Q3 2021 Alexandria Real Estate Equities Inc Earnings Call
[music].
Good day and welcome to the Alexandria Real estate equities third quarter 2021 conference call. All participants will be in a listen only mode should you need assistance. Please signal our conference specialist by pressing Star then zero.
After todays 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 now like to turn the call 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 periodically.
Sports filed with the Securities and Exchange Commission.
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 everyone to Alexandra as third quarter, 'twenty, one earnings call and our seventh consecutive quarter and the COVID-19, which for sure has forever changed our world and our lives and very fundamental ways with me today are Jennifer <unk>, Peter Moglia, Steve Richardson, and Dan Chicken AGA.
In honor of my favorite NCWA basketball coach and in its final year as head coach for Duke men's basketball coach K, you said imagination has a great deal to do with winning.
And I'd like to say to our extraordinary Alexandria family. Thank you from the bottom of our hearts for a spectacular third quarter okay.
And operational pace and execution tempo that really defines the terms operational excellence and for your great imagination as coach case sat in all things big and small.
Moving on the keys to Alexandria is stellar third quarter performance by all metrics amid a historic demand environment.
I think and importantly, the best is yet to come continuing historic high demand for Alexandria is best in class lab space, the niche, which we invented and are mission critical and operationally excellent lab operations.
Year to date and others will talk about this we've leased five 4 million square feet and looking for a great fourth quarter to end the year Alexandria is at the Vanguard in the heart of meeting this historic high in unprecedented immediate lab space demand from many of our over 700.
50 client tenants Maduro is a prime example, and another one which dean will talk about a big tenant in South San Francisco for a full building as well as a critical paths for future growth, which is so needed thus the need for our acquisitions redevelopment and development.
And that has been repeated time and time again by life science tenants and their brokers if any other company is going up against Alexandria for leasing space. The tenant will almost always pick Alexandria.
We are proud to partner with Madonna on their Cambridge headquarters in car core R&D facility and <unk>.
<unk> and others will talk about it'll be the most sustainable lab building in Cambridge, with very strong economics, and really great value creation well.
Very honored and proud that Alexandria has had very strategically significant tenant relationships and stellar brand reputation across all of our cluster markets. We're also very fortunate to continue to have to truly demonstrate.
Do demonstrate pricing power in each of our core cluster markets.
And by the way the war for talent like other industries in the life science industry is creating an even greater space need set of space needs and demands and the core key life science clusters and that is very good for Alexandria, and we see an accelerating leasing demand even above and.
Beyond what we see this quarter in several of our key cluster markets continuing.
Rental rate growth continues strongly and excess supply is not a current threat.
Alexandria has differentiated expertise and unique platform with its compelling internal and external growth drivers and outlook translates into genuine earnings power as indicated in the press release and supplemental are visible multiyear highly leased development pipeline is expected to generate approximately.
$615 million in future incremental revenue and beyond that the future leasing prospects really look extraordinary as I've said, the biotech boom in historic life science demand driven by the strong industry fundamentals.
As is evident the 20 <unk> century is really the biological century as biology is in transition from an empirical science of trial and error to really an engineer able science with much more predictable and scalable outcomes.
Witnessing the industrial Revolution in biotech as we accelerate the application of new and innovative tools, we will see an acceleration in value creation products will come to market faster for less capital and with fewer failures.
The life science industry, and its ecosystem and its positive impact on humanity is truly a crown jewel of the United States and a testament to the free enterprise system of innovation.
Yeah.
I think it's important to remember politically those who seek to create a cradle to grave entitlements Society.
Should not use this industry as its fully pulpwood.
And then finally I want to turn to.
The second anniversary of our $1 15 project in Dayton, Ohio, which this month we celebrate.
Sad to say that overdoses have claimed a staggering 96000 lives. During the 12 months ended March of 2021 a 30% increase in the year before.
100, <unk> is an innovative data driven nonprofit evidence based health care ecosystem dedicated to the full and sustained recovery of people with addiction.
As I said Dayton, Ohio, $1 15 is revolutionizing revolutionizing the way addiction is treated through its tech enabled care platform, which applies analytics to measure the effectiveness of various treatments.
And choices throughout the full continuum of care and continuously evolves. Its approach based on insights derived since its opening in 2015 $1 15 is served almost 4000 individuals struggling with addiction and conducted over 9000 telehealth visits since the start of COVID-19.
The pandemic with a $1 15 partners, we are unwavering in our commitment to help people recover from addiction live healthier lives, while revitalizing the community we would like to see this model replicated across the country, but politicians seem wholly ineffective, even given the large amount of.
Capital that came to the cities and states during COVID-19.
