Healthpeak Properties, Inc. (PEAK) Q4 2022 Earnings Call Transcript

Healthpeak Properties, Inc. (NYSE:PEAK) Q4 2022 Results Conference Call February 8, 2023 11:00 AM ET

Company Participants

Andrew Johns – Senior Vice President, IR

Scott Brinker – CEO, President & Director

Scott Bohn – Chief Development Officer & Co-Head, Life Science

Peter Scott – CFO

Thomas Klaritch – COO

Conference Call Participants

Nicholas Yulico – Scotiabank

Austin Wurschmidt – KeyBanc Capital Markets

Juan Sanabria – BMO Capital Markets

Steve Sakwa – Evercore ISI

Vikram Malhotra – Mizuho

Richard Anderson – SMBC

Ronald Kamden – Morgan Stanley

Michael Griffin – Citi

Joshua Dennerlein – Bank of America Merrill Lynch

Steven Valiquette – Barclays Bank

Omotayo Okusanya – Credit Suisse

John Pawlowski – Green Street Advisors

Daniel Hogan – Baird & Co.

Operator

Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note 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

Welcome to Healthpeak’s fourth quarter 2022 financial results conference call. Today’s conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors 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 the call. In an exhibit of the 8-K furnished with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com.

I’ll now turn the call over to our President and Chief Executive Officer, Scott Brinker.

Scott Brinker

Thanks, Andrew. Good morning, and welcome to Healthpeak’s fourth quarter earnings call. Joining me today for prepared remarks are Pete Scott, our CFO; and Scott Bohn, our CDO. Senior team will be available for Q&A. Through all economic cycles, our business is driven by two fundamentals: The

aging population, and the desire for improved health.

Demand for our real estate led to an estimated 17 million visits to our MOBs last year. Our buildings are critical to outpatient healthcare delivery in Dallas, Houston, Denver and Nashville and many other attractive markets. Biotech tenants are producing life changing therapeutics, for cancer, heart disease, sickle cell and many other diseases.

To clear, our buildings have an impact, not often seen in real estate, and we expect that impact to grow, driven by the ongoing push to outpatient care and exciting advances in personalized medicine and drug discovery. Certainly, there will be periods of belt tightening in biotech, but Healthpeak is in great shape with only a modest amount of space to lease both this year and next. Our new developments are fully funded and 78% pre-leased. We didn’t chase non-core submarkets or conversions and kept our pipeline in check.

Most important, we finished the quarter at 99% occupancy and continue to sign leases, when we do have availability often with existing relationships. Our significant scale in each of our submarkets is a competitive advantage against small landlords and second tier product. And in recent weeks, there has been positive momentum in the public markets for biotech. A sustained improvement could lead to reacceleration in demand.

Moving to operating results, which were strong across the company. Full year same-store NOI grew 5.1% in Life Science and 4% in medical office. We achieved those results despite difficult comps as we had best in sector, same-store growth in 2020 and ’21 in both segments. Our fourth quarter results exceeded the full year growth rates, a positive way to close out 2022.

Last quarter, we increased earnings guidance by $0.02, and we finished the year at the high end of that new range. We’re projecting another solid year of operations and development deliveries in 2023. Offset by the change in interest rates and some non-economic timing issues that Pete will cover. The underlying business is strong and the NOI growth opportunity that we described in our November investor presentation is unchanged. We’re in great shape from both a leverage and liquidity standpoint. The attractive spread on our January bond issuance reflects our strong balance sheet and support in the credit markets.

The $113 million sale of two R&D buildings in Durham for a 5 cap is a good transaction comp in an otherwise quiet market. The price was negotiated in December, enclosed last week to an unlevered buyer. Also, the rents are at market, whereas most life science sales comps have below market rents that make the cap rate less relevant. The sale was opportunistic given we recently signed a long-term lease extension and had maximized the value creation. For progressing entitlements across our core markets, but it’s possible for the first time in several years that risk adjusted returns on acquisitions will be more attractive than development.

This could impact capital allocation in 2023. We’ll have to see where cap rates and cost of capital settle and what happens with construction costs as the economy slows. Either way, our balance sheet allows us to be opportunistic and the land bank provides optionality.

In South San Francisco, our sovereign wealth partner has agreed to allow Health Peak to continue owning 100% of the Vantage Development campus. A lot has changed since the agreements were signed a few quarters ago, including a 2x increase in the allowable density, and less clarity around the timing of commencement given the environment. As a result, it made more sense for Healthpeak to own 100% of the project.

Nothing has changed from the standpoint that will utilize third party capital if and when it makes sense for our shareholders. Depending conversion to an upgrade announced yesterday aligned us with peers and will provide a more flexible structure to grow the company through acquisitions.

I would like to congratulate Ankit Patadia, who was promoted to our executive team. Ankit is a 13-year veteran of Healthpeak and runs Treasury and FP&A with great skill and leadership. He’ll continue to report to Pete Scott. We have a strong bench and continue to promote from within.

Finally, we’re advancing sustainability initiatives across the portfolio and are proud of our ESG recognition, that includes being named as CDP’s Leadership Band for the 10th consecutive year and being named a best managed company by the Wall Street Journal.

I’ll turn it to Scott Bohn to expand on life science results and fundamentals.

Scott Bohn

Thanks, Scott. This morning I’ll provide some color on life science sector fundamentals, an update on our life science portfolio and close with an update on our development and redevelopment project. I’ll start with a life science industry update. Overall, the industry remains healthy. There’s been a slowdown in demand from the toward levels of 2021 and 2022, but there are a number of tenants actively seeking space, and we’ve captured more than our share of that demand.

From a funding perspective, pharma has been active on the partnership and licensing front and continues to funnel cash into biotech R&D, and the secondary equity market has been open for companies with solid data. Just last week, a long time tentative of ours in South San Francisco, Client Therapeutics closed a $288 million secondary offering on the heels of positive interim data in its Phase 2A study in idiopathic pulmonary fibrosis

Also, last week, we saw a successful $161 million biotech IPO, and there was another nearly $200 million IPO scheduled for later this week, so hopefully a sign that the IPO market is beginning to reopen. VC fundraising of $25 billion, while trailing 2021’s record of $41 billion with about 50% higher than 2019, than record high. DCs will continue to invest these funds in the new company formation and B&C rounds of existing companies.

The 2023 NIH budget was approved at $49 billion, a 6% year over year increase, which will continue to provide scientific discovery and at the academic and early stage levels. Public company R&D spend through the third quarter of 2022 was $115 billion and is on pace to be the highest year ever when year-end numbers are reported.

Now I’ll move to our life science portfolio. We had a great year on the leasing front with over 1.4 million square feet of leases executed across the portfolio, 68% of which were new leases. This amounted to 186% of our leasing budget for the year and included a 35% cash re-leasing spread on renewals. Additionally, 79% of the executed leases were done with existing tenants, again, highlighting the importance of our scale and deep relationships within our core markets. 2023 is off to a great start with an additional 143,000 square feet currently under LOI.

