-year time lines between commencement and completion of the buildings given their scale. So there are thresholds. I won't share the specifics on the call, but certainly when we have our committee discussions it's not just a discussion around a particular project but how does it fit into the balance of the portfolio.
Clearly, every time we sign a new lease, like we have quite a few times this year particularly in San Diego, it gives us a little more confidence to commence the next development project. And we definitely feel like, the remaining unleased portion of our development pipeline is showing great momentum as well. So hopefully, we'll have more news to report in terms of new development starts.
But trying to balance that with more accretive near-term acquisitions, that is a goal. We've done almost $650 million of medical office to date. Now they stabilize in the 5% to 6% range but not all of them achieve those yields right away. So there is some lease-up potential within that big acquisition portfolio as well. And it's a balance. We evaluate each individual asset and opportunity on its own but also have to put it in the context of a desire to deliver some near-term earnings growth in addition, to the tremendous longer-term value creation that comes with these big development projects.
Covered land is an interesting play because it allows you to generate some level of earnings. And given our current cost of capital it might be modestly dilutive but certainly not as dilutive as it would be to buy vacant land and then go through an entitlement process. So, we try to balance all of those different metrics as we deploy capital. Pete, anything you'd add?
Yes. I think Scott, just the thing I would point out from just a numbers perspective is for the acquisitions we've announced to date, if you go into our earnings releases we provide a lot of different cap rates in there. And the blended yield is right around 5%. On the remaining pipeline, the yields can range anywhere from 3% to high single digits depending upon the type of assets we're buying from land investments to CCRC. So we're not giving specifics on the remaining pipeline but I just wanted to at least put some guardrails out there as to what it could be.
That’s helpful. .Appreciate your time
Thanks, Amanda.
Our next question will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.
Thanks. Maybe Pete, first, I'll start with you. I'm just coming back to the guide, because the low end, I'm trying to understand how you can even get to the low end at this stage of the game. You upped the contribution from the CARES Act grants is lower interest expense coming through combined, I think, those are north of $0.01 sequentially. How do we get to the low end?
Yes. I mean, Jordan as I said, I repeat again, we are trending towards the higher end of the range there. There are a lot of different moving pieces, and I think I'll just point out, a few of them. I also encourage you to take a look at 41 and 42 the pages within the supplemental, since we give a lot of detailed information on what builds up for the low and the high end. But $0.01 raise for this quarter comes from a bunch of different items, right? One we did increase life sciences and MOB same-store 75 and 25 basis points respectively. So those businesses are doing great.
We lowered the interest expense a bit given the success of that green bond deal. And then we moderately increased our acquisition guidance. So what would be the two areas where we could see some risk today, I'd say, the first would be on CCRC. And if you look at where we are year-to-date, we're at $40 million for the LCS CCRCs that annualized is right to the midpoint, it's $70 million to $90 million. So there's probably $0.02 there from the midpoint down to the lower end.
And then I would also point you to acquisition guidance. We've got $800 million of unidentified at this point built in. So the two items of risk would be firming up that acquisition pipeline and the timing of that as well as the yields and then on the CCRCs again, we're trending well and that's something I want to reiterate. But I think at this point we felt like a $0.01 increase is what made sense, and we'll continue to reevaluate as the pipeline firms up and as the year progresses.
Okay. That's fair. And then Tom coming to you on sort of just strategy again. I mean, you guys have done a full revamp and reassessment through the pandemic now out of all the shop. But I'm kind of curious heavy MOB investments year-to-date. Obviously, you've got the life science development pipeline investments that have been very successful as well. But as you think about sort of growth going forward and sort of weigh, let's say, you have $100 of capital to invest, how do you see yourself looking to deploy that based on the growth profile of these two different businesses?
Jordan, I think it's a mix. There could be some element that's opportunistic as to what actually arises. We're constantly working on our land bank densification opportunities within life science. And within the clusters that we built in the built-in natural demand that comes from a tenant base based on demand supply characteristics, the continued boom in biotech and the growth of those companies, we do believe that there's going to be substantial opportunity there for the foreseeable future call that at least the next two to three years. So we feel that we'll have strong growth in that business.
In the MOB side, it comes down substantially to relationships for the types of MOB assets that we want to add either on-campus or strongly affiliated off-campus. Those relationships are critical, because you have to have an invitation from the health system or the hospital.
