Q1 2021 Alexandria Real Estate Equities Inc Earnings Call
[music].
Good day and welcome to the Alexandria Real estate equities first quarter 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
On a touchtone phone to withdraw your question. Please press Star then two please note. This event is being recorded.
I would like now to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.
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 companys.
Periodic reports filed with the Securities and Exchange Commission and now I would like to turn the call over to Joel Marcus Executive Chairman and founder. Please go ahead Joel.
Thank you Paul and welcome everybody to our first quarter call and with me today are Dean Chicken I go Steve Richardson, and Peter Moglia, and we want to wish everybody a safe and healthy.
Go forward year, we want to welcome all of this.
Our first quarter call as well and recognize and thank the entire Alexandria family team for the operationally excellent and truly stellar first quarter earnings report by all metrics and measures. We collectively continue to operate at an outstandingly high level into the second year of the COVID-19 pandemic.
And as I'm, often fond of quoting Jim Collins of good to Great same commented on Alexandria feature in our annual report.
Alexandria has achieved the three outputs that define a great company superior results.
And we believe the first quarter is emblematic of that distinctive impact.
And we believe that our social responsibility.
Programs have truly made a difference and lasting endurance and with respect to lasting endurance.
Sit here at.
Literally.
Several decades. After we were founded in 1994, and I will talk more about that in a moment, we're particularly proud of the six pillars of our highly impactful and longstanding social responsibility efforts.
Accelerating groundbreaking medical research to advance lifesaving treatments and cures.
Harnessing the entire agrifood ecosystem to combat hunger improved nutrition and support human health at its most fundamental level.
Thirdly, bolstering the resilience of our military our veterans and their families.
Fourth conquering the opioid epidemic and revolutionizing addiction treatment. The fifth pillar that we've spent a tremendous amount of time on over the last year and for a good part of the last decade educationally empowering underserved students to achieve long term success and reach their potential as important.
Both leaders in the community and then finally building a model for comprehensive sustainable solution to address homelessness.
Alexandria is also proud to be the focus cover story of the January February 2021 may read magazine showcasing that.
We have pioneered a novel data driven comprehensive care model to overcome.
The opioid epidemic launched in Dayton, Ohio.
We're now focused on it.
Adopting.
A similar model, but in different respects to the homeless problem, which has really become.
Become pretty out of control in many urban cities and it is fraught with.
A lot of <unk>.
Complex stratified issues and actually is more of an issue of health care than it is simply one of housing.
We've been recognized as a leader and continuing and we continue to enhance our leadership in the area of sustainability and we're on pace to achieve our first nearer.
Sorry, net zero energy building in South San Francisco, one of our important Submarkets and only one of 70 of such buildings in the entire world. So we're very proud of that achievement when we finally get that designation.
I always try to think about a theme on each quarter and they are so different given macro and micro circumstances and I would say the the theme for the first quarter has to be exceptional core and internal growth and really stellar value creation and external growth both of which have driven our continue.
Outstanding earnings results and as the absolute go to landlord in life Science real estate leasing demand for Alex Alexandria is owned and operated first in class assets.
Historical high.
And as I alluded to a moment ago first.
First quarter of 1990 427 years ago. This quarter, we completed our series a financing led by Jacobs engineering for $19 million and here. We said 27 years later to the quarter.
The total market cap of $32 5 billion and among the top 10 of all our rights.
I remember attending the first REIT conference I think it was in New Orleans in 1994, and I didn't know a single sole so we've come a long way.
And we still are in our fourth consecutive quarter of COVID-19, something we none of us will ever forget the stellar results by any measure metric is we're very proud and we are thank each and every one of our great team members Dean will speak to the outstanding core and internal growth results.
Driven in part by strong rental rate growth and particularly a feature this quarter in the San Francisco Bay region among others.
One of our highest leasing quarters ever and Steven Peter will also speak to our stellar value creation growth in part driven by our collaborative.
Then way blockbuster transaction and we greatly appreciate and recognize the team that put that together.
A very highly leased valuation creation pipeline, which will provide continuing growth for Alexandria, and so we're very proud of that also important to note and I think Steve Peter and Dean will also allude to this our partial interest sale. This quarter I think set a true benchmark valuation for Alexandria owned and operated.
First in class lab space in South San Francisco Submarket.
Led by both Steve and Peter and Peter in particular, who we brought here in 1998, who had special and unique joint venture talents and a and a stellar network and we've been at it under his guidance. There for 20 years. So we think those two very much for that execution in the teams.
That supported them, we completed our first quarter with a very strong balance sheet Dean will talk about that with no debt maturities until 2000 22024.
And as some of you were aware we filed an S. One with the OCC to raise 250 million foreign Alexandria sponsored back.
Importantly, because we believed there was a real need for this in our core Agri food Tech industry and as we are in a quiet period, we won't be discussing this at all.
Moving on to life science industry for a moment, the velocity and continuing demand for Alexandria lab space across our cluster markets is as strong as we've ever experienced the pace of FDA approvals.
During the first quarter remained very strong with FDA approving 14, new drugs, 36% of those were Alexandria client tenants.
We also note strong bipartisan support and a provoke and a proposed whopping 20 per cent increase.
For the budgets of NIH CDC and HHS.
We don't know about F D. A at this moment and hopefully the administration will select in the not too distant future.
A true great leader up there and we're hoping for that public markets continued their strong pace with $4 $5 billion raised from 29 Ipos.
This past quarter, Anna 100, I'm, sorry, $12 6 billion raised in follow on offerings truly kind of a stellar capital markets quarter Biopharma continues to invest heavily in its own R&D likely north of 225 billion for all of 2021.
Let me comment a moment about some proposed corporate tax changes that were announced by the current administration, which if enacted into law would foolishly indirectly hurt U S manufacturing U S R&D and the repatriation of cruise salt crucial supply chains that became evident in the pandemic that we.
