Q3 2024 Healthpeak Properties Inc Earnings Call

Peter Scott

Thanks, Scott. We had an excellent third quarter. We reported FFO as adjusted of $0.45 per share, AFFO of $0.41 per share and total portfolio same-store growth of 4.1%. Let me briefly touch on segment performance. Starting with lab.
Our scale, portfolio quality, depth of tenant relationships, competitive positioning and importantly, our best-in-class team are driving outperformance. This is clearly evident in our leasing activity as we posted a second straight quarter of elevated lease execution, and we have a robust pipeline to back this up.
A few important highlights from the third quarter, occupancy increased 30 basis points sequentially to 95.9%. The cash rent mark-to-market was 10%, which is at the high end of the 5% to 10% opportunity we see in our portfolio. Tenant retention was 83%, driven by an increase in early renewals across the portfolio and same-store growth was 2.8%.
Year-to-date, our same-store growth is 3.1%, above the high end of our expectations when we set guidance earlier in the year. Turning to outpatient medical. Our results this quarter once again underscore the strength of the long-term demand drivers combined with our unmatched and superior platform. We have executed over 5 million square feet of leases year-to-date and are on pace to have our strongest leasing year in the history of Healthpeak. A few important highlights from the third quarter.
The cash rent mark-to-market was 10%, which is the strongest rent mark-to-market we have reported in 60 quarters. Tenant retention was 89%, above our historical average. And same-store growth was 3.4%. Year to date, our same-store growth is 3.3%, which is at the high end of expectations when we set guidance earlier in the year. Finishing with CCRCs.
We reported another strong quarter with same-store growth of 14.2%. This was driven by occupancy and rate growth, coupled with moderating expense growth. Year to date, our same-store growth is approximately 20%, which is well ahead of the expectations we set earlier in the year. Shifting to the balance sheet. We ended the quarter with a net debt to EBITDA of 5.1 times and $3 billion of liquidity with our revolver being completely undrawn.
We are sitting on significant dry powder in the range of $500 million to $1 billion, which could fund accretive acquisitions. And our recurring CapEx needs are modest, with over 85% of our FFO translating to AFFO, which combined with an AFFO dividend payout ratio trending towards 75%, provides us with approximately $250 million to $300 million of retained earnings annually. Finishing now with guidance. We are revising upwards for the third time this year. We are increasing our FFO as adjusted guidance by $0.01 to $1.79 to $1.81.
We are increasing our AFFO guidance by $0.01 to $1.56 to $1.58. Our guidance increase is primarily driven by two items. First, we increased and tightened same-store guidance by 50 basis points to 3.5% to 4.5%. Second, we are now trending to $50 million of merger synergies in 2024. We continue to execute with excellence, having increased the midpoint of our FFO and AFFO guidance by $0.04 each in 2024 and having increased the midpoint of our same-store guidance by 100 basis points.
One last item to note, in advance of upcoming investor meetings, we plan to publish an investor presentation in early November. The focus of the presentation will be on our competitive positioning and key growth drivers of both labs and outpatient medical. The presentation will highlight the strong momentum we see as we finish 2024 and head into 2025. With that, operator, let’s open the line for Q&A.

Operator

(Operator Instructions)
Nicholas Yulico, Scotiabank.

Nicholas Yulico

Thanks. Good morning. So nice to see the leasing getting done at Gateway, Vantage, Portside. Can you just quantify a couple of things there. First, as we think about the commencement of that NOI, I know you gave timing, but an average rent to think about? And then also specifying the square footage of the existing tenant base associated with that in the portfolio and how we should think about that as some level of offset versus the new leasing?

Peter Scott

Yeah. Hey, Nick, it’s Pete. I’ll take this one. When you aggregate all of the new lease deals at Portside, Vantage and Gateway, the total square footage is around 340,000 square feet. The existing tenant footprint that underlies that is about 100,000 square feet. So we’re increasing by around 240,000 square feet, which is a lot of net absorption within the portfolio.
And then as you asked your question around the lease commencements, we did add some commentary in the earnings release on it. But to give some specifics around that, of the $60 million of NOI upside, we’ve now executed leases to capture a little more than $30 million of that $60 million. You won’t see all of that flow into our numbers in 2025, probably about one-third of that will hit in 2025 with a big chunk of the balance hitting in 2026, and then a little bit more in 2027. But certainly, we’re trending in the right direction with regards to development earn-in and pretty pleased to get the leases done that we’ve gotten done.

Nicholas Yulico

Okay. Thanks for that. And just to be clear, that $30 million you talked about, is that including the negative offset for the existing square footage, which I’m assuming these tenants are going to be giving up? Or how should we think about that?

