Q4 2019 Earnings Call
Dead dead dead dead.
Thursday
Good day and welcome to the Alexandria real estate equities fourth quarter and year-end 2019 conference call. All participants will be in a listen-only mode. So you need assistance, please signal conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to act questions to actually question. You may press star then one on your telephone keypad to withdraw your question, please press star than to please note that this event is. I would now like to turn the conference over to Paula Schwartz of investor relations, please go ahead ma'am.
Thank you and good afternoon. Everyone this conference call contains forward-looking statements within the meaning of the federal Securities laws. The company's actual results might differ materially from those projected in the forward-looking statements additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And that would like to turn the call over to Joel Marcos executive chairman and founder, please go ahead Joel. Thank you Paul and welcome everybody to the fourth quarter and year-end 2019 conference call back in with me today or Dean chicken, I guess Steve Richardson and Peter Mowgli. Oh, we'd like to thank first of all most importantly to each and every single member of the Alexandria family from the birth of our hearts for a stellar execution of our 2019 business plan a real granular day-by-day execution with the highest level of operational excellence. We're very very proud.
we celebrated our twenty-fifth and
Nursery in 2019 from our founding. We also achieved and passed the 25 billion dollar total market cap level for which we're also very proud and we're proud to announce long as you see today the highest leasing activity in the history of the company with so many companies actually seeking Alexandria campuses not just space anywhere the highest rental rate increases in ten years in the best or really driven by the best and location locations and our assets which have really driven that success and our operating margins have reliable an outstanding and they're really driven by judicious management of our unique business plan. So thank you everybody for that. When we look at the industry. There's continued bipartisan support for NIH funding which has remained strong Congress has provided an additional two point six billion dollars for fiscal year 20 budget totaling almost forty two billion dollars in this marks the fifth and sixth
Did you hear Congress has?
Bite at the NIH with a multi billion dollar increase in 2019 that were 48 new therapies approved by the FDA another historically strong year for bringing new novel therapy patients importantly most importantly several new therapies Improvement, 2019 included Innovative modalities against novel targets and for diseases, which have long needed treatments such as sickle cell disease and postpartum depression and we're proud to say that in 2019 Alexander received 52% its tenants of the FDA new approvals wage of all those approvals about a quarter were cancer-related and a quarter were central nervous system related total life science Venture investment continued strong at about $20,000 billion dollars for 2019 the second highest record over the past decade and despite Market volatility in 2019 Capital continue to flow to public markets, and yep.
19th 5.5 billion was
Raised across 48 biopharma IPOs on the United States exchanges and eighty 4% of that amount raised was in Alexandria cluster Marcus.
Let me turn for a moment to the coronavirus on January 30th that who declared China's novel. Coronavirus a global Health Emergency and some of Alexandria is most important tenants are already working with the NIH on vaccines and hopes are that a vaccine will be ready for human trials Bay as early as April in the interim us drug makers are donating large amounts of antibody real medicines in the interim that may help in the fighting of the virus. And as many of you know, some experts predict. There may be as much as a 2% decrease in China's GDP due to this, uh do to this viral due to this virus moving over to briefing to policy. There's been an increase focus on both drug pricing and FTC review of m&a that has caught the attention to both private and public market investors as they work.
To understand how this may impact that.
Situations and interest in Innovation by biopharma and re-evaluate which types of companies are prime for success in both the current and or potential future environments month. However, these issues have not led to a substantial change in the capital available to fund Innovative life science companies and m&a continues to be active with multiple deals announced at the end of 2019 June the first month of 2020 and it's likely that when you look at there are now for bills in Congress that are pretty much stuck with relating to some Focus
Give or take the focus on drug pricing but it's questionable given that we're in a major election year, whether these will ever see the light of day. And then finally the Trump Administration in its own policy is interested in potentially time what Medicare pays for physician administered drugs to a basket of economically sick or products, uh, in other countries a basket of countries and under such a proposal Medicare would pay 126% of the average price paid in these countries, but I think it's fair to say it's a long way away. The White House is still reviewing a draft of the proposal and once it's public supporters and opponents at time to make their case before the administration long before it will be finalized and then the idea will only likely be a temporary pilot program. Remember too that Medicare basically covers about a third of the US population. So with that let me turn it over to see Steve or some granular wage.
sales on the quarter in the year
Thank you. Joel. Alexandria is continuing clear leadership as a partner to the broad life science Industry and the premier developer of world-class Science and Technology campuses wage being exceptional performance as evidenced by the highest annual leasing volume and its history of one point of 5.1 million square feet and the highest leasing spreads during the past five years of 32.2% on a gaap basis. It's important to take a step back as we start a new decade and assess what is driving this outperformance 1-month or talented people across the entire company and a strong culture of meritocracy into the strategy that we emphasize that our recent investor day. The ongoing creation wage curation of unique Mega campuses in the country's strongest Innovation clusters.