We're.
Really woefully unprepared and relied on 70% of our supply chain efforts outside of the United States.
I would say mission critical sectors, including Biopharma, certainly will not be a will not be helped in essence the threat to the American competitiveness is way bigger than way more important than the everyday life of Americans and higher rates.
At higher rates and a sad commentary on poor public policy.
It's interesting to note the paradox of this pandemic moment large corporations have oftentimes have oftentimes been politically villainize derided by the left and the right yet the main and perhaps only reason COVID-19 scourges easing is that is the vaccines that were developed by.
Biopharma and some in connection with the.
The the government in a.
Groundbreaking effort with the warp speed up for it and we're very very thankful for that.
I think to quote are Alex Gorsky CEO of J&J, He made a pretty.
Important quote recently and said, we fundamentally believe that having a market based innovation based biopharmaceutical industry as well as a medical technology environment is critical to long term critical long term to produce the best overall outcomes for health care and I think that absolutely range true.
So as I do each quarter, let me finish with a or I did last quarter and will each quarter.
Kind of a timely quote I quoted Confucius last quarter.
Quote this quarter, Steve Prefontaine, one of the World class runners of his time to.
To give anything less than your best is to sacrifice the gift and with that let me turn it over to Steve Richardson.
Thank you Joel and welcome everybody and as well as we presented during the last quarterly call 2020 represented an exceptional year of high quality growth for Alexandria, as we increase the asset base by 27% to nearly 50 million square feet.
Now the first quarter of 2021 truly blowout quarter by all metrics.
It's clearly signals the continuation of this exceptional growth trajectory.
The net of reaffirms Alexandria, his leadership role and then now core life science asset class and its highly valued status within the broad life science ecosystem.
The company's 27 year commitment to operational excellence at every level fuels that following outperformance highlights for Q1.
Accounts receivable, we've collected 99, 4% of our April billings as of today.
And again Alexandria as labs are essential infrastructure and have been operational from day, one in the pandemic.
Some detail on leasing outperformance during Q1, we leased approximately $1 million 677000 square feet, which notably represents the second highest quarterly leasing activity during the past five years, an amazing statistic considering the broader turmoil in the <unk>.
This market.
Peter will touch on this in more detail, but the current and near term development pipeline continues to deliver value.
De risked manner as we are at 76% leased and negotiating even while adding a million square feet of new starts during this quarter.
The core in particular is exceptionally strong.
Continue to highlight and bring everyone's attention to the embedded growth and value within the core operating platform comprised now with nearly 34 million square feet with cash increases this quarter of 17, 4% and GAAP increases of 36, 2% on occupancy.
<unk> also very very solid with 94, 5%, which has grown in excess of 2 million square feet. This quarter compared to Q4 three of our strategic acquisition activity.
We want to continue to bring to everyone's attention and near term opportunity for increase in cash flows through the lease up of one 2 million square feet of existing inventory provided by these recent acquisitions.
Overall end market health demand continues to be robust in our core clusters, and our Mega campus offerings provide a significant competitive advantage to the company.
Importantly, sub leases are in tight check as since the start of 2021 just to sub leases have been brought to market in one of our clusters and both of those sub leases have already been put under LOI.
<unk> more broadly is constrained for 2021 across all of our markets and in the two largest markets for 2022, we see nearly 50% of the supply is pre leased in greater Boston and in the San Francisco Bay area. We're monitoring just two projects for potential vertical activity in 2020.
Two.
As we've stated before Alexandria Mega campus high quality class a product offerings continue to outperform.
Any inferior one off class B office conversions.
Isolated locations.
The year 2020 was truly an amazing year for Alexandria at the Vanguard in heart of the life Science ecosystem.
And now the first quarter of 2021 has exceeded those accomplishments with stellar performance and in conclusion I would like.
To add to Joel shout out to the entire Alexandria team for this quarter's achievements.
With that I'll hand, it off to Peter.
Thanks, Steve I'm going to update you all on our development pipeline comment on construction cost escalation and discuss a couple of life science sales.
We continue to work at it very productive pace, delivering 376645 square feet during the quarter, including the full delivery of nine eight O four medical center drive in Rockville, Maryland to a high quality cell therapy company at an 8% cash yield which was 80 basis points above our initial disclosure.
<unk> outperformance was the direct result of our best in class team, who were able to drive down overall cost savings through a combination of a depth schedule management alternative construction techniques and highly effective coordination with the tenant. In addition, we fully delivered the 100086 square foot 11, 65 Eastlake Avenue.
Leased building in Seattle to adaptive Biotechnologies, a cutting edge public immune medicine company on the Frontlines of fighting COVID-19. This building is highly unique as it sits on the edge of Lake Union operating expansive views of the Lake Queen Anne downtown Seattle.
Leasing activity in our pipeline continues to be robust with approximately 789000 square feet leased during the quarter and another approximately 450000 square feet. An executed LOI highlights include completing the lease up of 3115 Merryfield road well in advance of its 2022.
Delivery day incremental progress at Alexandria Center Life Long Island city, which is approaching being half leased and committed and a surge of activity in both SD Tech and our newly acquired 201, Brooklyn asset and the February of Boston and that's the tack we executed LOI is increasing its leased negotiating status by <unk>.
37% as tenants affirmed the attractiveness of our transformation of this historical midsized Tech campus until a highly amortize science and technology Mega campus.
As impressive as that is the response by the market to a friendly transaction until one Brooklyn has been even more remarkable when we closed on that transaction in late January the asset was 17% leased as we sit today, we have letters of intent that one converted the leases will bring that percentage up to 84%. This is it.
Testing.
To the trust life Science companies have and our best in class brand as these opportunities came to 201 Brookline in large part because of Alexandria.
