Healthpeak Properties Inc

F:HC5

Earnings Call Analysis

Solid Earnings and Optimistic Outlook

In a robust fourth quarter, the company enhanced its FFO per share to $0.46 and achieved a 4.8% growth in same-store NOI. This catalyzed a 5.5% increase in AFFO per share for the full fiscal year, lowering the dividend payout ratio beneath 80%. A healthy balance sheet was maintained with a 5.2x net debt to EBITDA ratio. The upcoming merger with Physicians Realty Trust, set to close on March 1, is poised to expand operational capabilities and is projected to add several cents to earnings per share in 2024. Looking ahead, 2024 guidance includes FFO per share between $1.73 to $1.79 and AFFO per share between $1.50 to $1.56, encapsulating benefits from the merger. Same-store growth is expected to range from 2.25% to 3.75%, with outpatient medical growth predicted to be 2.5% to 3.5%, lab growth at 1.5% to 3%, and CCRC growth estimated at 4% to 8%.

2024 Outlook and Capital Allocation

The company provided an initial outlook for 2024, projecting FFO (Funds From Operations) as adjusted to be in the range of $1.73 to $1.79 per share, with benefits from the merger accounting for around $0.02 to $0.03 of this figure. AFFO (Adjusted Funds From Operations) is expected to range from $1.50 to $1.56 per share, including around $0.05 in merger-related benefits. Same-store growth is anticipated at a positive 2.25% to 3.75%. The company has also upsized a term loan to $750 million with a fixed interest rate of 4.5%, closed a profitable joint venture, and sees a weighted average share count at approximately 690 million, assuming no further equity issuances.

Expense Management and Interest Costs

General & Administrative (G&A) expenses are forecast to rise marginally to $95-105 million despite inflation and a larger asset base, revealing efficient expense management. However, interest expense is predicted to increase by $35 million due to rising interest rates, and a $0.03 negative impact is expected from the mark-to-market on assumed DOC debt.

Operational Headwinds and Redevelopment Impacts

The company faces headwinds, including a modest decline in lab occupancy and timing of free rent fluctuations. Additionally, they are undergoing significant redevelopment at two major campuses, which is anticipated to lead to a temporary decline in NOI of $40 million for 2024. However, these positions offer redevelopment and retenanting opportunities in the future.

Development, Redevelopment, and Capital Expenditures

Executives elaborated on their capital spending plans in the Q&A session of the call. The company has a targeted range of $700 million to $800 million for development and redevelopment, including the completion of significant projects like the Vantage and HCA developments. A large portion of the capital expenditure will be directed towards redevelopment initiatives at their Point Grand campus and additional properties.

CCRC Portfolio Performance and GAAP Impact

The executives discussed the Continuing Care Retirement Community (CCRC) portfolio, noting that occupancy growth and rental rate increases continue, albeit at a moderate pace. They mentioned that GAAP accounting methods do not fully reflect the actual cash NOI from the portfolio, as they amortize nonrefundable entry fees, which represent the majority of NOI.

Guidance on Labs and Medical Office Buildings

In the Q&A portion, management addressed the performance of lab spaces and medical office buildings. They indicated that they expect mark-to-market performance to be modest in the near term, particularly for lab spaces, and anticipate gains in lab space agreement renewals to escalate. Furthermore, executives feel confident about capturing substantial synergies from the DOC merger, with the majority expected to materialize immediately post-closing.

Capital Recycling and Stock Buyback

When questioned about potential stock buybacks given the dissatisfaction with the current stock price, the executive team expressed caution. They mentioned considering capital recycling as a safer approach to leveraging, with stock buybacks only on the table if executed through capital recycling rather than additional leverage. Moreover, the company has ongoing discussions for potential disposition volumes, contingent on market conditions.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Andrew Johns, Senior Vice President, Investor Relations. Please go ahead.

[Andrew Johns, executive]

Welcome to Healthpeak's Fourth Quarter 2023 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, forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from expectations. 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 in an exhibit to the 8-K we furnished to the SEC yesterday, we have reconciled all non-GAAP financial measures to most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com. I'll now turn the call over to our President, Chief Executive Officer, Scott Brinker.

[Scott Brinker, executive]

Thanks, Andrew. Good morning, and welcome to Healthpeak's Fourth Quarter Earnings Call.

Joining me today for prepared remarks is Pete Scott, our CFO. Joining for Q&A is John Thomas, the CEO of Physicians Realty Trust and our senior team.

I want to start by thanking our entire team for their contributions in 2023. Public market volatility, notwithstanding, your collaboration and winning mindset allowed us to produce record leasing volumes in 2 of our 3 business segments and to exceed our initial same-store and earnings guidance by 130 basis points and $0.05 per share, respectively.

Last evening, we reported a strong fourth quarter, both operationally and financially. For the fiscal year, we grew same-store NOI by 4.8% and AFFO per share by 5.5%, driving our dividend payout ratio below 80%. The balance sheet remains in great shape with 5.2x net debt to EBITDA at year-end. We expect to close the strategic combination with Physicians Realty Trust on March 1. Since the announcement in late October, the 2 teams have been working side by side on culture, best practices, tenant relationships, technology and every other area that will determine the success of the merger.

We have the highest level of confidence that this combination will in fact augment our platform capabilities, relationships, balance sheet and earnings. Just last week, we internalized property management in 3 markets with up to 6 additional markets expected to go in-house by midyear. We've had near 100% success, bringing the existing third-party staff onto our team. Those employees, on average, have worked in these buildings for 7 years, minimizing execution risk.

As for synergies, we're confident we'll achieve the targets we outlined in late October, and they are contributing several cents per share to our earnings in 2024. Pete will expand upon the synergies and outlook in a few minutes. I want to share some thoughts on the operating environment for the 2 largest segments, starting with Outpatient Medical, where the sector is benefiting from demand exceeding supply. We have 2 decades of operating history in the sector and in 2023, we were at or near all-time highs for leasing volume, retention, renewal spreads and same-store growth.