Year-end portfolio occupancy remains strong at 98.9% and rent collections exceeded 99% in the fourth quarter. Mark to market within our portfolio remains strong at approximately 25%, and our watch list remains consistent with prior quarters. We have very modest leasing exposure in both San Diego and Boston in 2023, and even though we have some work to be done in South San Francisco on our redevelopments as Lisa’s role, we’ve had great success on those projects to date and look to continue that momentum into the New Year.

Shifting to our developments and Redevelopments. Healthpeak nearly $900 million life science development pipeline is 78% pre-leased and is 100% under GMP contracts, locking in our costs and estimated returns. In the fourth quarter, we delivered 142,000 square feet, a fully leased class A lab space at 101 Cambridge Park Drive, bringing our total life science ownership in greater Boston to 2.6 million square feet.

Our sole remaining availability is at our Vantage campus in South San Francisco, where we remain confident in our lease of success based on our dominant market position with approximately 40% market share, and deep, long-lasting tenant relationships and what we see as the most favorable near term supply demand dynamics of the three core markets.

Moving to our point, grand redevelopment. We converted 100,000 square feet of LOIs to leases during the quarter and now have an additional 29,000 square feet under LOI. Of the 245,000 square feet that went into redevelopment in 2022, we have 76% already leased or committed. It’s been an outstanding start to this redevelopment and we look forward to continued success as more spaces roll this year.

We also continue to advance our entitlements. In Cambridge, we’ve made great progress on the rezoning efforts in our LOI project. Since June, we’ve been part of a city and community led working group tasked with recommending zoning for the district. This first step in our entitlement process comes to an end this week, culminating in a zoning proposal that will be brought to the city council. We’re very pleased with the relationships we developed and are excited about the vision and direction that city staff, local residents, other property owners and Healthpeak collaborated on for this zoning recommendation. We look forward to working with the council in the coming months.

With that’ll, turn it over to Pete to cover financial results and guidance.

Peter Scott

Thanks, Scott. Starting with our financial results. We finished the year on a strong note, delivering excellent operating results. For the fourth quarter, we reported FFO as adjusted of $0.44 per share and total portfolio of same-store growth of 6.6%. For the full year, we’ve reported FFO as adjusted of $1.74 per share and total portfolio same-store growth of 5%.

Let me provide a little more color on segment performance. In Life Sciences, as Scott Bohn mentioned, same-store growth for quarter with a very solid 5.7% and we finished the year 99% occupied in each of our major markets. Turning to Medical Office, we had another fantastic quarter with same-store growth of 5.4%. For the full year, we commenced 3.6 million feet of new and renewal leases, the highest year on record for Healthpeak.

Our tenant retention rate during 2022 was a strong 82%, reflecting not only the competitive advantage of our largely on-campus portfolio, but also our deep relationships, high-quality team and industry-leading platform. Finishing with CCRCs, same-store growth for the quarter increased 15%, bringing full year growth to the midpoint of our 8% guidance. During 2022, we recovered 340 basis points in total occupancy and generated NREF cash collections of approximately $101 million exceeding our NREP amortization by $22 million. Last item under financial results, for the fourth quarter, our Board declared a dividend of $0.30 per share.

Turning to our balance sheet, which continues to be a competitive advantage. A quick update on recent activity. First, in late October, we settled the $500 million of five year delayed draw term loans that we opportunistically swapped to a 3.5% fixed rate through maturity. Second, in late December, we settled the remaining $308 million of equity forward at a weighted average price of $34 per share, based on the net issuance price, the blended FFO yield was 5%.

Third, in early January, we successfully issued $400 million a 5.25% fixed rate 10-year bond. In a challenging capital markets environment, the deal was 6 times oversubscribed and priced with no new issued concession. Credit market clearly sees the differentiated nature of our high-quality portfolio and ascribes a premium value to our bond spreads. Fourth, in late January, we closed on the $113 million sale of our Durham asset at a 5% cap rate, allowing us to further improve our balance sheet metrics.

All-in, these four transactions represent over $1.3 billion of capital raise at a blended yield of 4.5%. The net proceeds from these transactions allowed us to reduce floating rate debt exposure to approximately 5%. In addition, we currently have a net debt-to-EBITDA of 5.3 times, $2.5 billion of liquidity, no bonds maturing until 2025 and our development pipeline is fully funded, eliminating any capital markets risk in 2023.

Turning now to our 2023 guidance. We are forecasting FFO adjusted of a $1.70 per share to a $1.76 per share, and we are forecasting blended cash, same-store NOI growth of 2.75% to 4.25%. The major components of our same-store guidance are as follows. In life sciences, we expect same-store growth to range from 3% to 4.5%. Portfolio occupancy is 99% and we have very modest lease maturities in the same store pool giving us less of a positive rent mark to market benefit. As a result, growth this year is primarily driven by contractual rent escalators in the low 3% area.

Medical office we expect same store growth to range from 2% to 3%. Our portfolio produced outside same store growth of 4% during 2022, and we expect 2023 growth right in line with our historical average despite the difficult year-over-year comp, and in CRCs, we expect same store growth to range from 5% to 10% excluding CARES Act grants. I did want to spend a moment expanding on some important items underlying our guidance.

First, the midpoint of our guidance assumes $1.17 billion of cash NOI an increase of $65 million compared to 2022. The increase in cash NOI is driven by same-store growth and the earning of some key development projects, including the Shore, Boardwalk and 101 Cambridge Park Drive.

Second, the midpoint of our guidance assumes $205 million of interest expense. The assumed average interest rate in 2023 for floating rate debt is 5.5%, up over 300 basis points compared to 2022. The average line of credit balance during 2023 is expected to be approximately $750 million.

Third FFO is adjusted is negatively impacted by $0.03 of deferred revenue recognition. We have two large life science leases, one at Callan Ridge and one at 65 Hayden that were delayed due to tenant M&A. However, cash and NOI and AFFO are not impacted. We have included an AFFO per share range on our guidance supplemental page, which is a better measurement of year-over-year growth.

Fourth, we assume no CARES ACT grants in our guidance. As a reminder, we did receive approximately $8 million or 1.5 pennies of FFO from CARES Act grants in 2022. Fifth, we have included a high-level sources and uses on our supplemental guidance page. Our guidance assumes $600 million of development and redevelopment spend, up modestly from 2022. This does not assume any new development starts and its spend associated with completing our active pipeline. We also do not assume any speculative acquisition activity. Any accretive acquisition activity that could occur throughout the remainder of the year would be additive to our guidance range.