Overall with the addition of five new projects and the full delivery of 98 four Medical Center drive we now have approximately 4 million square feet under construction that is 66% pre leased and 76% committed when including signed LOI that is only 2% below the committed leasing percentage from last year's or from <unk>.
Last quarter.
And as Steve alluded.
Two despite the fact that we also added a million square feet of new projects.
Given the recent news on anticipated inflation, we wanted to give you guys an update on construction cost escalations as it relates to our pipeline before we get into what is happening in the construction market. We want to note that the projects listed on page 42 that make up the 4 million square feet under construction are largely subject.
Aaron Teed maximum price contracts, which protect us from any escalation is not already negotiated into the pricing under construction projects that are still in negotiations.
That well the ones that are still in negotiations have been conservatively underwritten with a conservative escalation range applied in our underwriting the 80 basis point yield be at 98 O. Four medical Center drive that I spoke about earlier is a testament to our conservative underwriting and outstanding budget management.
As we all know coming into 2020, we all expected growth in the real estate sector to continue and we were all taken by surprise on a global pandemic created disruption in our personal and professional lives as reported in our <unk> call last year Alexandria was required to temporarily suspend seven projects during <unk>.
Quarter due to COVID-19, but with life science being deemed an essential business, we were able to restart relatively quickly that wasn't so for many other developers and a large number of projects were put on hold or canceled altogether that caused general and sub contractor backlogs to shrink and for a moment in the middle of the year.
Are most of major contractors assumed the worst and laid off workers demand from materials also diminished and for a brief period of time overall construction costs trended lower than pre COVID-19 levels, we now in California that cost dropped as much as 2% during that time. However.
However, as news of the effectiveness of vaccines came to light towards the end of the year. The construction industry experienced a V shape recovery led by residential and advanced technology with life Science and health care contributing to the sudden increase as well.
One of our major contractors had to pivot quickly and today is still spending 10 hours a week on hiring as backlogs grow. In addition to the shortage of labor costs are being materially influenced by a shortage of subcontractor shop capacity the makers of glazing duct work and other pre fabricated materials.
More work than they can handle so many are increasing price in the control their backlog on top of that the demand for raw materials is putting pressure on steel copper lumber and plywood steel is up 20% from April 2020 to February of this year, copper sept, 37% and lumber and plywood or up 62%.
Over the same period, although these percentages are high materials are only 30% to 35 per cent of the total cost stack. So we've been advised to plan for 5% to 6% annual escalations in the aggregate over the next 12 months rest assured Alexandria constantly stays in front of this data factors that indoor.
Underwriting and employ strategies to mitigate its impact as a major developer with a number of significant major contractor and subcontractor relationships, we are able to leverage preferred pricing and priority in the queue. We have a great reputation among our vendors as we treat them like partners and that enables us to continue to deliver on.
Time and on budget in any market condition.
I'll conclude my comment my commentary.
Talking about some private cap rates that you should factor into your models.
Our own partial interest sale.
300930 square foot 213 East Grand building in South San Francisco was executed at a record 4% cap rate.
Translates to it.
A value of $1429 per square foot.
This should be very impactful to our overall valuation of South San Francisco is one of our largest submarkets as we hold $3 3 million square feet in operation or under development. Despite the fact that the rent is approximately 20% to 25% below market on that asset the lease goes for <unk>.
Another 12 years. So we believe the yield is very reflective of what investors are willing to pay today for first in class Alexandria owned and stabilized assets.
We'd also like to report that Blackstone sold the 400.
454000 square foot, 96% leased science Technology Park at Johns Hopkins to Ventas for $272 million or $600 per square foot, which is a four 8% cap rate. Although the asset has strong tenancy. The neighborhood is tough. So this was a positive outcome for Blackstone.
And another testament to the high demand for life science assets today.
With that I'll pass it over to <unk>.
Hey, Peter Thanks, Dean Chicken Nugget here and good afternoon, everyone.
I just wanted to kick off with a huge congratulations to our entire team for just a spectacular quarter of exceptional execution. The first quarter of 2021, when you compare it to the fourth quarter reflects one of the strongest operating and financial results in the company's history with our unique and differentiated life science real estate platform really at the core of this very strong grow.
Our highly experienced team trusted partnership to the life science industry and high quality campuses in key centers of innovation continues to generate significant growth and value.
Now I want to kick off with allocation and sources of capital. We continue to remain very disciplined with the allocation of capital into projects that have and will generate significant long term cash flows and tremendous value for our company and shareholders now let me take a moment to highlight again the exceptional execution by our team during the first quarter, we strategically.
Our current and future pipeline of development and redevelopment opportunities one with $1 9 billion in acquisitions.
These value creation related acquisitions also included in place cash flows that contributed to a very strong NOI growth in the quarter.
<unk>, though through these acquisitions, we added a number of very high quality current and future development and redevelopment projects to our pipeline.
Another key driver of strong NOI growth in the first quarter was the delivering completion of development and redevelopment projects aggregating 376000, rentable square feet that we're 100% leased.
And on average these were delivered mid quarter.
As of March 31, we had 4 million rentable square feet. If some of the best laboratory space under construction that was highly leased negotiating at 76% and this included a 1 million rentable square feet of projects that were added in the first quarter.
Now importantly over the last four quarters, our team executed leases aggregating almost 1.8 million rentable square feet related to the development and redevelopment.
<unk> projects and.
This included 789000 rentable square feet of leases that we executed in the current quarter. Now these are truly spectacular stats highlighting that we are the trusted partner to the life science industry and we're very pleased with our allocation of capital to these value creation projects. These projects are on track to generate significant value as highlighted by the parcel.
Won't you sale, we completed in the first quarter at a spectacular cap rate of 4%.
We have a great pipeline of near term and intermediate term projects aggregating $9 2 million rentable square feet and we're in a strong position to meet the demand from our broad and diverse network of life Science and AG Tech relationships.