Looking forward to 2024, our same-store outlook includes the DOC portfolio and is 75 basis points above our 5-year history for initial guidance. We expect to benefit from sector fundamentals that have never been stronger, high-quality assets and operations and internalization. Most important, we believe we're combining the 2 best outpatient platforms in the country to create an even bigger and better company to drive internal and external growth for the next decade plus.

Today, more than 65% of the tenants in the combined portfolio are health systems. When they make leasing decisions, it's often driven by relationships and no one is better positioned than the combined company. It's a very different leasing dynamic than other real estate sectors who deal with tens of thousands of very small tenants. Relationships are absolutely critical in our sector and the senior team of the combined company has more than 200 years of experience in the sector, creating an unrivaled relationship network. Our next generation coming behind them is learning from the best and bringing energy to continue innovating as the sector evolves.

Let me turn to our lab business. The fundamental drivers of long-term growth are solidly intact with both drug approvals and new drug applications at or near all-time highs. That means R&D funding is paying dividends, creating a virtuous cycle. Big Pharma is ramping up partnership deals and M&A to replace looming patent expirations and companies with good data have ready access to capital.

At the same time, venture capital deployment and the IPO market remains soft and boards are deferring leasing decisions when possible. Those dynamics will eventually turn in our favor, and we'll be well positioned to capitalize. We can also comfortably underwrite a massive reduction in new deliveries starting in 2025. Fortunately, even during the market exuberance for life science, we stuck to our strategy. As a result, we're highly concentrated in 5 of the best submarkets in the country where we have significant scale and deep relationships to capture leasing demand.

Moreover, 85% of our rent is from campuses with 400,000 feet or more, which allows us to offer a wide range of price points and space plans and to accommodate expansions, all of which are important to tenants. Year-to-date, we signed 58,000 feet of leases with another 115,000 feet under LOI plus active discussions across our portfolio, so an encouraging start to the year. Cyclical slowdowns create opportunity on the other side, and we're preparing accordingly. In the past few months, we received approvals or entitlements that expand our land bank to more than 4 million square feet in 2 of the most important life science submarkets in the country.

We're well positioned when new development begins to pencil. On a related point, we were pleased to close on the sale of a 65% interest at our Callan Ridge development for a 5.3% cap rate with rents essentially at market on a long-term lease. The sale was driven by favorable pricing, not a desire to reduce our lab exposure. We're actively evaluating capital recycling opportunities across the combined $20-plus billion portfolio, including outright sales and JV recaps.

Any such proceeds would likely be used to fund a growing pipeline of relationship-driven opportunities across our core segments that we could always consider stock buybacks or debt repayment depending on relative returns. I'll close by saying that the macro backdrop has been casting a shadow over the underlying strength of the company. We can't control that shadow but we're more confident than ever about what lies behind it, in particular, platform, portfolio and balance sheet. I'll turn it to Pete.

[Peter Scott, executive]

Thanks, Scott. Starting with our financial results. We finished the year on a strong note. For the fourth quarter, we reported FFO as adjusted of $0.46 per share and total portfolio same-store growth of 3.6%. For the full year, we reported FFO as adjusted of $1.78 per share and total portfolio same-store growth of 4.8%. And our balance sheet is in great shape as we finished the year with 5.2x net debt to EBITDA. Let me provide a little more color on segment performance. In lab, same-store growth for the quarter was 2.7%, bringing our full year growth to 3.7%, in line with the midpoint of our guidance range.

During the year, we signed 985,000 square feet of leases with positive cash re-leasing spreads on renewals of 23%. The majority of these lease transactions were signed with existing relationships, and we were also successful in capturing incremental demand from new tenants. Occupancy in our operating portfolio ended the year at 97%.

Turning to Outpatient Medical. We had a strong finish to the year with 4.3% same-store growth, bringing full year growth to 3.4%, in line with the midpoint of our guidance range. Occupancy ended the year at 91% and our tenant retention was approximately 80%. Both metrics are reflective of our leading portfolio and platform. Finishing with CCRCs, same-store growth for the quarter increased 5%, bringing full year growth to 15.6%. 2023 was a record year of entrance fee sales and cash collection. These cash collections exceeded the amortized amount included in both FFO and AFFO by $40 million.

Two quick items on our financial results before shifting gears to our 2024 outlook. For the fourth quarter, our Board declared a dividend of $0.30 per share. The dividend payment is forecast to remain the same post closing of the merger, which should provide us with incremental retained earnings in 2024. You probably also noticed that DOC filed an 8-K earlier this week with preliminary fourth quarter and full year 2023 results. They expect to complete their 10-K and other financial reporting on their normal time line in the next few weeks.

Turning now to our combined outlook for 2024. Given our high degree of confidence the merger will close, coupled with the heavy lifting done by our respective teams to successfully integrate our forecasting, we are in a position to provide investors with an initial view of our combined 2024 outlook. However, critical items, including finalizing the GAAP merger adjustments will not occur until after the closing date. So we will make any necessary updates to our outlook and finalize guidance most likely in conjunction with our first quarter earnings.

With all that said, our initial outlook for 2024 is as follows: FFO as adjusted ranging from $1.73 to $1.79 per share, which includes merger-related benefits of approximately $0.02 to $0.03. AFFO ranging from $1.50 to $1.56 per share which includes merger-related benefits of approximately $0.05. Total same-store growth ranging from positive 2.25% to positive 3.75%. Let me touch on some of the major items that underlie our outlook.

First, based on the March 1 closing date, our outlook is for 2 months stand-alone Healthpeak and 10 months combined Healthpeak and DOC. The result of this is a weighted average share count of approximately 690 million for full year 2024, assuming no additional equity issuances. Second, we have identified sources for all of our capital needs and have no remaining funding requirement in 2024. We upsized our 5-year term loan to $750 million and recently swapped the entire amount to a fixed rate of 4.5%.

