Q2 2021 Alexandria Real Estate Equities Inc Earnings Call
Good day and welcome to the Alexandria Real estate equities second quarter 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist.
The list by pressing Star zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then 1 on a touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being recorded I would now like to turn the conference over to Paula Schwartz with Investor Relations.
<unk>. 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 may differ 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.
As contained in the company's periodic reports filed with the Securities and Exchange Commission and now I'd like to turn the call over to Joel Marcus Executive Chairman and founder. Please go ahead Joel.
Thank you Paula and welcome everybody to our second quarter call with me here.
Here today are Jennifer <unk>, Peter Moglia, Steve Richardson.
And Dean Chicken AGA want to welcome all to this second quarter call and.
Also as I always try to do to recognize and thank the entire Alexandria family team for 1 of the best quarters in the entire history of the company with an operational tempo really like none other while working virtually.
For most.
Many of us for most of the past.
Now into our second year of Covid.
As Michael Jordan, 1 said some people want it to happen.
Some people wish it to happen others make it happen Alexandria makes it happen, we're deeply mission driven and thankful.
Full for all that we do and urge you to read about many of our important programs and activities in the corporate social responsibility area in our press release and sub.
For a moment keys to the second quarter historic high demand for Alexandria as.
Lab space and our critical lab operations, which go along with that.
Alexandria is at the Vanguard of meeting the historic and high unprecedented demand from many of our more than 750 tenants for growth needs now and a critical path for future growth very importantly.
Fundamental drivers of demand are the strongest we've ever seen rental rate growth continues unabated and no excess supply on the horizon at this time.
We're very proud that we've got almost 7% quarter to quarter per share <unk> growth more than 40% rental rate growth.
Almost 18% NOI growth almost 8% same store NOI growth and a $1.3 plus billion dollar annual NOI run rate not to mentioned about 545 million in incremental revenue in our development and redevelopment pipeline Alexandria truly has a.
As for bolt pricing power advantage in each of our cluster markets and win life science tenants choose they almost always prefer Alexandria as lab space.
Our operational excellence.
Based on our critical lab operations.
Nature.
Biotechnology a magazine back in April.
Wrote the following 2020 was a year that smashed many records biotech save your role in the pandemic attracted a stampede of private and public investors like the tenant the pandemic apparently reinforced the requirement for long term value based.
Investors of any kind to have exposure to life sciences.
And life Science demand has in fact hit an all time high as the World has recognized the importance of next next generation therapies to solve current and future <unk>.
Really difficult health care challenges and.
In general talk a bit more.
I'm going to highlight just a couple of things for the moment.
The pandemic has underscored the support for the National Institutes of health and investment in basic science, which are keys to ensuring that the U S maintained its leadership position in life science, and maximizing national preparedness to address current and future health care.
Our challenges are.
There is a proposal right now to increase the.
Fiscal year 'twenty, 2 NIH budget up to 51 billion nearly a 20% boost over our fiscal year 'twenty 1 the FDA center for drug evaluation and research better known as Cedar has approved 23.
The new molecular entities in the first half of 2021, putting it on pace to exceed 2000, Twenty's near record approval high of 53.
Following a historic year for <unk> 'twenty 'twenty venture capital and life Science continues at a very strong pace of almost $36 billion already raised in the first.
First half of 2021 on pace to Eclipse 2000, Twenty's, all time high of 46 billion.
This unprecedented level is likely to continue throughout the year due to substantial dry powder available to life science funds and increased investment from institutional generalist and traditional life science.
Investors.
Following a record 2020 for Ipos and follow on offerings in the first half of this year have continued to reach new highs with over $8 billion raised in 52, Ipos and over $17 billion raised in many follow ons positioning 2021for an all time record year of public.
Click market invest in investment in life Science, R&D continues with amazing productivity and resilience through COVID-19, enabling the industry to expediently deliver novel vaccines and therapies to combat the global pandemic, New biology drug discovery platforms and increasing focus on complex.
Complex medicines as the future therapy deep therapeutic innovation have all demonstrated the life science industries ability to.
Effectively drive solutions to current and future health care challenges and yield strong returns to investors.
And maybe a final comment would be as.
Warped speed did in bringing a historic public private partnership together of the government on the 1 hand and the.
Private industry biotech and.
Pharma companies on the other hand at a warped speed right to bring research and development and commercial commercialization.
Project with vaccines in record time, as well as ensure a timely manufacturing supply, we really do need a 21st infant infrastructure package not at 20th century package like the 1 Congress is now debating.
Debating.
We need to make the U S self sufficient in semiconductors.
For the currently produce now about 11% to 13% and self sufficient and Nextgen manufacturing of complex medicines, and so with that let me turn it over to Jennifer.
Thank you for Mexico, and good afternoon, everyone.
Bill highlighted last quarter.
Reaffirm my fundamental data shared is the.
Tremendous paradoctor depend on equipment for the life science industry.
By the current as of the past many months Covid has illuminated the power plant from the industry's ability to transport for future human health not only have so many of our tenants in the industry as Joel mentioned rhythm to the challenge of combating this global pandemic, but R&D and bio innovation broadly have persistent amazing productivity.
<unk>.
Real time.
I don't know how critical it is.
To preserve.
Unfortunately, the Cadillac with groundbreaking so.
For me what their current correct.
Okay.
According to the World Health organization.
Morning.
There have been over 194 million confirmed cases of COVID-19, including over $4.1 million.
Total of $3.7 billion vaccine doses have been administered worldwide with nearly 10% of these doses from the U S alone roughly 57, 5% of the vaccine eligible population in our country, that's 12 and.
There had been for me back Florida.
Either our mccarran actual shot mrna those back for our timing John.
It was just over 49% of the total U S population.
We hope this number for me that they can always work continued to steadily rise.
These numbers are simple.
Before we get Inc.
Oh, very now I want to emphasize that despite the Covid 15, we all continue to feel even despite some relief from the easing of restrictions over the past few months, albeit with a likely return to some new ones. None of where we are in the recovery process can be taken for granted.