We have also been very strategic and disciplined with sources of capital and have for many years been taking advantage of the continued exceptional growth in private market valuation for our properties as Peter highlighted we completed a 70% partial interest sale at $301 million and a class a property located in south San Francisco that is leased long term to Merck.
Now this transaction as Peter highlighted sold at a record cap rate of 4%.
$14 29 per square foot and really generated a spectacular profit margin of 53% now this transaction highlights continued tightening of cap rates and growth in price per square foot for our high quality life science properties per.
<unk> from real estate dispositions remain an important low cost component of our sources of capital each year and we have completed real estate dispositions aggregating $324 million to date and have several transactions moving along that will allow us to hit our real estate disposition forecast range from one 5 billion to $1 5 billion.
And we expect to provide more details on real estate dispositions next quarter now.
Additionally, we expect to generate capital for reinvestment from our venture investment program and more on this topic in a moment.
Next I wanted to really turn to real estate, which is at the core of our strong growth. We reported total revenues in the first quarter of $480 million or one 9 billion annualized up nine 1% over the first quarter of 'twenty and over double total revenues reported five years ago in the first quarter of 2000.
<unk> now we continue to report exceptional real estate financial.
And operating results.
Excuse me.
<unk> and solid growth in our outlook for 2021, we.
We delivered the following outstanding results in the quarter.
Very strong cash net operating income growth of 10, 3%.
And again, congratulations to our leasing team for truly awesome execution of leasing we hit the second highest quarter of leases executed in the history of the company at one 7 million rentable square feet.
Continued strong rental rate growth on lease renewals and releasing of space at 36, 2% and 17, 4% on a cash basis.
And we're in a great position today and updated our outlook for rental rate growth for 2021 by 100 basis points to a range from 30% to 33% and from 17% to 20% on a cash basis.
And again record leasing on the development and redevelopment projects over the last four quarters at $1 8 million rentable square feet.
That includes the 789000 square feet that we executed on in the first quarter.
We're off to a great start and we're on track for strong same property NOI growth for 2021 first quarter same property NOI growth was strong and up four 4% and $6 one on a cash basis.
And the strength of our real estate vertical drove improvement in our outlook for same property NOI growth for 2021, we increased our outlook by 50 basis points to a range from one 5% to three to three five per cent and 30 basis points on a cash basis to a range from four 3% to six 3% our.
Our EBITDA margin was very strong at 69% one of the best in the REIT industry.
And our occupancy remains very strong at 94, 5% and represents a key area that will drive growth in cash flows in 2021, and 2022 and please refer to page 25 of our supplemental package for details on the recently acquired vacancy aggregating $1 2 million rentable square feet, 26% of this $1 two.
We're nimble square feet.
Our vacancy is leased with most of this 26% taken occupancy over the next two quarters.
And we're forecasting solid occupancy growth in 2020, one of 100 basis points with half of this increase forecasted in the third quarter and the remaining growth in the fourth quarter.
We're also forecasting stronger occupancy growth into 2022.
Now briefly on venture investments our venture investment portfolio continues to perform exceptionally well and as of March 31st had unrealized gains of $729 million.
On an adjusted cost basis of $912 million now our adjusted cost basis represented only three 2% of gross assets as of March 31st realized gains on our venture investments included <unk> <unk> per share were $24 3 million up only $2 7 million over the fourth quarter of 'twenty now.
We're looking forward to the rest of 2021 realized gains from our venture investments should be in the $25 million to $27 million range per quarter. Now importantly, we also realized an additional gain of $22 9 million that related to an investment in a privately held clinical stage biopharmaceutical company focused in the oncology area that was acquired by.
A large equity cap Biopharma company now this significant gain related to one transaction and was excluded from <unk> per share as adjusted.
We have significant unrealized gains of $725 million and our venture investment holdings, and we hope to have additional opportunities to generate capital and reduce a portion of our future equity capital needs by approximately $100 million in 2021.
Now turning to our very strong and flexible balance sheet, which really supports our strategic growth initiatives. We're very proud of what our team has accomplished over recent years, our overall corporate credit ratings from Moody's and S&P ranks within the top 10 per cent of all equity Reits over the past nine quarters. Our team has issued $6 2 billion of unsecured.
Senior notes payable representing 72% of our total outstanding debt at a weighted average effective rate of 3.26% and a term of almost 16 years.
Now the debt capital consisted of both growth capital and refinancing capital that significantly extended our weighted average remaining term of outstanding debt to 13 years and locked in very attractive long term fixed rate debt.
The February 2021 bond offering was a key example, we took a took advantage of very attractive interest rate.
Rate environment in the Opportunistically issued 175 billion in unsecured notes with a portion of the proceeds used to refinance $650 million of notes that were due in 2020 for now these new notes were issued at an amazingly low.
Great of 2% for 11 year notes three per cent for 30 year notes.
Also we just wanted to highlight how the balance sheet.
Statistics for the quarter.
And the year, we remain on track for continued improvement in net debt to adjusted EBITDA to 5.2 times by year end, our fixed charge coverage ratio was very strong as and has increased to four seven times for the first quarter annualized and we continue to maintain significant liquidity of $4 $3 billion and as Joel had touched on earlier.
We have no debt maturities until 'twenty, 'twenty, four and only $184 million coming due in 2024.
Touching on guidance here as we wrap up as a reminder, just want to refer you to pages 11, and 12 of our supplemental package for a detailed and updated guidance assumptions for 2021.
Our improved outlook for 2021 over the prior guidance captures the strength of our real estate performance, including an improvement in rental rate growth and growth in both same property and overall net operating income now EPS diluted was updated to a range from $1 58 to $1 68, and <unk> per share as adjusted was updated to a range from <unk>.
768 to $7 78, and the midpoint of that range from <unk> per share of $7.73 is up three.