Please refer to Page 39 of our supplemental for additional detail on our guidance. Finally, let me quickly comment on the UPREIT conversion. We anticipate closing the UPREIT conversion on February 10, because of the conversion, we need to file an updated shelf registration statement and other various documents, including an ATM prospectus. Over the course of the following days, you should expect to see some administrative 8-K items get filed.

With that, operator, let’s open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Today’s first question comes from Nick Yulico with Scotiabank. Please go ahead.

Nicholas Yulico

Thanks. Hi, good morning, everyone. I guess first question is, if you could just give a little bit more detail on what kind of leasing pipeline looks like in South San Francisco right now? And sort of the depth and breadth of the market. And in particular, I guess, for Vantage, how you’re thinking about timing on getting the rest of that lease, what’s underway right now?

A –Scott Brinker

Nick, it’s Scott. So I’ll start there. I’ll start with Vantage. As you know, we produced 45% of it the first building to a global pharma tenant, and they should be taking occupancy later this year, they started the TIs this past month. That group is an existing health peak portfolio tenant. With the other building, the 189, we do have activity for multiple prospects of varying size. It’s probably too early in the process to get the detail on those deals, but hopefully more to come there. Overall, we feel really good about our ability to execute given our market share and our tenant relationships and history of doing the leasing on our development deals with existing portfolio tenants in South San Francisco in general. We continue to feel good about the near-term supply and demand balance.

And when you look at the staff in 2023, there’s about 1.4 million square feet delivering South Francisco and Brisbane, which is the true competitive set for the bulk of our portfolio. And that space is about 72% preleased, which is pretty solid sitting here on February 8. There’s a few large projects that come in in 2024, but we feel good about kind of being first to market with Vantage versus those deals and again, leaning on our market share and tenant relationships in the market.

Nicholas Yulico

Thanks, Scott. Just second question is on the acquisition market. If you can give a little bit more feel, maybe Scott Brinker or Pete, about kind of what you’re seeing in terms of cap rates and opportunities and how to think about whether the company would be active at all with acquisitions of more stabilized type product. And if so, how you would plan to fund that? Thanks.

Scott Brinker

In terms of how we funded the balance sheet is in great shape. So we do have capacity there. I’d say the likelihood of doing acquisitions is higher today than it would have been six months ago or 12 months ago. The fourth quarter was really quiet, really not much happened. So a lot of the feedback is more anecdotal, obviously, given just how much cost of capital has changed for public and private companies in the last six to 12 months. But just as a general rule, underwritten IRRs in our two core segments were in the 6% range or a bit higher a year ago, that’s probably more like 7% a little bit higher today, so 400 basis points, plus or minus, obviously, depends on the asset, but just as a general rule.

Harder to peg cap rates for life science just given the rental rates are often pretty far below market, so you just have questions around, which submarket, the tenant profile the amount of the mark-to-market as well as the timing that could make the initial cap rate somewhat misleading. So the asset that we sold in Durham last week, really two buildings lease to do kind of a long-term basis. Those rents are at market. with a new lease in place. So the 5 cap we thought was pretty good pricing, probably demand a premium in today’s market, just given the lower obviously, risk profile of the tenant.

So that hopefully gives you a general feel for the acquisition market, but we are starting to get people reaching out, which is interesting. I mean across the company, there’s some pretty deep relationships. So if cost of capital makes sense, I would expect we could be pretty active in 2023, we’ll see.

Nicholas Yulico

Great. Thanks guys.

Operator

The next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt

Hey, good morning. Scott, you just — Scott Brinker, you just referenced kind of the balance sheet being in a great position, but your guidance does assume $300 million to $450 million of the debt capacity is used to fund your existing capital commitments, predominantly development. So I’m just curious how much additional capacity do you have to pursue acquisitions. And what’s sort of the thinking on funding that on a medium-to-longer term basis?

Peter Scott

Yes. Austin, it’s Pete here. As Scott mentioned, our balance sheet is in great shape. We did and the year at 5.3 times net debt to EBITDA. So we could do a modest amount of acquisitions, but to do anything more than that. Since we do have a pretty significant development and redevelopment pipeline, would require additional capital recycling or accessing the ATM. We have not accessed the ATM in quite some time. We will be quite disciplined about how we think about that. We do pay attention to consensus NAV as well as our own internal NAV. Our stock is not trading at levels right now, where I think we feel like it’s appropriate to access the equity markets.

But as Scott said, we feel more opportunistic today than we did six months ago, and we’ll continue to look at our cost of capital and assess whether we would want to access the ATM to do accretive acquisitions. But our base case right now for guidance does not assume that we do any accretive acquisitions. We think that’s probably the most appropriate way to level set how we’re looking at 2023 right now.

Austin Wurschmidt

That’s helpful. And you guys have spent a lot of time talking about the attractiveness of the development pipeline that you have. And last quarter, you alluded to potential starts in the back half of this year, clearly pivoting as a result of how you’re viewing risk-adjusted returns today. But how should we think about sort of the next wave of starts and how much you could look to do in any given year going forward?

Scott Brinker

Yes. Well, I mean the potential pipeline is pretty big and it’s really core submarkets within our three existing markets. So we’re advancing entitlements across all three of those markets so that we’re in a position to proceed if and when cost of capital and spread versus acquisition cap rates make sense. From where we sit today, we’d be less aggressive on development than we have been for the past five years when there was a pretty enormous spread between return on cost for development relative to acquisition cap rates as well as our cost of capital we’ve had in the last year, Austin, I think you realized cost of capital as adjusted, but return on cost is probably down in most industries, certainly in medical office and life science.

But that’s a point in time, development makes a lot of sense at certain points in the cycle, and then there are other points where it makes more sense to look more at acquisitions or value-add shorter turnaround time. So from where we sit today, we’d be less aggressive on new development starts, but that could change. There’s a lot of uncertainty about what development construction costs really look like. They’ve been escalating in the 10% to 15% range per year for a little while now, but we’re starting to see evidence as well as anecdotal feedback that, that’s slowing down. So that would obviously make a pretty big difference.

So I would view our land bank as something that’s a valuable asset, if and when it makes sense for us to start.

Austin Wurschmidt

I mean on some of the life science deals, what yield today in your mind would make sense to give you enough of a premium to move forward? And that will…

Scott Brinker

I mean it depends on really two major things. One is just timing. So a 24 to 30-month development is obviously a lot more risky than a 12-to-15-month development. So you compare what we do in medical office, which is a much shorter time line between when you make the decision and when you actually have to invest the capital. that makes an impact or has an impact.

And then the other thing is just spread to acquisition cap rates. And today, that spread is lower than it would have been in the past. Our current pipeline is going to yield about a 7.5% return on cost. If we were to start construction today on new projects, it’d probably be a bit less than that realistically. And it’s unclear exactly where acquisition cap rates have settled.

