Q2 2020 Alexandria Real Estate Equities Inc Earnings Call
Good day and welcome to the Alexandria Real estate equity second quarter 2020 earnings Conference call all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question. Your press Star then one on your touch trends.
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Thank you good afternoon, everyone. This conference call contain forward looking statements within the meaning of the federal Securities laws.
The company's actual results might differ materially from those projected all forward looking statements.
Additional information concerning factors that could cause actual results could differ materially from those are forward looking statements.
The company's periodic reports filed with the Securities Exchange Commission and I would like to turn the call over the Joel Marcus Executive Chairman of founder. Please go ahead Joel.
Thank you very much Paul and welcome everybody to Alexandria.
Second quarter earnings call and our first full quarter done virtual way and that's always do I want to thank the entire Alexandria family for an outstanding we executed second quarter really in all respects and by all metrics as a set our first full reporting quarter virtually.
It was wants to add a couple of notes about change everything changes but change.
And as I've quoted before they award winning visionary author, Jim Collins noted to be built to last you must be built to change.
Stephen Hawking Sad intelligence is the ability to adopt a change so Alexandria, yes has always been.
I think a resilient and I'm very responsive to watch a changing environment.
We're all blast compared to many we're struggling during this pandemic and I want Oh, My heart goes out and wish everyone. A both safety and good health here and Dean will talk about this but entire are huge kudos to the entire accounting and finance team.
Our when they reach best Communications Gold award once again.
And our first quarter, calling and are on our first quarter call I should say, we dialed back our growth in light of the uncertainties.
The cobot onslaught at all realms, but now that we've gotten through that quarter and through part about gotten through the second quarter, certainly and into the third quarter.
We have a much Claire I think view of the landscape going forward.
I want to say a couple of things about corporate responsibility. It's a lot in the press, but we're not new to this and we've included in our press release, the panoply of corporate responsibility initiatives. We've worked on very hard over many many years, many long standing and impactful active.
Ladies and our regional communities are truly positively impactful sustainability initiatives, including our pioneering zero carbon building in south San Francisco and more recently in response to the Cobot pandemic. We are in fact that the vanguard of a life science industry in advancing the search for solutions to cope with nine.
Team.
Well it also harken you back to our project 115 with.
Alpha about the subsidiary of alphabet Virally 72000 Americans died last year are hard to imagine half of the number that have died of cobot. This year, but an enormous number and more than in the entire Vietnam War.
Of opioid addiction, and 2020 odd deaths are up 13% and one could imagine why that may be a last year, we announced our 115 project in Dayton, Ohio to serve as a unique and complete care model comprehensive care model relate to attack the opioid crisis in America.
Our hope was we would build a model that other communities couldn't copy we pioneered the design and development of the almost 60000 square foot campus. Some thank you to the great team that I worked on this.
On about four acres, which opened to outpatient since the fall up 29 team. This month, we completed 115 living the residential housing component of the campus.
This facility is the so called sober living facility for patients suffering from opioid addiction to live while accessing full on campus treatment that will come over time.
Really the first full treatment care facility from de talks to job placement.
Any shift gears here for a moment talking about the life science industry, and then I'm going to have Jenna speak after I finish and talk specifically about the three most advanced vaccine projects.
As we all know we're living in truly unprecedented times in history with the onslaught of a pandemic the resultant recession and a civil strife in many of our cities we've seen a significant uptick however in demand this quarter across all of our market.
It's both from new and existing tenants and that's given us. So I think good comfort Oh, there's been strong bi partisan government support for a life science R&D to solve cobot 19 for example, a $10 billion has been committed to operation warp speed.
And they brought together some amazingly talented people Oh data Mount.
Or in addition to that there's a large number oh over 7 billion for C.D.C. over six and a half billion to.
The so called BARDA group over 3.6 billion that the NIH and up over 160 million to the NIH all supporting cobot maintain pandemic. So far this year DFT is approved 25, new drugs last year. They approved 48, so we're on our way to maybe a.
Beating of the 2019 number.
During the first half a 2020 funds raised by life science companies via Ipos and follow ons almost matched all of 2019 and this is amazing because that's happened. Despite cobot venture capital was strong to the tune of about $9.5 billion and 10% more than one Q this year.
And we're pleased to say, 80% of all venture capital funding and 2020, it's been in Alexandria is region. So before I turn it over to a jet I'll, let me make a comment like probably won't returned to normal until we have a widely distributed cobot 19 vaccine and the good news.
Is this may happen sooner.
Unexpected thanks to years, a private investment and new cooperation between U.S. government and drug companies up this tax mer payer money could not have been spent better even if some vaccines make candidates may actually end up they like the potential return from resuming normal life is far greater than from.
All the transfer payments Congress have spent so far and we hope that this combination of private innovation with faster regulatory action truly pays off and with that let me turn it over to generate boger, our senior Vice President who co leads our life science deal.
Thank you so much at all and good afternoon, everyone.
Against the backdrop Cokemaking I'm not that had minimum Talbot market our society the economy and keep our public health is still note at my friend fundamentals remain strong at the biopharm industry represent the Beacon Oh I'm sorry.
Good night.
We are currently tracking over 80 talent across our cluster markets where it.
Okay, and we owe it to another set of gratitude to the heroic work.
Really just on that kinda safe and effective vaccine should help round about the effective corporate 19th.
As a prerequisite to probably reopened.
For the global economy as a reminder, given the global demand for a vaccine not well back in multiple company further athlete required I such researchers around the world.
That's the operation at least 165 distinct rotavirus vaccine program, which nearly 30 vaccine candidates are already in human trial.
The cornerstone of the U.S. government effort.
Manufacturing and distribution and making back then.
And I can either be administrations allocate a $10 billion operation work.
And as a word grants a handful of company partner on all of which are Alexandria kind of including after Monica emergent biosolutions dominant and mother and I know that fiber.
Among these efforts I want to called your attention nor types into the three most advanced vaccine program from the dark fiber and after that each atop Alexandria in their respective region. Each of these companies has reported early clinical data points for initial safety and efficacy and all three companies vaccine programs have now, especially in all major late stage pivotal study the kinds of Dallas.