Over the prior guidance and represents projected growth of about five 9% over our strong <unk> per share results for 2020 of $7.30 with that let me turn it back over to Joel. Thank you.
So operator, if we could go to question and answer please.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time your question Thats been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question will come from Manny Korchman with Citi. Please go ahead.
Hey, good afternoon, everyone.
Maybe this one's for Steve.
Steve or it.
Maybe this one will go to Steve.
Can you speak to your tenants about the markets that they're looking at it looks like you're going out of your sort of core cluster markets.
Expanding close by but out of those core clusters is that tenant driven or is that just where the opportunity for this company net lives.
Yes, well this is Joel so maybe let me address that in a macro way.
I don't think you could say, we're going after our core cluster markets the core cluster market, you're referring to maybe.
Fenway is really.
If you look at the greater Boston market, Cambridge has been the hallmark, but there have been a set of inner suburbs. If you will that are somewhat have somewhat adjacency to the Cambridge area that had been attractive seaport. It's been there for quite a while and many others have had life science activity. So I think.
It's part of just growth overall, and we're very selective about where we go and how we do it.
And then way was a natural I think I said last quarter, we've been eyeing fenway from more than a decade.
It is kind of a connection.
From two Longwood, where we've had activity and certainly one of the core.
Markets.
Cluster markets at Cambridge, but I don't think I wouldn't characterize it out of the core market by any means.
I don't know, Steve if you want to comment on that.
Yes, I would add to that Manny it's Steve here.
As a.
Pension incremental expansion of the core clusters, so it's not new to new markets.
Our new clusters, I would absolutely characterize it as expansion of existing core clusters.
Thanks, and Dean I know you mentioned that you'd give more detail on dispositions in the coming quarters, but should we expect those to be similar to what you've done this quarter with a large JV sale or do you think you'll actually cause some assets outright.
Yeah.
Yeah.
Manny it's dean here the bulk of the dispositions that are targeted for the remainder of 'twenty one.
Our.
<unk> focused on.
Bulk of the dollars are focused on partial interest sales. So these will be high value low cap rate.
Extremely attractive cost of capital transactions.
It's possible we have.
Some amount over the next year or two of outright sales as well, but stay tuned on that.
Yeah, and I would say, let me add a footnote to what Dean said I think Manny.
You saw us make a move to sale the stripe and Pinterest buildings, which we developed early on in.
Starting in 2014 circa in San Francisco, Opportunistically and made a sale of those entire buildings and there are some assets that we are eyeing for that so it could well be a combination.
Thanks, everyone.
Thank you art.
Next question will come from James Feldman with Bank of America. Please go ahead.
Great. Thank you.
I guess my first question can you just talk about market rent growth I mean, I know conditions are very tight you guys were talking about very strong fundamentals, but what have you seen across the markets year to date.
Yes, I think I'll ask Steve to comment, but I think it's fair to say that across almost all the markets, maybe New York City would be the exception, we've seen as I say exceptional demand for.
Alexandria owned and operated first in class assets and.
I think thats really.
Cut across all markets, but Steve you could give some macro color.
Yes.
Do you want to underlying net it has been across all markets certainly research triangle in Maryland.
We've seen nice rent growth, there as well as Seattle, San Diego, Cambridge, San Francisco.
And I guess, Jamie when you look at our re leasing and renewals stats this quarter at 17% plus cash and 36% GAAP.
And the last four quarters 2020 in entirety.
In that range as well I think that really speaks for itself as you see our rent growth over time here in these class a assets.
So can you quantify how much you think rents are up today over a year ago.
I know you talked about leasing spreads, but the actual market rents I guess I'm curious based on the rising construction costs.
Pricing power, just how it's holding up.
Yeah, I would broadly say that lease rates are exceeding.
The anticipated construction cost increases so it's all positive.
Hey, guys. Thanks, Peter I can just give you anecdotally.
Our analysis showed that just quarter over quarter so far.
<unk>.
Market rents were up over three 5% just for the quarter. So you can annualize that.
Double digits.
Alright, great that's helpful.
And then could you talk about the business plan and Watertown Mall NOI.
I focus on that sub market versus some of the other Boston Submarkets.
Yes. So the answer is we won't talk yeah, we won't talk about that specifically, but we'd been in Watertown.
For maybe as much as 20 years.
We felt that that was a an attractive adjacent sub market to the Cambridge market life Science has always.
Enjoyed going there, we clearly made a big move with the Arsenal on the Charles.
And that campus and what we're doing to redevelop and develop that the Watertown mall is kind of an adjacency and what youre looking at as kind of a mega campus in in Watertown.
We're seeing some great R&D.
Continuing to favor that market I think if you look at that versus some of the submarkets in and around the greater Boston market.
Where transport is really really difficult I think Watertown is one which is I think.
Easier to both ingress and egress and that's been a real attractive thing as well, but as far as the specific asset I don't think we want to comment.
Yes.
Thank you and then finally you guys had commented on.
Yes.
Constrained supply in 'twenty, one and 'twenty two I think you were talking mostly about new construction can you just talk about conversions and what do you think it will be competitive in 'twenty, one 'twenty, two and even into 'twenty three.
If you look across the major markets.
Yes, I mean, Steve can comment on a macro way, we just havent there is a lot of.
Smoke, but not a lot of fire and we have some anecdotal evidence of even some that have been attempted that are really kind of totally failed and theyre not a an attractive alternative to.
For first in class companies that are looking for high quality space, We just haven't seen the tsunami of.
Conversions that people are talking about but Steve you could comment broadly.
Yeah, Hi, Jamie its Steve.
Look you can put a flyer out you can send out blast emails and say your office building is going to accommodate lab users, but until you go ahead and actually start making investments in the base building infrastructure and advancing that.
Tenants are not going to.