Peter Scott

No, that doesn’t include the negative offset on that. But those leases will stay in place up and until the commencements begin on that. So I was just speaking to the gross amount that we would expect to get, Nick.

Nicholas Yulico

Okay. Thanks. And then just second question is on the broader lab market. You are seeing, I think, some examples in your portfolio of funding picking up, creating leasing demand. Perhaps you could just talk a little bit more broadly about that trend and how you think it could impact leasing going forward here?

Scott Bohn

Hey, Nick, it’s Scott Bohn. I think we have seen some good funding. The IPO market has been slow. Generally, we have seen — 26 done this year, which is already more than 2023 in total. We just had a South San Francisco tenant go public today.
Septerna had an outsized IPO, I think it’s $288 million. So those will certainly turn into demand on the IPO side. If you see the market, when you look at fundraising has been a record year. And the fund deployment, which has lagged over the past 12 months, it’s continuing to pick up in new company formation. And then Big Pharma, you’ve got a lot of M&A.
They’re sitting there with $200 billion of revenues coming off patent between now and 2023 — or 2030, excuse me. So they’re continuing to funnel money into biotech, which will continue to increase the tenant demand and the leasing demand. So I think we’re happy with where the demand is today, and I think it will continue to grow over the next few quarters.

Nicholas Yulico

Okay. Thanks, Scott.

Operator

Joshua Dennerlein, Bank of America.

Joshua Dennerlein

Hey, guys. Scott, I wanted to explore your comments on, I guess, you’re looking at structured investments as a way to kind of deploy capital. What kind of opportunities are you seeing? And what is it that you like about this versus maybe just buy buildings outright?

Scott Brinker

Yeah. I mean there may be situations where we do buy a building outright. At the end of the day, our balance sheet is in great shape. We have all the key variables that tenants look to when they’re signing leases, whether it’s the footprint, the credibility, the balance sheet, the team. We have all of those things. So I think we’re going to be as successful as anyone in getting buildings leased up.
There are a lot of opportunities right now, all the new supply that’s not leasing up, while Scott and the team do a great job leasing up what limited development we do have. Not everyone is so fortunate. So we are seeing quite a bit of opportunities, some in our key submarkets where we’d like to grow and have a competitive advantage. Clearly, the sector is improving, but it’s not doing a hockey stick back up. So the structured investments, in our view, would buy us some time to completely lease up buildings, right?
It’s not a six-month turnaround. This could take a couple of years, and the structured investments would just buy us more time as well as immediate accretion in the longer-term growth pipeline. So each deal is a little bit different, but I think the majority would be structured, accretive day one type investments. But I can’t tell you we’ll get home on any of them, but we are looking at a lot of things right now.

Joshua Dennerlein

No. Interesting. And then it looks like you increase like the synergies post-merger. Is that kind of new synergies you’re finding or maybe just like a pull forward of stuff that would have maybe hit in 2025 or beyond?

Scott Brinker

Yeah. I mean we’ll give the 2025 guidance in early February. But across the board, the merger has been a catalyst in a number of ways, culturally and financially. Financially, I mean, there were some just traditional G&A synergies, but the vast majority of what we accomplished and still have to accomplish are at the property level and the internalization has really been a huge impact on the company, and that’s most of the upside that we’ve seen in 2024.
I’d say the profit margins are a little bit better than we had underwritten. The rollout has been more aggressive and successful than we had originally anticipated. So that’s a big part of the $50 million and $10 million of improvement in 2024 is really property level earnings. So really a great outcome. A lot of hard work, but a great outcome.

Joshua Dennerlein

Thanks, Scott.

Operator

Austin Wurschmidt, KeyBanc Capital Markets.

Austin Wurschmidt

Great. Thanks. Good morning, everybody. Just going back to the lab theme. There are various puts and takes, I guess, in the leasing next year with some of the tenant relocations. But with that, it sounds like you’ve made a lot of progress as well on the 2025, addressing some of the 2025 lease expirations.
So I’m just wondering, if at a high level, you could provide or characterize kind of how the trend line in lab growth should look from here? Really just trying to get a sense if there’s any disruption from the tenant relocations or free rent that goes along with that.

Peter Scott

Hey, Austin, it’s Pete here. And we almost got the highly coveted five green thumbs up. We’ve got 4 out of 5, but we’ll keep trying to get that highly coveted one of these quarters. We did add an additional footnote disclosure on our 2025 lease expirations. And that was really put in there to just help with forecasting.
I think it tells actually a pretty good story. Nearly 40% of the expirations we have, which are quite small at a little less than 800,000 square feet are either under LOI or we’re in advanced discussions. We did note that there will be some redevelopment space. And actually, a big chunk of that is some of the give-back space as tenants have grown with us. So just to be clear, it’s not tenants vacating the portfolio, its tenants upsizing within the portfolio.
And the other thing I just wanted to mention as I focus on that redev amount. I think 3 points that are really important. One, it’s leased for the majority of 2025, so there is a very, very limited near-term impact. I think the other thing to mention, the in-place rents are in the high 50s. So we actually see a pretty good mark-to-market on that when we do relet those buildings.
And then the third thing is it’s spread over multiple buildings and primarily in South San Francisco and in Torrey Pines. So we actually feel pretty good about our prospects on re-leasing those. It’s multiple buildings, great locations. They’re just a little bit older and need some capital. But again, we wanted to put that information in there to help with the forecasting.