So in general, I think the spread of development relative to acquisition cap rates, it’s somewhere in the 50 to 200 basis point range. If you have a fully leased MOB that’s delivering in 12 months that needs a lower risk premium than a 24-to-30-month spec development in life science. So that hopefully gives you just a general view of how we approach it.

Austin Wurschmidt

That makes sense. Thanks for the time.

Operator

The next question is from Juan Sanabria with BMO Capital Markets.

Juan Sanabria

Hi, good morning. Just hoping to go into the guidance a bit. And for the MOBs, what — if anything is assumed in ad rent for ’23 and if you could just remind us what was the contribution in ’22 in the long-term impact that typically has on what we think of historically is kind of the 2% to 3% type growth?

Thomas Klaritch

Sure. Juan, this is Tom Klaritch. Typically, we’ve seen the ad rent at Medical City grow kind of in the 5% to 8% range. We did have a significant growth in ’22. Part of that was some onetime items. Part of it was just great results at the hospital recovering from the pandemic. So we saw close to 10%, we think that will moderate given the big — the large growth in ’22 that we’re kind of assuming right now that’s kind of a 3 plus, little bit higher than that ad rent growth for ’23. So that’s why the number is down a bit in our guidance for MOBs for this year.

We typically — the bulk of our growth comes from mark-to-market and in-place escalators, which are quite strong at an average of 3.1%. And on the escalators and mark-to-market kind of in the 2% to 3% range. And then obviously, you have some offset from net expenses.

Juan Sanabria

Thank you for that comment. And then just on development contributions for guidance for ’23, you guys give fantastic details so kudos to you, but just curious on how much development NOI should we expect to contribute in ’23 and any sort of insights into at least currently, what would be incremental in ’24, not to get ahead of our skis, but just curious of whatever details you can provide on development NOIs.

Peter Scott

Yes. Juan, it’s Pete here. One thing I will point out is starting in our investor deck in November last year, we did start giving development yield by project, and we’ve included that in the supplemental. So that should we hope, assist with modeling going forward. That said, let me just talk about the ’23 development earn-in contribution.

I did say in my prepared remarks that we have $65 million of NOI growth when you look at ’23 relative to ’22. A big chunk of that is development earn-in. We had three projects that delivered during the course of 2022, that’s the shot Boardwalk. And then at the very end of the year, 101 Cambridge Park Drive, which is coming in phases. There’s still a very small piece that’s coming in earlier this year.

And you think about the blended yield on that was around 7%. So we have, from a cash NOI perspective, another $30 million. So when I said $65 million of NOI growth, about $30 million of that is the incremental earn-in from those three projects I mentioned. And then on our active pipeline right now that has not yet delivered and they will deliver over the course of the year, you’ve got Nexus, Sorrento Gateway as well as Vantage Phase 1 and then also Calen Ridge. And the cash NOI contribution from that is a little less than $10 million. So that’s really the significant driver of NOI growth, ’23 to ’22, and then the balance of that would be just same-store growth that’s included within our guidance.

Around your question on ’24, certainly, we’ll have some additional earnings because, as I mentioned, some of those projects interactive pipeline are delivering during the course of the year. It’s a little too soon for me to start saying exactly how that would phase in. But in the aggregate, the blended yields on that active pipeline is in the mid-7% range. And I gave you the number of what’s coming in this year. So you can kind of back into what would be the balance that would come due or at least earn in, in 2024. So hopefully, that gives you enough pieces on it.

Juan Sanabria

That’s perfect. Thank you.

If I’m still live, I can ask another question.

Peter Scott

Juan, we just got notice that the operators line crashed. So we’re still here and I guess we’ll soften the two-question rule for you.

Juan Sanabria

Just with regards to CCRC, just curious on any conversations you’ve had or any interest in those assets as you kind of maybe foreshadowed an eventual exit. So just the latest thoughts on how — when anything may transpire for you to exit that portfolio? and what the buyer pool or interest looks like?

Scott Brinker

Yes. I mean, Juan, it’s Scott. I mean last quarter, we said we’d be opportunistic. That hasn’t changed. But we didn’t hire a broker, we’re not running a process. So I wouldn’t expect any updates in 2023, just given the state of the financing markets, and it’s a big portfolio, but we’ll see. Right now, there’s no update. But the business continues to perform well. So we’re happy to hold it in the interim.

Juan Sanabria

Okay. I’m happy to continue again if you guys are up for it.

Scott Brinker

I don’t know. Is the operator back on, if not…?

Operator

We could take the next question. The next question today is going to come from Steve Sakwa of Evercore ISI.

Steve Sakwa

Great. Thanks. Scott, I guess I wanted to circle back to your opening comments about the change in kind of the venture structure up advantage. And maybe just if you could provide a little color on what happened there and just the overall appetite from kind of sovereign wealth funds to continue to come into life science.

Scott Brinker

Yes. We have a successful venture with them right next door at Point Grand, our team on the ground, led by Scott Bohn is making tremendous progress getting those assets redeveloped and leasing them up. So our sovereign partner is really happy with the investment there. A lot has changed, though, in the interim. That transaction was really negotiated over the summer, so a pretty dramatic change in the allowable density in that campus now up to 1.3 million square feet of future development, a pretty massive opportunity for Healthpeak.

And in terms of return on cost, I mentioned it earlier, we would, at Healthpeak, be less aggressive today on starting new construction than we would have been 9 months ago. So for us, it made more sense, given it’s less likely that, that project would commence in 2023 to go into the joint venture because we lose quite a bit of control and flexibility. And it was more important to us to have that control and flexibility moving forward.

Steve Sakwa

Okay. So the sovereign wealth funds haven’t lost to earn interest, it just sounds like you’re pulling back just given where yields are that you guys are less likely to go forward?

Scott Brinker

Yes. I mean it was a mutual decision. But yes, we’re happy to control 100% of that project.

Steve Sakwa

Okay. And then I guess, secondly, just on the UPREIT, I guess, conversion. I mean, have you felt like you lost deals or that has been a competitive disadvantage to help Pete not having the UPREIT structure and hence, your desire to put it in here?

Peter Scott

Yes. I mean we did one on the Medical City campus about 18 months ago, we’ve got 7 or 8 legacy down reach structures in the portfolio today, which are pretty cumbersome and expensive to manage. So yes, I would expect that we would be able to use that structure going forward.

Steve Sakwa

Great. Thank you.

Operator

The next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra

Morning. Thanks for taking the question. Just two. First — maybe. Can you just go back to the guidance and I’m sorry if I missed this, but just maybe walk us through Life Sciences, in particular, how much conservatism are you baking in? You typically started, I think, at around 4%, 4% or 5%, and then you’ve exceeded that the last, I want to say, three or four years. I know you have fewer expirations, but can you just walk us through what are you baking in, in terms of occupancy and the bumps that there, but occupancy and rent spreads?