And so, we have people that are working those relationships continuously. We've had good success with that. We've got people that have been in the business for decades. Tom Klaritch just got about three decades in this business. I think he knows just about everybody out there, Justin Hill, others.
And with that we think we'll get more than our fair share. So some of that can be through development in the MOB side, as with our HCA development program and others that we're working on with some health systems, as well as being able to go out and compete with our scale and our cost of capital at times when assets come to market that fit our investment profile.
So it's certainly competitive out there. There's no question about that, but we're very well positioned to get more than our fair share. And then, occasionally, there will be a CCRC that pops up or two or three that there could be not-for-profit that, based on their capitalization, or it could be a for-profit, that would like to connect in with a well-capitalized entity and we're the natural player to go to. And those types of transactions are going to yield 8%, 9% even 10% FFO yields when we identify those.
So, yes, I think we've got opportunities in about three different fronts, both from an acquisition and from a development perspective. And the same thing applies in CCRCs. We've got a lot of, what we’ll just call, adjacent developable land to expand on these huge parcels.
We've got over 150 acres of land connected with 15 different mega campuses and infill locations that are irreplaceable. So we've been -- we're going to move forward on a couple of those developments as well, where we've got waiting lists in our independent living units and those are going to be profitable for us too. So those are probably, Jordan, the plays that we're looking to make.
And last one, maybe for Brinker. Just on San Diego. What else is available THAT you've had a lot of success here recently? Is there anything else available in terms of to scale up or to build anything new?
Right. Yes, three projects commenced in the last year all 100% pre-leased before -- opening in some cases, before even starting construction. So that does take up the vacant land that we had available. And we do have some longer-term or intermediate-term densification opportunities, it's a great submarket, but that is a market that the team is hard at work trying to find additional opportunity to grow, given our tenant base continues to look for space. The footprint that we have in Sorrento Mesa and Torrey Pines is outstanding. And we'd like to do more. Mike, anything you'd add?
No, I think you hit it, Scott. We've got some embedded potential densification opportunities on our own assets that we are working on, but we are certainly scouring the market for more opportunities to provide us an ability to build more.
But I'd like to add Mike. You're not starting from a standing stop either. You're in the middle of a number of deals within your acquisition pipeline that could certainly create opportunities to keep us busy and have had great progress on that. So I don't want to make it sound like we're not well underway on identifying those opportunities and I think we'll have some success. Mike, anything you'd add on that?
No. That's exactly right.
Okay.
Thanks, Scott
Thanks, Jordan.
And our next question will come from Steven Valiquette with Barclays. Please go ahead.
All right. Great. Thanks. Hello, everyone. So I just wanted to circle back quickly on the MOB study that you presented in greater detail back at REIT week back in June that you spent so much time conducting it. The headline results showed, obviously, the non-campus MOBs performed better than off-campus unaffiliated properties.
I guess, I was curious to hear more about how rigidly this may shape your strategy more near term in particular. Could this prompt some additional near-term divestitures as you look to upgrade the MOB portfolio, or is this just more about what you will focus on going forward just from an acquisition and/or a development perspective?
Yes. Steve, I like the question. Just to update people or refresh memories, we had done a 10-year study a very extensive study. It took us, I forget now is like about a quarter to complete it across our entire portfolio to look at every asset that as to what the outcome had been within our portfolio on on-campus versus off-campus affiliated versus off-campus unaffiliated.
And just based on our knowledge and intuition as to what our portfolio has done we had a pretty good sense for what the answer would be. But the NOI less CapEx returns we wanted to get to a total cash flow return. We ended up across our entire portfolio at a plus 2.3% growth for on-campus.
For off-campus, affiliated it was a positive 1.4%. And for off-campus unaffiliated it was a minus 1.7%. And based on our sample size which was pretty extensive far fewer on the off-campus unaffiliated so I recognize some others could have different outcomes.
But that has dictated our approach from the very beginning of MedCap before we acquired MedCap and for the couple of decades since that we've always had a view that on-campus would perform better in off-campus affiliated would also perform quite well due to the fact that there are specialists, the stickiness of the nature of those tenants and the difficulty in adding new supply.
And in the off-campus unaffiliated especially the single tenant lease -- triple net lease exposure where a property can do great during the lease period and then it can end up empty or you're at the mercy of the one tenant.