Be attracted to that that type of offering and that type of entity with a one off building again, they're in kind of isolated locations are not always in the core life science clusters. So as Joel said I think there is a lot of talk out there, but we don't see a lot of action.
Inevitably there will be a handful of 50 to 100000 square foot offerings.
But nothing that really competes with.
The 1 million plus square foot Mega campus, that's fully monetized with.
Brand, new or newly Redeveloped class a product that we're offering.
Okay.
Every market very closely.
This is Peter I would like to add purpose built which is what we have.
Trump's conversion every day in a week.
When conversions generally are going to require.
Compromise.
The tenants plans there yes, there are areas in the building where the structure is not going to work.
Her heavy equipment.
Plumbing or the shops won't be available because there's another tenant in a way I mean, it is just a very challenging thing we have done it ourselves a number of times, we know the challenges we've been able to overcome them and provide great product, but at the end of the day purpose built will always be much more attractive than office.
Conversion.
Yeah.
Okay. Thanks, everyone.
Thanks, Jamie.
Our next question will come from Sheila Mcgrath with Evercore ISI. Please go ahead.
I guess good afternoon I was wondering if you could give us a little bit more detail on the one investors way transaction in the route 128 sub market, just what kind of yields.
That should be since you brought the tenant with you and.
Just the plans for that expansion as well.
Yes, so I think the.
<unk> correct me, if I'm wrong, I think yields will likely come out in future sub so I'm not sure we want to quote anything at this point, but I think Sheila.
Madonna's turned out to be.
One of those monumental companies in vaccines, we're really almost nonexistent or a sideshow in their business plan for the last decade, but it's pretty clear that we own.
The adjacent.
Location, where.
It is mission critical.
Manufacturing for the for the vaccine and as you can imagine they're looking at lots of opportunities to expand that because the vaccine is not a one or two and done this is likely to be like the flu, where youre going to have to get boosters on a fairly regular basis. So this is really par.
Are there strategic plan to be able to supply.
Both the United States and part of the World with.
Much needed vaccines, now and into the future and it's going to be iterating, because the variance youre going to cause changes in.
What the vaccine needs to do and so we felt that.
As the go to landlord from <unk>.
Within both of our interests too.
To make happen. So I hope that's helpful. As just kind of a framework, but you can expect yields to come out I guess, either next quarter or shortly thereafter.
Okay, Great and I was wondering if you could comment on two markets.
Research Triangle Park.
Following apples announcement, just remind us what your holdings are there and how proximate you will be to apples expansion number one and then number two just.
You haven't touched on New York City in a while just wondering if.
If you could update us on life science demand and that third.
Building on that you have.
Yes, So let me maybe take those in reverse and maybe speak to New York City. So as everybody knows many on this call either live or work in New York and have seen over the last year, what's happened there still a somewhat tough place to be security is still an issue.
Unfortunately, you know.
Crime rates in shootings have gone up really skyrocketed in enormous fashion. So we're very focused on the security of our campus. Our campuses is almost full although we're creating some additional space in the existing two buildings.
Moving a number of tenants around to accommodate growth and were also filling up long Island city, which is kind of a nice relief valve. We are in discussions with the city on the North tower, we're going to break ground here over the past.
Any months, but clearly because of what's going on there and the change in the macro environment.
We we didn't go forward instantly, we had a rejigger kind of what we're thinking about but we're in discussions with the city to see how best we can move that forward.
You have to remember in New York are growing our cluster is like having a baby for 25 years.
And it's painful right.
And we're in the we're just finishing the first decade in literally in New York When we came and launched our first building there in 'twenty 2010, and then into 2011 and beyond literally no research life Science Research was done there are world class academic work World class clinical work one incubator up in.
Upon the Columbia campus, but by and large Pfizer had a headquarters there, but by and large no research. Since then we've made enormous strides we've gotten venture capital off the ground. There a lot of companies have started but we don't see big companies, they're reluctant and havent really been successful in moving.
Any big companies there.
The recent <unk>.
Tax efforts by the state certainly are regressive too I think growth in New York.
Adding on to the tax burden in New York City, New York State et cetera, and then a federal.
As kind of hurtful, So New York has a range of issues, it's great substrate, great NIH money venture is formed but yes.
It's going to take another decade, or part of a decade and a half to really grow that into a a real life.
<unk>.
Secondary.
A market like.
Some of the others that you know much better so it's a work in process.
See some company formation.
Theres, certainly institutional demand and so forth, but it's different than the other markets.
So maybe moving to research triangle.
Might have either Peter or Steve give any macro comments as well, but we we made a move last summer. We felt that research triangle was an important part of the life science landscape. It has been for many years, we have both several mega campuses. Both on the life science side and now the first one of its kind here in the U S.
Maybe in the world on the Agri foods side, a growth food Tech and so we think it's a very very good location. It's attracted.
A lot of brains from many.
Many places around the country anchored by the three great universities, UNC, Duke and NC state and it's been just a really really good place to be.
It used to be looked at as kind of a.
Manufacturing or kind of a tertiary kind of location I think today, it's moved up and become one of the hot and truly important places and people like to live there I think that's going to be important going feud going into the future is it a good place to live and if you compare walking around in the triangle versus New York City, New York City is.
Tough these days you see what's going on in the subways and hopefully governance will get better security, we will get better and improve and hopefully COVID-19 will recede.
But walking around in the triangles like being in Heaven, So I think thats.
While a lot of companies.
<unk> been moving there and we've increased our footprint pretty dramatically, but Steve or Steve you you really started a lot of our efforts down there so maybe a comment or two for you.
Yeah, Hi, Sheila it's Steve.
Yes.
Apple footprint I think will be transformative for the part for sure and we do have one of our campuses in the Kit Creek area.
With a number of buildings that are in close proximity there. So we think that will help continue to.
Really invigorate the campus going forward as Joel it's been outlining and in particular really help.