The patients around the world Madonna in partnership with NIAD, either partner with Durbin biotech biotech are both developing messenger. Our navy backfill. These vaccines contain instructions that tell ourselves with actively built the same like protein that is down another round of Iris, which helps the virus and be in Dallas RMBS. This doesn't that make antibody.
Last onto like neutralize the vaccine induced by correct.
That one of that need it personally counters that aren't in the future those vaccines stimulated antibodies should provide the director of adapting copies.
Let's turn I was of course, the first U.S. based company and direct vaccine, it's going to try out marketing, marking an extraordinary and historic backtracking a vaccine.
The clinic to date Madonna has received just shy of a billion dollars with BARDA like the clinical development and manufacturing lead candidate.
After reporting positive initial safety and efficacy data from their phase one and two studies earlier this month demonstrating that healthy volunteers were beating their vaccine pretty significant neutralizing antibodies against the current a virus as long as down in 2005. Some degree of laughing immunity. Both mckiernan fiber began to enroll 30000. He said late stage. These two.
Three studies just this past week.
Fiber stated that they should have efficacy data to report.
Over and they also received 1.95 billion dollar contracts in the U.S. government top deliver over a billion dollars at their vaccine by the end up to 2021.
And finally after done it got in partnership with the University author, Oxford is a slightly different approach their vaccine development effort using genetically engineered viral vector to deliver corona fire season to sell similarly in code the credit viruses signature I can't ever broken immune response.
Based on results announced last week after that it also shows a relatively big vaccine with only mild to moderate.
I suspect that successfully engages the human system.
But it's definitely needed.
Despite the front a virus Astrazeneca has received up to $1.2 billion from the government to deliver up to 2 billion doses of they're about 2021.
The where we now.
No. It is challenging to protect exactly when the vaccine will become widely available. We do expect interim data read outs on each of these three pivotal program potentially others over the coming you month, which should directionally inform us about the broad safety profile, each vaccine candidate and or whether it shows continued signs of activity.
Results are positive there is of course, the potential for emergency use authorization by the FDA any of these vaccine candidate by year end 2021 and into early 2000 excuse me by year end 2020 and into early 2021.
Given that each of these companies already yelling its manufacturing capability to be able to deliver at least a billion doses of each vaccine next year. There is a clear path towards the widespread availability, a safe and effective vaccine in first half of 2021.
However, this isn't remains unclear how long natural immunity last after a person becomes effective as opposed to 19.
Our ability of a combination vaccine also remains an open question.
Also you have to be determined or the anticipated frequency and cadence that which we will need to get back needed which segments of the population may respond better or worse, the vaccine and what proportion of the population needs to get back needed <unk> ultimately drive herd immunity and eradicate cold 18 altogether, but in the meantime.
New antibody therapy is by companies such as tenants, Eli Lilly and beer biotechnology and others could serve as a bridge the backlog and help reduce the severity of corporate 19 participation.
There are an additional 300, plus new and re purpose therapy Clinicals about note in parallel with increased widespread testing and continued socially responsible possible behavior. We're hopeful that bid virus will become more manageable left needle overall.
Look to say, we look forward to continuing to support the mission critical work or Kevin.
Overcome the football pandemic and the coming here and with that I'll turn it over to speech.
Thank you Dennis.
Richardson here everybody good afternoon.
As we stated during the Q1 earnings call Alexandria, his role as the proven leader in providing mission critical and indispensable strategic National Health infrastructure is only becoming more important as cobot 19 pandemic continues to challenge or country.
I'd like to acknowledge with allowed shout out to our full operations team.
Pillar work they are undertaking as they have been on the job 24, seven providing exceptional in high quality service to our tenants at Alexandria is essential services facilities, which had been opened and fully operational everyday throughout this difficult time.
Increasing complexity of construction delivery and ongoing operations. This mission critical infrastructure is formidable and not an easy task and requires the highly skilled and talented team that Alexander has carefully built since its inception.
We're pleased to report a healthy dynamic in positive operations end market reality for the company and I'll pick through a number of.
Pieces of that brand loyalty as dividend as Alexandria tenants garner great value in our delivery of excellence in all operational matters and as such the company is collected 99.5% of accounts receivable during the second quarter and 99.3% during July so.
For truly a testament to both the quality of the company's we serve and the great work by our operations team.
Outperformance during Q2, we outperformed our Q1 leasing activity with a total of 1.077 million square feet lease and as we've noted now the past several quarters. This contribution is coming from all regions with this quarter significant leasing statistics highlighted by San Diego's activity.
Great kudos to the team there.
Strong core the rental rate increases continue to be strong with 15% cash of 37.2% gap during Q2.
Early renewals year to date are consistent at our historic levels of 69% and during Q2, we exceeded that with the figure of 78% Mark to market or is that 15.6% cash and 16.1% gap, which is pretty amazing. When you consider is a large number of new cloud.
Say facilities, we've delivered during the past few years in core markets.
Solid occupancy we were at 94.8% across 28.8 million square feet in the operating portfolio and taking into account lease up opportunities that two recent key projects in San Diego in South San Francisco would otherwise be at 97.1%.
Finally market health.
Alexandria is core clusters have experienced no significant lab subleases coming to market during the pandemic and important harbinger for alexandrias ability to continue solid occupancy levels and consistent cash and GAAP rental rate increases for the balance of the year.
As an additional data point the lamp demand has remained steady in San Francisco Bay area with 2.3 million square feet today versus 2.2 million square feet. During Q2 2019 a.
A few requirements were in fact on pause during Q2, but we are actively talking prospects again tech demand. However is weaker falling by approximately 50% compared with one year ago, and we will be closely monitoring this segment over the coming months.
In conclusion, the Alexandria team is fully engaged providing operational excellence and importantly, Alexandria is long term and historic commitment to the life science industry as evidenced by the fact that the vast majority of leasing this quarter is with executive management teams, we've worked with as a trusted partner.
For many years and in some instances decades.
This is a truly unique and irreplaceable competitive advantage and when we relentlessly pursue an honorable fashion each and every day.