The fact that the biopharma industry Youre headed by many of our tenants was equipped with the Knowhow.
Where our losses and technology to create an effective backhaul to combat a novel viral pathogen. It would have been unimaginable just a few decades ago. The fact that our kind of Pfizer and Merck <unk> and document Jonathan if I can develop robust clinical trials monies Baxter.
We ended the vaccine that Dow in less than 12 months.
Absolutely unprecedented.
The vaccine, but she's buckets, Donald safety and efficacy in a 90 plus percent range from the FDA has set the original bar at 50%.
Low income for side effects or credit for millions of people who have now received that is truly astounding.
The fact that the biopharma industry government and many other.
Our recent private agencies came together to ensure all of the above transpired at a pace and level sufficient to provide adequate vaccine supply to inoculate the entire U S population as we now have unlike most nations around the world is not to be undervalued.
And the fact that we have a regulatory agency and the FDA that has worked around the clock to review.
Public I'll go into COVID-19 related application to maximize the availability of high quality testing and safe and effective vaccines and therapies against COVID-19 cannot going back right.
So we are low.
It's been just over 18 months since the first U S. Covid cases reported on January 21, 2020, yet to play all.
<unk> with vaccines et cetera countries around the world are still very much combating new COVID-19 surges driven most recently in part to the increasing prevalence of the so-called delta areas.
In the U S. This highly contagious delta variant approximately 50% more transmissible, but a thousand times higher viral load accounts for at least 80.
All of the percentage of Covid cases.
Average daily confirmed Covid case, count now exceeds 50000, which is 5 acts that have been too low for the past.
Location and depth rising as well.
Such that as of this morning indoor maps requirements are likely to rise in the various parts of the country.
However.
83 for I guess this trend may seem breakthrough infection. Those are infections that occur in vaccinated people are still relatively uncommon in the vast majority of these breakthrough cases have not caused serious illness hospitalization or death or the 95 per cent of people hospitalized for COVID-19 or on vaccinated in the vaccine still remain effective even.
Thanks, Scott for Varian for a while they may not entirely prevent transmission they do seem entirely able to prevent severe disease and death.
With regards to backfill safety therapy.
<unk> been very few adverse events from 7 per million reported overall with nearly all cases resolving without long term side effects reported.
As such the strong safety and efficacy profile, we're likely garner full FDA approval for mrna based vaccine for Pfizer in the dirt out this fall.
With regards to pregnancy in women of Childbearing age. So data is more weighted based on the safety data generated to date and how we know vaccine work in the body for CDP does encourage pregnant women to get back from.
Against especially given the pregnant and recently pregnant women are at increased risk for severe illness from COVID-19 with regards to children. Pfizer has an emergency use authorization for children over 12, and the FDA is urging Pfizer in Mcdonough.
And our studies in children ages 5 to 11.
So what's next and where are we headed.
Weighted in the evolving data on the duration of immunity and COVID-19 variance of concern suggest that COVID-19, and the need for vaccines and boosters will likely persist long term. However, the faster we can vaccinate the population in this country and increased access to vaccines and the rest of the world. The more effectively we can flow the emergence of new variants and the sooner.
For this virus into a less deadly pathogen, even if still contagious.
And given that Covid will likely remain on the planet for the foreseeable future therapy.
<unk> therapies are going to continue to be important in mitigating the severity of COVID-19, such as recently authorized to our tenant vir and GSK for their new antibody equally as important.
We can price continued COVID-19 testing of course per active buyer for symptomatic individuals as well as surveillance testing across the population to detect new outbreaks sequence emerging variants and talk overall transmission.
The last point I want to make is regarding the FDA, which has received somewhat unyielding slack over the past several months despite the herculean COVID-19.
Efforts, while maintaining a near all time record high pace of new drug approvals as Joel highlighted this criticism was announcing on account of several factors, including the lack of a fully appointed FDA Commissioner for growing backlog of review requirements for new investigational drug applications, given the strong pace of innovation of our industry the lack of fully.
Ooh vaccines, despite there being authorized under the emergency use authorization pathway.
And most recently the historic at highly controversial approval of Biogen Auto home.
To treat Alzheimer's disease, which was the first approval in nearly 2 decades for this chronic neurodegenerative disease affecting over 6 million people in the U S alone.
I will.
Proved commentary on all of this for another time, but it needs to be said that without the FDA is steadfast and tireless work throughout COVID-19 to maximize the review of the immense COVID-19 related testing.
Therapeutic and vaccine applications, while trying to keep pace with the record numbers of submissions from the industry, we as a nation would fall way behind it is nothing short of astounding.
Ending and worthy of yet gross recognition. The FDA is critical for ensuring the safety of all drug products that are available in the U S, while balancing efficacy and expediency.
Future productivity and leadership of the agency, which will be announced by November of this year of the utmost importance to all of us at the FDA and instrumental in ensuring the continued pace and vitality.
Same medical innovation in our country.
So in summary, thank you for the heroic work in collective investment of so many of our tenants in the industry, we have the tools and the roadmap at our disposal and the pandemic Biopharma is emerging from Covid at the dawn of a historic new era for biotech and scientific innovation.
<unk> recognizes the value of this industry and the potential.
And final for next generation medicines, as evidenced by Madonna and Pfizer's next generation vaccines to address current and future health care challenges and clearly in the <unk>.
Paradox for this pandemic moment has only reaffirmed by Alexandria has dedicated our business our passion and our purpose helped drive this mission critical industry forward and without.
Potential turn it over to Steve.
Thank you Jennifer.
I'd like to take a step back at the start of my comments provide some historical context for the accelerating demand.
Which really translates into leasing at warp speed for Alexandria campuses.
The Alexandria as annual Investor Day.
With that I'll timber 2017, we presented a bold framework to nearly double the company's annual rental revenues from a little more than $800 million to $1.5 billion.
The end of 2022.
We're pleased to share those annualized revenues for Q2.2021 are in fact.
During disconnect from $1.5 billion and so the Alexandria team has accomplished this lofty goal and accelerated timeframe more than 1 year sooner than anticipated.