So how does that affect us going forward? It does not change our fundamental view on the value of on-campus and off-campus affiliated that we will lean in that direction. Off-campus unaffiliated would be very rare you'll see us seeking those types of assets. But I'm going to turn it to Tom and to Brinker to see if – Klaritch, especially, why don't you jump in first. What additional color might you have on that because this was a pretty big topic for us?
Sure. And the -- you asked if we were just looking at this moving forward or looking at our existing portfolio. If you look at the non-system-affiliated MOBs the off-campus ones we have today we only have 13 properties. Two of those are actually in held for sale so they'll be going away and one has a purchase option that likely would be exercised. So we'd be down to just under 3% maybe in the 2% range at that point.
The rest of the buildings are actually performing pretty well. So in the near-term, I don't see divesting of them we'll probably just continue to operate them. But certainly as Tom said moving forward, we would not targeting off-campus of affiliated in acquisitions. I don't know Scott if you have anything else to add.
Yes, I would just quickly add that the Atlantic Health portfolio was technically off-campus but highly affiliated. It's less than a mile from their flagship hospital and they just signed an 11-year lease on all three buildings showing their dedication to that campus. So, assets like that with the right system and affiliated with the right hospital we think can be tremendous long-term investments. So, we'll continue to look for those as well.
I want to add also that you can certainly make money in off-campus assets affiliated or even unaffiliated with the right assets. So there may be some of our peers that have a different point of view on this. And based how they've positioned their portfolio they feel very good about a strategy that differs from ours. But we've also been influenced by the dramatic increase in urgent care and telemedicine which for the obvious reasons has continued to expand as a way to contain increased healthcare costs. But I don't want to make it seem like our study and our point of view indicates that we couldn't have peers that do well with other strategies but that -- this is our point of view.
Okay. The real quick follow-up on this. It's just that at REIT week you also highlighted you have the highest percentage of on-campus assets in the industry at 84%. And I guess just notwithstanding a prior question on the internal versus external management of the mad portfolio and everything you just talked about a second ago rather any other ways to help peak may be differentiated in its MOB strategy versus other health care REITs focus on this profit type that is just worth reiterating just given our discussion around this. If you covered everything that's fine but just throw it out there anything else pops in your mind.
Go ahead Tom.
Yes. I mean you hit two of the big differentiators. I'd say the other one is we've always been highly tenant satisfaction focus. And we actually -- our scores and tenant satisfaction have been well above the MOB index for years and continue to grow. So that's another area I think we're differentiated very focused on the tenant and affiliated hospital relationships.
Scott, you got anything to add?
No, I think you've covered it.
Great. Thanks.
Thank you.
Our next question will come from Joshua Dennerlein with Bank of America. Please go ahead.
Yes, hi everyone. Just wanted to follow up on one of Scott's comments about covered land plays. Just curious where you're seeing the best opportunities? Is it more on the MOB side or life science? And then how would you kind of utilize this to fit into your broader strategy?
Yes, the covered land plays are definitely in the Life Science business. With medical office those are highly targeted with specific hospitals or development partners and we're generally, not closing on those land acquisitions or in some cases signing the ground lease until the project is almost ready to start. So, it's a very different profile. Medical office development versus life science it's a much shorter development time line. There's generally significant pre-leasing and always strong sponsorship from the hospital.
So really no recovered land plays there. But in life science, we do have a big presence in particular submarkets in all three of the core markets that we find to be compelling and we want to continue to maintain if not grow our market share. So those tend to be the focus of the covered land plays, Josh.
Okay. And then just one quick one on the medical office portfolio. Where is parking revenue today? Is it kind of back to normal, or is it still going to trend higher across the second half of the year?
Hey, Josh, this is Tom Klaritch. It actually has popped back pretty significantly. It's not up to pre-COVID levels at this point. But if you look at the results for the second quarter 4.1% is obviously well ahead of where our typical average of 2% to 3% is. About 100 basis points of that was from improvement in parking revenue. So it's a big factor. And we continue to see it grow, but there's still certain restrictions on visitors. Obviously with the increase in cases, we probably would see more restrictions on visitors so we'll continue to watch that. But so far year-to-date, it's done very well.
Okay. Thanks, Tom. Appreciate the color.
Thanks, Josh.
And our next question will come from Vikram Malhotra with Morgan Stanley. Please go ahead.