Scott Brinker

Juan — excuse me, not Juan, Vikram, sorry. I got so used to Juan asking questions that I had to adjust. But it’s a good question, Vikram. And as you noted, we’ve guided 4% to 5% the previous five years, five years in a row. So we had a lot of consistency on that. One of the contributors, though over the last five years was the fact that we still had pretty significant net leasing activity every single year, allowing us to increase our occupancy.

The good news is we’re at 99% occupancy across the portfolio right now. But the bad news is there’s really not a lot of room to go higher than that at this point in time, just given how many tenants we have in the portfolio and the weighted average lease term. So when you look at our guidance for this year, it’s primarily focused on the rent escalator, which, on average, is around low 3%. We do have some modest lease maturities, and we do have some modest mark-to-market benefit embedded within our guidance. Not all of that though was within the same-store pool. Some of that is within our large redevelopment campuses, Point Grand and Oyster Point to just name the two biggest one.

So that’s really the reason for the 3% to 4.5%. It’s not a deceleration within our portfolio. And the other thing I would just add to it, you asked about bad debt. And I think you’ve asked this before, we do include a little bit of bad debt within our same-store guidance at the beginning of the year. And to the extent that we don’t utilize the bad debt cushion or we don’t need all of it, that certainly would be a benefit throughout the course of the year. A little early in the year to comment on that at this point in time, although we’ve been very pleased to see the capital markets improve significantly for our life science tenants. So that’s really the gist of our 3% to 4.5% guidance range in that segment.

Scott Bohn

Development and redevelopment, it always — you sign a long-term lease, it comes with free rent. I mean we’re not taking the benefit of that free rent either. So all the NOI growth that you see coming from that development and redevelopment portfolio, that’s not benefiting same-store at all, but it’s obviously generating a heck of a lot of NOI that will eventually flow through earnings absent some unique issues that we’re overcoming this year.

Vikram Malhotra

That’s helpful. And maybe just, Scott, sticking with you, just a follow-up. You mentioned on the call at the beginning of the call that for the first time, acquisitions are appearing more attractive than development. Can you maybe give us more color on specifically what you’re seeing in terms of types of opportunities, pricing expectations or IRR? And if you can just link that sort of acquisitions over development to maybe how that feeds into broader goals for the executive team as you think about long-term compensation and what metrics you may be gauging as it pertains to altips [ph].

Scott Brinker

Yes. I mean we don’t have a metric focused on just volume of acquisition or development. But obviously, we have a lot of metrics around total shareholder return, FFO growth and leverage. So if growing the company can help us accomplish those objectives, then we’re going to do a lot of it. So it’s made overwhelming sense for five years, not a new development.

The spread relative to acquisition cap rates was 300-plus basis points is a pretty easy decision and there’s a nice spread to our cost of capital as well. It feels like that spread is down quite a bit today. Some of that is anecdotal. But the big commercial banks really aren’t doing secured financing yet. So big portfolios are harder to trade, which can make things more interesting.

Some of the regional banks are starting to be more active. But obviously, interest rates that are 100 if not 150 basis points higher than what you would have seen 1.5 years ago, LTVs are probably down a touch. That is a huge impact on levered buyers. We’re not really a levered buyer at least in the traditional sense. And you saw the pretty strong execution in the bond market two weeks ago. So we do feel like our cost of capital relative to conversations we have with counterparties, whether it’s the big LPs, private equity, the brokers, the banks, it feels like there’s a higher likelihood that acquisitions could make sense this year, but it’s still early in the year. In the fourth quarter, as I had mentioned earlier, it was just really quiet. So not much happened. But activity is picking up, and we’re starting to get a lot of phone calls on things that are more interesting and potentially more actionable than what we would have said for the last couple of years.

Vikram Malhotra

And sorry, just if I could clarify that, that you mentioned the life sciences non-core assets traded at I think it was a 5. Would you give us — can you just share any more color on where kind of asset pricing in life sciences are today like core, not higher quality — non-core versus higher quality core?

Scott Brinker

Yes. I mean I’ll do my best, but some of it is anecdotal just because not much is actually closed, but I still think it’s directionally correct. But like the assets in durum at a 5 cap relatively small portfolio at $113 million. It’s an unlevered buyer that we’ve done — they’ve done a counterparty of ours in the past. So we know them well.

But we had signed a 10-year lease extension with Duke a couple of quarters ago. So there’s really not much more work to do in collecting rent. And it’s a 3-ish percent escalator on top of the 5% initial cap rate. So when I said earlier, the unlevered IRR expectations for the highest quality product in our segments was probably started with the 6%, plus or minus 6% a year ago, that’s probably more like plus or minus 7% today, and that seems to line up with the type of price that we got in Durham. Now we do think that it was a strong price just given the environment that maybe a buyer was willing to pay a bigger price for what’s deemed as a kind of a low-risk collective rent type investment.

Vikram Malhotra

Thank you.

Operator

The next question comes from Rich Anderson with SMBC. Please go ahead.

Richard Anderson

Thanks. I think I’ll just wait 30 seconds to ask my question because I like that anticipation with Juan. So on the acquisition versus development conversation, I may have based on this, but I understand the spread is making it more interesting on the acquisition side. and you have some cost to capital advantages and so on. But is the spread also narrowing because of just the general cost structure of development still because I would have thought that, that would have been a conversation last year with costs sort of starting to moderate now. I just want to get a sense of what driving that declining gap between acquisitions and development? If I can have more detail on that. Thanks.

Scott Brinker

Yes. I’m happy to take that one. Rich, I mean, what’s driving the change in acquisition cap rates is just cost of capital. Risk-free rates are obviously a lot higher, which is changing return expectations for equity, LTVs are down, cost of borrowing is up. So that one is pretty straightforward, as I’m sure you appreciate.

On the development side, costs have been up 10% or more for a couple of years in a row now, just given supply chain issues and a lot of demand. As a result, the cost to build continues to climb. And rents for a while we’re keeping up, if not exceeding the change in construction costs, but that’s obviously starting to change a little bit in 2023, which is putting some compression on return on cost. Now obviously, it’s cyclical. So both of those things will change over time. But from where we sit today, that’s the dynamic that we see in our two core businesses, Rich.

Richard Anderson

Okay. Great. And then another follow-up on the UPREIT conversion. Is that — I know — the question was have you missed on some things and perhaps this is sort of a rainy day opportunity or optionality for you down the road. But maybe more real-time or near term as well. Are you seeing more UPREIT potentially OP unit type of deals in medical office versus life science, I imagine it’d be more on the medical office side, but maybe you could just sort of give some color on that in terms of the opportunity set using the UPREIT structure.

Scott Brinker

Yes. I think that’s more likely, Rich, it’s certainly possible we could see it in life science, but it’s more likely to be applicable to individual owner, a small group of owners, which, generally speaking, that’s going to be more in medical office. It tends to be more the institutions that are doing the big life science projects. But there are examples that we could envision OP units being used for life science as well.