He has also grown from emission critical operating asset base and development pipeline from 29 million square feet.
<unk> 2017 to a total of 62 million square feet at the end of Q2, 2021 truly exceptional growth more than doubling the footprint of the company and importantly concentrated in our core clusters with disciplined execution, enabling the continuation of high quality cash flows.
And as we fielded questions. During this 2020 as to whether the healthy leasing activity for Alexandria Mega campus platform was perhaps a short term blip driven by COVID-19, the second quarter of this year as leasing volume of more than 1.9 million square feet.
This quarterly leasing volume in the history of the company is again evidence of the company's unique position as a trusted partner to the growing life science industry, providing a durable and sustainable competitive advantage in the market.
I'll go ahead and review a few of the exceptional highlights including the following.
The high leasing outperformance as we just stated the 1.9 million square feet leased represents the highest quarterly leasing activity. During the 27 year history of the company truly leasing at warp speed.
I'll direct you to page 2 of the supplemental for it indicates the 3.4 million square feet under control.
Friction is 80% leased.
And the additional $3.6 million square feet anticipated to commence construction during 2021.2022.
89% leased and negotiating so robust leasing in our growth pipeline provides exceptional clarity and these projects.
<unk> will drive incremental revenues in excess of $545 million.
You also have exceptional core results cash increases this quarter of 25, 4%.
GAAP increases of 42, 4%.
Occupancy remained very solid.
And told 94, 3% in the operating portfolio, which would have been 98, 1%. If it were not for the 1.4 million square feet of vacancy and recently acquired properties, which provide for near term incremental annual rental revenues in excess of $55 million.
And market health.
At manned as we've outlined continues to accelerate and Alexandria is branded and highly desirable mega campuses.
And supply it does continue to be restrained during 2021 across all of our markets.
And we do not see any disruptive large scale projects delivering 2022.23.
We're closely evaluating.
The greater Boston is ground up pipeline, which is 56% leased and in the San Francisco Bay area, we are monitoring leasing activity at 2% or 3 ground up lab projects.
And as we've stated before there have been no significant lab sublease spaces put in the market for several quarters now.
So in conclusion, the first half of 2021 continues to very strong outperformance by Alexandria and I.
Our intense focus on operational excellence has positioned.
Position the company very well to enhance its industry leading brand.
With that I'll hand, it off to Peter.
Thanks, Steve I'm going to update you all on our development pipeline and construction cost trends comment on our recent asset sales and report on a couple of comps that reflect that the private market appetite for life science assets is still very healthy.
As Stephen Joel both noted we're experiencing.
Same historic demand and have responded by executing our differentiated life science strategy at an accelerated pace through expanding our collaborative campuses in asset base in each of our cluster markets.
<unk> signed for the health of the underlying life science industry is that we're expanding significantly in almost all of our markets.
And many of our Submarkets the supply and demand imbalance has been exacerbated by a lack of near term opportunities to expand leading Alexandria to push the boundaries of those markets. Examples of this are successful forays into Watertown, and seaport in greater Boston, New Mega campuses in Sorrento Mesa.
Lisa and expansion of San Diego Science sector to the North and east.
In our highly successful Mega campus underway in San Carlos.
This high demand paired with our highly experienced development teams resulted in another very productive quarter for Alexandria, and the second quarter, we delivered 755000.
565 square feet spread over 5 assets located in South San Francisco, San Carlos Long Island City, San Diego and the research Triangle. This is double what we delivered in the first quarter and these deliveries will provide more than $31 million in annual rental revenue over the next year.
In addition.
Additionally, this historic demand has led to improved quarter over quarter leasing and leases under negotiation numbers. Despite adding 2 new assets that have had little marketing time.
Assets contributing notably to this outcome include a 40 winter Street in Waltham mass, which is a testament to our ability to capture demand from cash.
And eating facilities for Nexgen manufacturing.
$31.60, Porter drive in Palo Alto, a joint effort with Stanford to commercialize the university's most innovative science and 55 O 5 Morehouse and Sorrento Mesa, which is benefiting from Alexandria is place, making expertise and strong demand drivers in sandy.
<unk>.
As illustrated on page 2 of the press release this historic demand and our corresponding strategic response has led to our current pipeline growing to $3.4 million square feet in 33 properties better as Steve mentioned, 80% leased or under negotiation. In addition.
And we expect to have another $3.6 million square feet and 19 properties commence construction. This year and next that are already 89% leased or under negotiation as Steve also mentioned these properties will cumulatively add approximately $545 million.
Of annual rental revenue.
Once fully delivered.
Felt it necessary to remind everybody of that.
Construction costs remain elevated from trade from some trades and commodity is holding steady and others continuing to be unexplainable and unprecedented levels.
Lumber is a positive story.
And could be a microcosm for what will happen with other commodities a year ago lumber was $500 per thousand board feet, which was about $100 above its historical norm.
<unk> hundred dollars per thousand board feet in early May but has since dropped back down to $600 per thousand board feet and is still dropping.
The reason for the drop was a large number of residential projects were put on hold due to the price of lumber.
With this pullback in demand that mills have been able to catch up leading to stabilization in pricing.
Correction due to a decrease in demand is essentially what's going to eventually normalize all construction commodities.
Copper has shown signs of dropping but it's still 2 times above historical norms alternatives such as aluminum are being considered to alleviate the pricing pressures and if theres enough adoption it could lead to a stabilization in pricing.
Despite the promising news with lumber and copper rolled steel remains variable.
Very volatile and is not showing any signs of stabilizing rolled steel is used for things such as metal decks metal studs and duct work. So it's very impactful on multi level buildings with large HVAC needs such as lab buildings. So we have to keep our cost escalation assumptions on the high end.
Despite the noted dropped in some commodities.
The reason being reported as both a commodity and labor issue at the shops that create the products from raw materials Covid.
Covid caused many to shut down and then when demand exploded the shops at a hard time getting the labor to come back.
The shops tried to solve this by scheduled.
Scheduling longer shifts, but the amount of rolled steel showing up was not enough to support those ships. Thus prices remained very high with metal studs up 75% since January.