We were very well positioned for robust future growth with compelling Mega campuses in each of our clusters. Peter will cover in detail. The recent acquisitions that have added to these campuses and the following a high level summary provides a clear framework for this high-quality growth opportunity in Greater Boston Arsenal on the Charles in New York City. We are advancing the third Tower negotiations with the city in Maryland the Shady Grove built two suits and a new large land parcel in Research, Triangle Park, the Research Drive and Davis Dr. Campis is in Seattle Mercer mega block anchoring or dominant position along the Eastern portion of South Lake Union and in San Diego the San Diego tech center in Sorrento Mesa and a present a particular day like today the very creative and compelling joint venture with Boston properties in South San Francisco the campus total of 29.3 Acres Alexandria has contributed.
313000
Square feet of operating properties comprised of a Class A lab facility in office building and a state of the art Net Zero Timber amenity building with conferencing Cafe anchored with tenancy from the California life science Association. Boston properties has contributed seven hundred and seventy-five thousand square feet in 3 Office Buildings off. The existing facilities will eventually be on an approximate fifty-fifty basis and new development on a 51-49 basis. We jointly have the ability to unlock tremendous value on the site with the ability to develop three ground up class safe facilities, totaling 637000 square feet and redeveloped. One of the Boston properties Office Buildings off so that approximately 50% of the campus offers value creation opportunities overtime and a ultimate transformation to a high-quality laboratory, ma'am.
campus the site
Is really destined to become the Premier Life Science location in South San Francisco as it features walking distance to the Caltrain which is undergoing a substantial renovation and upgrade reimagine master-planned and a unique community building that will be a magnet for the life science Industry Alexandria, Boston properties share a high regard and mutual respect for each other's teams and accomplishments and collectively we are very enthusiastic about the future of the campus as we co-develop with Alexandria as the lead developer a highly a minute. I did not get campus featuring a total of 1.7 million square feet at completion.
On a separate note The Proposition E in San Francisco will be we expect to be passed during the upcoming March election will essentially provide yet another barrier to entry for development as it ties the allocation of prop M office entitlements to the city's ability to deliver its state of California mandated requirements for affordable housing the proper amount allocation of eight hundred and seventy-five thousand square feet or approximately 1% of the entire City's Office Inventory could thus be further constrained and reduced we were monitoring this ballot measure closely and anticipate its passage will make existing and entitled campuses even more desirable and valuable.
rod company
Wide metrics include again 5.1 million square feet least during 2019 the highest in the company's history 2019 rental rate increases of 17.6% cash and 32.2% GAP the highest during the past ten years on a mark-to-market basis across all regions. We're at about 17.1% on a gaap basis and finally and importantly a sense of urgency continues in the marketplace as nearly three-quarters of our leases and 2019 were really renewals Alexandria strategy the team and strong brand is positioning the company well for sustainable growth in each of our markets, I landed off to Peter. Thank you Steve, I'm going to spend the next few minutes updating you on our fourth quarter deliveries $88 bucks on the Mercer mega block and 15 Echo progress. Give an update on construction costs and then.
recent activity
I'll add a couple of major Acquisitions that occurred in the fourth quarter and one that closed in January.
So as for developments 2019 was a very busy year in many respects. But especially on the development and Redevelopment front as we delivered over two million square feet off at an average initial yields a 7.4% on a gap and 6.9% on a cash basis. The fourth quarter deliveries were light relative to the first three quarters at five and thirty one thousand square feet, but we closed out five projects during the quarter and ended the year with all eleven projects spanning nine submarkets at 95% occupancy or higher illustrating the strong demand present in all of our markets.
Given the significant interest in eighty eight blocks and then the Selma submarket of San Francisco the Mercer mega block in Seattle and 15 Echo & Seafort's area Boston. We wanted to provide a briefing update on those three as many of you know, the various team the Bay Area teams significant community in Municipal engagement resulted in our eighty eight bucks and project received an allegation on the entire project as opposed to approval and phases other developers received. We are pleased to report that we are now fully entitled as all challenge. Have expired and the central Soma plan litigation has been resolved. We expect to receive a permit for Demolition and our site work in May and we expect to commence those activities in the summer one certain required off-site work is completed as you likely know. The sounds are the million seventy thousand square foot project is 46% leased to Pinterest and Thursday.
eight percent least overall
The status on the Mercer mega block is that we're negotiating or prospective purchaser consent decree with the Department of ecology that essentially will cap our environmental liability and that should be resolved by year-end and we should close shortly thereafter concurrently. We're preparing drawings for early design guidance and submittal of a month East from it shortly after closing which will perfect the entitlement to that project. We're as far as 15 Echo goes we're redesigning the building to be alone know she'll and it is currently in for review with the Boston Planning and Development agency. We expect the entitlements to be complete and have a permit to break ground in the first quarter next year. The location has been very well received by tenants in the market and we've had preliminary discussions with a few of them.