Richard Anderson

And do you think from the standpoint of taking on OP units, would it be more individuals? Or could you see even hospitals and health systems willing to do a deal of that nature?

Scott Brinker

Yes, we’ll see. I mean we didn’t really have a structure in place that allowed us to effectively pitch the idea. I mean we could use the antiquated downrate model, but it wasn’t ideal for us or the counterparty. This is a much better structure for both sides that would allow us to be a little more aggressive in pitching the idea. Obviously, it still requires an equity price that we’re happy with. But the execution risk is far different from our perspective, and obviously, the outcome for the counterparty could be quite a bit different as well.

Richard Anderson

Yes, great. Okay, thanks very much.

Operator

The next question comes from Ronald Kamden with Morgan Stanley.

Ronald Kamdem

Just two quick ones from me. I’ll second the comments on the disclosures, which are really, really helpful on the guidance and the sources and uses. But sort of the first one I have was just going back to — if I think about the deck you guys had put out about a total NOI peak opportunity of $13.25 by 2025. And so I’m comparing that to sort of the guidance for ’23 of $11.70 on cash. So that suggests going forward, you’re going to need to be at sort of a 75% to 80% growth rate a year to get there.

Just trying to get a sense of post those numbers post the guidance, how are you guys thinking about sort of that long-term opportunity if it still makes sense, feeling better or feeling worse about it. Thanks.

Scott Brinker

Yes. Look, what I can say, Ronald, it’s a great question, is that NOI growth story is firmly intact. And typically, we would not provide a cash NOI supplemental measure within our guidance page. We did this year. We will continue to do that going forward as well because we wanted to be able to provide a bridge to what we did put in that deck. Obviously, nothing is guaranteed. But when you look at our portfolio, I talked about the development earn-in before, we still have significant earnings again next year and the year after as well on our active development and redevelopment pipelines plus the same-store growth that should be pretty consistent across our portfolios.

And when you think about the three segments we’re in, irrespective of the economic environment, we believe they should perform well. So we feel like that NOI growth story is very much intact, and that was actually one of the reasons we wanted to provide some additional line items in our supplemental disclosures this year.

Ronald Kamdem

Great. Really helpful. And then just going back to the same-store questioning for the life sciences. I guess I see the stocks down today, maybe people thought that was a little bit lower than expected. I guess the question really is, given that you’re basically at potentially peak occupancy, you’re getting sort of a low 3s rent bumps I’m looking at sort of the exploration schedule, which is pretty small for this year and next year.

So it’s sort of the 3% to 4.5% sort of a new normal, if you will, for the next couple of years which is still pretty good. It’s just going to be sort of slower than it was for the past couple. Is that the takeaway there?

Scott Brinker

I mean it’s probably the right range and a fair amount of that lease expiration this year and next is going into redevelopment between Point Grand and Oyster Point, both in South San Francisco. So obviously, that comes out of same-store. But the overall mark-to-market across the portfolio is still in that $145 million range. That’s a gross number. Present value is probably closer to $100 million.

But the biggest mark-to-market and the biggest lease maturities are in 2025 and thereafter. So you could see a reacceleration at that point. And then obviously, what happens with market rents relative to our escalators would have an impact over time on whether that mark-to-market opportunity grows or contracts.

Ronald Kamdem

Right. That’s just for me. Thanks.

Operator

The next question comes from Michael Griffin with Citi. Please go ahead.

Michael Griffin

Great. Thanks. On the 140,000 of leases under LOI that you mentioned in your prepared remarks, I guess, what’s the momentum and demand you’re seeing for the rest of the year? And then maybe Bohn, what are tenants asking for when you’re talking for them in terms of space needs, concessions, anything like that would be helpful.

Scott Bohn

Sure, Michael. So, demand — I’ll start there, demand numbers certainly come off the record highs in the past few years, as I mentioned. But they’re in line with pre-pandemic levels and the markets continue to be strong with low single-digit vacancies kind of in all three core markets. There’s a lot of active users in the market. Deals are getting done, just like we’ve done at our Pointe Grand campus.

I think from a demand perspective as well, I think one note I would say there’s been several larger deals — large and mid-size deal I would say that where a tenant wasn’t necessarily up against the clock with an expiration that got put on hold. I think as the markets continue to improve here, several of those will come back to the market into those demand numbers. I think in importantly to remember, too, is the fundamental drivers of demand are still incredibly strong with VC new fundraising and investment in biotech. NIH funding the biotech index, S&P increased 40% since mid-June.

So, well the valuations are still well off their 2021 highs, we’ve now had six or seven months of fairly steady improvement, which is very encouraging. There’s also capital really available in the secondary markets for companies with good data. And we’ve — in the past week or so, as I said, we’ve seen some good signs in the IPO market. So, I think that from a demand standpoint, we feel pretty good where things are heading on the tenant concessions and what tenets are looking for. We haven’t seen a big uptick on concessions and good, well-located product.

I think some smaller deals with Series A type companies may require a little bit more of a turnkey type build, but those are spaces where you may have otherwise done a spec suite to get at least and get the market quicker. So, your kind of I view those as a little bit of a spec sheet with the tenant and two.

We certainly take a good look at the credit on those if we’re going to put in those larger TIs on some of those smaller deals and make sure that we’re building generic space. But the tenants who are out there looking at bigger spaces or new build shelter spaces or have a different credit profile that are still pretty strong.

Michael Griffin

Great. Thanks. And I was curious if you could give a little more color on the deferred revenue as a result of the tenant improvement delays. I think you mentioned that it was something had to do related to M&A activity. And I know that’s obviously harder to predict in the future, but could we see this, I guess, occur down the road? Or do you think this is more kind of a one-off? And any color there would be great.

Peter Scott

Yes. Michael, it’s Pete. I’ll take a stab at that. I think you were pretty astute to point out when we spoke yesterday that the two main issues with regards to revenue recognition this year are one is a redevelopment project, 65 Hayden and the other is our development project, Callan Ridge, where we push back the initial occupancy dates on those.

We actually will have those leases commence, one with Dicerna, who was bought by Novo Nordisk and 65 Hayden and the other one with turning point who was bought by Bristol Myer, they will commence. Actually, the Dicerna lease has commenced at this point in time and they are paying cash rent. They’ve just decided to invest a heck of a lot more money their own money into our campus.

So it’s a great credit upgrade for us, but the project just takes a little bit longer, about three quarters longer to complete, and we can’t recognize that cash rent we are receiving into FFO right now. So that’s the basic gist of it. And then at Callan Ridge, Bristol Myers has decided to acquire Turning Point that they would like to sublease that space and wait on spending any TI dollars until a subtenant is identified. So at this point in time, we’re just pushing out the initial occupancy dates to as conservative of a date as possible.