With that I'll hand, it off to Peter.
Thanks, Steve This is Peter Moglia I'm going to briefly update you on all of our development pipeline activity acquisitions closed in the second quarter and touch on some capital markets activity. So coming into 2020, we had 11 development redevelopment projects and we added to this quarter.
Including the second phase of our of our five laboratory drive project in research triangle, and 9877 wafer holes in the San Diego Submarket of Serrano may So which is 100% pre leased these development projects are spread among a number of regions and give us a great mix of Alexandria branded projects to meet the growth.
Demand in all of our regions.
Whenever possible tenants want to locate their mission critical operations in our high quality and expertly managed assets.
Although we achieved 196000 square feet of leasing in our development pipeline during the cobot impacted quarter leasing percentage remained 61% as the new leasing was offset by the additional project. We added in the triangle and a positive development at our our sit on the Charles project, where we were able to.
Take back a poor performing least retail space that will be converted to high value lap office space, our redevelopment of Arsenal on the Charles of that project has met our high expectations for it to date, we have signed three yellow wise for approximately 144000 square feet remember, we only closed.
On this asset mid December we have a number of prospects for more than its really like dislocation our development plans for it.
Despite the continuing overhang of Cobot 19, we had an uptick in activity at many of our development redevelopment projects in long Island city, where in serious negotiations with groups, representing 86000 square feet a demand at the Alexandria District in San Carlos We have solid interest from a number of companies.
Aggregating in excess of 200000 square feet of demand and up the one I want it to on Haskins, we're working with six companies for space ranging from 20000 square feet to 100000 square feet, but cobot 19 is causing some companies to move deliberately.
Last quarter, we mentioned that are seven projects that of our seven projects.
Experiencing Tim or seven of our project experienced temporary pause in construction and we're pleased to report that all of them are going forward with no current delays, we reported that we expected about a one quarter delay on average for those projects and did not anticipate any material movement in yields that assessment has been confirmed.
Farmed in our QQ numbers and is due to the remarkable job of our highly experienced real estate development teams that have done an amazing job managing the impact of delays and other cup in 19 related costs, which include the impact of social distancing, which has reduced our construction efficiency added cost for sale.
The measures such as the procurement a P. P E. A dedicated cobot 19 safety officer acquired in many locations in added security.
In addition to the contribution by are highly skilled seasoned team the minor impact of our yields can also be credited to our highly disciplined underwriting starting at the acquisition of these opportunities through the development leasing phases.
In the second quarter, we closed on 97 and one of seven five commercial Street project, we discussed last quarter and we added a prime parcel on UGC Submarket of San Diego across from our 90, 363, and 90 393 Town Center Dri project that will be device.
Philips into a class a 200000 square foot lap office project with the potential of making it larger throwing up selling process.
As far as sales activity goes.
Last quarter, we discussed the strong interest in lab office assets from a diverse set of investors mentioning health peaks purchase of the post in Waltham at a 5.1% cap rate and a healthy price per square foot for a suburban asset of $751. We have since learn that help peak has also paid a significant price.
For the 224000 square foot 35, Cambridge hard drive asset and ill wait for reported $1484 per square foot.
At 4.8% cap rate.
We also mentioned last quarter that are liable source said disclose that a transaction and the Boston area had gone under contract well and shut down and we can confirm that sale occurred 27 dry dock at 286000 square foot Lab office project and Seaport area of Boston was acquired by being.
In capital partners at an estimated cap rate of 4.8% and a price per foot of $916. This pricing was somewhat surprising as the asset is subject to a very onerous less or favorite ground lease.
It's really a good time to be in the market with assets and life Science Submarkets. We will continue to maintain are highly disciplined approach to underwriting and we're going to keep you informed of our opportunistic acquisitions and dispositions over the coming quarters. So before I pass the baton I would or we would like to encourage everyone.
To read Chip cutters article that appeared in Friday's Wall Street Journal title companies start to rethink remote work isn't so great. After all.
As an alternative to all the press speculating that the office market. It is is headed for the Chris Laboratory office is not part of the work from home trend, but nonetheless, we believe traditional office product, it's not going anywhere there will likely be some shifts the new such as workers not coming in every day and reverse of the Densification.
And trend permeated over the last decade, but there are a lot of reasons to have people physically together and this article goes into some of them.
So with that I'll pass it over to Dean.
Hey, Thanks, Peter Dean Shigenaga here good afternoon, everyone.
Our national essential real estate platform really combined with our trusted partnerships with some of the most innovative entities in the world continues to generate high quality growth and cash flows.
51% of our annual rental revenues generated from investment grade rated or large cap publicly traded companies.
Really highlighting that our team has curated one of the best tenant rosters and Threed industry. This high quality tenant base continues to support growth in our common stock dividends that is currently a dollar six per common share.
For $4 in 12 cents per share on an on an annual basis and was that 6% over the previous 12 month period, we remain in a great position and continue to benefit from a very strong and flexible balance sheet. The best in the history of the company really to support our strategic growth initiatives and more on this in a moment.
In June we published our annual corporate responsibility report, which along with our supplemental package highlights our longstanding commitment to iasci.
Our focus on making positive meaningful impact on society, and Alexandria is critical role at the forefront lifestyle ecosystem advancing solutions for Cove at 19.
Thank you to our industry team for an outstanding job over the last year before jumping into the second quarter I also want to share a shout out with a huge thank you to our entire team for their five time recognition.
As new reach Gold award winner for communication and reporting excellence. So congratulations team.
The second quarter results were solid and in line with our expectations rental revenue was up almost 20% over the first half 2019.
And why it was up approximately 19% or first half of 19.
And adjusted EBITDA margin was very strong at 69% continues to be one of the top within the breed industry rent collections are now well over 99.5% and our outstanding Aer balance as of June 30th represents the lowest balance in the last 12 years.
Occupancy trends have been positive. This year. However, this is hidden by the 2.3% of vacancy from recently acquired leases.
Please refer to page 23 of our supplemental package for details of this acquired a vacancy occupancy as of June Thirtyth was reported at 94.8% and included 2.3% of recently acquired vacancy so occupancy before this vacancy was 97.1 person.