Austin Wurschmidt

No, that’s helpful, call it, a green thumb answer. So I appreciate the detail there. And then maybe, Scott, going to back to the structured investment opportunities. I mean how much capital are you willing to allocate to these investments? What are kind of the returns you’d target for these deals? And are you most focused on deals that you’d ultimately like to own? Or would you kind of cast a wider net on the structured investment side? Thanks.

Scott Brinker

Yeah. Most, if not all, would have a pathway to ownership. I think a lot of the projects that got either built or converted would not be in our sweet spot that we would consider strategic and want to own long-term. We like the submarkets that we’re in.
There’s a few others that could be interesting, but having scale has proven to be a competitive advantage and we wouldn’t change that philosophy. In terms of quantum, I mean, Pete talked about $500 million or more of just balance sheet capacity given we’re underlevered today. Hopefully, the stock continues to perform, I think it should. I think it will. That would obviously give us potential capacity to increase that amount.
But we’ve got a big outpatient development pipeline as well, that’s highly attractive. So we’ll have to balance that. But it could easily be several hundred million dollars based on the things we’re looking at. The returns, they would all be accretive on day one, but obviously, the risk profile would impact the rate of return as well. So probably won’t say anything more than that at this point.

Austin Wurschmidt

I appreciate the detail. Thanks, everybody.

Operator

Vikram Malhotra, Mizuho.

Hey. this is [George Ibrahim] for Vikram. Thank you for taking my question. Can you just walk us through how much of the leasing is from existing tenants? And can you just talk about the type of tenants that are driving the demand?

Scott Bohn

Hey, George, it’s Scott Bohn. I can take — start with that one. On the 733,000 square feet in the quarter and subsequent, it was about 71% existing tenants in the portfolio. And from the new demand driver perspective, it really — it’s a great cross-section of the life science industry. I mean we’ve got everything from Series A tenants that we did deals with this quarter up through mega cap pharmaceutical companies. So it really runs the gamut across spectrum there.

Peter Scott

Yeah. And George, just to add, to your first part of the question. I mean, from a square footage perspective, tenants are increasing if they had existing footprint within the portfolio over 3x. So they’re growing over 3 times. So pretty significant. It’s not like we’re just trading the same amount of square footage for different square footage in other buildings. We are actually like increasing that absorption pretty significantly in the portfolio.

Right. That’s helpful. And just a follow-up. Can you just comment on the TI packages? And if you have seen any signs of moderation or they continue to remain elevated?

Scott Brinker

Yesah I would say, I mean we’re still looking at turnkey TIs on a lot of these deals on the new developments or some of the major readouts. And we talked about that for several quarters now in those TI packages in the $300 a foot range. But that’s not every deal.
If you look at where we’ve been year-to-date on new deals, we’ve averaged right around $85 a foot on new deals into sub $40 a foot on renewal deals. So we have talked about those elevated TIs, which have leveled off, but those are not on — certainly not on every single deal.

All right. Thank you.

Operator

Juan Sanabria, BMO Capital Markets.

Juan Sanabria

Hi. Good morning. Just hoping to follow-up, a little bit on the merger synergies. It sounded like you’re outperforming on the margins in terms of internalizing some of the property management. So does that mean that there could be upside to the $60 million initially targeted longer term?

Scott Brinker

Yeah, probably. Juan, it’s Scott. But like I said, we’ll give guidance in 2025. We’re still working through exactly which markets we internalize in 2025 and the timeline. So a lot of that is still under discussion. But we feel great about the numbers we put out in March, if not last October versus what we’re actually executing.

Juan Sanabria

Great. And then just on the CCRCs, just curious on the latest thoughts about that business and wanting to own that longer term. I mean it’s been a great performer year to date, outperforming initial expectations. So just curious if there’s any opportunities to sell out near term, or how you’re thinking about that?