As I think about M&A, generally, there are a lot of pluses to it with regards to the credit upgrade. And sometimes there can be minuses to it. I don’t know that this is really a minus because we’re getting such a great credit upgrade in both cases, it’s just a matter of the timing of when we can recognize it in one metric versus when we recognize the cash rents received and another metric.

So sometimes, these delays don’t occur. Sometimes they do occur just through the M&A and transition process. So it’s hard to tell you what the overall trends are, but sometimes it works in your favor and sometimes it doesn’t.

Michael Griffin

Got you. Well, that’s great color. That’s it for me. Thanks for the time.

Operator

The next question comes from Joshua Dennerlein with Bank of America.

Joshua Dennerlein

Maybe just one follow-up on that. What’s your ability to kind of get that $0.03 back from the tenant-driven TI delays, is that a next year event or potentially something that might come in this year?

Peter Scott

Yes. I think on the larger of the two, the 65 Hayden project, we are highly confident that we’ll start to get that back beginning later this year. With Callan Ridge it’s hard to say, right, because it really depends upon when Bristol Myers identifies a subtenant.

So I think we’ve pushed it out to the most conservative date in the beginning of 2025. But it is important to recognize that the FFO that we aren’t able to recognize in our earnings this year we do get to recognize that over a slightly shorter lease term versus the way we recognize the cash NOI. So if it takes on a 10-year lease, for example, if it takes a year delay before you start recognizing FFO, you would recognize that FFO over nine years, so a slight modest benefit. from that perspective. So you do eventually recoup it. It just doesn’t begin to get recouped until after that TI project is done.

Joshua Dennerlein

Okay. And does your guidance include any of that 65 Hayden in total coming back?

Peter Scott

Yes. So I’d say about $10 million of that $15 million is at 65 Hayden.

Joshua Dennerlein

Okay. And then maybe just on the MOB guide. I think if I recall correct, I think last year, you guided like a Q1, Q2 well ahead of that this year, Q3. Curious kind of what gives you the confidence that come out with Q3 this year versus Q1 Q2 last year? And then how do you get to the high end and the low end of the range?

Thomas Klaritch

Yes. This is Tom. This year, we did benefit, as I said earlier, from the 3.1% escalators. So we didn’t anticipate that higher number last year when we started out. So we would expect that to continue given where CPI is and the fact that our fixed escalators jumped up about 10, 15 basis points to the 2.8% range.

So that’s, again, the biggest driver of growth. The other thing we benefited from in ’22 is our recovery percentage jumped up about 150 to 200 basis points as we were able to shift some more leasing to net leases from gross. So we were expecting to be at about a little over 50% recovery percentage in ’22. We ended up at 52%. We don’t expect that kind of growth again next year, but we expect that higher number. So that’s why we were more confident in putting out the 2% to 3% this year.

And obviously, we can benefit from some of the other drivers we hit in ’23. And Medical City does much better than we expected. We’ll get some growth there. Parking income we still have some opportunity. Most of our markets are back up to pre-pandemic levels, but we still have two that are below. So we could see some pickup there. So it could be a little conservative, but I think we’re pretty comfortable with that right now.

Operator

The next question comes from Steven Valiquette with Barclays. Please go ahead.

Steven Valiquette

Thanks everyone. Thanks for taking my questions here. And then last one, you might have just touched on this. I might have just missed it, but the — again, within the model portfolio and the growth guidance, was there any assumption for higher occupancy or that still one of the drivers of upside relative to the guidance?

And then a separate question. You have the $0.05 FFO headwind in ’23 versus ’22 from the assumption of no CARES Act grants for this year. I guess the question is, is it pretty much set in stone that you’re probably not going to receive any grants in ’23? Or is there still some potential to receive some, and you just haven’t baked it into the guidance. Just wanted to get your thoughts around that? Thanks.

Peter Scott

Steve, we’ll tag team this. This is Pete. I’ll take the CCR — excuse me, the CARES Act grant question. So we had $8 million last year in CARES Act grants, which was about 0.015 benefit to FFO that we are assuming we do not receive any CARES Act grants this year. which is a roll down. I know you said $0.05. I just wanted to confirm that the 1.5 could we get some? Sure, we could, but that’s not baked into our guidance. And our expectation is that, that program is winding down at this point in time. So it would just be upside to our numbers.

With regards to MOBs, I’ll turn it to Tom Klaritch.

Thomas Klaritch

Sure. On the occupancy, if you look at our historic occupancy percentages, we kind of run that 91% to 93% range. Same-store occupancy right now is at 91.5%, give or take. So I think we have some opportunity to see a little bit of an increase from occupancy. But Overall, when you look at our growth each year, occupancy has a slight benefit, but it’s typically only 30, 40 basis points, either up or down. So — but as I said earlier, the bulk of our growth really comes from the pricing either in escalators or mark-to-market on renewals.

Steven Valiquette

Okay. That $0.05 on the CARES Act grant, that’s the live transcript. So hopefully, that will get corrected in the final version of the transcript. I just want to mention that. So I’m glad you corrected that. Thanks.

Peter Scott

I appreciate that. So the 0.05 just with regards to the interest expense roll down, but we’ll make sure on the final transcript it’s accurately reflected.

Steven Valiquette

Okay. Got it. Thanks.

Operator

The next question is from Tayo Okusanya with Credit Suisse.

Omotayo Okusanya

Yes. Good morning. Yes. The comment you made earlier on about financing still being available for life science companies that have good data, I think that context is appreciated. Just kind of curious, maybe other companies out there where maybe things are not going quite as well they did get good results from the data. I mean, in the days of cheap financing, those guys who kind of got a lifeline and still got some time to try to turn things around. Could you describe today what’s happening to companies like that, whether they’re all just kind of closing up shop, basically, VC is not being a patient with them and what implications that could have just for demand in the market?

Scott Bohn

Sure. It’s Scott Bohn. I can take that. So one thing I would note in the secondary market over the past, call it, six to nine months, you really needed that positive data. This is a little bit anecdotal because it’s just one or two, but we’ve seen some pretty decent secondary offerings over the past couple of weeks with companies who I would call it more neutral to maybe slightly negative data that have come out over the past several months. So it’s an interesting development there.

We’ve also seen a number of tenants raise capital via debt offerings or private placements. They tend to be pretty creative in times like this in ways that are pretty resilient as an industry overall. And there’s also pharma. We’ve seen several companies who have been short on capital, not in a position to raise it in a public market enter into partnerships and licensing agreements with pharma to kind of push on there.

Omotayo Okusanya

So it sounds like some of those companies are kind of maybe more focusing on M&A and things like that.

Scott Bohn

Yes. I mean whether it’s trade M&A or reverse mergers or just pure partnerships and licensing of molecules or programs out to pharma. I think those are the best and simplest path for tenants in that situation?