Actually up 30 basis points since December 31st.
In addition to this key takeaway it's important to highlight that.
Recently acquired vacancy will provide growth and cash flows as our team executes on these leasing opportunities.
Now on internal growth or operating results continue to benefit from contractual annual rent escalations, averaging almost 3% today continued strong same property NOI growth remains on track with our 2020 midpoint guidance of 5.5% on a cash basis. We also reported continued strong rental rate growth on lease renewals and really.
Just in a space of 37.2% and 15% on a cash basis for the second quarter.
Our rental rate growth has been amazing since 2015, as an has averaged 29% and 15% on a cash basis.
Now while our outlook for 2020, a same property NOI growth remained strong second quarter same property performance was slightly impacted by two items.
First the second quarter results was impacted slightly by temporary vacancy of about 152000 rentable square feet from leases, primarily located in Cambridge in South San Francisco.
About two thirds of this square footage or 100000 rentable square feet has been pleased with occupancy commencing in the third quarter.
If we normalize for this temporary vacancy second quarter same property NOI growth would've been 1.6% and 4.2% on a cash basis and closer in line with our outlook for the full year.
Now. Additionally, we also have other contractual rent increases that will begin in the second half for 2020 for leases at properties located in greater Boston, San Francisco, Seattle that will bring same property NOI growth on track with our 2020 midpoint guidance of 2% on a GAAP basis, and 5.5% on a cash basis.
Now the second item to highlight that impacted same property NOI growth for the second quarter.
As a retail and transient parking now as a reminder, retail represents only 0.7% of annual rental revenue.
Approximately half of our retail is paying rent monthly.
About half is not paying rent at the moment and this drives a slight reduction to both GAAP and cash same property NOI income growth.
Now as I wrap up my comments on same property I just want to reiterate that we're on track for solid same property and net income net operating income growth for 2020.
Switching briefly to our venture investments over the past year. So we have been taking advantage of the strength of the capital markets. Our cost basis has remained about the same over the past year really highlighting that we had been strategically monetizing certain holdings. Additionally over the past year or so unrealized gains have grown significantly to.
556 million as of June Thirtyth.
Now realize gains have averaged about 15.3 million per quarter over the last four quarters and was 17.7 million in the second quarter 2020.
Now moving onto external growth our team completed approximately 200000 square feet of leasing related to current and future development and redevelopment projects located in our San Diego market, our active pipeline of developing a redevelopment projects consist of 2.3 million rentable square feet and is 65% leased and negotiate into.
<unk>.
We also have important near term and intermediate term development and redevelopment projects aggregating an additional 7.6 million rentable square feet.
No congratulations again door team for transforming our balance sheet over the past decade, our overall corporate credit rating ranks the top 10% among all publicly traded Reits. We have one of the highest quality tenant roster is that is driving growth in cash flows we remain committed to our strong and improving credit profile.
Liquidity was about 3.7 billion as of June Thirtyth, and even higher after consideration of our $1.1 billion forward equity offering that we completed in early July.
Our debt maturities are well laddered with no maturities until 2023.
The bond market today is extremely attractive long term fixed rate debt for Alexandria is in the sub 2% range for 10 year bonds.
And this is really amazing when you compare to cash yields on our development projects in the 6% to 7% range.
Or higher.
Concurrent with our common stock offering on July six we provided key updates on our sources and uses of capital for 2020. This update reflected continued demand for our well positioned development and redevelopment projects and our solid outlook for 2020.
Construction spend outlook move closer to our initial guidance for 2020, <unk> and is now 1.35 billion at that point.
Additionally, our updated guidance on July six that was also reaffirmed yesterday reflects the strong outlook for acquisition opportunities and builds upon our strong initial outlook that we gave for 2020 now the midpoint of the range of our acquisition guidance is 1.8 billion.
On July six we also announced our target for real estate dispositions, including partial interest sales at an aggregate midpoint guidance of $1.25 billion.
No more details on this will move up be provide because over the next quarter or so we updated or 2020 guidance to arrange for EPS diluted from $3 to $3, an eight cents and for AFFO per share diluted.
As adjusted from 726 to $7.34.
No as usual please refer to our detailed underlying assumptions included under 2020 guidance beginning on page nine of our supplemental package with that let me turn it back over to Joel.
Okay, we're ready for.
Questions from.
The group.
Operator, we're ready for questions.
Well you will now begin good question answer session.
You asked a question you May Press Star then one and you touched on and said if you using speakerphone. Please pick up your handset her personal key no.
Question. Please press Star then to it at this time, we'll pause momentarily to assemble the roster.
My first question today will come from Manny Korchman with Citi. Please go ahead.
Good afternoon, everyone.
Gene if we think about the accelerated disposition program a couple of questions. There maybe just could you could help us figure out how you're waiting or thinking about doing dispositions versus even more equity the new you've already done.
And maybe to help on that would be to talk about what types of assets or maybe what market you're thinking about sign those in and also timing of those sales.
So I mean, Manny let me kick off with a little color.
If you look back over probably five to seven years now pretty much have been consistent with our.
Sources of capital being from a range of opportunities to blend or long term.
Cost of capital in.
And dispositions had been a component going back to 2014 2015 now.
Lot of them have ranged from a partial interest sale on these are high value core assets that we want to retain ownership in.
So I would say without getting into a whole lot of details because the deal flow is in process right now.
We're looking at opportunities from an outright sale to partial interest sales.
These are high value assets in order to generate some equity capital to reinvest in the business.
And then Manny just touching on the difference between dispositions and equity capital. There obviously are considerations to to be taken.
When you consider both I think for for US, it's always been a blend of capital.
And our cost of equity has been a fairly attractive over the time period that I was chatting about since 2014 15 looking forward and our multiple is only improved which has improved our cost of equity capital.
Do you think though it's still prudent to consider dispositions from time to time and as a result.
Program for 2020 given.
That needs for business here. This year, we felt it was prudent to balance the equity needs with some dispositions.
I guess, we give some color to that program over the coming quarter or so it'll help bring a little more clarity to what we're focused on here.