We want to assure you that we're keeping a very close eye on commodities and have been developing strategies to counter these increases.
And together with our prudent underwriting we will continue to deliver our projects on time and on budget as we always have.
I'll conclude by commenting on our recent sales and provide a couple of comps that were announced recently.
<unk> discussed our record for percent cap rate.
Right at the <unk> Grande last quarter, but want to add that in addition to achieving that cap rate. We also achieved an unlevered IRR of 9.6% and a value creation margin, which is calculated by dividing our gained by gross book value of 56%.
This quarter as disclosed.
On page 3 of the press release, we once again demonstrated our ability to create tremendous value for our shareholders by selling a 70% interest in 400 Dexter located in the Lake Union Submarket of Seattle for a 4.2% cash cap rate with a gross value equaling 1002.
$255 per square foot.
We achieved a 12% unlevered IRR on this sale and a value creation margin of 61% a truly remarkable outcome and its very reflective of the high quality assets, we've developed and continue to develop in the Seattle region and elsewhere.
Outside of those Alexandria transactions. There are a couple of transactions of note in our submarkets that reflect the high value that private investors are putting on life science assets today.
In Sorrento Mesa and asset known as the canyons, which contains a little over a third of lab and manufacturing space with the balance being office.
So that a 4 point for 8% cap rate and a value of $575 per square foot.
The cash flow is from a credit tenant and there is no near term upside. So the cap rate really reflects the yield a private investor was willing to pay in a sub market that a couple of years ago would have.
Commanded a cap rate with a 6 handle.
In a similar vein the other.
Their comp we're reporting comes from Rockville, Maryland, which was perceived to be a 7 cap rate submarket by some analysts not too long ago.
100, 615 Medical Center drive located in the Shady Grove, Submarket and adjacent to a number of Alexandria.
For the properties were sold to a U S insurance company for a 5.18% cap rate and evaluation of $610 per square foot.
Asset is a lease hold interest subject to a long term ground lease that happens to be owned by Alexandria.
Thank you.
And with that I'll pass it over to Dean.
Alright, Thanks, Peter Dean <unk> here good afternoon, everyone.
We reported exceptional operating and financial results for the first half of 'twenty, 1 and provided a very strong outlook for the remainder of the year.
Revenue and net operating income for the second quarter was up 16.
6% from 16, 8%.
Over the second quarter of 2020, respectively in NOI for the second quarter was up 6.9% over the first quarter of 'twenty..1 now venture investment gains included in <unk> per share were $25.5 million for the second quarter and was consistent with the first.
First quarter of 'twenty, 1 now looking back over the last 2 quarters, we raised our outlook for revenue per share 3 when we reported our first quarter results and during the second quarter, we raised our outlook for <unk> per share again by another <unk> <unk> increase was announced in connection with our form 8-K filing dated.
2014, when we were substantially through the second quarter and had solid visibility into the strength of core results for the quarter.
Same property NOI growth for the first half of 'twenty, 1 continued to benefit from our high quality tenant roster with 53 per cent of our annual rental revenue from investment grade rated or large cap publicly traded companies.
At June same property NOI growth for the first half of 'twenty, 1 was very strong at 4.4% and 7.4% on a cash basis.
Hi rental rate growth on lease renewals and releasing the space was the key driver for the improvement in our outlook for 2021 same property net operating growth to 2% to 4%.
<unk> for 7 to 6.7% an increase of 30 basis points and 40 basis points respectively.
Now while the primary focus of our acquisitions for 2021 has been driven by strong demand from our tenant relationships for both current and future development and redevelopment projects certain acquisitions.
And also included operating properties with opportunities to drive growth and cash flows through lease up of vacancy.
Now these operating properties have also contributed to NOI growth in the first half for 'twenty..1 it's important to highlight that the lease up of $1.4 million rentable square feet of vacancy at these properties.
We will provide further.
<unk> set a growth in annual rental revenue in excess of $55 million now occupancy that we reported for June 30th was 94, 3% and 98, 1% on a pro forma basis, excluding vacancy from real recently acquired properties.
And it's also important to highlight that if we set aside recently acquired properties.
Further our occupancy is on track to improve by 100 basis points in 2021.
Now we believe it's important to highlight the strategic benefits of having a team with tremendous experience and expertise with designing building and operating sophisticated laboratory office buildings.
And the team with decades of trusted partnerships with.
A pretty highly innovative tenants as mentioned earlier, we have 1 of the highest credit tenant rosters in the REIT industry. We have 1 of the highest adjusted EBITDA margins in the reading industry at 69%, we reported our lowest balance since 2012 at $6.7 million truly amazing when you consider that our total market capitalization.
With her over 26 billion as of June 30th.
And we continue to consistently reported high collections at $99.4 per cent for July we reported record leasing velocity at over $3.6 million rentable square feet executed in the first half of this year and this run rate significantly exceeding the strong leasing volume.
So it was 2020 and on track for exceptional rental rate growth in the range of 31 to 34 per cent and 18% to 21% on lease renewals and releasing of space.
Figures on a cash basis by the way.
Now as a trusted partner with access to over 750 tenants in our portfolio, we are well positioned.
Volume for capture the tremendous demand from our tenant roster and life science industry relationships, we have a super exciting pipeline of projects under construction aggregating $3.4 million rentable square feet, 80% leased negotiating near term projects.
<unk> starts 89% leased or under negotiation aggregating 3.
<unk>, 2.7 million square feet.
Now this aggregates about $6.9 million square feet, 90% of which is related to space requirements from our existing relationships.
These projects will generate an amazing amount of incremental annual rental revenue exceeding $545 million.
334% increase above the second quarter rental revenues annualized of 1.6 billion.
Now importantly, we also expect to start additional projects between now and December of 2022 R.
Our venture investments portfolio continued to highlight the exceptional talent of our science and technology team for underwriting.
For the innovative entities.
As of June 30th unrealized gains were $962 million on an adjusted cost basis of 990 million realized gains on our venture investments for the second quarter were $60.2 million, including $34.8 million of realized gains excluded from F. F O per share.