Last month, we closed on our well-received Callan Ridge joint venture, generating $130 million of proceeds and eliminating $22 million of future TI spend. We have $250 million of projected retained earnings given our well-covered dividend, and we expect some seller financing debt repayments. These proceeds will be used to fund our development and redevelopment pipeline, repay $210 million of DOC's private placement notes and fund all of our transaction costs. Third, G&A is expected to range from $95 million to $105 million, which compares to stand-alone Peak at approximately $95 million for full year 2023. All in, our G&A is only increasing by approximately $5 million at the midpoint despite inflation and our asset base increasing by $5 billion.

Fourth, our current FFO outlook includes a negative $0.03 mark-to-market on the $1.9 billion of DOC debt that we will assume. Notably, we do not add back this headwind to FFO as adjusted. Fifth, perhaps conservatively, we do not include any benefit from the Graphite Bio termination fee in our FFO as adjusted. Fixed item, the components of same-store growth are as follows: We see outpatient medical ranging from positive 2.5% to positive 3.5%. Fundamentals in outpatient medical continue to improve versus historical norms, including higher tenant retention, increased rent mark-to-market and increased escalators. Our outpatient medical same-store NOI for 2024 is approximately $825 million or 60% of the overall pool. We have included the DOC portfolio in our same-store pool for 2024, given the size and strategic nature of the merger.

Turning to lab. We see same-store growth ranging from positive 1.5% to positive 3%. Lab growth is driven by contractual rent escalators, positive rent mark-to-market and the benefit of increased NOI from internalizing operations in San Francisco and San Diego. Not surprising, we do have some offsets, including a modest decline in occupancy relative to 2023 and timing of free rent, which naturally fluctuates year-to-year and is a headwind, particularly in the first quarter.

Finishing with CCRCs, we continue to see growth in 2024 with a same-store outlook of positive 4% to positive 8%. I thought it would be helpful to finish with a high-level bridge of the major drivers in our outlook. Our outlook includes $40 million of synergies from the merger noting that a portion of these synergies are operational and flowing through NOI. We see approximately $30 million of year-over-year earnings benefit from same-store growth. And we see a positive $15 million benefit from development earnings, largely Vantage and Nexus plus the benefit from the Callan Ridge joint venture. So there are certainly a lot of tangible positive trends. But we are facing some headwinds.

Interest expense is forecast to increase $35 million due to a combination of rising interest rates as well as the aforementioned debt mark-to-market. There is an approximate $10 million earnings roll down due to some onetime security deposits received in our lab business in 2023 that are not forecast in 2024 plus dilution from potential seller financing debt repayment, which, although dilutive does provide capital to recycle into our core businesses. We have $40 million of a temporary decline in NOI at 2 marquee campuses that I wanted to spend a moment on.

First, there is $30 million of year-over-year decline in NOI from the well disclosed Amgen expiration at Oyster Point. The 323,000 of combined square footage across 3 assets is being put into redevelopment as we upgrade these assets to Class A product and multi-tenant buildings. We are rebranding the campus Portside at Oyster Point and substantially upgrading the amenity package and infrastructure in order to integrate the buildings more with [indiscernible] creating a nearly 2 million square foot contiguous mega campus with leading life science tenants.

We have backfilled 101,000 square feet of the expirations already with our client lease, although we don't expect that lease to commence until the third quarter as we complete work to the base building and their suite. Second, after months of uncertainty, we have clarity on the Sorrento Therapeutics situation, although the lease rejections do result in a negative $10 million NOI impact in 2024. We have placed the 168,000 square foot Directors Place assets into redevelopment and are actively touring tenants through the buildings. There is a nice mark-to-market upside opportunity on this campus as we retenant the buildings, but the downtime is a headwind in 2024. In addition to the headwinds discussed already, we have included about $10 million in conservatism in our outlook for various items, including potential further capital recycling activities, proactive lease terminations and bad debt.

In conclusion, while there are lots of puts and takes to our outlook, let me try and sum it up succinctly. Core operations are performing in line to perhaps better than expectation. Lab is not growing at the same rate as the last 10 years. Nothing grows to the sky in perpetuity, but we do like our market positioning and firmly believe we will outperform as sentiment and fundamentals improve.

On the other side of the spectrum, Outpatient Medical is growing at a higher rate than historical averages as demand is outstripping supply, a key thesis in our merger with DOC combined with the improved capabilities and significant synergies. We have managed the balance sheet conservatively but like all REITs, we are not immune to rising rates nor can we avoid the required merger-related debt mark-to-market. And as we have consistently pointed out, we have 2 large marquee campuses undergoing significant repositioning. We have forecast the capital spend for these redevelopments in our 2024 plan, but none of the earnings upside. We are confident in our ability to recoup the lost NOI, but our base case assumption is lease commencements won't start at these projects until 2025 and beyond.

If we can outperform that time line, then we will have further upside to our outlook. With that, let's open it up to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Nick Yulico with Scotiabank.

[Nicholas Yulico, analyst]

I guess first question is just relating to the guidance. I appreciate all the info you gave us on the DOC impact plus some of the other year-over-year items. But is there any way to kind of think about what just legacy Peak FFO or AFFO growth would be year-over-year? Just putting aside sort of all the merger impacts, maybe just on like a percentage basis or pennies impact?

[Peter Scott, executive]

Yes. Nick, it's Pete here. Maybe I'll just start with AFFO. We did provide AFFO this year because of all the GAAP merger-related items, and we don't necessarily want to get mired into discussion on all of those on this call. But if you look at AFFO this year versus where we were last year, our outlook is effectively flat, but that does include the benefit of the synergies.

If you try and back those out, you'd say our AFFO would be down year-over-year. That's actually a correct statement. And if you go back to the merger proxy, the S-4 we put out, you'd actually see that in our forecast as well. And that's really primarily because of the temporary lost NOI at the 2 large campuses I mentioned in the prepared remarks. So if were not for this merger, our AFFO would actually be down year-over-year, but Certainly, with the benefits of this merger, the accretion we've articulated being about $0.05 per share, we're able to keep our AFFO flat year-over-year.