So I think you'll have to stay tuned for for marked information and details for at least a quarter.
Right, Thanks, and maybe just thinking about how tenants, especially the ones that are so involved and searching for.
Yes, the treatment the cure or the vaccine whatever it be how are you thinking about their growth in real estate needs is that on the back burner or is it just that they're separate teams that are doing one versus the other and so those are the same entities that are looking to to lease more space from you or others.
So Steve you want to maybe feel that.
Sure Hi, Manny it's Steve immediately see it's the combination of both.
Both you have.
Existing platforms that you know the capital markets or very liquid as Joe was mentioning in general the strength of the venture.
Joe markets, we know the company that did a virtual roadshow went public during this time.
So there are using that capital both for their existing platforms and for any cobot initiatives.
In addition to that we're also seeing manufacturing.
And become a real and viable dimension as well, which is further driving demand. So you really guide two elements.
The coal that R&D, and then the coded and kind of very early manufacturing as well continuing to drive demand and that is broad based across a number of markets. Yeah. You could also note Manny that there was an announcement yesterday that the U.S. government.
With loan Eastman Kodak a company that.
Failed to adopt Jim Collins is notion of change $765 million as part of a wider attempt to bring pharmaceutical ingredient manufacturing back to the United States. So thank you are going to see a lot of activity.
In the entire supply chain issue when it comes to Biopharma.
Thanks, everyone.
Thank you.
And our next question will come from Sheila Mcgrath with Evercore. Please go ahead.
Yes, good afternoon.
Wondering if you could give us more insight on the Sorrento Mesa leasing that you mentioned did you have a tenant in hand, it before you purchase.
97, seven way both.
Did we did and it was that Oh, yes, Hey, Sheila and it was a covered related requirement. So the answer is yes.
Okay, and then on the quarter I was surprised that you had over a million square feet of leasing activity was that just other activity that spilled into the quarter or were there any new requirements during twoq.
So Steve you could give color, but I hope you weren't surprised that we had a million square feet we weren't.
We thought it would even be bigger but anyway Steve.
Yes, Sheila I a couple of things there again it it has as we've talked about for a number of quarters been broad based across.
By nearly all markets and as they did highlight San Diego in particular was kind of a stand out there, but nevertheless, all markets were contributing I know not necessarily surprising.
And you know the impetus for space the sense of urgency is still there.
Literally 78% we're early renewals during this.
Q2 time period, so we have very very close longstanding relationships with these tenants. So this was.
The expected.
During this quarter.
Okay and last question you Didnt, just mentioned and I think Steve or Joel on the manufacturing being a new source of demand would Alexandria I'd be interested in owning any of the pharma or vaccine manufacturing facility.
Well, we already do and some of them are embedded in assets, we own some are dedicated manufacturing others are.
Pilot manufacturing or other clinical trial.
Scale manufacturing it kind of spans the gamut, but yes, we're we're finding that there isn't need I think hopefully that we can bring a bunch of the critical manufacturing and other supply chain needs of biopharma products back from overseas, including China.
For our own protection and yes, we are very interesting that now we wouldn't be interested in a random.
Manufacturing in the middle of.
Nowhere, but if they're in strong submarkets that are tied to core.
Core markets.
Thats out that's a good thing.
Okay. Thank you.
Yes, Thanks Sheila.
And our next question will come from James Feldman with Bank of America Merrill Lynch. Please go ahead.
Thank you.
I wanted to just get your thoughts on the election, and even with prop 13 coming up before we know it what do you.
What are you concerned about most if its advisor.
[music].
And how do you think about the risks.
Yeah, I I'm not sure I want to comment.
Out about a 100 days I think on the third quarter call. It will be better we'll have a more triangulated view, you know who Bidens Vice President is it we don't know that yet is very important.
Who may be.
The cabinet.
But you know it's it to me, it's a worry for everybody because to elect somebody who may not be and the best of help.
Would be a worry there.
And that's unfortunate is too bad we don't have to 45 or 50 year olds running.
But that's.
The way it worked.
So I think I'll reserve comment until the third quarter.
And we'll have a better view on on things up the other part of your question I'm, sorry, I forgot.
Yes, you guys are sitting in California, and just your thoughts on prop 13, Oh, yes, So I don't know Peter or Steve you guys want to talk about prop 13.
Yeah sure this is Peter.
Yes, Sir you know I I've sat in on some.
Calls with a committee that is.
You know running the campaign against it they feel.
Like there's a better than 50% chance it does not pass, but I'm sure. It's you know tight enough to make everybody a little bit nervous.
I think we're in good shape, because a number of our assets in California are our were developed by US in the last few years I don't think.
From that.
Plus we have a triple net lease structure so.
We would fare better than others, but you know given the.
Current economy.
You know don't think it would be a good news.
To help California out of its troubles by making it harder to do business.
Okay. That's helpful.
And then Peter you had mentioned the Wall Street Journal article I.
I just want to get your thoughts I know that tech is a smaller part of your business, but you do have Facebook stripe on your top tenants list.
Yeah, when you think about the Bay area specifically.
You know from.
Your vantage point on the ground there what do you think changes in terms of how people use office space and.
Especially more along the tech companies do you think.
Well be doing more work from home or more flexible work arrangements, which will have a longer term impact or even satellite offices I'm. Just curious what you guys are hearing on the ground.
I think Steve can can talk to the San Francisco specifics, but I think there's there's been a lot of talk over whether or not office is.
Going away or not I think the consensus is that things are going to work differently that you know the majority of people you know, 75% to 90% to putting survey you look out Juan will go to work.
They want to separate their home life from work I know I personally do because it just becomes very odd to leave your life.
And in a constant stayed work but.
You know the advantage is are becoming more and more apparent it's very difficult to train people.
When they work from home so your Onboarding people on a zone.
Very difficult to transfer your culture.
You know how do you celebrate a win how did you come Israel loss I'm not going to just get on zoom and say hey, let's.
You know what celebrate you're in the office something great happens.
Yeah, Hi, five your your colleagues everybody goes and you know gets a cup of coffee or whatever and talks about it and you know just develops a bond that does not work on the same thing when you lose a deal you know debrief.