Scott Brinker

Yeah. It’s really been a great performer for 15 years since we bought it. It’s outperformed rental senior housing in virtually every year in those 15 years, steady growth. Even during the older building that occurred in the kind of 2015 to 2020 time period, we had strong growth, and that’s continued. So we have a really strong portfolio, great operating partner in LCS and a team that manages it very, very effectively.
So it performed. It’s not exactly strategic to our overall platform. There aren’t a total a ton of synergies with life science and outpatient medical. And as we’ve said in the past, it’s a great business. But if public investors want access to senior housing, they have other great companies they can turn to.
So if and when the price made sense, we would look to recycle capital out of it, but we’re also in no hurry. Dynamic today is the public market investors are a lot more excited about that segment than the private market. So that’s not a great time to sell. If that dynamic ever reversed, we would obviously consider transacting. But for right now, we’re fully focused on growing NOI, which we have been.

Juan Sanabria

Thank you.

Operator

John Kilichowski, Wells Fargo.

John Kilichowski

Hi. Thank you. Maybe I’ll just start on lab. Another quarter of acceleration here on the rent mark-to-market at 10%. And then also occupancy picked up in the quarter after several quarters consecutively of decline. Just kind of curious about the cadence here moving forward. Do you expect this to be a steady climb or if you see volatility over the next 12 months? And then maybe part two of that, if you could just talk about like from a fully diluted occupancy perspective, where you think you are today and where you think that number can get over the next 12 months?

Peter Scott

Yeah. Hey, John, it’s Pete. Maybe I’ll start with the last question first. Heading into this call, we were probably around 85% on a fully diluted basis from an occupancy perspective. With some of the new leasing we’ve gotten done, it’s probably ticked up a couple of hundred basis points.
And as we look at where we’d like to get in the next 12 to 18 months, I mean, we don’t see any reason why we shouldn’t be able to get to a low 90% stabilized occupancy level. I know that’s a bit lower than where we were 100% a couple of years ago. I think 100% is probably going to take a really long time to get back to. And I think we feel really comfortable with stabilized occupancies in the, call it, low 90% area. And I think the pathway is there for us to achieve that.
And then on the rent mark-to-market question. Look, it will be lumpy sometimes. And in fact, I think the fourth quarter and what we see in our pipeline could actually be the best rent mark-to-market quarter if we get a lot of those leases across the goal line that we will put up for 2024. That said, we’ve been pretty clear that it’s basically a 5% to 10% rent mark-to-market opportunity. It’s probably closer to 10% than it is to 5% based upon leases that we’re getting done and we see that as a pretty good number if you’re forecasting going forward.

Scott Brinker

Pete, I’d add one thing on the occupancy. There’s kind of the operating portfolio, and then there’s the total portfolio. And we’ve just had a period of time here where we had some big campuses that needed to be redeveloped and some development projects that were in lease-up. So although the operating portfolio is at 95%, our total portfolio is more like 85%, and that’s obviously what drives earnings is the total portfolio
So we do see pretty significant upside from where we sit today. And I think that’s what Pete’s referring to when you talk about what’s the go-forward occupancy number. Hopefully, that’s for the entire portfolio. And the actual like stabilized operating portfolio could be even higher than that, in part because we have a lot of single tenant buildings. It’s just the frictional vacancy is lower in life science than it would be in a business-like outpatient medical.

John Kilichowski

Got it. Thank you. And then maybe just a similar question on outpatient medical. You put up a 10% number there as well, but it has the previously communicated CommonSpirit deal. Could you maybe parse that apart and give us what the rest of that or those leases were mark-to-market at? And then kind of the expectation of how you think the next 12 months will look for that space.

Peter Scott

Yeah, I can quickly take that. And then if others have some thoughts, they can jump in. But yes, we were up 10%. That’s on the 3 million square feet of lease executions we got done last quarter. If you back out, CommonSpirit, which was 2 million, up 13%-ish, we were probably up 3% to 4%, right, which is still pretty darn strong.
And I think we’ve been averaging probably close to that 3% to 5%, maybe a little bit higher in some quarters. And I think that’s a trend that’s here to stay, right, between that as well as the lease escalators no longer being 2.5%, but really pushing those at 3%. As we’ve been saying, we think the fundamentals in outpatient medical are as strong as they’ve ever been. And we think we feel great about maintaining that occupancy in the 92%, 93% range. I don’t know, Tom Klaritch, anything you want to add to that.

Thomas Klaritch

No, I think you covered it. That’s exactly where we’re pulling it.

John Kilichowski

Thank you.

Operator

Rich Anderson, Wedbush.

Richard Anderson

Hey. Thanks. Good morning, everybody. So on the internalizations, $50 million now, I assume that still means $25 million G&A. I think you said, Scott, that the incremental has been at the property levels. But beyond that, and I know it also applies to your life science portfolio. When you say internalization, like what is not being internalized? Like, I just want to sort of definitionally, what you mean by internalization? And what — if there’s anything, after all this is said and done, that there’s another leg up of synergies that isn’t a part of the internalization process today that might be in the future?