Omotayo Okusanya

Okay. That’s helpful. And then just going back to some of the earlier comments about development, again, the contribution to the bottom line, the guidance is helpful. But could you just talk a little bit on the redevelopment side again, some of the purposeful redevelopment that you are doing today, pulling some things out, moving them out of the things pool and things of that nature. What impact is that having on some of your life science same-store numbers in 2023? And what potential earnings drag is also being created to ’23 numbers as a result of that?

Peter Scott

Yes. Tayo, it’s Pete. It’s really two big redevelopment projects. We have some in addition to that, but it’s the point brand as well as the Oyster point. It doesn’t have really any immediate impact on the same-store numbers because we do appropriately take those redeveloped campuses or the redevelopment projects, and we pulled them out of same-store.

There is typically downtime associated with the fact that we aren’t receiving rent during the redevelopment period, and then there could be a little bit of downtime with regards to how long it takes to lease up. We’ve had a lot of success on leasing up redevelopments before we even deliver them.

And we do get the capitalized interest benefit, but that’s typically a lot lower than the yield we get on the rental income. So there is drag during the redevelopment period as a result of that, but there is also when those campuses do deliver, there is actually a nice earn-in from those as well. And as we talked about the NOI growth story over a three-year period of time, we certainly have embedded in there the development — excuse me, the redevelopment earn-in from Pointe Grand as well as from Oyster Point.

So you have noted there is a little bit of drag during redevelopment, but we do expect to see some earn-in the next couple of years as those projects come online. And there’s no real impact on same-store because those assets are not in same-store, they go into a non-same-store bucket while they’re redeveloped.

Omotayo Okusanya

Got you. And then last one if you would indulge me. Again, I know not no acquisitions in the guidance numbers, but I get you guys are talking about acquisitions may look a little bit more attractive now than they ever have related to development as part of that thought process, any interest desires, ambitions to do acquisitions more on global markets like life science in the U.K. or something of that nature?

Peter Scott

No, I wouldn’t say that time of priority list. I mean most other countries don’t have a for-profit healthcare market, which is really our model. It’s much more government reimbursed, especially on the medical office side, that product really doesn’t exists in the same format that would be interesting to us from a private pay standpoint. There is some global R&D that’s done, but so much of that is government funded and I wouldn’t put that high on the party list to a lot of international investing over the years.

It can make sense, we have to do it in pretty dramatic scale to really try to form a competitive advantage, and I don’t see a scale opportunity in our two segments. We’ve got a lot of opportunity here in the U.S. So we’ll stick with that.

Omotayo Okusanya

Thank you.

Operator

The next question is from John Pawlowski with Green Street.

John Pawlowski

Thanks for taking my call. Just one question for me. Pete, could you give us the revenue growth and expense growth assumptions that underpin the 5% to 10% CCRC, NOI growth guidance?

Peter Scott

Yes. Maybe I’ll just be even more high level than that. We still have about call it, 500 basis points of occupancy to recapture to get to stabilized occupancy levels and more of a stabilized NOI there. I think a good rule of thumb is we probably get about half that back this year and the balance of it next year in ’24, and that has a pretty significant NOI benefit to us.

I will say one thing we are dealing with this year is labor costs are still kind of stubbornly high, right? It’s a pretty full labor market right now. So those costs are still more elevated today than they typically have been, and that’s a bit of a wildcard.

And then what I would say is on a rate perspective, we are seeing year-over-year rate growth probably closer to 10% as it tracks higher towards an inflation number. So those are really the main drivers, occupancy growth rate growth, but expense, unfortunately, not just in labor, but a couple of other line items remain elevated.

John Pawlowski

Okay. And the presumption is the expense issues don’t really moderate at all in 2023?

Scott Brinker

I mean they’re better. I mean contract labor is down 70% from the peak. So I mean, things have improved. But part of bringing that number down is just paying workers more. So despite the headlines around labor, I think for the most part, the service level employees making $20, $25 an hour, that’s still a very competitive market. So we have seen contract labor come down, but certainly, there’s still pretty strong cost inflation, utilities, food insurance.

So our margins are improving. We’re a couple of 100 basis points higher in the fourth quarter than we were throughout 2022 as we recapture occupancy. Pete mentioned, we’ll get a big rate increase this year, but some of that gets spread out because the residents a lot of them are on anniversary date increases as opposed to January 1. Nonetheless, we’ll get good rate growth over the next year, but margins aren’t going to reflect all of that improvement in rate and occupancy.

And then just last point is, I think you know this, but that cash receipts continue to be really strong and far exceed what we’re able to recognize in earnings is about $22 million in 2022. So when you think about year-over-year growth rates in both 2022 and 2023, our actual cash results are a lot stronger than what we’re able to recognize via gap because of that entry fee amortization model.

John Pawlowski

Yes, understood. Thanks for the time.

Operator

The Next question comes from Aditi Balasandran [ph] with RBC.

Unidentified Analyst

One general question for me. But given that life science demand appears to be normalizing and supply will likely pick up in a few of the major costs, what is your expectation of market rent growth in 2023 and 2024?

Scott Bohn

This is Scott Bohn. I can take that one. So in 2022, we saw rent growth kind of across all three markets in the mid-single digits. I’d say pegging bank growth in 2023 is probably a bit challenging as we sit here today, given the macroeconomic environment.

We do see rents doing well currently with minimal concessions on goodwill located products, properties in A locations with experience life science sponsorship continued to perform well from a rent standpoint, this type of product that and always will capture the bulk of the tenant demand.

So I would say any slowing in the market persists, there will be probably more of an impact on rents in secondary markets or submarkets, Thankfully, we don’t really have much of that product is really any of that product in the portfolio. So really more anecdotal they are from other landlords and brokers. But I think things will generally hold up pretty well in 2023 and good product.

Unidentified Analyst

Great. Thank you.

Operator

The next question comes from Dave Rodgers with Baird. Please go ahead.

Daniel Hogan

This is Daniel Hogan on for Dave. I just wanted to ask, you mentioned balance sheet strength being a big positive. I was just curious about with the remaining swap from the new debt versus commercial paper, do you intend to do anything that along those lines in 2023? Or is that just reserved for if short-term and long-term rates continue to move further apart.

Scott Brinker

Yes. I think I understand the question. If you think about our commercial paper rate, we look at the forward curve for 2023 and that’s what’s embedded in our guidance, and that translates to around 5.5% average rate for the year. Could we do better than that in the bond market today — think we could. So, that is the plug in there is worst case. We would draw down on our line to fund any debt needs we have for the year, but we certainly could look to access the market inside of that rate, and that’s something that we are actively looking at.

So while we have no capital markets risk because we don’t need to do that, we certainly could have an accretive opportunity as the year progresses to do some permanent financing inside of that.

Daniel Hogan

Great. Thanks. Helpful color.

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

Yes. Thanks for joining the call, everyone. Have a great day. Thank you.

Operator

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