Commiseration what did we do wrong, how will you better next time ideas or strategies in front of a white board.
One of the one of my rare trips into the office recently was to meet somebody so we could get on away board is that we needed to storyboard presentation. It just couldn't do it on sale.
So you know I think companies are going to realize that for retaining employees, they're gonna have to establish a culture.
With those employees because otherwise it just becomes a battle salary and benefits you know if people don't really feel connected to the company.
Why should they stay there somebody else's offering a few more showings. So I think you're going to hear more and more about that as I.
I think we've done really well as a as a business.
Community in the United States in managing.
On productivity and keeping it going but I think cracks are starting to appear and that's what that article kind of goes into I don't know Steve that you want to talk about the tech.
Yes, Thanks, Peter Jamie Steve Here, if you look at tech demand from San Francisco down of the Peninsula see Palo Alto as I referenced it has fallen by about half we had a little over 7 million square feet. A demand. This time last year now it's about 3.5 million I think a lot of that.
Is there was result of exactly what Peter seeing people are.
Navigating this in a scheme of things, it's still kind of early innings as to the outcome. So we're certainly monitoring it closely having said that the context is Soma for instance, now has a 4% vacancy rate versus 1.3% vacancy rate.
And you know when you've got big floor plates.
Kind of lower mid rise construction in those areas, which is probably more desirable coded wise.
And you know that peninsula has gone from 7% to 9.9% so on a relative context on its still healthy there and then.
Talk with somebody this morning, who had a little bit of insight into googles stay at home till summer 21.
And.
They are understanding chatting with people that Google is you know, it's really primarily driven by the school year.
They were trying to provide certainty to families. As you know the next school year is still highly uncertain and ultimately its voluntary at this point. So I you know we're monitoring it closely.
We are getting direct Intel I think it's still kind of early innings, and we'll we'll keep everybody updated as it unfolds.
Okay. Thank you.
Congratulations on the quarter.
Thank you Jamie.
Your next question will come from Anthony Paolone with JP Morgan. Please go ahead.
Okay. Thank you and nice quarter on that Tech demand side, you mentioned down 50% can you talk about whether that has any impact on how you're looking at any other developments in your pipeline was anything dual tractor does it make a change directions on anything that Youre your plan.
If that piece of the demand picture pulls back.
I think in general no.
Okay and then.
In terms of.
You all increasing your your net investment activity as you look to the back half of the year, but you also talked about.
Oh, just the amount of capital out there that is a paid some big numbers for deals and it just seems anecdotally that theres a lot of folks that certainly like your business right. Now I mean, how did you think about just increasing the capital deployment returns and what would have you been saying in terms of competing bye.
Product, whether its land or existing assets in this environment.
That's a pretty broad question I don't know made maybe try to be more specific if you could cause I'm not sure we want to.
Get into pipe no acquisition pipeline discussions or things like that until we can actually disclose something.
And just trying to bridge, a sort of what seems to be more capital being pointed towards your markets and air space well have to say, yes, but I mean, I think driving up activity.
Yeah, I think you know the three sectors generally people are seeing today that of.
Been fairly cobot.
Resistant or resilient is obviously logistics data centers.
Life Science, there are others, but those have been the primary ones and so its natural for people to think about how do I do this.
But it's a lot more difficult in a sense because it's it's not like a company is moving into a generic office.
These are fairly mission critical facilities for companies in the entities and they really don't they're pretty picky about locations that are pretty picky about.
The details of the improvements and the deliveries and the certifications and things like that and how they're going to operate. So you know there may be you know there may be money and so forth, but if people mess up.
You know they won't be given the second chance by tenants that's for darn sure because when you have millions of dollars of experiments have stayed good it's different if you're.
You know JP Morgan in an office versus they'd Cobot Therapeutics company and something goes wrong. So that's kind of a perspective.
Okay. Thank you.
Next question will come from Tom Catherwood with BTG. Please go ahead.
Thank you good afternoon, everybody following up on on Tonys question on acquisitions.
Joel last quarter, you had been.
Let me a little call it a little kg on the potential for acquisitions to ramp back up, especially with maybe more product coming to market. So my question then given that the obviously you quite a bunch this quarter and there's more to common you raised guidance.
The additional acquisitions, where those primarily ones that you already looking at prior to co vid or were those acquisitions that have come up kind of since coded and then the second part of that is what do you think the opportunity set looks like moving forward is there a chance for kind of more.
Or assets coming on is there any chance for distress out there on the acquisition field.
Well so first let me correct. The characterization I don't think I would say Gee I think.
Honestly when we reported the end of April I think in the first quarter think about we had only been shelter in place for 45 days.
And so when the executive management team looked at.
You know.
Our balance sheet, which is in great shape and looked at.
Prospects at our pipeline.
We wanted to be really careful having lived through a 99 2000, having lived through or weighed on nine.
We wanted to be very careful about really reining back our commitments and so we did do that in a very very I thought thoughtful and careful way.
So I don't think it was caginess at all it was really one out of concern that we don't know what this thing is.
You know I mean, we know what it is but we don't know what damage. It can do Kobin 19, we don't know.
We have no real information from China as to what you know went on there in places that were hard hit and so forth. It just was a very you know a non transparent situation. So none of us had any idea what to what it was going to.
What it was going to happen. So we had to be very conservative about our go forward game plan, but I think as time. We're on ended the second quarter and it was clear that the industry was really being Marshall to really.
Come up as John talked about whether its testing the diagnostic side therapeutic side and importantly, the all important vaccine side the government's real ramp up.
Especially on those so were speed project on the back saying or work.
Yep speed project.
I think it gave us better confidence that we could.
He is our use our concerns and go back to a more growth plan, but still I think carefully guarded masked some of the acquisitions I mean acquisitions don't hang on for months and months. So I'm not sure. There were a lot that were before that we may be still looking at and there are processes that go.
So on but I think from time to time people see a pretty buoyant real estate market Peter cited pretty low cap rates on secondary location assets that are pretty strong. So you know people are thinking of maybe trying to.