[Nicholas Yulico, analyst]

Okay. That's helpful. I guess second question is just in terms of the lab business, if you can give maybe a little bit more feel for the leasing that you talked about that's in the pipeline right now. Kind of how the -- if any of that relates to San Diego plus how we should think about, I guess, the composition of what leasing would look like going forward from a maybe mark-to-market standpoint because I know that was impacted in the fourth quarter?

[Peter Scott, executive]

Good question, Nick. I'm not surprised that you're asking it. We did disclose that we've signed year-to-date about 175,000 square feet of leases and LOIs. The first week of January is quite slow. So that's probably a pretty good 4-week number. If you annualize that, it's still trending in a positive direction as you compare it to a year ago where leasing was. I'll turn it actually to Scott Bohn to give a little bit more color on the composition of those leases and LOIs.

[Scott Bohn, executive]

Yes. Nick, this is Scott. On those LOIs, we're -- it's a multitude of deals. It's not just one large deal, really across all the markets. As we talked about over the past few quarters, the demand has really trended towards the kind of sub 30,000 square foot range, and that's where the bulk of those deals that are today. We're pretty happy with the economics that we are shaking out on those. When you look at mark-to-market on the portfolio, we were probably in the 20% range last year.

If you look at it today, taking into account where we are probably more in the 5% to 10% range, but that varies greatly given the TI Capital and other aspects of the lease that are in play today. So hard to pin down an exact number because there's so much differentiation in the leases today. But I'd say, it's probably in the 5% to 10% range overall.

[Operator]

Your next question will come from the line of Juan Sanabria with BMO Capital Markets.

[Juan Sanabria, analyst]

Just a question on dispositions. You talked about potential for more assets to come on the market. So just curious, if you could give a little bit more flavor for the types of assets that you may look to sell. Would they be kind of core, long-leased assets, stabilized or maybe more noncore assets. Just kind of curious on what may be being floated out there at this point in time.

[Scott Brinker, executive]

Juan, it's Scott. I mean, obviously, we're not happy with where the stock is trading. There's a pretty big disconnect between what the private market would value our assets at and what the public markets would. So we're certainly looking at all available opportunities to create value. So I would say, it's a pretty wide-ranging menu of things that we're considering. If it's core assets like we did in San Diego a couple of weeks ago, it would be more likely than not kind of a recap where we maintain an ownership stake.

We don't have a whole lot of sort of true noncore assets but we have less core assets that we could consider selling those may come at slightly higher cap rates than the print we had a couple of weeks ago in San Diego. That was obviously an A+ type asset in campus. But we're looking at a number of things. We've been saying that for the last year. We were a net seller of real estate in 2023. From where we sit here today, we'll probably be a net seller in 2024. But we have the ability to be price sensitive. Balance sheet is in great shape, sources and uses are spoken for. So we'd be price sensitive on anything that we do.

[Juan Sanabria, analyst]

Great. And then hoping maybe you could talk to the -- maybe a question for Pete. The cadence of lab same-store growth, you mentioned there could be kind of a temporary drag in the first quarter. I believe you said free rent, I'm not sure. Lots of information, which is great. But just curious if you could talk about the cadence of expected growth for fiscal year '24.

[Peter Scott, executive]

Yes. Sure, Juan. I think from an FFO perspective, I would say that the cadence, there's probably not a huge amount of variability as you look out across the 4 quarters in the year. I will say that some of these larger leases that are commencing in the first quarter for lab, especially some of the ones we've been pretty vocal about like the Voyager deal out in Boston that we did that commenced at the beginning of this month or January, I should say, beginning of the year as well as the RevMed deal. I mean, they just came with 3 months of free rent, and we have the MGM deal that we just commenced as they took over one of the Amgen buildings that expired.

So there's just a -- I'm not going to say there's a significant amount of additional free rent beyond what's market, but all of those leases are pretty sizable and commenced earlier this year. So it's just going to have a little bit of an impact on the first and second quarter same-store numbers relative to the overall guide. And that's really why I wanted to point that out. Some years free rent works in your favor, some years it doesn't. A little bit of a headwind this year in our number. But again, these are long-term leases with really high-quality tenants. So I just want to point out that same-store for lab will be a little bit weaker first half of the year versus second half.

[Operator]

Your next question comes from the line of Michael Griffin with Citi.

[Michael Griffin, analyst]

I wanted to ask on the development pipeline. I noticed some of those projects were pushed out a couple of quarters relative to last quarter. Curious if you could give any color on why that's the case? Are there any worries about demand for those projects?

[Peter Scott, executive]

Yes. Greg, it's Pete. I can certainly start with that. And I'll hit on the biggest ones. Vantage, we actually delivered a portion of that late last year. And then the initial occupancy is for what's remaining, and we do have another lease with Astellas that's expected to start later this year. So that's really the reason why that got pushed back a little bit. It's because we delivered a portion of that.

On Gateway, we have certainly talked about that at length over the last 6 to 9 months with the Sorrento situation. I mean, realistically, the way we look at it, even if we signed a lease today, between space planning and actually doing some of the work to do the specific TI build-out, I mean you're talking about 6 to 9 months before a lease can even commence. We don't have a lease signed at this point in time. So as a result, we did push that out a little bit. We're certainly touring tenants through the building and the facility. It's a really great looking, high-quality campus, A+ right there overlooking the 805. But as we look out, based upon how long it takes leases to get signed, that has actually slowed a little bit. we decided that it made sense to push that out just a couple of quarters.

I don't know, Scott Bohn if there's anything you'd want to add to that.

[Scott Bohn, executive]

No, it's good, Pete.

[Michael Griffin, analyst]

Great. Thanks. And then I just wanted to touch again on the synergies from the merger. You talked about realizing about $40 million to $60 million of that. It seems like the merger is going on pace or maybe even better than expected. Curious if you could see any additional upside kind of on top of that $60 million or if that's sort of the kind of highest level of synergies that you could see.