Scott Brinker

Yeah, fair question. Rich, when we talk about internalization, we’re speaking to the on-site property manager as well as, in most cases, the property level accountings. So that’s the personnel that we brought in-house. And for the most part, it’s simply been a matter of taking the existing third-party team and bringing them on to the Healthpeak team. So the execution risk has been really low, and we’ve had near 100% success rate bringing people over.
So I think that’s one reason we’ve been able to roll it out faster than we anticipated without a whole lot of hiccups, but again, with a lot of hard work by our team. The leasing, there are times when we do internal leasing, particularly on big renewals, especially in the outpatient medical space.
In life science, Scott and the team end up doing a lot of the negotiation, but it’s critical to have really strong broker relationships. So that’s not a function that we’ve internalized. We still utilize third-party brokers to help canvas the market and give us the broadest possible exposure for our portfolio. Does that help?

Richard Anderson

Okay. So there’s no thought about bringing in the brokerage function internal that, that’s something you see you need long-term, generally?

Scott Brinker

Not beyond what I mentioned with outpatient medical, where we’re doing some big renewals in-house.

Richard Anderson

Okay. Second question, looking at your disclosure, about $900 million of development underway total cost. That’s call it, 3.5%, 4% of your enterprise value. You mentioned you haven’t done a new development start since 2021. And you’re sort of teasing us into thinking that perhaps that day is coming, even despite the structured investments that you’re talking about for life science.
What is your sort of ceiling in terms of size of development relative to the totality of the company so that you don’t kind of get into the situation where you have the market goes against you and you’re having trouble financing it for some period of time? Like where are you comfortable allowing development to get to in terms of the size of the organization? Thanks.

Scott Brinker

Yeah. Thanks, Rich. I mean we do have a threshold that we talk about with the Board. It’s generally been in the 5% of total balance sheet. But I’d also point out that outpatient development is vastly different than life science development.
They tend to be 18-month type projects. They’re oftentimes 70% or more pre-leased. So the risk profile there is obviously different. You don’t have the lease-up risk. You just have the timing risk, and what happens with cost of capital and cap rates in the interim 18 months. So that would have an impact as well as we think about our maximum exposure, but as well as our balance sheet. But today, it’s never been stronger.

Richard Anderson

It used to be that your life science was the overwhelming part of the development pipeline. That’s not the case anymore. Do you think that there’ll be more of a balance longer term, despite what you’re saying about the risk profile of medical office development?

Scott Brinker

Yeah, that’s probably right. But for the next year or two, at least, I would expect the development pipeline to be focused on the outpatient business where — there’s some really exciting opportunities. I mean, best-in-class health systems, highly pre-leased, beautiful new buildings, good yields. That’s really our emphasis for development in the near term.

Richard Anderson

Great. Thanks.

Operator

Michael Griffin, Citigroup.

Michael Griffin

Thanks. I wanted to go back to the Portside lease in South San Francisco. And if you can give us a sense if this deal was more broadly marketed to the brokerage community? Did you mainly work on it in-house so you kind of have a leg up on the competition? And if you have a sense, maybe not just in South SF, but your other markets, if there have been larger space requirements that have been popping up?

Peter Scott

Yeah, I think maybe I’ll start, and Scott Bohn can jump in. It’s Pete. I mean that deal was not marketed whatsoever. So I know Scott Bohn’s got a lot of communications, and I’m sure there’s other landlords out there trying to figure out why they didn’t get a shot at that deal. That’s a tenant that’s been in the portfolio for quite some time and never spoke to another landlord about potentially leaving our portfolio and has actually told us that they will never do a deal with another landlord other than Healthpeak.
So I think we feel pretty well positioned with that. And I think the other thing to just mention with your questions, and I know we’ve said it a lot the last couple of quarters, but it’s a great example of our competitive advantage that we have in lab. We’re in the best markets and best submarkets.
Our brand is exceptional. We have a best-in-class team led by Scott Bohn and our extensive tenant relationships are going to continue to fuel our leasing pipeline. So I appreciate you bringing that up because it’s actually a query point that I wanted to expand. I don’t know, Scott, if there’s anything else you wanted to add.

Scott Bohn

Yeah. Hey, Griff. On the demand side part of your question, we’ve talked for the past several quarters about kind of that barbell of demand, with a lot of the demand leading towards the smaller kind of sub 30,000 square foot range and then some large deals out there.
So I think it still probably skews towards the smaller deals, but we’ve started to see that, call it, the handle of the barbell, start to fill in there of the deals we did this past quarter, eight of them were greater than 35,000 square feet. So it’s really good to see that tenants of that size range coming back into the market and transacting on deals. There are some larger requirements out in the market that have been out in the market. Those take a long time to actually transact and take place, but there are a few.