Moving on a construction cost given our proclivity for value-add activities or underwriting process includes rigorous periodic updates of construction cost Trends. The exact of terrorists have been have been a constant theme in many of our investor meetings and by and large we've been able to manage through them by engaging our contractors early and leveraging our deep relationships with them to achieve the best pricing for steel and aluminum buy out and cover any unexpected spikes with contingency despite recent positive developments in the trade war or remain cautious and conservative in our underwriting of cost as manufacturers are quick to point out pricing is subject to change based on trade negotiations.
Our latest analysis which we get directly.
From our contractors indicates that the national average for escalations remains in the 5% range, which is consistent with 2019 and recent years. Most of our major contracts Partners across our markets anticipate slowing toward the end of 2020 and into twenty one and twenty two, which could ease pressure on pricing. Most of the pressure on pricing is attributed to skilled labor shortages. Although the construction industry continues to add jobs. Most of the additions have been unskilled laborers increasing the productivity gap, which is led to above Market wage scales for skilled workers and overtime to staff projects.
The projected slowdown would mitigate this moving on to Acquisitions as you know, we executed a secondary offering in January and use of proceeds includes finding a number of strategic Acquisitions. Approximately 956 million of these were completed in the fourth quarter of nineteen and include the following
Arsenal
On the Charles which was which was disclosed investor day is located in Watertown in Denver suburb of Cambridge and closed December 17th at a purchase price of $525 a half million. This acquisition is a terrific example of our focus on value-added investments upon full development. We contemplate a 12 building campus containing a million $35,000 fee that will provide unprecedented scale and cambridge's inner suburbs 303 872 Million Way closed in December at a purchase price of $291 and is located in the greater Stanford submarket of Palo Alto this four hundred seventy eight thousand square foot campus has been least back to the seller and provides a similarly unique opportunity for Alex easy to achieve scale and a highly valued cluster location.
The five hundred ninety-eight thousand square foot San Diego tech center will be rebranded as SD Tech by Alexandria and will ultimately be fully developed in phases into an approximately 1.3 million square foot Life Science and Technology Mega campus, which we owned in a fifty-fifty joint venture. Although it's known as the Premier Technology campus and strong. It is lost its luster in recent years and therefore offers us a great opportunity to leverage our Redevelopment skills and long-term long-term ownership Verizon to create a significant value walk through a thoughtful repositioning.
in addition
To the 1419 and Acquisitions, we completed three transactions totaling a little over $341 in January and I'll briefly touch on one of those as well to 75 grocery also known as Riverside Center is a 510000 square foot office project with terrific access to Cambridge and Boston via its adjacency to the Riverside Green Line station and location at the Nexus of the Route 128 and Mass Pike interchange. It is also located in an area of the western suburbs where a considerable amount of executive Talent resides. The project is in Newton, which is within five miles of our Waltham cluster and we see this acquisition as an extension of that in addition to the transit advantages and productivity decision-makers Riverside Center provides optionality to incrementally convert the building to lab over time. So with that I'll pass the call redeem. All right. Thanks Peter Dean. She cannot get here.
Afternoon everyone, you know as admission.
Driven real estate company we're very proud of our teams awesome execution of operating and financial results. Our team remains very focused on leadership and ESG making a positive impact on society by asking in a thoughtful manner to minimize the impact that our business has on the environment and advancing human health well-being and nutrition during 2019. Our team earned a five-star rating and an age as your score from Grimsby we issued 550 million and green bonds with proceeds allocated to Green eligible projects consisting of gold or platinum leed-certified projects. In addition to other boss issuance has continued the execution of our 2025 goals focused on how we manage carbon emissions energy consumption waste diversion and water usage and then continued leadership and wellness. November was a really exciting time. For our employees as fifty nine of them finished a 26-point to my New York City marathon in support of raising important funds for mission-critical rebirth.
at the mount Sloan-Kettering
Cancer center now. This is pretty amazing. Since this was the first marathon for most of our renters are solid results highlight continued growth and high-quality cash flows operational efficiency and several key industry-leading statistics.
Total revenues were 1.5 billion up 15.4% over 2018 cash in a wide was a billion dollars for the for fourth-quarter annualized and ffo pressures adjusted was right on track with our expectations at $177 and $6.96 for for for the fourth quarter and 2019 respectively high-quality cash flow growth was generated from one of the best choice. Rosters in the industry with 50% of our annual rental revenue from investment-grade or large cap tenants same property. Noi growth was wrong for 2019 and 3.1% and 7.1% on a cash basis and as Peter and highlighted in 2019. We delivered 2.1 million rentable square feet of development and Redevelopment projects contributing significant growth in rental and then off income now occupancy came in very strong this quarter at 97.8% before consideration of vacancy in recently acquired properties No Vacancy from these recently acquired properties.