Thanks for taking the questions. I know the MOB side has been beaten to death, but just two quick ones. First of all, I know you had started a CapEx program for redevelopment, maybe 1.5 years two years ago. Can you give us an update where you are with that transformation for the portfolio? And second, maybe just your high-level thoughts on how you think inflation impacts your MOB portfolio?
I'll start and then I'll turn it to Klaritch. As far as CapEx redevelopment, Vikram, when you think in terms of an MOB, it has a much longer life to the improvements that are added through redev. So when we do a redev on an MOB, those improvements last anywhere from somewhere in the low-20s as far as the years. And if you went out and toured with us before and after property on an on-campus where we're trying to maintain a high-quality product, it would become very, very apparent the difference that it makes in an MOB and how you can then capture rents and have a happy hospital partner and it produces real IRR. So we've been projecting to spend about $75 million a year on that and we have been somewhere in that range maybe a little less at times it could be a little bit more, but it's in that range. We've been quite happy with that and that does produce real long-term returns in IRR.
As far as inflation on MOBs, that's kind of a broad question. I always think in terms of inflation with REITs in general. So why don't I just take a moment on that and I'm not going to get too deep into it because I think everyone on this call has a pretty informed view on this topic maybe not everybody has the same opinion, but a pretty informed view, but I'll give you my take which is only my take. There are simply elements of any REIT that are both bond like and stock like. Inflation drives higher rental rates over time, but it also puts pressure on REITs in the short term as they act a little bit bond like as well. So the interaction of that almost becomes impossible to break apart into its components.
I thought Sakwa [ph] had a pretty nice study on this by the way whenever it was three, six months ago where he lined out different sectors and what the historical impact of inflation has been. I studied it. I talked to Steve about it. I thought it was quite interesting. But it's -- I think it's again well known that bond like stock like and then how do you how do you figure out what the interaction of those two is. It's kind of impossible. But I do come back to real estate produces a yield. It produces a hedge against inflation and it's based on tangible assets.
And when you think about people that are of retirement age they want to yield on their money they want inflation hedge and they want to be intangible assets for the obvious reasons. Real estate creates an outstanding opportunity and will continue to. So, I think inflation just becomes noise in the process. But over time I think that that balances out and it will be a very strong investment over time.
And our next question will come from Mike Mueller with JPMorgan. Please go ahead.
Hi. Just had a quick question here. I know the life science developments can be big-ticket projects. But when you look at the new development pipeline, it's roughly 90/10 split between dollars allocated to life science versus MOBs. And I'm curious over the next years do you see that balancing out a little bit more with MOBs or staying just heavily skewed towards life science?
Mike again it's Tom. Right now it's heavily skewed toward life science. With the cluster concept and the inability to typically buy quality product at a reasonable price while you have a growing tenant base, fortunately, we've got some form of land bank and densification and life science development has produced a tremendous return for us. We're still modeling even today. 150 to 200 basis points amazingly exceed that even at current land costs. So, it's a natural way to invest in life science.
I would say it's a natural way to invest in MOBs too with relationship with health systems, but that -- there's a lot of work involved in capturing those relationships identifying the opportunities and moving them forward. We've been successful in that front too.
And if you look at our pipeline we do have a pretty good sized pipeline right now of MOB development opportunities and I think that will continue to grow. I think life science though the development side will continue to be a larger opportunity. And probably on the acquisition side we may see more activity that makes sense for us across the MOB portfolio. Scott Brinker what would you add to that or modify?
I don't know how much to add. I think medical office could go higher. We are prioritizing that as an opportunity. Things slowed down during COVID but we're starting to see some real activity and it is an area we'd like to continue to grow. But just by the sheer scale and cost per foot of life science plus the dramatic growth in that industry, I think it's fair to say that there's a larger opportunity in that market. So, I would expect it might not be 90/10 going forward, but it would certainly be more than 50%.
Got it. Okay. Thank you.
Thanks Mike.
And our next question will come from Lukas Hartwich with Green Street. Please go ahead.
Thanks. So, life science values keep moving up. And I'm just curious how much higher they'd have to go before you consider being a seller?
That's a good question. I'll tell you what Lucas one of the things about being a seller is the money then has to go somewhere. I recognize, there's always opportunities for special dividends and whatnot, but that's not really the play that we would typically be looking at. The fact is that if life science is continuing to have a decline in and cap rates is because the growth opportunity in rents and the supply demand dynamic continues to be strong.