Now for the first half for 'twenty, 1 we realized gains.
And about $57.7 million that related to significant gains and 3 investments that were excluded from <unk> <unk> per share as adjusted now we're pleased that the venture investment program is generating capital exceeding our initial forecast for 2021.
And we hope this will be in the range of about 100 plus million dollars for the entire year.
Now continuing on to our very strong and flexible balance sheet to support our strategic growth initiatives. We continue to be very pleased to have 1 of the best balance sheets in the REIT industry, providing us access to attractive long term cost of capital.
We remain on track for a net debt to adjusted EBITDA of 5.2 times by year end, our fixed charge coverage ratio for the fourth quarter has increased to greater than 5 times.
Continue to maintain significant liquidity of $4.5 billion as of June 30th we're in a solid position with debt maturities with our next maturity.
Charity, representing only $184 million comes due in 2024.
And while it is challenging to predict when owners of real estate will decide to sell 2 to 3 transactions drove most of the amount of acquisitions and accounted for about half of our target for 'twenty 'twenty 1.
For the remainder.
For our goal is to remain very selective with acquisitions.
Our team is advancing a number of important dispositions primarily focused on partial interest sales in high value low cap rate properties for reinvestment into our strategic value creation development and redevelopment projects now to date in 2020, 1 we have completed.
The year of $580 million at cap rates in the 4 to 4.2 range.
We have about $1.4 billion in process at various stages and expect to move along other dispositions.
That will push us well above the top end of our range for dispositions, which are currently at $2.2 billion.
Now we were targeting about $1 billion in dispositions to close in the third quarter and the remainder in the fourth quarter importantly, each of these key pending transactions will continue to highlight the tremendous value, we have and continue to create for our stakeholders.
Now as a reminder, please refer to page 6 of our supplemental package for a detailed and updated guidance.
Pleated jeans for 2021day.
Guidance is an update to our guidance for the year that was disclosed on a form 8-K dated June 14th we narrowed the range of guidance from 10 cents to 8 cents for both EPS and <unk> per share EPS was updated to a range from $3.46 to $3.50 for an F. A full per.
And so as long as adjusted was updated to a range from $7.71 to.
For $7.79 times with no change in the midpoint of <unk> per share.
Diluted as adjusted of $7.75.
Now as a reminder, since our initial <unk> per share guidance for 2021, we have increased the midpoint of our guidance by.
<unk> for growth in 2021, representing an increase of $6.1 per cent over 2020.
Now before I turn it back over to Joel Marcus I, just wanted to highlight that we recently published our annual ESG report highlighting continued leadership in sustainability, social and governance matters. I also wanted to express our team's appreciation for continued.
Per share due recognition by an independent panel of judges for a sixth NAREIT Gold award for communication and reporting excellence to the investment community. So congratulations to our team for outstanding execution, and I'll turn it back to Joel.
Thanks, very much Dean operator, we can go to questions. Please.
Continued.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at anytime a question that's been addressed and you would like to withdraw. Your question. Please press Star then 2 at this time, we will pause momentarily to assemble.
Our roster.
Yeah.
Okay.
Okay.
Our first question will come from Manny Korchman with Citi. Please go ahead.
Oh.
Hi, sorry about that.
Assemble them. This is maybe a question for you now I'm here.
It's Manny and Michael that's good and then I had to hop in for Michael.
I was on mute.
Dean in your last comment you talked about going forward being more selective on acquisitions I was wondering if you can or maybe Peter sort of talk about what's going to change.
In your approach or your underwriting or the yields you're targeting relative to the for Asia appetite that you've had in putting capital out how old deals going forward be scrutinized for since the deal you've done.
Yes, so maybe.
Michael This is Joel let me, maybe maybe it's best to amend.
Change word selective.
And think about it as <unk>.
Being a bit more patient we've had.
<unk>.
If you just look at the quality of deals we've done we don't change our underwriting we don't change our focus it hasnt changed.
<unk> for <unk>.
Very long time, we look at if you look at the 2 big deals we did this year.
Both were aimed at 1 creating a new sub market in Boston. The other was extending the Alexandria Center for life Science at Kendall Square.
Both of those to meet kind of historic high demand.
For that but we're mindful of the overall capital markets. So I think we're being just a bit of a slower pace, but I wouldn't say the selectivity or the change in the underwriting or how we do things or what we do is any way shape or form changed.
And from a capital markets you've shown.
A lot of discipline and pre funding a lot of these deals through forward through that or through straight equity offerings is it more of a concern about where the markets are going and Joel in your mind about funding future deals.
Well I think.
If you look at.
We're probably at a historic high with GDP right now, we're probably peaking and.
It's just hard to know where the market might go. So we're just going to be careful about step wise about how we do things. We also have no anticipation of when I think Dean said this pretty clearly.
We don't know when an owner is going to bring a an asset to market.
And so that oftentimes drives decisions as to.
The.
750 tenants, many of whom have active current requirements and many of whom want a path for future.
Clearly growth. So we just have to be maybe the best word to use as judicious rather than selective.
That's not necessarily parsing words, so I think we're just going to be judicious about how we go forward there's only so many.
You know big.
Acquisitions, 1 can continue to do in that.
Future Glee exist, so I think the market will determine that.
That's helpful. I think judicious definitely it sounds like more of the word rather than selective.
Great and then just secondly on just.
On supply Joel in your opening comments.
You basically said there is not a concern.
Actual yours.
Now you're obviously as an entity building upon others are building a lot is it just the level of pre leasing and tenant demand that causes you not to worry about the levels of development going on in life Sciences from just the overall.
And then.
That there is.
<unk> from a whole lot of corporate landlords to do it.
Yes, so I'm going to ask Steve to comment, but I would say.
We're always worried about everything I think when you look at.
We're fans of Jim Collins, we always have productive paranoia and so we're always.
No.
How do we wake up we assume nothing and we have to prove everything and so I don't think it has to do with or not.
Or are not worrying or so forth, but I think if you look in each of the key markets you look in the Bay area, you look at the greater Boston area.