[Scott Brinker, executive]

Yes. Griff, I'll take that. It's Scott. In October, we talked about $40 million of year 1 run rate synergies, and we've got a full $40 million in our 2024 guidance. So I would say, we are ahead of expectations in year 1. So hopefully, we can exceed that number as well. In terms of year 2, we'll see. The internalization so far is going well, 3 markets down, 6 more in the queue, so we're taking them one at a time just to make sure that it goes well, reduce execution risk.

But if we're satisfied with the results, we could certainly continue to internalize more and more markets going forward and that would be a big part of achieving the high end, if not above the high end of that synergy range.

[Operator]

Your next question comes from the line of Rich Anderson with Wedbush.

[Richard Anderson, analyst]

So on the Amgen and Sorrento spaces, I think your -- the next time we'll see that in the numbers is 2026, correct me if I'm wrong. Is any one of the other sort of maybe faster to the punch. It sounds like Sorrento is a little bit more ready to use based on what your comments were. I'm just curious what the realistic time line is to see them back in cash paying assets?

[Peter Scott, executive]

Yes. I think, Rich, as you quoted 2 years, that's really more of a same-store figure. I would say from a lease-out perspective, as you pointed out, the 2 campuses. Sorrento, the scope of work is less significant on that than the scope of work on the port side project that we've rebranded. So I would say that we can finish the scope of work on Sorrento, and that's the Directors Place campus a lot quicker, and we'll actually finish the work on the portside campus.

So I would see NOI probably earlier from that campus if I were to give you some guidance between the 2 then I would from the port side campus. Although that said, you do have to bear in mind that we will actually commence that lease, the 101,000 square foot lease at Portside with client later this year. So we have backfilled some of that. We have not backfilled at this point any of the Sorrento campus, but we're certainly touring tenants through it.

[Scott Brinker, executive]

Can I add something to that? From my seat, like our lab business, even 2 years ago, we're essentially at 98%, 99% occupancy, essentially nothing in redevelopment and a completely pre-leased development pipeline. From where we sit today, we've got some upside in occupancy on the operating portfolio. Scott and Mike are working on. We've got a pretty big redevelopment bucket that has a lot of NOI upside and then a fair amount of development that hasn't been leased yet.

So just on Amgen, Sorrento and Vantage alone, you're talking about $50 million, $60 million of NOI upside. I don't know if that's 25% or 26%, but we do think it's achievable. Those are all Class A assets. There's a cost of capital, so maybe subtract a little bit of that upside from an earnings standpoint but it's substantial. So our lab business 2 years ago was kind of hit full utilization, for lack of a better word. And today, there's a fair amount of upside for us to go recapture.

[Richard Anderson, analyst]

Okay. Yes, fair. Scott. The second question, shifting over to MOBs or outpatient medical, whatever we call them, so you guys are guiding to 3% same-store would combine with DOC. Your big pure play peer Healthcare Realty sees a path to same-store going up over the next couple of years beyond that through some occupancy lift and whatnot. I'm curious if you have a game plan of 3 -- sort of like that's your starting point, but do you see more growth out of medical office now representing the majority of your portfolio? Do you see more growth potential beyond that 3%, which has been sort of the legacy level of growth for medical office over the many several past years? Wondering where you see it going from here.

[Scott Brinker, executive]

Yes. I mean it's really been a 2% to 3% growth business for the last decade. We do see that accelerating. It's not going to 10%, but we do think it's going to improve for the forward 5 to 10 years versus the previous 5 to 10 years, just given supply demand, construction cost and therefore, our ability to push rents. So our guidance this year is at the very high end, actually well above the high end of any guidance we've given in that segment historically.

We have a pretty good track record of beating our same-store guidance and our earnings guidance. So you can assume that hopefully, there's some upside to the number that we gave. But it's a combination of occupancy. Obviously, we were up 40 basis points quarter-over-quarter, I think like 60 basis points year-over-year. All-time high re-leasing spreads, all-time high retention. So yes, we do think that there is some upside to the historical outpatient medical growth rate.

[Richard Anderson, analyst]

How do you condition tenants to be okay with higher rents, right, because they've lived with this world and you got to be careful about sort of screwing up the system, so to speak. Is it there for the taking, you think? Or do you sort of have to sort of thread that needle?

[Scott Brinker, executive]

Yes. And I'll ask John and Tom to comment as well. They're both here today.

[Thomas Klaritch, executive]

Yes. If you look at, Rich, the rents, I mean, we've seen -- what's actually benefited us is the new developments because the market rents that are coming in on those is typically 20% or so higher than what the existing rates are. So it gives us a little room to grow. And then if you look at our tenancy back 20 years ago, it was 25% hospital leases and 75% third-party physicians. Today, that number is 65% hospital. So you do have a little more ability to push the rents up when you're dealing with the institutions like that.

John, if you have anything to add?

[John Thomas, executive]

Yes. No, I agree with that, Tom. And I think we've seen 6 straight quarters of well above that in renewal spreads and then conditioning -- your comment about conditioning tenants, the options, as Tom said, historically was to go to a new building, but the rents now are 20% higher than the new building. So it's just -- it's much more, I guess, negotiating leverage. And if you're raising the rents 5% to 10%, that's better than the 20%, and that's the conditioning.

And then inflation increases, that's more important, I think, than the renewal spread right now, we're starting to get across the board annual increases that are fixed of 3% to 4% to 5%, people don't want to do inflationary CPI increases. So that just adds to that continuous stream. So it's more and more of the portfolio roles, more and more of the rents are going up 3%, 4%, 5% on renewal spreads and then you're adding a 3% to 4% annual increase. So the next 10 years, as Scott said, is very optimistic.

[Operator]

Your next question comes from the line of Wes Golladay with Baird.