Deus occupancy in the 4th quarter by one
Percent and when combined with Acquisitions we completed in January of 2020 will in aggregate reduce occupancy in the first quarter by 2.4% Now this vacancy is primarily related to San Diego Tech that was acquired in the fourth quarter in the consolidation of buildings. Boston properties contributed to our joint venture with 27% vacancy.
Now the important takeaway is that our occupancy across our core asset based remains very strong and this vacancy represents opportunities to grow rental income and cash flows over the next 6 day quarters. So, please refer to the tabular disclosures at the bottom of page twenty of our supplemental package for additional information. Now there has been recent attention on potential changes to property taxes for commercial real estate correct 13 commercial real estate in California subject to property taxes that are assessed at 1% of the purchase price subject to annual increases in fair market value capped at 2% and subject to investment for new construction. Now, it's really too early to tell that there will be changes in property taxes for commercial real estate in California. But a few key points to keep in mind Alexandria is a very favorable lease structure birth or 97% of our lease is providing for the recovery of operating and major Capital expenditures. Therefore there would be a very insignificant amount that we would not recover from our tenants if if our properties were a
Test at fair value additionally. Most of our properties are relatively new from ground up.
Development and Redevelopment and therefore we believe we are in a better position than the average property in our core markets importantly the life sciences industry is extremely focused on the benefit of proximity to other scientists and Innovative entities in order to develop new and Innovative therapies versus the nominal amount of rent. They pay relative to their annual R&D budget now a couple points on impairments during the fourth quarter be recognized impairments aggregating ten million dollars primarily to reduce a portion of our cost basis and two privately-held Investments. We still expect to recover a significant portion of our original investment one company is focused on neurodegenerative diseases and the other is a clinical-stage company focused on novel enzyme targets importantly our overall Venture Investments continue to generate significant value or disclosures this quarter highlighted recent valuation aggregating almost a half a billion dollars consisting of over four hundred million of unrealized gains as of December 31st and birth
Seventy million of net realized gains over the last two years now the real estate side and the fourth quarter we decided to commit to the sale of the only to Legacy properties that we own in New Jersey and Florida which resulted in impairment charges aggregating 12.3 million. We hope to sell these properties over the next four quarters. Now, we remain on track with our disclose goal 5.26 times for net debt to adjusted ebitda by December 31st, 2020, and we felt it was prudent to remain patient and execute our follow-on Equity offering in early 2022 fund to key positions that would were awarded and completed in December of 2019. Now as a result our net debt to adjusted ebitda for the fourth quarter of 2019 was four times higher than the five point three times that we originally forecast it. It's really important though. The Highlight that our team deserves recognition for the achievement of our be one trip will be plus credit ratings. Yep.
Frank's our credit profile at approximately
The 90th percentile across a hundred and sixty publicly traded REITs and this excludes mortgage rates now one brief comment regarding our ATM program. We do expect to file a new at the market offering program the first quarter here on guidance. We have reaffirmed our 2020 guidance for EPs and ffo per share is adjusted at a midpoint of $2.22 and $7.38 respectively life, and please refer to page 7 of our supplemental packages for details underlying assumptions included in our guidance. Let me turn it back over to Joel operator. You can open it up for question answer please.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 or your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We'll pause momentarily to assemble our roster.
And our first question will come from Jamie Feldman of Bank of America Merrill Lynch, please go ahead.
Great. Thank you. I guess I just wanted to start on just thinking about the potential risk of excess Supply in both South San Francisco and Boston Seaport things that we've got several projects if I find their can you just give us your latest thoughts on both those markets?
Jamie hi, it's Steve. Yeah, thank you for the question. You know we've talked about this for quite a while in South San Francisco. And I think we've been very pleased to see that. You know, that's why that's come on has been substantially absorbed Kilroy with six hundred and fifty thousand square feet of phase one is entirely lease. So that does not present a near-term opportunities Blackstone now has resolved half of their four hundred thousand square foot buildings. So they just have two hundred thousand square feet available there and then finally hcp just has 65,000 square-feet available when their project little further north and south San Francisco. So on an overall basis, you know, that's very limited supply of available inventory and we in turn field, you know, like we're extremely well positioned with 201 Haskins. We've got a hundred thousand feet least there and ongoing discussions for another big block of space dead.
So as it may have been a concern in something we were watching closely.
Year ago, you know we're in very good shape, you know the future pipeline. I think we'll take a look at that and continue to monitor that but I think that'll be metered over a number of years and not really present a big Supply shock moving out to sea port there are probably three other projects that could compete with our nicko's site. If I'm looking for large blocks of space a couple of them it about a couple hundred thousand square feet and another one at about five hundred thousand square feet. So again, you know, you may have a future Supply that's a number of years down the road but, you know, nothing in the near intermediate-term that we're overly concerned about but we're always monitoring this extremely closely.
Okay, thank you. Can you talk about the demand pipeline for the seaport? It does seem like there's several projects in the pipeline there Beyond, you know, it's part of the router as well.