The supply chart.
Everybody is focused out several years, it's not focused on 'twenty, 1 'twenty 2 or even 'twenty 3 you'll start to see bigger blips for example.
<unk> capability to do.
Large scale projects in the Oyster point area in South San Francisco pretty.
Large numbers, but those are out quite a number of years. They are also at a disadvantage because they have.
A sub standard location that kind of the gateway location, but Steve do you want to comment on cash.
On the supply overall issue I think you have a good perspective on that.
Sure Yeah, Hey.
Real it Steve.
Look we have been in these markets for more than 2 decades. We track. This on a building by building parcel by parcel basis. So we have absolute granular information and insight on these projects.
And just to add to what Joel said when you look at greater Boston.
Michael in that pipeline of projects that actually have gone vertical that are under construction.
More than half of that is already leased.
And those will extend into 2022 and 2023. So when you look at that you really don't see very significant.
Boss pieces being added to the overall inventory from that basis.
Other people may be talking about supply.
But again for 5 years out.
Evidently the markets will change.
Office will always be an alternative for.
These new entrants as well and then in the Bay area as Joel said, there is 2 or 3 projects we're monitoring.
There is leasing activity there. So there is additional supply, but we don't see large disruptive.
Very large projects that are well under construction that have no lease.
All activity. So again, we do monitor it on a very granular basis and that's what we're seeing over the next.
Year, or 2 or even 2 and a half years.
Great. Thank you both for many and me on the responses take care. Thank you guys.
Our next question will come from Sheila Mcgrath.
Leasing of Evercore ISI. Please go ahead.
I guess.
Good afternoon acquisition cap rates have compressed her life science as we can see at 400, Dexter how should we think about the development.
Yields for your current pipeline should we expect some of the newer projects to have them.
With that are some compression in the development yields versus historic yields.
Yes, so Peter.
Yeah, Hey, Sheila.
I think it's fair to say that.
There's been a tremendous amount of growth in rent so that will help to keep the returns buoyant but.
A little.
With that has come in.
Growth in the cost of land.
<unk> been some obviously some costs.
Increases that I just went over my comments, but.
But I think it's fair to say that.
<unk>.
Goal.
Development.
Redevelopment and having a minimum spread of 150 bps over exit cap rates will will continue.
And so that's that's very important.
Number for us.
We often exceed that well.
Well over 200 bps in many cases.
But.
Yes, just the core.
Cost of capital is advantageous you can <unk>.
Something to a 6 and it would be very accretive, especially if you can sell it for a for.
Okay, Great and then I was wondering if you could provide a little more detail on the Sorrento Mesa.
But acquisition.
The existing buildings.
I will you redevelop those buildings and add density or knocking them down 1 at what are the plans there.
I think we've got a number of scenarios that.
Dan and team has explored.
But youre right.
The advantage or 1 of the great things about that acquisition is the ability to combine it with an existing property and create a 2 million square foot Mega campus.
Will that.
Certainly contain new buildings, whether they're all new.
Florida.
Redeveloped is still.
To be undertaken or or to be decided but.
We're very comfortable with our basis there.
We've got a lot of optionality with the existing buildings, but also our basis is good enough that if we are if we.
And so a couple down we can build bigger ones.
At good yields.
Okay and last question leasing spreads were almost a record quarter was that driven by any 1 particular transaction or market and where do you think in place rents for your portfolio compared to Mark.
Take care to market right now.
Yes, so pretty broad Sheila and not based on any single 1, but Steve you could or Peter you can give some view on that on the uptick.
Yeah.
Yes, the mark to market Sheila it's Steve here has actually increased over the past several quarters.
Yeah.
We're roughly 23, 5% on a mark to market basis.
Across the entire portfolio. So I think that's clear evidence of the continued.
Healthy demand and rent growth.
So we are in the mid teens not that long ago. So that's that's.
Significant increase.
Okay. Thanks.
Thanks Sheila.
Our next question will come from Anthony Pallone with J P. Morgan. Please go ahead.
Hi, Thank you and good afternoon.
Joel you mentioned some of the record capital formation in the form of venture capital Ipos.
The precinct.
As well in the past that those numbers have ebbed and flowed and just wondering what you think happens to space demand.
If theres any sort of pullback in that net capital formation. This time.
Yes, so that's a really good question and welcome to the call Tony.
This is a kind of.
It was an historic biotech bull market.
Really been going into its seventh year, which is pretty historic I think which gives us good comfort is.
On the private side, a number of the venture firms quite a number of the venture firms have raised record amounts of money in those.
Funds, usually take multiple years to invest 2.3 sometimes 4 and so that's going to give runway to private companies, let's say there was a black swan event or.
Something forbidden happens.
It.
Just causes the market to sell off pretty pretty drastically.
I think we're very fortunate as Dean said, we have a historically high credit port.
Profile on our.
Asset base. So that's good I think the companies that would be most most at risk would be newly public companies now that are outside of the private venture.
Private equity financing there are public now and if the market shut down they.
They have capital they will have to adjust their burn rate and be careful because they won't be able to go back to the capital markets. So I think that we saw that in <unk> 9.
It was the newly public companies companies that.
For preclinical, particularly or in the clinic and needed a number of years of runway. So that would be a downside scenario, but as I said I think for at least for the coming couple of coming quarters, we see a pretty steady flow of capital, we don't see any interruption, but you never know if.
When it decides to.
Make Taiwan, like Hong Kong or something like that.
And <unk>.
Decided to reunify that could cause the market to certainly freeze up I mean, they're already attacking a lot of the tech companies and so forth. So I think China remains a huge.
Change.
A question as to the impact on the market and what their intention is.
Okay got it. Thank you and then just the other question I have is you mentioned your pricing power advantage.
And tenants wanting to be in your portfolio are you being asked to.
Hugo to either new markets, new submarkets to satisfy some of the demand for your tenants and just updated thoughts on potentially go into those places itself.
Well I think what is true of this industry for a long time and I've said this for a long time.
The lifestyle.
Life Science clusters, generally take a generation to grow.