Michael Griffin

Great. Appreciate the color there. And then just maybe one on MOBs. It seemed like a strong quarter from a renewal standpoint. But just given the more favorable supply-demand backdrop we’ve seen this year, have you seen a greater ability to push rents either through cash re-leasing spreads or maybe larger lease escalators? And are tenants willing to commit to longer-term leases, just given kind of the positive backdrop you’re seeing in the industry?

Thomas Klaritch

Yeah, this is Tom. I think when you look at it, the — we’ve been pretty successful over the past three or four years, getting 3% escalators. You can see our average has jumped up to 2.7% overall. We actually have been pushing the past couple of quarters, 3.25%. So hopefully, we can get more of those pushed in there.
And the mark-to-market, Pete mentioned, 3% to 5%. We’ve been — absent the CommonSpirit lease, that’s kind of where we’ve been falling out all year. And you’ll tend to see leases, 80% of them are going to be in that 3% to 4% range, and then you get an outlier group on either end of that, that drives what the total is. But overall, the 3% to 4%, 5% is kind of where we’ve been running.

Michael Griffin

Great. That’s it for me. Thanks so much for the time.

Operator

Michael Carroll, RBC Capital Markets.

Michael Carroll

Yeah. Thanks. Scott, I know DOC announced a few life science leadership changes. And specifically, I think you added a Boston leader. I mean, would — should we think about DOC positioning itself to be more active on the investment side with these additions? Or is this just partly driven by winding down some of your external partnerships to kind of manage some of these assets?

Scott Brinker

It could be a combination of both. Part of it is rewarding really strong performance for some of our existing employees. Obviously, Scott Bohn has dramatically increased his seniority at the company, and Natalia has always been his number two and had tremendous success. So we have to reward our best internal people. There’s been a real emphasis on that.
The new hire in Boston, we’re super excited about. She’s a longtime fixture in that marketplace, which is important, just given the dynamics in Boston. We did buy out our primary joint venture partner in Boston earlier this year, so there was a need to step up. So that certainly had an impact, but we would like to grow in Boston. It’s a hugely important market. We’re up to roughly 3 million square feet, but we see a lot of opportunity and distress in that market in particular that could be interesting. So it’s all of those factors, Mike.

Michael Carroll

Okay. And then on — because I know you provided some on the leasing that you completed this quarter and some of the new leasing and the developments, you kind of gave us some commencement times. And obviously, on Portside, it’s a little bit more elongated. But the new leases signed this quarter, I mean, is there a rough timeline of when you think that those leases could commence? Is it over the next few quarters? Or is it longer than that?

Peter Scott

Yeah, on the renewals, I mean a lot of those would just commence immediately once we sign them. And then obviously, the Portside lease has a longer lease-up time associated with it because it’s obviously a much larger lease. I’d say the balance of it is probably mid-2025. We’ve got to build out some TI space.
And I think the ones that are in San Diego and at Gateway would probably be more mid-ish 2025, and then the lease at Vantage will probably be kind of second half of 2025. That’s probably the best way to characterize the commencements of those.

Michael Carroll

Okay. Great. Thank you,

Operator

Ronald Kamdem, Morgan Stanley.

Derrick Metzler

Hi. Good morning. This is Derrick Metzler on for Ron. Yes, my question is about the lab portfolio development pipeline. And given positive leasing trends and these positive absorption trends, are you getting any closer, you think, to putting the pipeline into play?
And are the hurdles to starting new projects now more about occupancy in your existing lease-up properties or more about cost of capital? And if there are not starts in the near future, then is there kind of other optionality or alternative uses that you would consider for that land bank? Thanks.

Scott Brinker

Yeah. Happy to take that one. We do control, upon full entitlement, almost 5 million square feet of potential life science development in core submarkets where we already have a presence and a competitive advantage and a tenant base. So from that standpoint, we feel great about the land bank.
The economics today, when you look at construction costs, which is up very dramatically in the past couple of years, including the turnkey TI as well as where rents are relative to cost of capital, it’s going to be difficult for life science landlords to start anything new in the foreseeable future.
The economics are just tight. That won’t last forever. That will obviously benefit our existing portfolio. So we feel good from that standpoint. But I don’t expect us to start new life science development in the foreseeable future.
We would need costs to come down, maybe at least stabilize, but we need them to start coming down. Cost of capital to improve and obviously, rental rates start to move higher. All of those things are a combination would allow us to consider activating the land bank. In the interim, we’re going through the entitlement process. In some cases, doing construction drawings so that we’re ready to proceed because part of our business plan is obviously catering to growth tenants.
And some prefer to have Class B space, but others prefer to have Class A space. And you need to have both available. So a development pipeline becomes an important part of our marketing pitch to all of our tenants, which is one reason, we’re also looking at some of the distress in the marketplace and whether that could be an outlet at a much lower cost basis to provide a growth avenue for our tenants.