I've always said we're in the real estate business to be in the real estate business. And we want to diversify between the two businesses and even the third with CCRCs to smooth out the inevitable cyclical nature of each of the three businesses. So, at the same time, I recognize there can be times when there's a price that somebody is willing to pay that you absolutely cannot refuse and that always comes into play.
But when I look at life science in the, let's just call it for quality product in the low four cap rates, it's because there is such an enormous demand for this quality product within these clusters. And obviously that means our NAV has gone up some and that's a good thing. At the same time, then it becomes harder to grow.
So, thank goodness we've got a good-sized densification pipeline to grow high-quality product to meet our tenant demand. So I don't know this could -- that's probably the topic of a 15-minute conversation, because it's a great question. But if I was just to give you a quick answer that's how I might respond. Brinker, you've thought about this a lot too you and I've talked about it, what would you add?
Yes. I mean I think there's the initial cap rate. And then, there's considerations around NOI growth and how much CapEx is necessary to produce an IRR, and how does that compare to other real estate sectors. And when you do the math, on life science although on an absolute basis those cap rates seem awfully low. On a relative basis, to other real estate sectors or even the broader bond and equity markets, it still feels like there's a pretty compelling total return. So, you can't just focus on initial cap rate. We still think there's a lot of growth to capture in that business and long-term returns that will make a lot of sense.
I'd add the same thing is true of MOBs. For a number of years, it wasn't the darling child of different asset classes. I remember some years back, Green Street wrote a piece that said MOB cap rates are just much too high. It doesn't make any sense relative to office and other sectors.
One can look at the same thing today in MOB and life science against some of the other really hot sectors and make the argument that these two businesses, especially with the high barrier to entry for on-campus MOBs and life science in the three big markets and the clusters, are of very high quality irreplaceable and probably still have some value to capture to equate to cap rates in some other sectors.
So that's an arguable item that again the investors and analysts on the screen are experts on that, and that's up for you guys to decide, but we still feel quite comfortable that the value is there in those assets and there's further upside.
Great. Appreciate it. And then, can you provide an update on the shadow supply pipeline for life science in your markets? Is that mostly noise still, or are you seeing traction there?
I'm not sure, I'd call it noise, but I'll give you the best estimate that we have. I might ask Mike and Scott to comment too. But if you just go one market at a time, in Boston there's about six million square feet underway that will deliver through year-end 2022. It's about 80-plus percent pre-leased at least for the counts that are delivering in 2021. We're getting great traction on our 101 Cambridge Park Drive development that delivers in late '22. So we feel really good about the near-term outlook.
Now, there is a shadow pipeline of another six million square feet. The timing of that is obviously less certain. Some projects may get pushed back, some may get delayed indefinitely. And some of them may go tech because, in the three core markets, that market for tech tenants continues to be really strong. We've seen that happen in the past. It will probably continue to be the case that some of this lab product will end up being occupied by tech tenants. And all these numbers that we quote do include conversions even though in many cases those aren't as competitive, we certainly don't ignore them. So that's the Boston outlook.
In the Bay Area, today, there's about two million square feet underway. Virtually, everything that's delivering through year-end 2021 is pre-leased. And we're getting great traction on some of our deliveries in 2022, really into 2023. So we feel really good about the outlook over the next two to three years in the Bay Area. There is a shadow pipeline there as well naturally. By our estimate, it's about three million square feet, subject to all the same comments I made about Boston.
And then San Diego, there's about two million square feet underway. It's about 50% preleased. Most importantly, our three projects, totaling almost 600,000 feet are 100% pre-leased. So that's the most relevant from our standpoint. And again, there is a shadow pipeline of about two million square feet in San Diego that we're keeping a very close eye on. That applies to all three markets, right? There's a lot of demand, but certainly there is the potential for increased supply. It's something that we continue to monitor on a regular and very, very detailed basis.
Thanks so much.
Thanks, Lukas.
And this will conclude our question-and-answer session. I'd like to turn the conference back over to Tom Herzog for any closing remarks.
Well, thank you operator, and thanks to all of you for joining us today. We appreciate your continued interest in Healthpeak and look forward to seeing many of you at the upcoming industry events. We'll talk to you all soon. Bye-bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.