Yeah, I think it was we look at the demand in you know, the Cambridge Market it continues to to stay healthy with 2.7 million square feet of office. And and when you start looking at you know with 2% vacancy in that market, we have discussed all along Seaport being a very strong natural outlet for that. So we took or in early discussions with you know, a very large tenant face that we have in our three Mega campuses there in Cambridge. So, you know, we're very encouraged at a very early stage with you know, the tenant interest in that site and this is Peter Jamie. I can just give you some color that obviously the seaport is a major Tech destination is a a number of big tenants going in there Amazon is making a huge move and will likely double up a lot more.
space and when you talk about the
Concern over Supply, but also it's starting to gain a lot of traction with life science companies bird text, which is already there is looking to expand in a fairly big way and there's a couple Foundation medicine has moved over there and there's a couple of other tenants that will keep to ourselves that are interested in as well. As Cambridge has very limited ability and people see Seaport is is a great place to go in lieu of that.
Okay, and then last for me and if you think about your Acquisitions done today and the pending, I think it looks like you're pretty close to your full year Target. So, how do we think about how do you how do we think about potential that you go? Well above that Target and it's so how do you finance it?
Well Jamie, it's Dean here. I think what we found really interesting about the market today versus looking back several years ago is dead. There's obviously a a volume in the market many deals of which we pass on the other thing. That's really interesting about the Dynamics today's I would say that we're we're required diligence before we're even aware of being awarded as a as the winning bidder on a transaction. So I think think what I'm trying to highlight is off there is deal flow in the marketplace. We're very disciplined in what we choose to pursue and there's a short fuse when it does come up as a winning opportunity. I will keep the market informed as we go through the year as far as funding goes weather. It's construction value creation projects or future Acquisitions wage.
will remain as disciplined as we have
I've been historically Jamie today. We've got a a bucket of equity to solve for we solved the big chunk of it, and we have a an amount to resolve for the rest of the year, but I think you'll find that was disciplined and preserving or optionality as we look forward to solving the rest of our Capital needs for this year.
Okay, how long how large is your non-core pipeline or 9 4 portfolio right now you'd sell.
Oh, I I think the way to Simply describe it Jamie is we always prune the bottom of the portfolio. There's always a couple assets we're selling every year that don't even resonate to any meaningful Capital. We we did most of our heavy lifting back in 2012 and 2013 on the non-core side.
Okay. All right. Thank you.
Thanks, Jamie.
And our next question will come from Tom catherwood of b t i g please go ahead. Excellent. Thank you. Steve. The opening you mentioned kind of the role of Alexandria is a partner to life science Industry. And then you know you leader you mentioned this sense of urgency for your tenants across your markets. Hence the high leasing spreads in the early renewal. How do you balance this kind of almost dual Mandate of the ability to push rents because vacancies are so low and tenant demand is so high with the fact that you have these long-term relationships with tenants. What's the kind of an equation that goes into that? How do you make sure you're giving them the space that they need while also pushing a rents as far as you can with Tom hired Steve. Thank you for the question. I think it it's been and it has been for you know the time since the company was started. It's a balance of you know respect wage.
for the clients that were
Working within the work that they're doing. These are multi-market relationships their multi-company relationships. So they are critically important facts and I think we balance that respect with the reality of the marketplace and share that in an opening pretty transparent way. So that ultimately the companies and the decision makers feel like they're gaining, you know, tremendous value in the facilities tremendous value in the operations of the facilities and really are working with somebody who's a partner for the long-term. So, I think it's a balance between those two.
Got it. That makes sense. And I assume that there is kind of also helping them find space in other areas which leads to my next question. Peter was really helpful. When you provide more insight to the Riverside Center purchase in the Boston suburbs. Obviously, the Boston suburbs has been an area. We've been more active with Acquisitions and Redevelopment over the past few quarters. What do you seeing as far as demand Dynamics Beyond just Executives living in the area. What are you seeing as far as tenant demand there and how does this differ from previous Cycles when the suburbs experience much more volatility than your Urban markets. So so Tom is Joe. Let me start off before Peter jumps in I think one of the things you have to think about is there are a host of companies broadly in the life science area. That actually don't want to be in the in the Cambridge location for variety of birth.
Beyond where executives
May live and so we've seen certainly being the number one life science Market in the United States. There are a continual flow of companies that either started in Cambridge and choose to move out or have never moved there in our our expanding and I think those are ones we see pretty regularly a number which are pretty great credit and a number of which are not but I think there's a pretty good core of tenants and then those tenants are pretty mindful of what Peter says is Transit has become king and I think working with a owner operator that both understands their needs and is pretty sophisticated about what they do and how they do things but Peter can give you any further. Yeah. I mean, I you know, I think Joe answered it. Well, I guess one thing I'd I would remind everyone about is we've had over a million square feet in the suburbs for a number.
years with high ninety
Talk and see never really running any problems. There is Joel said there's a there's a number of companies that just would prefer to be there but we feel confident in Acquisitions off Arsenal on the Charles and Riverside Center because they do connect well to Transportation. They have very close proximity to Cambridge and Boston and you know given just what is going on in Boston in general such as the tech Cadre going to downtown, you know connecting to all the different teams such as the green line as well as red line is important and so, you know, the demand is really coming from a lot of folks that want to be in the suburbs you'll said but there's also a tremendous amount of company growth in Cambridge that can't find growth space. So we're figuring out where to go next. And I think we've made some pretty good decision.