[Wesley Golladay, analyst]

Can you comment on what's going on with the pushout of collecting on the seller financing, if it was pushed out a few months?

[Peter Scott, executive]

Yes. The seller financing, I mean, we actually did quite well off of providing that on our senior housing sales, which were 3, 4 years ago. So it's a business that we actually like if we provide the right LTV to the counterparty. With these loans, we've gotten repaid a lot over the last few years. I mean the balance was, I think, $600 million, $700 million. It was pretty high, down now to about $175 million. And our guidance for this year, call it, outlook, we had 0 to $100 million getting repaid. So $50 million at the midpoint, could be a little bit higher than that. And obviously, that's probably more front of the year weighted as well. I think our expectation is if it gets repaid, it will get repaid in the very near term, if not, it would get extended, which obviously, if it gets extended versus repaid, then there's an earnings benefit to that. But again, the expectation given where the LTVs of those are is that as the counterparty sell assets, we'd expect to get those loans repaid and probably more towards the front end of the year.

[Wesley Golladay, analyst]

Okay. And then I guess, can you comment on maybe how the conversations are going on, on leasing lab space? I think you had a new lease just under 200,000 square feet in the fourth quarter. It looks like some good activity in the first half in January. And maybe there's a little bit of a lag effect, but there's been some M&A in this space. There's the biotech in that that's had nice balance. Any noticeable change in your conversations?

[Scott Bohn, executive]

Yes. Wes, this is Scott. Scott Bohn I think from a demand perspective, we're in line with pre-COVID levels across all 3 portfolios. Boards are still cautious, as Pete mentioned, is taking new space and expansions and things like that. We are seeing some groups who have been on the sidelines are kind of -- have been floating around in the market, really kind of starting to dig in on space plans and getting real as they approach funding at some of the capital markets, both private and public open up. So I think that we're off to a strong start for the year. We like the way that the pipeline is shaping up.

The underlying fundamentals that Scott mentioned in his prepared remarks are strong indicators of future demand.

[Operator]

Your next question comes from the line of Jim Kammert with Evercore.

[James Kammert, analyst]

The Q&A is kind of built on some of this, but could you provide a little bit more detail regarding the $700 million to $800 million of development or redev and CapEx guidance that you provided because I ask you kind of reconcile to a known development and redevelopments and what remains to be spent. And even if that were all spent in '24, I think that's roughly half of kind of a $700 million kind of target. So is this other activity at [ AOI ], Vantage, Sorrento? If you could just help kind of what are the major components of that in terms of that total spend for '24, please?

[Peter Scott, executive]

Yes. Happy to take that, Jim. I mean, obviously, on the development side, we still have to finish out the Vantage project, which is pretty significant. We've also got some new HCA developments that are kicking off. I mean that's a great program for us, and we'd like to continue to recycle capital and keep that program going and the yields are starting to increase on that, which is great.

I'd say what has gone up pretty significantly year-over-year as you look at 2023 versus 2024 is the larger, redevelopment bucket. I mean we're still redeveloping our Point Grand campus. We've got another asset given the Astellas [indiscernible] behind space there as they took on the lease at Vantage. So we've got another large building there. Plus we'll have the portside buildings go as well as Sorrento. So I'd say that the biggest components of that are finishing out the current development pipeline as well as the redevelopment ticking up. And that was always our expectation was that we would have to redevelop the specialty portside when those leases expired. I mean Amgen was on that campus for 20 years and really, we had to put 0 CapEx into that over that period of time. So we did really, really well on that investment. But 20 years later, there's some capital that has to go into that. Those are really the biggest drivers of that spend this year.

[Scott Brinker, executive]

Yes, there's no new starts in lab in that forecast. There's a couple of new starts in outpatient medical. Some are from legacy Healthpeak, others from legacy DOC just commitments that were made in some cases, 2 years ago. Any new commitments, though on development, it's because the yields are attractive, 7%, 8%, highly pre-leased. So we continue to find those very attractive and would recycle capital so that we can go ahead and move forward with those.

[James Kammert, analyst]

Great. So basically, as this unfolds, the lease opportunity becomes more apparent, that's when those shift to become more explicit redevelopment or CIP activities, is what you're saying?

[Scott Brinker, executive]

Yes. Correct .

[James Kammert, analyst]

That's fine. And secondly, if I could. You mentioned, I think, Scott Brinker that you're looking at all capital alternatives. What are the latest thoughts on the CCRC portfolio? Is that still a potential? Or is it still room to grow on the NOI and FFO contribution? Or is that nearing maturity that might be a capital event for you?

[Scott Brinker, executive]

Yes, we're at 85% occupancy today. I would think we could get back into 90s. In that portfolio, it's performing well. We've got good assets, mostly in Florida, obviously, favorable supply/demand in that market for seniors, we've got a really good operating partner in LCS. We've got a really strong internal team overseeing it.

So we're not in a rush. At the same time, it really has no strategic overlap with our medical and lab businesses, which are highly complementary, same process and procedure, et cetera. So at some point, I think we will recycle. But to my comment earlier, would be price sensitive. We don't need to do anything. It's performing fine. We've got the team to run it, but the capital markets have just been too tight and soft to transact on a portfolio of that size, but we'll see if things start to open up in 2024.

[Operator]

Your next question comes from the line of Joshua Dennerlein with Bank of America.

[Joshua Dennerlein, analyst]

Appreciate all the color around guidance. One quick question on that. I think you -- I think if I heard correctly, you're including DOC in your same-store medical office NOI outlook. If you strip out DOC from the 2024 same-store pool, what would the same-store MOB NOI growth look like?

[Scott Brinker, executive]

Yes, hard to say. We are getting the benefit of the internalization in the peak portfolio that we obviously would not have done absent the merger, so it comes hard to parse the 2 numbers. But I think we said historically, DOC has lower in-place escalators than Healthpeak, but that's converging over time as they sign new leases with, as John said, 3% or better escalators. So I'm guessing it'd be a little bit lower but not materially.