These specific assets. So we're very enthusiastic about their presence there.
Okay, great. Thank you.
Our next question will come from Richard Anderson with S. M. D. C. Please go ahead.
Good afternoon.
Joel you mentioned.
Your frustration with the corporate tax.
Narrative going on in.
Impact on repatriation, where are you seeing.
Any tangible evidence of kind of the.
Onshoring of the supply chain.
And impacts positively to your tenants that could actually reverse course, if this were to happen I'm wondering if it's more of a story line as opposed to something.
Concretely underway at this point.
Well no I think it's been dramatic and not just in the Biopharma industry and the medical technology industry. There was pretty dramatic tax reform in 2017, where multinationals previously charged with full U S corporate tax rates.
And they kept much of the cash overseas they kind of opened its called the guilty tax Gia LTI. They kind of open that up lowered that dramatically and you saw a lot of companies, including a lot of big pharma and companies like Apple Facebook.
Uh huh.
Google others.
Microsoft other big tax, bringing back large amounts of capital to invest in this country. So we had a couple of years of really positive.
Repatriation not only of capital, but reinvestment in the United States, which was really positive.
Think COVID-19, then shown up very bright shine, a very bright light on the medical supply chains, where as I said, 70% of medical.
Supply chain, many of our intermediates to create pharmaceutical product products et cetera, even just normal plastic gloves and all the stuff that we call PPE, 70% of that was.
Sourced overseas and we were seeing dramatic movement of that back to the United States not just.
Pills and stuff like that it was very broad.
And I think.
To reverse that or even to put out the word that you are going to start to share.
<unk> that I think is one of the worst things you could do in the middle of a per hour.
Midway in the pandemic I'm not sure what inning, we're in would have to ask about your.
Some of those folks based on what they see but I think it's fair to say I was in and assume call with a company.
Just getting off the ground here in the United States and the first thing they did was.
Set up operations and IP in Ireland, which has a 12, 5% tax rate.
Where we're going to be going to.
I don't know what it'll be 28 or something like that China is at 25 and most of the world is sub 28, theres only a handful that are above that.
That's not a good place to be if you want to create jobs and want to really.
Joel this economy forward given the damage that we've suffered over the past year from the pandemic. So I don't know I have pretty strong feelings and I think many many many people who are in corporate America believes that.
There are better ways to do that then become anti competitive and I think the administration's comments about well theyre going to try to a range.
Kind of a global Tam.
Tax kind of arrangement, where everybody is charging the same rate if it's done through what's called the organization for economic cooperation and development, our global minimum tax well, okay. That's a total joke.
There is no one that's going to sign on to that but so bad news.
So I guess my question it sounds like it was having a tangible impact on your business, even though clearly it was happening, but you were seeing and its way broader than Biopharma I mean satish wastewater.
Second question I have is you.
Absent from today's presentation was gender in which no offense to her.
It makes me feel like things are getting better because she wasn't giving her uptake.
But I do have a question for the team there and then maybe she's around.
The.
The vaccine success is wonderful you mentioned this is not there is more to come.
It's trading at more like a flu, but I wonder if that if the shift will turn maybe more to therapies as opposed to vaccines in the sense that if we feel like we can be treated for it even if we.
It is an annual event and we know there is a a thorough flew out there to take care of it.
Beyond <unk> and I'm just wondering if you can comment on that at all so if by popular opinion will bring Jenna back next quarter, maybe but.
We decided not to do that just because you know vaccines are kind of in the at the forefront.
The country is making I think good progress.
We'll see how that goes but you are seeing Andy.
India's hit an all time high and if you look at pictures of what's going on there are low.
<unk> breaks your heart, we've got some severe outbreak throughout the United States, Michigan, which has been one of the toughest shutdown states.
So go figure that out is having some tough time. So we're still I don't know we may be in the fifth inning, something like that I don't want to be a doctor vouchee here, but you know.
We got a long way to go here and it's going to be with US. This just doesn't go away. It comes back in various forms but I think when it comes to your question on therapies.
I think if people rely on therapies like flu.
Flu therapies or other kinds of therapies for COVID-19 I think that's a huge mistake and we will next quarter address that I'll ask agenda, specifically address it but what I think is the challenge is if you get COVID-19. There is a cohort of patients right now people, if you ask Scott Gottlieb and others right now.
It's maybe 10, 15% don't know if that number's two lowered too high but my guess is it could be.
Right about right and it could be higher who are experiencing the long haul symptoms. If you ever look at some of the articles on COVID-19 COVID-19 attacks almost every system in the body and its something that you would not want to get and just get over because you don't know what the long haul.
<unk> to the brain.
The immune system.
Circulatory all the systems of the body. So I don't think the.
Therapy is the answer I think its immunization.
And.
Hopefully herd immunity, although theres a.
Cohort of people here in the United States, who simply won't take the vaccine.
There may be medical reasons, there may be religious reasons, but I think it is hard to understand.
The assumption of the risk for oneself and others. If you don't have those issues not to take the vaccine. So long winded answer I hope that's helpful.
Thanks, very much everybody. Thanks Joel.
Yes.
Our next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yes, Thanks, I wanted to touch on the repatriation of the drug supply chain real quick again, I know, it's important I guess for the industry in the country I mean does that drive the demand and cluster markets at all I mean does it impact your business materially one way or another.
Well I think it's incrementally I was talking more more macro because to bring back supply chains for intermediates for pharmaceutical products. So we don't have to rely on India or China or ire.
Ireland or other places.
That's critical that's national security It seems to me and yes, there has been certainly impacted the demand, especially in the manufacturing and the Nextgen manufacturing I think people are not going to put cell therapy gene therapy, and a range of Nextgen manufacturing, which are so tied to R&D in the biopharma industry.
Overseas and less tax rates, absolutely force them to do that which would be stupid as policy I ever heard.