You know maybe exit or other people are trying to come in and I think we've just tried to be super thoughtful and Super Smart and disciplined most importantly, we learned that from the teachings that Jim Collins about what we do and how we do it I think the Arsenal that I think Peter Steve alluded to campus.
That we bought last quarter and.
Watertown as a great example, so I think that's how we have journey through this last couple of month.
That's completely fair and I think your is the conservative.
Classification as much better than the one that I gave an you're absolutely right with that.
Along those lines.
Joel Seattle has obviously been a key area of growth for you guys over the last few years.
Most of your portfolio has been focused in the South Lake Union Submarket.
But this quarter you disclosed some previous acquisitions in the pioneer square Submarket and it looks like you've added a substantial development site outside of your core markets in Seattle as well. So can you kind of speak to the your investment strategy in Seattle and maybe whats.
Driving your or what you're seeing in other sub markets, that's increasing your interest.
Well, let me say overall in Seattle were up we have a you know an important presence there we started back in 1996. So we've been in that market for a long time minutes and it's an important market for us. It is one of the markets that thankfully has taken advantage of the comp.
Fluence of.
Life Science and.
Information technology, we just topped out adaptive building on on the Lake at East Lake Union 11, 65, we're building for them and they have a big pride or a big joint venture with Microsoft.
Folk focused on coven 19 issues.
We have a very small presence and pioneer square that we kind of.
Put our toe one of them water a couple of years ago I think the most recent acquisitions, our south of that so they're really not in pioneer square they're more.
Really in the stadium area and those are more long term kind of thinking.
But you know we just want to be careful because you know seattle's been one of those hot spots for civil unrest and you know.
Some people have attacked I think without any real fair.
Balance on they've gone after Amazon and Starbucks.
Starbucks certainly as one of the most.
Heralded and great companies Amazon certainly is but Starbucks in particular, you know has done a great job for I think people and so you see some of that stuff, that's pretty disconcerting, but we hope that comes under control and that the city and the state you know really.
Try to.
Really go forward with a very positive game plan. So I think it's a little bit of a wait and see on some of those things, but but that was a little bit forward thinking I'm not sure we would.
You know.
Those wouldn't be coming to the.
In the development in the in the near term for sure.
Understood. Thank you Jill.
Yep.
And our next question will come from Rich Anderson with SMBC. Please go ahead.
Thank you good afternoon everybody.
So I just want to make sure I kind of understand that's when we talk about a vaccine and and the duration.
Which you would be.
Oh, we maintain <unk> antibodies and thereby protect people from the from the disease.
I've heard.
Then it could be maybe six months, where you'd have to go twice a year to go to another kind of booster.
Correct me, if I'm wrong on that number one number so would that be good thing from your tenants perspective, or a bad thing I'm trying to sort of triangulate how how permanent.
<unk> covert 19 will be for the underlying workings of your your tenants. If that's vaccine happens and it's like measles vaccine. It's good life.
Maybe things go back to normal in that regard I'm. Just curious if you can sort of kind of explain that logic to me.
Yes, so I'll have Jim to answer that in the second but let me just say that each of the three most advanced candidate.
Cases that she talked about each have varying antibody immunity I think Madonna probably is shown among the best but no one really knows at this point the duration, but remember.
Much like everything in life, there will be in certainly in the in the biotech and pharma area. There will be dramatic improvements I mean, there will be vaccine 2.03, 0.04, 0.0, so I wouldn't get too hung up about 1.0, but generally you want to maybe comment on Rich's question.
Sure Hi, rich on the on the booster question I think on the idea that there will likely will need to be booster first on the DNA vaccine program I don't think that that is necessarily a bad thing on I think all kinda hit the nail on the had that we really just don't know that buyers has only been known to us for.
Six month after month Amen.
So we really need to to learn more but I think you know as far as the vaccine in general I do think that this will be.
If approved they will be revenue stream for no. These are tenants for the foreseeable future. I also think that the knowledge that has been gained and the approach to vaccine development in general and I've been gleaned from this experience will be absolutely laughing.
Well, you know point a lot to be company to develop no additional product thereafter.
Great great. Thanks, John.
I kind of ask version of this last time, but let me ask again I've seen a change in how your tenants are sort of attacking the situation reallocation of of IP or hiring more people deserve more demand for space because of covert 19 juxtaposed to the their core drug.
Research business that was you know near and Dear them before covered that Im just curious if this is all create more and power within your buildings.
Yeah, I think the answers the simple, yes, I think it's an add on its a bolt on some companies. It's dramatic other companies. It may not be exist and in other companies that may be more minor, but the answer is yes, and the amount of money going into this because think about there's testing all kinds of diagnostics than you.
Got the Holy Grail Therapeutics in vaccines, So and then remember cobot 19 isn't likely to be the loudest you know.
Infectious disease agent that we see.
And I think people worry about you know.
The big worry would be.
Somebody try to weaponize. These things so you get into a whole government need to prevent there to stockpile.
Anti biological agents. So this is a big big thing that's going to go on for quite awhile here.
Okay and then Peter last question mentioned some of the.
Investment activity happening around your up portfolios are you seeing any different money come and capitalized looking at these like science assets or is it pretty much.
Yeah. The same players just being more perhaps a little bit more precedents space.
No I, there's been a pretty large cohort.
That's true, but we've been tracking ever since we started selling assets in 13.
I I don't think the mix of them.
That's changed much.
It's just there probably a little bit more aggressive today.
So I got it thanks very much great color.
Thank you very much.
And our next question comes from Dave Rodgers with Baird. Please go ahead.
Hey, Peter you mentioned earlier that construction timing was really not having a big impact on your yields returns expectations costs et cetera, which was great maybe taking a step further is there anywhere where this kind of work at home environment for cities is causing zoning or entitlement issues and then how do you look at construction costs and the impact on on kind of zoning a.
Crushing cotton that next wave and development any thoughts on that.
Yeah, it's funny, it's like two things that just offset each other now on the one hand, there's less staff and we are submitting.
Plans for permits and things and they're dealing with people that are working from home.
So that would say geez inefficiency timing delays that on the other and nobody else is developing really much anymore.