I think they said numerous times, their growth rate in 2023 was impacted by some unique asset specific events and proactive termination. So I would expect our growth rate to mirror or closely mirror the Healthpeak growth rate going forward.

[Joshua Dennerlein, analyst]

Okay. Okay. That's helpful. And then maybe 1 different kind of question. Just you mentioned the stock price, you're not happy with it. Just kind of curious for your appetite for stock buybacks here.

[Peter Scott, executive]

Yes. We did buy back some stock, albeit at a higher price 1 year, 1.5 years ago. And I would say that the response from the Street was pretty unenthusiastic to that. That said, we do put an authorization every quarter for stock issuance or buyback with our Board. And we're not at a level, I think, today, where we buy back stock, but certainly, it's something that we're paying attention to. We're certainly a long ways away from a level where we even consider issuing equity, which is why we're talking more about capital recycling.

So we have a buyback program in place. We don't need to file one. We still have $400-plus million of buyback we could do, but we're not going to look to lever up if we ever bought back shares, we would look to do something through capital recycling. But I think I'd probably just leave it at that, Josh.

[Operator]

Your next question comes from the line of Mike Mueller with JPMorgan.

[Michael Mueller, analyst]

I know there are some moving parts with properties that are going into redevelopment. But can you give us a little more color, unless I missed it, in terms of the lab same-store NOI, what's embedded in there for occupancy and spreads for '24 compared to what you did, especially when the spread tightened in '23 .

[Peter Scott, executive]

Yes. Mike, it's Pete. I'll handle that. So obviously, our outlook is 1.5% to 3% positive. What are the positive drivers within that, I mean, obviously, you've got rent escalators, which tend to be on average in the low 3s. We've got some positive mark-to-market embedded in there on lease renewals that we do get done. And then as we've said, there's a little bit of internalization benefit as well. So I think if we just stop right there, we'd probably be 5% plus from a same-store growth perspective, Which actually would kind of mirror what's happened over the last 10 years. .

That said, there are some offsets, which I think are pretty well known. We've got average occupancy will probably be in the low 96% area. So you compare that to where we were last year. That's probably 100-plus basis points decline, so a modest decline, but nevertheless a headwind. The free rent that I mentioned, some years, it's up; some years, it's down. It's up this year, but it certainly is a little bit of a headwind as well. And then as we always do, we have a little bit of bad debt cushion in order to provide ourselves with a little bit of flexibility depending upon what goes on within our tenant portfolio, that certainly improved pretty significantly year-over-year, but we still do include a little bit there.

So when you take all the positives and you take all the headwinds kind of blends out to that 1.5% to 3%. I know it's not what it was for the last 10 years, but our stock price is also not where it was a couple of years ago as well. So it's certainly been factored into, I think, our valuation at this point of time.

[Michael Mueller, analyst]

Sure. And maybe 1 follow-up, talk about positive spreads. Would you think that the spreads would be closer to what you were showing in 24 -- fourth quarter '24 or full year '23?

[Scott Brinker, executive]

No, the fourth quarter number was an outlier. I mean there may be select spaces within the portfolio that would have a negative renewal rate mark-to-market, but that was an outlier. I think 10-year-old TIs, the tenant that wanted to stay in the space with credit -- investment-grade credit, no downtime, no TI. So I mean that was a unique situation. I wouldn't expect a lot of those. .

[Operator]

Your next question comes from the line of Vikram Malhotra with Mizuho.

[Vikram Malhotra, analyst]

Just maybe first on CCRCs. I know you mentioned at some point, you might look to divest. But I was a bit surprised just I thought the growth would be higher, at least I was anticipating it and just looking at the outlook. I thought there would be a more sort of robust outlook. So maybe if you can just compare and contrast or just give a sense of if you're seeing something different from your earlier expectations?

[Scott Brinker, executive]

Yes. Well, we still see some occupancy growth in 2024. Rental rates will grow, but more in the mid-single digits as opposed to high single digits just given the fundamentals in that sector. Then obviously, we've had a huge benefit from contract labor coming down over the past 18 months. We're largely through that benefit. We have very little contract labor in the portfolio today. So you just lose a lot of that benefit in same store. So I mean, that's what's happening at the property level. And then obviously, our accounting for this asset class has an impact as well.

Most of the income in this portfolio comes from the prepaid rents on the nonrefundable entry fee. That's usually more than 75% of the total NOI and we just have this GAAP accounting method that we amortize all the entry fees. And we're leaving roughly $40 million of earnings on the table relative to the cash NOI that's actually being generated. So unfortunately, our reporting for CCRCs does not really reflect the underlying performance of that asset class, but chalk that up to GAAP accounting, unfortunately.

[Vikram Malhotra, analyst]

Okay. That makes sense. And then you mentioned sort of relationships or key in MOBs and you've got a great HCA program. I'm just wondering 2 subparts to that. One, is there likelihood of the HCA program expanding, becoming bigger or other types of properties within HCA. And then second, just is there a pathway for similar programs with larger health systems?

[Scott Brinker, executive]

The answer is yes across the port. I mean there's a massive opportunity to help these big health systems grow their outpatient network. I might ask John to comment specifically.

[John Thomas, executive]

Yes. Vikram, I think you're aware, we've been doing this with Northside in Atlanta, have a project that's actually about to top out and further opportunities on the Northside pretty routinely. Same thing at -- we both -- both organizations have a great relationship with on [indiscernible], and we continue to have development opportunities there as well to come, so standby. But those are just a couple of great examples and fantastic markets.

[Operator]

Your next question will go from the line of Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt, analyst]

Scott, you flagged the estimated mark-to-market on lab of 5% to 10%. I'm just curious how that compares to the lease expiration you have over the next several years? And I'm also curious if there's -- what sort of the variation between larger versus smaller requirements? You noted some strength in sort of that smaller segment requirements. So any detail would be helpful.