Gotcha. So it sounds like it is a little bit different in the suburbs than it used to be. So one last one for me and not all suburbs are created equal to remember that wage. Very very fair. The last one for me probably for either Dean or maybe Steve, you know, a lot of redevelopments as part of the Acquisitions that you guys did in 2019, whether it's off campus point or SD Tech or the Arsenal. Is it possible that earnings could kind of take some chunky hits as leases expire and you go in to reduce the number of these either outbuildings or parts of the buildings or are you planning to pull the projects out of service? So you end up capitalizing interest and ffo remain stable? How should we think about how those kind of roll on over the next, you know twelve to eighteen months?
Hey Tom, it's Dean here. I'm trying to think about the Redevelopment projects that we have on the horizon. At least if you look at our 2028 lease expirations as an example. In fact Twenty-One as well. We highlight that there's some Redevelopment opportunities as an example. So I think over the next five years. What we do have going into Redevelopment is very very modest. There's 75 76,000 targeted for twenty and then another $79,000 a month for 21 and that is related to the Arsenal and the Charles. So I think that gives you some visibility over the next 24 months that it's not really going to have any impact and this is Peter. I think I'll just try him in to remind everybody that some of these redevelopments are considered covered land plays if you look at the club.
21260 Campus Point Drive
4161 Campus Point Court, we have latest occupying those properties as we do a build-to-suit for them just next door. So we're able to see you kind of get the earnings while we build and then once we deliver one of those buildings will be converted to lab. The other will be demolished in favor of a new building off of the overall 1.9 million-square-foot Campus Point, maybe campus development ten. Necco Street in Seaport is very similar. It's a parking garage with good income coming off that as we you know position it for redevelopment. So we have a number of things like that and we're very aware when we buy something that could be redeveloped Thursday and to the extent it has cash flow of things and more direct.
Understood. Thanks everyone.
And our next question will come from Rich Anderson of SMBC, please go ahead. Hey, thanks and good afternoon on the on the Boston properties join Thursday, or I'm curious if you can speak about that in dollar terms a little bit in terms of you know, buildings get more to Market when they get contributed into the JV is what's the leverage on the JV? You know, what's your what is what's your Equity investment in? You know, what kind of capital or are you kind of taking out of pocket and putting into this JV? I just I guess mainly I want to know one point seven million square feet of means in dollar terms.
so
Richard Sedin here. I think he asked a couple points first off. I think it's important to recognize. This is a tremendous joint-venture opportunity for Alexandria. The mark-to-market is actually fairly modest on the operating assets. So that really doesn't come into play here as far as dollars going in I'd say stay tuned for the first quarter disclosures will get into a little more information that's required to be disclosed. But it was just a very recent transaction it was premature for us to get into the details right now. Okay fair enough now the this satisfies your to sort of objectives, which is Mega cabs in buying vacancy. And so I I agree. It seems like a really great set up for two really high quality companies. So like all that. Yep.
If there's a pipeline here.
No, Boston properties operates in a lot of your your markets is there is there, you know a chance that you the two companies could work more together in in other areas around the country and do something similar or is this sort of a one shot deal do you think?
Retired Steve this this was a very unique opportunity. We were literally adjacent neighbors to one another for a couple of decades. There's actually one part in the heart of the campus that Boston properties owns and we had a long-term Perpetual easement across it there's additional parking with a pack facility that ends up unlocking another chunk of square footage. So you had presented to both of us you were very unusual and unique opportunity. So, we're very focused on this and don't necessarily see this being, you know, a pipeline as you mentioned again just a very unique and exceptional opportunity to create something that really will be transformational for nearly Thirty acres in South San Francisco. So quite the scale when you think about it. Okay, great and then dead
on your buying vacancy
Initiatives what is like the path the Cadence to cap rates if you're buying an X and how how how does that ramp? You know, if you could speak in general terms wage, when you look at these sort of, you know, half vacant type of opportunities for the company. Yeah, I wouldn't say that. We have a strategy to buy bacon searage. I think it is unique to each transaction. So the San Diego tech center as we said presented itself in a unique way very, you know, under managed and relieved was not meeting up to what we think it it's aspirational capabilities could be I don't think we went in there specifically because it had you know significant vacancy think same thing with Boston properties issues. I mean, I think they were motivated by they can see I'm not sure we were but we were motivated for the things that Steve pointed out is the ability to overdose.
time create a
Very unique made campus right on you know, right at the Gateway entry to to South City. So I don't think I would into it that as a you know, as a like deliberate strategy. Okay didn't mean to put words in your mouth. They're so sorry about that, but nonetheless good deals. And then finally for me, what is the timing of that fifty five million dollar burn off of free rent on the on the delivered developments?