Derrick Metzler

That’s helpful. I appreciate the color. And I guess as a follow-up, just in terms of the lab market conditions. And it’s easy for us to point to new supply as a potential headwind, but your portfolio has performed really well. I guess in terms of competitive supply that you see, and do you think conditions are improving over the next year or moving sideways or are there markets that could be potentially more challenging over the next year?

Scott Brinker

I mean the overall market is clearly improving. It might be a little bit slower than we’d like. I do think we’re capturing outsized market share, but the trajectory is obviously positive. I mean the amount of supply that’s underway today is 50% of what it was a year ago, and it will be count another 70%, 80% a year from now and then it will go to 0. And I think that will last for quite a while.
And clearly, the fundraising environment is starting to improve as interest rates decline, in particular. Venture capital fundraising has never been stronger. They obviously need to raise that money to sit on it. They’re going to deploy that into new companies going forward. So we do feel good about the big picture market backdrop in what it should lead to for landlords like Healthpeak over the next three to five years.
And even bigger picture, just the way the industry works with Big Pharma. I mean they have a 7- to 10-year time horizon to make a profit on a drug. And when that window expires, they have to replace it, right? They’re not shutting down. I don’t think BMS or J&J, they don’t have a business plan that entails just, hey, let’s run out our patents and close up shop.
I mean they’re redeploying those profits into new innovative drugs. And already today, the majority of the revenue comes from drugs developed by biotechs, and it feels like the momentum is only positive in terms of most of the innovation happening at the biotech level. So we remain incredibly confident about the longer-term outlooks for the industry. In the next three to five years, we’ve clearly see an improving backdrop.

Derrick Metzler

That’s very helpful. Thanks for taking the question.

Operator

Wes Golladay, Baird.

Wes Golladay

I just want to go back to the supply question. How much or how early will you lead the recovery? I imagine there’s a subset of landlords that have the money that can do the TIs. And there’s the other subset of the people that are delivering 0% occupied projects and may just struggle. And so I’m just trying to get a sense of, will you be leased up in a year or two and then everyone else may take another three or four years? What kind of landscape are we looking at?

Peter Scott

Yeah. I mean, it’s a good question. I think in the core submarkets, stuff is going to lease up back and a lot faster. And I think for those large incumbent landlords, you’re going to see us continue to gain market share. For those that developed in new submarkets and don’t have existing tenant relationships, they’re going to struggle. They are struggling. They will struggle. Hard for us to tell you how that product leases up or if it ever does lease-up, but it’s not competitive for us.

Scott Brinker

You have already seen projects that were planned — Okay, Wes, I was just going to say you’ve already seen projects that were planned for life science that have gone the other direction, either planned conversions that never went anywhere or potential developments that have stalled and are basically mothballed. So that’s happening as well as projects just sitting vacant, in some cases, looking for capital.
So the markets, it’s not a criticism, it’s just a reality that they tend to overshoot in both directions. They got overly excited about life science, and — there’s a period of time where they get — they probably underappreciate the strength of the business. So we’re clearly in that phase, and we’re trying to take advantage of it.

Wes Golladay

Okay. And then one final one. Maybe you can comment on how your tenant watch list is looking since the start of the year. Anything adding or maybe even falling off for both the outpatient medical and the lab?

Peter Scott

Yeah. I think we’ve had, within our portfolio, our tenants have raised $7 billion year-to-date. And as a result of that, you’ve seen our monitoring list come down to what we consider just normal course at this point in time. And a lot of that is just a function of capital markets opening up, which is certainly leading to better credit for our tenants as well as additional leasing.

Wes Golladay

Thanks for the time.

Operator

John Pawlowski, Green Street.

John Pawlowski

Hey. Thanks for the time. Curious if you can give us a sense what the typical amount of free rent concession on the leases executed in the third quarter, and then the batch of leases and LOIs for fourth quarter were?

Peter Scott

Yeah. As we’ve been saying, it’s probably for every year of lease term. It’s about a month of free rent, and that’s actually consistent with what we’ve achieved with all of our leases, especially those that are these larger new developments.
So it’s in line with what we’ve been saying to The Street. And by the way, John, that hasn’t really changed all that much over the last year. It certainly has gone up from the halcyon days a couple of years ago, but it stabilized as well as rental rates stabilizing in the last couple of — really the last year.

John Pawlowski

Okay. Understood. And then maybe if you could just expand on that, Pete. I think maybe a quarter or two ago, the expectation was for lab NOI growth to accelerate throughout the year, and there is a sequential decline this quarter sensibly because of free rent. So what — I guess, what has surprised the downside on the trajectory of occupancy or trajectory of free rent? Just any more color on the sluggish rebound in NOI growth in the second half of this year would be helpful.