[Scott Bohn, executive]

Yes, sure. On the mark-to-market, I think it's slightly lower in the very near term just with the Amgen leases rolling. It's kind of weighed down a little bit, those were relatively high rent that grew over that 20-year period that Pete mentioned. And then on the tenant demand side and leasing, we've talked about over the past several quarters, I mean, if you look across all 3 markets, the after demand probably somewhere between 60% to 75% of that is sub 30,000 square feet. So it's been really the strike zone for deals over the past 6 to 9 months.

[Austin Wurschmidt, analyst]

But even as we get into sort of '25 and '26, I mean, do you expect that still to be pretty muted? Or is there any opportunities? I know you guys have flagged in the past, I think '25 was going to be a little bit of a more attractive year. Like does that then reaccelerate still as we get into next year? Or has the gradual moderation in market rents sort of wiped away some of that upside?

[Scott Brinker, executive]

It's more of the former. '23 and '24 were more modest because of Amgen and it starts to pick up a lot more materially in '25 and thereafter. But keeping in mind, Scott's bigger picture comment that it is down year-over-year from what we would have said a year ago just because of market fundamentals. But this should be the low point on the mark-to-market, and then we'll gather some momentum into '25 and beyond.

[Austin Wurschmidt, analyst]

That's helpful. And then you guys gave a little bit of color around sort of the thoughts around synergies. But I guess I'm just curious how much of that $40 million do you think kind of hits right out of the gate when the deal closes? And what is sort of that go-get for the balance of the year? How would you kind of break down the cadence of that? And then thinking about maybe what could end up getting pull forward even or even upside beyond maybe the high end of that? Just curious the latest thoughts.

[Peter Scott, executive]

Yes. Austin, it's Pete. I keep hoping one of these days we'll open [indiscernible] and see 5 thumbs up that are green, but it wasn't this quarter. Maybe it will be next quarter.

[Austin Wurschmidt, analyst]

It just means you do.

[Peter Scott, executive]

We certainly do. Look, on the synergy -- what I would say on the $40 million, we said the vast majority of that is actually on G&A savings, and we would expect to achieve pretty much all of that at closing. Some of those G&A savings are difficult. We have to have conversations with employees on our side. DOC has to have those on their side. Those conversations have been had, never fun, but I'd expect the vast majority of that to hit right away. As we talked about on the balance, on the internalization, most of that really is the 3 markets that we've said we've internalized already.

So those are really tangible, but those will hit kind of quarterly as we get NOI benefits within our portfolio throughout the year. But again, we feel confident that we're going to hit all those numbers. That's why it's in our $40 million estimate that's really just 10 months as opposed to hitting that in a year. So hitting those numbers a little bit earlier on. As to the additional $20 million, I think those are really kind of 2025 numbers, and a lot of that is really internalization focused, although there could be a modest amount more of G&A. And where we sit today, we feel confident that we can hit those numbers. But again, those will be '25 numbers, and that will flow through to all the years beyond that. .

[Austin Wurschmidt, analyst]

Yes. No, that's great. Green thumbs on the answer. Appreciate the detail.

[Operator]

Our final question will come from the line of John Pawlowski with Green Street.

[John Pawlowski, analyst]

I was hoping you can provide just a very rough range of disposition volume that you would look to close on this year if your public market valuation is still depressed.

[Scott Brinker, executive]

I mean, it could be 0 if the market is tighter, it could be a couple of billion dollars if the market opens up. I mean, we'll see, John, we're having all sorts of discussions, but we have them. We've been saying that on a couple of quarters in a row of earnings call. So we'll just have to see how the market plays out. But there's a lot of active discussions across the portfolio today.

[John Pawlowski, analyst]

Okay. I know like the market's not completely liquid right now, but there's still such a massive gap in where your stock is trading and where you're able to close some deals, and I know not everything is going to trade at a low 5% cap rate. But even if it's well north of that, there -- it still seems like a very interesting trade right now to try to narrow the public to private valuation gap. So -- are you -- how much are you actively like on the market looking to sell right now in life science and [indiscernible] lease.

[Scott Brinker, executive]

Yes. I don't really have a different answer than what I gave in active discussions across the portfolio. I mean it could be a very material number if the markets open up..

[Peter Scott, executive]

Yes. I think the other thing I would add, John, is obviously, we don't have any acquisitions dialed into our forecast as well. And then on top of that, we did actually bake in, and hopefully, this was something that everyone got from our prepared remarks is that we have baked in potential dilution from if we wanted to sell noncore assets the likely use of proceeds immediately would be to repay debt, right? And that's got a dilutive impact to it. That's not to say that we're going to look to further delever. We'd like to recycle that capital over time into our core business segments, but we have dialed in some flexibility within our forecast to allow us to recycle capital.

[John Pawlowski, analyst]

Okay. And maybe a follow-up. Can you just help us understand the 2 development starts $90 million. I know it's a small volume, but 7% to 8% development yield on a risk-adjusted basis seems pretty thin relative to again, where the stock is trading or even debt repayment, again, on a risk-adjusted basis. So why is development winning out of the use of proceeds right now?

[Scott Brinker, executive]

Yes. I mean it's with a top partner in HCA. One of them is in Dallas, where we've had tremendous success. We've got assets on that campus. It's bursting at the seams. We're obviously highly pre-leased -- signing long-term leases with no CapEx for the foreseeable future. So the cash flow returns are still quite attractive in our view, and we're selling assets to fund it at an accretive level. So I still find those to be an attractive use of capital for our shareholders, John.

[Operator]

This concludes our question-and-answer session. I'd like to turn the conference back over to Scott Brinker for any closing remarks.

[Scott Brinker, executive]

Yes, I want to thank everybody for their interest. The team here is completely focused, hard at work on beating our earnings guidance again. I think we delivered really strong AFFO growth this year at more than 5%, we grew FFO more than 7% the year before that, and we expect to continue that. So in any of that, I appreciate you tuning in today, call with any questions. Thanks, everyone.

[Operator]

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