Hey Rich, it's a Dean here. The majority of that $55 million of free rent that is now related to properties are in service generating Revenue. So the month rent. We'll burn off substantially over the next four quarters. Okay, great. Thanks very much. Thank you.
And our next question will come from see let me grab of evercore is I please go ahead. Yes. Good afternoon. I wanted to First clarify on the Mercer mega block Peter. Did you say you don't expect that to close until the end of this year? And if so, when do you expect to have buildings open at that project? Okay. Well, I will confirm that closing will be at the end of the year. We are, you know concurrently as I said processing drawings for our early design guidance and mop so, you know, that is a fairly long process, but I'd imagine our entitlements will be perfected some time in twenty one and then you know decisions will be made then based on market conditions really hard to forecast where we'll go.
Okay.
Just following up on your comments on the mega campus strategy. Obviously, the flexibility for growing tenants is is a key part of it. Just wondering if part of the economic benefit is spreading the cost of the amenity building across the larger campus if that's part of your strategy and on those dedicated amenity buildings. Are you getting reimbursed for the amenity package from tenants? Yes, you know, it's Pier you're exactly right. The the mega campus does allow the spreading of the office not only the cost of the amenities but it actually gives us a lot of economies of scale and the operations of the buildings. So that's how we're able to get to that in a y premium, you know, in addition to our higher rental rates. We you know have lower reimbursements. So the tenants feel you know, that they can they can go ahead and cover those things the minimum wage
He's themselves are almost always.
What's included in a load Factor? So we do get full rent on them as well as some the collection of operating expenses. So the larger the dog is the easier it is to do cuz obviously you want to manage your load Factor. Okay, great. And one last question, you mentioned the leasing spreads continued to be significant June 2019 at I think a record or a record in the past ten years. Just wondering if you have a rough estimate for us. We're in place rents for the portfolio might compare wage to current market rents. Sheila hired Steve. Yeah, we we had talked about a mark-to-market of 17.1% on a gaap basis and nearly dead on a cash basis and that's across all markets and it is particularly strong as you might expect in Boston, Cambridge.
Okay, great. Thank you.
Our next question will come from many quarts of City, please go ahead. Hey, it's Mike in here with Manny. So I just want to come back to potential job opportunities around the assets that you own and it definitely sounded like from the EXP call that vehicle be approached you guys with this unique opportunity and certainly there's a lot of unique circumstance from that ownership of assets beside each other, but I'm just wondering after you've now identified and been able to go through this process for what will be one plus one thousand to have you sort of done a deep dive into every single one of your other assets and campuses to see whether there's other landlords that may be beside your assets who you can work with to create a similar value either by buying them out or entering into similar types of joint ventures like that. Yeah. Hey Michael this Joel
We we've actually been doing that for quite a while.
I'm thinking about our locations. The assemblages of Campus Point is maybe the best example of that where we grew a campus wage back in 2010. I can't remember exactly how big it was then but in the hundreds of thousands of feet today, it's over to almost 2 million square feet and that's probably the best example where we have very deliberately gone after adjacent Parcels or buildings or things like that other owners and so forth and I think that's something we always think about it's not so much easy to do often times, especially if their own or users that are adjacent, but that clearly is part of our long-term strategy.
I guess is there anything else sort of underway that got uncovered where arguably this thing would be once you got into the negotiation and understanding what was that? What was there obviously on a lot of value to both parties is there is there nothing that sparked something of similar scope within the portfolio today or probably get breaking news today stay tuned but the answer is right, whether you've gone through a more Deep dive into these opportunities and and the answers very much. So yes on many other question, too.
okay being just just
The capital plan understand you want to keep your options open, which is could you help us dial in how much of that is equity and and maybe as part of that what the Cadence is of taking down the full receipt just at home.
Manny sure, it's Dean here. So two questions, maybe I'll start with the ladder as far as the timing on the Ford because I'm a big component of the capital race was related to two key Acquisitions that not only closed in December but also were awarded around that time frame had a short fuse to work with we do need to bring down a a big chunk of the capital in q1. So you'll see some of the equity settle in the first quarter and then you took the rest kind of spread through the remaining three quarters as far as our broad needs and your guidance on page seven touchdowns on the broad, you know Equity component number that we need to solve the 2020 which was 1.95 billion at the midpoint and the following offering in January.
solved for
Little over a billion dollars of that then so we'll work through options to close out the remainder through the through the next several quarters.