Peter Scott

Yes. On that, in particular, that’s a good question. The free rent, as you point out, can have an impact from one quarter to another. I step back and I just look at the fact that at the beginning of the year, we thought we’d be at 1.5% to 3% same-store growth in lab. Year to date, we’re at 3.1%.
So we’re actually exceeding the upside of what our original expectations are. So I’d say, we feel like there’s been modest improvement. There is a lumpiness to that free rent that could have an impact one quarter to the next, but it is important to step back and look at it, not just in a one quarter increment, but to look at it over a longer period of time. So we feel like year-to-date, we’re doing quite well.

Scott Brinker

And the same-store NOI is just a lagging indicator. It’s also a bit misleading. I mean the fact is all the key metrics are moving in a positive direction, re-leasing spreads, now occupancy, the watch list, the leasing. Those are the things that drive earnings.

Peter Scott

Yeah. Obviously, it goes without mentioning as well, occupancy did tick up sequentially from 2Q to 3Q, and so the free rent had a little bit of an impact on the same-store NOI. But certainly, with occupancy increasing, that’s a pretty good trend line.

John Pawlowski

Okay. Thanks for the time.

Operator

Jim Kammert, Evercore.

James Kammert

Good morning. Thank you. If I could go back maybe just to the leasing you called out for 2025, the 320,000 square feet. Would that — is it too early to know what sort of the dollar magnitude will be expanded on that redevelopment and the typical yields you expect on that incremental capital?

Peter Scott

Yeah. I mean I don’t know that we’re going to get into all the specifics because every building is a little bit different with regards to the amount of capital depending upon the age of the building. But I do want to just mention that those buildings are leased for the majority of 2025.
So I just want to allay any concerns that people think those buildings are just going dark on January 1. And as I said, a lot of those are buildings where tenants are upsizing, and we’ve had a lot of success leasing those buildings up to earlier-stage biotech tenants and having them grow in the portfolio.
So we don’t look at it as headwind. We look at it as an opportunity. But as we’ve said, if you had to put first-gen type TIs in, it’s probably $300 a foot. I’m not sure that we’d have to do that across the entirety of that portfolio, but it will require a little bit of an investment because the average age is around 25 years, and we are moving tenants out of those buildings into really high-quality buildings. But again, we look at that as an opportunity, not as a headwind.

Scott Brinker

Yeah, they’re in core submarkets, too. It’s not like they’re just random buildings. So I think the execution risk is a lot lower. We just need to put some capital in and confident that we’ll get them re-leased. We really do like the portfolio that we own. I think it’s a unique position to be in.

James Kammert

All right. That’s fair. And then Scott, your earlier comments said that greenfield development, obviously, we know it doesn’t really make a lot of sense in most markets. So when you think about these redevelopment opportunities, you’ve got some coming up in ’25.
If you look at your lab portfolio, what order of magnitude, either maybe square footage or just give us a guidance perhaps what is still not in state of the art where you could continue to kind of harvest and increase the returns on an annual basis? What is it 1 million square feet, or what else might you want to redevelop in the lab portfolio as it sits today? In the operating —

Scott Brinker

Yeah. I mean, we do a pretty thorough across the 50 million square foot portfolio ongoing assessment of redevelopment candidates, kind of prioritizing them out one to three years. So I think the disclosure we gave as part of this earnings release was incremental and hopefully positive.
We could consider providing something additional, but it is a pretty intense portfolio management effort that we have, just to prioritize those redevs. But $100 million a year in the aggregate, still feels like the right benchmark given the strength of the portfolio, the age of the portfolio.

James Kammert

Okay. Appreciate it. Thank you.

Operator

Mike Mueller, JPMorgan.

Michael Muller

Yeah. Hi. Just a quick one on outpatient medical development. Are you seeing more pre-leased build-to-suit type or spec opportunities for the next few years? And when you think about yield requirements, how different are those two?

Scott Brinker

Well, there’s nothing spec. Everything is 70% or more pre-leased. In some cases, they are complete build-to-suit, it’s at 100%, like the one we announced yesterday with HCA. The yields continue to be 7%-plus, at least in today’s cost of capital environment. That’s been our target.
The pipeline could be even bigger if the return thresholds were lower. There’s no shortage of health systems that would like to expand their outpatient footprint. It’s just a matter of which projects get the green light given the rental rates that need to be paid. That’s really the governor on our opportunity set right now.

Michael Muller

Okay. Thank you.

Operator

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

Scott Brinker

Yeah. Well, thanks for your time and attention today, and congrats again to our team on really an excellent quarter. Have a good weekend.

Operator

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.