25 years or more and we see for instance, new York's now just into the 12th year of that gestation period.
And because of the density of.
Players the ecosystem.
Being collaborative and cooperative as opposed to tech, which is more little bit those guys like to be more isolated.
There is an employee base there most companies looking to expand or opting to stay in the existing markets I do not see and have not seen in Steve or Peter can certainly comment.
Any.
<unk> big move towards new markets or other locations, obviously, if somebody wants to go somewhere I mean, we'll look at it and we'll think about it but it's got to be a pretty convincing and persuasive situation.
Right. Okay. That's all I got thank you.
Thank you.
Our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Thanks, if I could just add on to Tony's question.
What about on the international I mean, clearly your platform is absolutely proven itself.
Any thoughts about trying.
Trying to do it again in other markets around the world.
Well I think if you look at this quarter's results you would ask you are you would ask the question why would you ever want to or need to.
We spent time in India and exited India.
Realized that the Indian Supreme Court invalidated, the Gleevec patent and so novel research just.
World going on there.
We have 1 remaining project in China, which is partially leased up we compete against government properties that get free rent for 3 years for Chinese tenants. So that's not a really great market to grow in mean Europe is.
Is fine.
Isn't still is by enlarge their socialized medicine system. So not a place you would think about booming R&D. So we're very happy with.
The markets were in and with our current.
Operational view of things Jamie.
Okay and then that's helpful and then thinking about New York.
But.
Can you give us an update on when you think you might start the new project, there and with long Island city it looks like.
100% leased in the supplemental just how are you thinking about other opportunities there.
Away from the center.
Yeah, I'll have Peter comment on long Island City, we're not we're not 100%.
Mark.
That's been a slower lease up than we would have wanted partially and due to what happened with Amazon and so forth kind of put a chill on that sub market overall.
We're working with the city right now going through a process and.
I would just say stay tuned there I think New York is the 1 market that.
<unk>.
Brokers tout like this big demand, but the reality use the demand is much less than the demand is primarily organic companies that are starting up being formed spinning out.
Don't see any big companies moving to New York for obvious reasons high taxes governance issues.
To some extent and just.
Is an expensive place to be so we're doing great at our center.
But it's a tough market, it's a heavy lift market you really have to create the.
The entities that stay there and we've helped do that over the last decade, but it's.
It's different than Boston, which is experiencing record high boom, so just fundamentally different.
Okay. So you said the long island is not 100% the supplemental yes. So Peter do you want to talk about long Island.
Yes.
A long island. According the supplemental is 41%.
Net lease and 41% leased and under negotiation on page 38.
For the.
That's actually the least percentage went up 10%. So we have started to make some progress.
We meet weekly about demand there and different companies we're talking.
2.
Essentially there is a lot of slow decision, making going on there I don't know if it has to do with just the state of New York City and if people are wondering when.
Covid is going to.
Not be as impactful to life, there could be could be 1 reason.
But as Joel mentioned, it's definitely a market, where we've had to almost create demand.
It's very organic the tenant prospects, we're talking to her.
Almost exclusively New York created companies, we're not getting a lot of help from in migration, but we are.
And we're seeing everything and capitalizing on some and.
Admittedly, it's been a slow process, but we.
And we do think we'll get that stabilized and.
The near term.
Okay I was looking at page 30 core, which I think showed that it is here you're talking about thank you.
For Jamie its what we deliver.
To date.
Yes.
Yes.
Parts of the building already delivered another full building.
Got it okay. Thank you.
Yep Thanks, Jamie.
Our next question will come from Rich Anderson with Smbs.
Please go ahead.
Hey, Thanks, good afternoon, everyone.
On the dispositions you are looking at 2 billion for this year.
And I look back at what you've done in previous years and you know this is this will be the most bye bye for margin in other years.
I'm curious obviously.
You've described capital flowing into the business like I think you used the word stampede.
And we're all seeing that for all the good reasons, but are you getting any reverse inquiry, where you would have maybe not so partial interests or whatnot.
You were just giving an offer that was too good to be to refuse is that happening to you or is.
This stuff you would've sold 1 way or another eventually.
I don't know so Peter you could come in on that.
Yeah regimen.
Very confident saying that.
Made a few calls and said hey, anything you like to make an offer and the other party.
Thought we'd sell anything that they wanted there'd be a lot of them.
So we have been the ones that have selected what to what to sell.
And.
Obviously, we've done quite well.
Typical profile is something that we have already really Max the.
The value out of.
At least in the near to medium to long term.
So it's a good time to monetize but it's fair to say that.
That our whole portfolio as.
It's very attractive too.
Many investors today, given the shine on the life science industry.
Okay, Great and then on the development side, Peter you mentioned Youre underwriting.
Cost inflation, despite the comments on lumber.
Can you can you say, what what type of inflation, you're assuming when you underwrite it development and on the other on the numerator side.
What your assumption is for market.
Market rent growth.
Taking a discount to what you're seeing I'm just curious if you could get a little bit more in the weeds of how you are underwriting a deal that so so it pencils and it makes sense to go forward with it.
Yeah, I'm not getting.
To give away too much secret sauce, but I.
Last quarter I mentioned when I.
Address the cost that.
We look at Escalations in the 5% to 6% range right now.
And that.
That may not seem like a lot, but labor is fairly stable.
So these large commodity increases and with materials being.
30% of the project.
You can get to a weighted average of about 5% to 6% now that's.
That's you know it could be double what a normal year.
Escalations could be certain times, you know things obviously fluctuate.
But we are along with our real estate.
Being about apartment team the underwriting team communicate constantly about these things so we make sure we get them right.
And the proof is in the pudding the yields that we publish we hit like pretty much 100%.
So other than that we do.
Don't underwrite spike in rents.
Stacy talked about that before.
We we have a very good idea of what long term growth looks like.
We're probably more conservative.
Then what actuals end up being but that's great surprise to the upside is always good.
But yes, we are.
We're very comfortable with our current.
That line in the way, we've underwritten that and I think.
I've been here for 23 years been an underwriter for all that time and feel very comfortable with our process and that will continue to do.