And our next question will come from Dave Rogers with beard, please go ahead. Yeah, good afternoon, baby fragile or Steve wanted to ask about just kind of the mega campuses versus the historical clustering a slightly smaller building. I mean as you move to these Mega campuses, is it your expectation? You would kind of move back toward maybe a smaller base of lab tenants. Would you prefer that five versus maybe leasing in the campus to attack 10 and it just seems like maybe the tech tenants would be less likely to want to rent next door to you know, competitive tenant versus the lab tenants. So just some thoughts maybe how that would direction that takes you
Dave hi, it's Steve. Yeah, thanks for the question again by and large, you know, ninety percent or thereabouts of The Noy is from Life Science companies and you know the industry as it's growing and maturing and you know, I think one of the most important slides we put out in investor day was the new modalities that the life science companies are pursuing to really get at intractable diseases. So what we see is, you know, these companies continuing to grow they they demand to be in these clusters wage in the footprints that they're looking to occupy and you know, their colleagues are looking to occupy continue to grow so, you know, we see the mega campuses as a natural response to the way the industry is growing and evolving in a very, you know, healthy productive and sustainable way.
Thanks for that. And then maybe just a second question you have about a little over two million square feet of remaining expirations between 20 and 21 as you talk to those tenants. What what are their maybe hesitate to it renewed already. I mean does it have to do with rent or you getting pushed back on rent? It doesn't sound like maybe you're getting a lot of that these new modalities. Are they thinking of hey, I have to move to another cluster. I mean how much of that kind of weighing into these decision of these smaller tenants in particular very much case-by-case. I think I I think it's very hard to to make a general observation there. Some are quite small and some are you know somewhat larger, but I think it's super case-by-case. I wouldn't read anything into it particularly in David. I would just emphasize Joel's point. We really don't have a number of large blocks rolling. It really is consisting of smaller tenants and they would typically, you know be looking at a different time.
and framed in a then larger tent
Gotcha. Thank you. Thanks.
Our next question is a follow-up from Jamie Feldman of Bank of America Merrill Lynch, please go ahead.
Great. Thanks. I was just hoping you could talk more about the impairment. I think you had a $10 impairment in the fourth quarter. And I think it was like $17 for the year. Just you know, what what caused you to take the rolls down and then also just going forward is that kind of a reasonable run rate based on obviously, not every every Investments going to play out the way you think it will.
Jamie so the ten million dollar impairments on the Venture side was really related to to private privately held Investments wage the impairment as well. Let me just touch on the accounting rules cuz it'll give you a sense for how the impairments do come up on the public side publicly traded Securities. They're marked off it through earnings now based on the closing stock price for each security. So it's pretty straightforward. There's no impairments on the public portfolio to the extent a private wage old company provides net asset value. The fast be said that asset value is is really effectively a practical expedient for fair value pack as a result. There's no impairments cuz you could just going to record those Investments at net asset value. So it's the other privately held Investments where there's no nav.
And you do have to mark the market from time to time for up rounds and down Route.
In those companies, but to the extent there's some hiccup in their business plan that impacts the value of the valuation for a company. The accounting rules will require you to take a look at indicators of impairment and recognize the right down. I think Jamie when you have a portfolio of any assets real estate or off your Investments, you will have an impairment from time to time. I don't think the historical run-rate gives any perspective for the perspective charges that could occur cuz they're very specific to the company's most importantly Jamie. We've got tremendous value that we've generated from this portfolio as I mentioned over 400 million of unrealized gains on the books as of December 31st, and that's a month in addition to roughly seventy million of realized gains that were recognized over the last two years. So I'd probably focus on the upside here than than the occasional right down which is inherent in a portfolio wage.
Yeah, the one I'll I'll add a footnote Jamie.
the one uh, similarity between the two companies is there was management changes in each of the companies that played into that that impairment
Okay, the first of these are investments you still holding on to that you think still have outside?
Well, we're we wrote down only a portion of a Jamie which means we still have a significant amount of our original investment. We expect to recover as far as the future goes. It's it's it's difficult to speculate whether you know will make more money Downstream in the future on it than our current budget. So stay tuned on that.
Okay, and then as I looked at the development pipeline, it looks like there are several projects where your leak percentage decline, but the square footage increase was there anything specific that you did this country in terms of changing building sizes or some of these projects? I'm just trying to make sure I understand what
there's no.
the one that I could think of Jamie that might have been a little more noticeable than anything else I think in in
in our project the Alexandria District
56% 56 percent least 65% least negotiating. I think it's pretty close to where it was. It might have moved a little bit. I know there's one least we had that were not as confident in completing but it's still still in the works. I think that was the only meaningful change that may have been reflected you off.
Okay, I'll follow up with one. I think there was one or two that had like they're now larger project. So it's pulled back the 20% but I don't have it in front of me. So I'll I'll follow up with you guys. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Joel Marcos for any closing remarks, please go ahead sir. Yep. Thank you everybody, and we look forward to chatting with you on the first floor call. Take care.
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