So the activities down.
So I think that you know netting that we're going to be fun as far as getting our permits and things like that to the extent that something needed to be done and your public hearing or something you get a little tricky, but so far we've been able to get through those hurdles.
On a construction costs on any early read on where that might be as you're buying kind of the future job.
Yeah, we actually have been analyzing that and in detail.
Dean and I, both and looking at it.
It's all theoretical right now.
That piece of work could slow down.
Taking pressure off material and labor cost I will say, we haven't seen it yet but.
It would.
You know it wouldn't be unreasonable to think that at least cost would flatten out.
Fair enough.
I think in your release there was a comment about maybe a project that you guys had written off the requiring that you decided not to acquire I read it as maybe being incremental to the one you discussed in the last call. The thing then it doesn't matter, but if it was incremental any details of that maybe more of an office component or more retail to it just you couldn't get comfortable with.
I think it was the same thing we get it was a dime on funding.
Right. Okay I wanted to double check. Thank you for that Dean moving on to you I think 29 million a free rent burn off you mentioned coming from leases that have started but not to that burned off that free rent yet is that in the second half of this year, we get that next year.
All right it.
Oh I think for the most part is being absorbed over about four quarters.
Dave.
Generally those numbers, we update every quarter and on average almost all of its rolling in over four quarters. The number is updated the next quarter because some has come in and some deliveries may occur it's over time, it's a different mix.
But historically, it's generally been.
Burning off over four quarters.
Great and then lastly, Dean maybe with you again on maybe guidance around the the realized gains for the second half I know, it's really what you guys choose to sell it how you get there you've made a lot of money in the business you get really good disclosure about it in the supplement.
It is running about you annualize the second quarters about 55 cents a share of earnings, but any thoughts on and how that would kind of play out in the second half with the strong market that we've seen so far do you anticipate continuing to sell.
Yeah, I think pretty consistent with what I've mentioned over the last few quarters.
The portfolio has done well I think you pointed that out but the run rate I touched on specifically its encouraging.
15.3 million per quarter, maybe a little bit upward this quarter. It 717 approach an 18 million.
So that run rate historically I think it's a good.
View for how you should think about the run rate over the next number of quarters.
You know, we I think it's prudent for us to monetize is some of these investments at this point, we've made money some of them. We believe strongly and we'll make more money. So we're going to hold a number of them, but I think it's prudent to prune so.
You should have a decent run rate looking forward.
Okay. Thanks for that and then I don't know Latin maybe for Steve I'll, just throw one more and I think you have about and I might add something similar to last quarter, but 420000 square feet of leases expiring. This year that are negotiating it looked like or that may have.
Resolution yet another million one next year I realize that you have a lot of small leases in there and it's kind of hard to get visibility far out on those but in terms of what yet to be committed is there anything known to be moving out. Besides those redevelopment assets where are you feeling really good about the remaining renewal.
Yes, Hey, David Steve Yeah, we just got about 3% to resolve.
Back in the second half for the year here, we started at 6.7 percents were already.
60, 70% three that we've really.
Just got three different suites, San Francisco, Boston, San Diego that are in excess of 70000 feet. So nothing.
Overly challenging.
You know I think we're making good progress on on one of them. Another one day I think we'll be able to reposition successfully so yeah, nothing nothing to be too concerned about there in 2020 for sure and then 21 you know again when you look at the early renewals, we've only got five points as.
10%.
Of.
Rollovers happening in 21, so we'd expect kind of consistent with what we've seen historically with early renewal.
And I just a handful.
Of any size you know over 70000 feet just a couple there.
Thanks for the added detail I appreciate the answers ever.
Yep. Thank you.
And our next question comes from Michael Carroll with RBC capital markets. Please go ahead.
Yeah. Thanks, Peter can you provide some color on the the recent India. The pending acquisition I guess, specifically there is a fairly large pending bucket I think totaling about $780 million how far along as company on these negotiations of these deals already been awarded to areas just a timing issue right now.
Yes, So let me let me jump in and say I think we prefer not to comment on those but just I think being mentioned stay tuned for third quarter up just can't do it at the moment.
Okay, and then I guess, one some of the assets that you've acquired obviously the recent acquisitions Theres a lot of.
Future developable sites I guess, what's the timing typically on these types of properties and when do you expect to start breaking ground on this aeroplan there.
Yes, everyone is totally different so if you looked at I mean, two examples I mentioned a question on Seattle, that's more a into the future.
Development side, and if you compare that to say the Watertown that would be maybe more in the near to medium term. So each one is different based on.
You know the campus the location, what's going on demand what's going on in that market. So there's no general way to generalize each one is highly specific and kind of cultivated.
And I and I can confirm that we you know we know that going into it. So we put out a lot of carry costs into our future basis. It was we underwrite these funds.
Okay, and I think that you did a pretty good job I think in the supplement if that you talked about the percent of I guess covered land plays that you have is a lot of these deals that you're looking at now too that you are willing to have that may be able to the longer development times, yet the upper land place.
Yeah again, each one is different so let us not characterize anything at the moment sorry about that.
Okay, great. Thanks.
Yep. Thank you.
And our last question stay will come from Tayo Okusanya with Mizuho. Please go ahead.
Hi asked apps and congrats on a linked quarter.
I just want it's kinda talk little bit acquisitions going forward in the past youre she's a lot about positions.
At this very heavily on.
A in a purchase of assets that have a lot of future development potential is that we should still be thinking about acquisitions going forward or you know you kind of stuck with the acquisitions of kind of operating assets going forward.
Yeah, I think Mike Carroll just asked that question maybe in a different way I think every every situation is different so I don't think theres, we don't want to characterize anything at this point.
So I'm not sure. It's good to think about one way or another just build that they'll be what they'll be and they'll stand on their own.
And you know.
But let's just wait for each one to unfold as as appropriate.
Okay. Thank you.
Yep. Thank you.
And this concludes our question and answer session I'd like to turn the conference back over to Joe markers for any closing remarks.
Yes, just thank you everybody please stay safe and B well I'm, we'll talk to you on the third quarter call. Thank you again very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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