Meet the numbers that we're publishing.
Okay. Thanks, very much I appreciate it great quarter.
Thanks.
Pipe.
Our next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yes, Thanks, Joel in your comments you discussed the need for the U S to be the leader in Nextgen drug manufacturing and I'm not sure. If I heard you correctly or not but did you say that U S. Only produces 11% to 13.
Thanks, Rich for sent today I'm not sure if you're referring to semiconductor production or Nextgen manufacturing, yes that was semiconductors.
Okay.
There is the Nextgen manufacturing being done right now I think given the advancement we're seeing in technology is it safe to assume that's going to be a bigger life science.
13 driver in general and for your industry for years.
Yes. The answer is yes, 1 it's still in the early days.
Number 2 because.
For more integrated with the research and development side, they will tend to be either at the same location or nearby.
Demand was too.
A random manufacturing if this was just normal synthetic chemistry pills and so forth you could put it anywhere you could put it in overseas or in any state.
But I think youll see these will be much more integrated with the R&D function.
As a pillow my guess is the clusters as they are today will be mostly benefited as opposed to other regions.
Okay and when you are looking at this I guess this demand driver I guess, how close do they need to be to I guess the headquarters.
Are they going to be in Cambridge or is.
And so like suburban Boston or how close does the manufacturing needs to be to get that synergy with the with.
The mines within the headquarters.
Yes, well I think it depends on the stage of scale up but in the early <unk>.
Clinical preclinical and clinical you could.
It going to be a being a part of the R&D effort, but then when it goes to full scale.
You could see that being.
In adjacent locations I mean, <unk> example is a great example.
They did a lot of work inside.
Tech square, but them.
See that built their plant in Norwood etcetera. So I think that's not although that's vaccine, but that's somewhat emblematic of what what you could see happen.
Okay, and then I just wanted I think I heard you correctly, but this is going to view driver for every cluster I mean is there some clusters that could benefit more than others.
Well I think the clusters that would benefit more the really established clusters, obviously, the Boston market San Francisco Seattle.
San Diego, Maryland, RTP, I mean, the ones that we're focused and I think secondary markets, probably wouldn't do as well because you also.
We need skilled workforce and you just don't find them, you're not going to find them in Charleston, South Carolina per se.
Although that is a great place.
Right.
Okay, Alright, great. Thanks Joel.
You bet.
Our next question will come from Tom Catherwood with BTG. Please go.
So net.
Excellent. Thank you and good afternoon, everyone.
Peter maybe turning to the dispositions, obviously partial interest sales have been an important part of your capital source for the past few years, when you're evaluating aspect assets for disposition, how do you decide.
Between an outright sale and a partial interest sale and are you able to maintain enough control over the joint venture to make decisions kind of holistically across your cluster instead of prioritizing certain assets kind of to the detriment of others.
Yes, so maybe maybe Peter let dean take it.
And then maybe you can kind of add the color around that.
Sure.
So Tom what part of your question really touches on the.
Complexity of.
Managing good governance around your joint venture relationships and.
That's what our team has tried to do.
First is to be very.
Respectful of these important relationships that are being established in markets and sometimes across markets.
We want to be long term partners.
And be mindful of as much as we've got.
No joint venture assets in wholly owned assets in a particular market.
And so that's important.
From a technical <unk>.
Control perspective, I think we're working with our partners.
Understand that we have the expertise to make these properties successful and.
And we've asked.
For reasonable leeway.
And the relationship.
To be able to execute in that fashion and so that's been an important I think is an attribute from a partner perspective for us so hopefully that helps a little bit per ton.
Yeah.
Yes, that's really helpful. Thank you. Thank you Dean and then maybe just focusing.
On a specific market.
Down in North Carolina, So back in August.
August of 2020, you acquired the Alexandria Center for life Science in Durham, and expectations at the time or that tenants will both expand within the research triangle and the ones that were there already.
<unk> owned than some would relocate to RTP from other areas to kind of looking for more talent.
In the second quarter occupancy in that Durham campus picked up I think almost 400 basis points alone and then you added another 885000 square feet of development rights are kind of in and around that campus.
And you know.
As you know almost a year out from that large acquisition how is the market perform there compare to underwriting and then what are your expectations for that going forward.
Yes, its been pretty spectacular Peter do you want to maybe give color on that.
Yes.
I can tell you that.
Certainly.
Our rental assumptions, probably close to 10%.
And then we have definitely absorbed for the they can see faster than we are.
Had underwritten net.
I'll give joe a lot of credit here.
You definitely saw this trend coming towards our T. When we made this deal.
And.
We knocked it out of the park, it's really been great.
Is the idea with.
With the expansion, adding the additional almost 900000 square feet in that demand.
There is great demand there and that campus itself has built kind of amenities. It has existing space that some tenants have gone into and we know that those tenants will need to expand.
Yes, Tom I think what has distinguished research triangle.
For many years it was kind of a 50 year old backwater place that.
Few companies went to an.
It was a nice place to be and then over the last number of years, it's emerged as a.
Powerhouse.
You know.
Cluster I mean, Apple is just now taken a gigantic stake down there and I think what people see as.
What they're looking at other places in the United States people see a great quality of life.
A modest.
It really.
Cost environment.
Beautiful beautiful place anchored by 3 world class institutions, and a really really great workforce. So we're seeing the incoming I mean, we.
We kicked off the.
The beam Nextgen manufacturing project.
Company that's in <unk>.
Cambridge, but.
They came to us for their next Gen manufacturing.
Gene therapy aimed at cancers in sickle cell et cetera.
And that was the best place because of the work for us. So I think that to me has been the <unk>.
Of that market, great place to be live work play and really talented people, which you just can't find everywhere.
No that's really helpful and it does sound like a very.
Very different than what it was historically so that's it for me thanks, everyone.
Yep. Thanks.
This concludes our question and answer session I would like to turn the conference back over to Joel Marcus for any closing remarks.
Just to say, thank you everybody and we look forward to talking to you on the third quarter earnings call take care of the safe God bless.
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