So yes, the impact has been.
Clearly.
Positive fashion, and we hope that doesn't get reversed.
Okay, Great and then just I guess last question from me can you talk a little bit about I guess the mentioned in the earlier prepared remarks about the model to help combat homelessness in Seattle.
All far along as this process and I guess, what type of timeline do you have in mind or when you'll be able to provide us more details on what that plan is and how it's going.
Yes, so it's still in the early feasibility stage I think understanding homelessness much like drug addiction.
As hard there are a few imagined the homeless population. It's highly stratified there are those that are down on their luck have financial issues. There is a large cohort that have <unk>.
Serious addiction issues, there is a large cohort that have serious mental illness.
Et cetera, so it's not just saying, okay. Let's just find housing that that that's a solution that many jurisdictions are pursuing but it doesn't help it's like Detoxing somebody who is addicted to opioids and then putting them back on the street, Okay that doesn't work more than 28 days. So we're trying to adopt.
This or adapt I should say not adopt the 115 model the continuous the continuum of care the complete care data driven.
But with deep research and so we're in the feasibility stage. So I'm not sure I can give you yet maybe over the next quarter or so I'll be able to give you more details, but we think it's an imperative that we we attack. This problem and I think we may have a model that will help a lot of people here, but it's no easy thing it isn't like putting up.
A few simple apartments is way way more complicated than that.
Okay, great. Thank you.
Yes. Thank you.
Our next question will come from Dave Rodgers with Baird. Please go ahead.
Yes, good afternoon, Brian I wanted to ask a question about and two really good quarters.
And then number of cornerstone together.
Seeing any slowdown like there was some backlog maybe that had built up from COVID-19.
Metering out a little bit more is that more a function of what you're offering in development. Just curious on kind of the pace of leasing in the second quarter and then maybe the flipside, what what's missing from the leasing pipeline if anything in terms of kind of your reports innovate.
Okay, I'm not sure I fully understand the first part of the question.
I think earlier you made the comment that I made the comment about demand.
Slowdown that was related to just not being able to build break for a little while I know it was I don't think.
Okay, I don't think we said that our U.
Who said that.
Just in terms of New Inc.
I guess the question wasn't it.
Change in leasing going from the first quarter into the second quarter and any evidence of a slowdown or any evidence that there had been any backlog from COVID-19.
That might be dissipating at any point no.
I think our comment should address that pretty pretty directly Dave now we.
We don't see any of that.
Okay and then.
Not particularly related to the fact that is there anything in your own guidance in Alexandria that would be dependent upon that getting done.
No alright. Thanks.
Our next question will come from Daniel Daniel Ismail with Green Street Advisors. Please go ahead.
Great. Thank you.
Joel I appreciate all the comments relating to ESG.
There are a variety of taxes or fines on greenhouse gas emissions proposed or in discussions across your markets.
Seems like lab buildings are generally lumped in with office buildings.
Those are enacted regulations. Despite the difference in use in potential energy intensity.
Is that a fair characteristic characterization and then does it come up and tenant discussions about the potential for a higher taxes are fine John.
Building greenhouse gas emissions.
Yes, I think it has not at the moment doesn't seem to be a a significant issue for tenants at this moment, although theyre looking for obviously very green and environmentally positive.
Sustainable buildings, both inside and outside and I think we've kind of been a leader here in the U S and maybe even worldwide in the hole.
Fit well.
Our healthy environments inside but dean do you want to comment because you're closest to that.
Yeah, So Danny I greet with what Joel highlighted are our tenants.
Having folks focus on your specific question, but they have focused on.
Really environmentally friendly sustainable real estate solutions, if you look across their business.
If you take just a sample of our top 20 tenants as an example, and look at their E.
<unk> initiatives sustainability as a high priority across their entire business real estate being a very small component they actually touch on real estate a little bit on a few of the top 20 tenants.
And as Joel highlighted.
You know carbon neutral.
Neutral.
Energy.
You know neutral buildings et cetera, just beyond lead today is super important most of these <unk>.
Pharma companies today have set.
Carbon neutrality goals that are well inside the broad 2050 type of target dates.
Some have put out there.
So I think overall, it's super important.
I think for us when we think about building green and sustainable buildings.
<unk> not only strategically important to our business, but it plays right into the strategies of our tenants as well so I think it works well.
I think your point the obvious challenge that all companies are facing today is how do you reach carbon neutrality.
Today at a pace that needs to be faster than.
Oh, maybe possible at the moment.
Given technologies and solutions that are available, but if we don't put our best foot forward to be impactful here.
You know, we won't get anywhere close to some of the definite lines in different jurisdictions, but theyre all different so it's hard to comp.
Comment on well on it broadly across the portfolio.
Okay and then just.
Last one for Peter on the cap rate on the South San Francisco trade how.
How would you compare that cap rate across market cap rates.
How would you compare market cap rates on San Diego.
San Francisco, Cambridge are cap rates heading to parity in these markets or are there still decent spreads across its markets.
Yeah, I actually think you're.
I think your comment on heading to parity that's actually when you start asking your question I would like.
The geographic differences that you see.
The obvious are being blurred.
Once you get down to four caps.
Sure.
I would not be surprised obviously.
For a cap is being.
<unk> in Cambridge would not be surprised to see it go below four.
Cambridge at some point soon.
A high high quality asset in San Diego.
Was probably up by.
Low five cap.
Two years ago, and I would expect that to be a low four cap today. So.
So things are things are starting to or the difference geographic.
Difference.
Cap rates had before are really starting to narrow.
And.
And it's probably obvious.
There's so many people out there looking for exposure to life science that day.
The geography doesn't matter as much as it does to get exposure to life science.
Great. Thanks, everyone.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Joel Marcus for any closing remarks.
I'll just say thank you everybody and please stay safe we will talk to you next quarter. Thanks, everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.