And our goal is not only to have 115 be a model for the success against opioid addiction, Dayton, Ohio, We hope to bring that model in a varied way to address the homeless crisis on the west coast.
And so with that I'd like to turn it over to <unk> who's going to comment on some important COVID-19 matters, the NIH and the FDA take it away.
You sound like style and good afternoon, everyone.
I'll tell you begin to turn in your corner on this COVID-19 pandemic I'll speak to in a moment life science industry fundamentals still high level continued to be very strong.
Structural integrity to weather market volatility.
Okay.
The confluence of these drivers and key advances in our understanding of biology, and next generation modality will continue to fuel lifestyle.
Take care.
And you spoke about last quarter.
Once the industry moves to protect our country in the world.
Well, there's no roadmap I just don't know.
Next while also ushering in a historic new era for biotech.
Alright.
Turning to our Covid specific update.
By the numbers according to the World Health organization.
<unk> Q4.
42 million confirmed cases of COVID-19 worldwide about 20% of these are point in the U S alone, including over four 9 million cumulative gas.
In the U S.
COVID-19 cases, and welcoming me declined 55% from its peak of over 160000, New cases Tomorrow, 70, Daphne Keith and I hope to see the trend.
I'm thinking of course.
The most widely distributed schools worldwide.
And developed by are you kind of Pfizer military and Johnson and Johnson and.
Roughly 67% of the vaccine eligible population in our country that solving over has been laid out.
It is just over 57% of the total U S population and we hope with booster as an expanding indication that this number I fully vaccinated individuals will continue to rise as you saw last week. The FDA authorized the use of Madonna and Johnson and Johnson boosters. In addition to Pfizer has already authorized booster shot as well as the mixing and matching booster doses.
<unk>.
J&J in eligible population.
In light of the evolving data out in the duration of immunity and COVID-19, Barry.
CERN opening.
In Belton area.
Darien hitting you must file its highly likely that COVID-19 vaccines will be required long term.
With regard to vaccine efficacy study evaluating the real world.
Thank goodness of the Pfizer and Lilly, a vaccine or preventing symptomatic illness.
Alternative vaccine efficacy rate of 96% and Pfizer at 89%. So as you've all heard breakthrough infections have occurred in a high single digit percentage of vaccinated population, but while current vaccine may not entirely prevent transmission or contraction with COVID-19, they do significantly prevented you hear it.
Even deaths with over 90% of all hospitalized Covid cases represented by an accident at all.
With regard to the excellent safety.
Very few vaccine related adverse events seven per million reported overall with nearly all cases, resolving and without long term side effects reported to date, given such a strong efficacy and safety profile. The FDA granted full approval for Pfizer mrna based vaccine for people 16, and older and modernize mrna based vaccine is likely to achieve.
Full approval for it backbone for ATM and all during the fourth quarter.
With regard to pigments in women of Childbearing age based on the safety data generated to date and how we know vaccines work in the body the CDC and top health officials had encourage any American who is pregnant planning to become pregnant or currently breastfeeding to get back to needed against that Corona virus as soon as possible.
With regard to children Pfizer reported that its COVID-19 vaccine for ages five to 11 with states and nearly 91% effect edge and on the basis of this data. The FDA is expected to authorize pfizer's vaccine for this population in the Fourthquarter Madrone also just announced yesterday that its called the backfill nickel based and highly effective in children ages six to 11, but they will also submit to the <unk>.
Our young children, aged six months to four years, asking authorization will likely come in early 2022.
Despite these advances in vaccine given that Covid will likely remain on the planet for the foreseeable future, albeit as an endemic virus with seasonal and sporadic geographic peaks therapies are going to continue to be important in mitigating the severity of COVID-19, and so most notably this past month Alexandria tenant Merck in collaboration with bridge Bank.
Biotherapeutics submitted an EUA application to the FDA for its oral anti viral nonnuclear of ear. This drug demonstrated a 50% reduction in hospitalization or death in patients with mild to moderate COVID-19.
Its author Amy if authorized.
While new peer of yours will be the first oral anti viral therapy for COVID-19, and this is a big deal it is far easier and more cost effective to administer broadly compared to current antibody treatments in the mild to moderate COVID-19 population.
Despite the Covid fatigue that we all absolutely steel on the multitude of challenges that this pandemic has placed on our country Our society in the world.
If you think of advances achieved at an unprecedented speed is the one the increase of this tragic carried in our history, the scientific attitude and adaptability of so many of our tenants to translate their broad platform and decades of work into safe and effective vaccine therapies in testing and really a year's time is remarkable and the application of these tools will forever.
For them the way, we develop vaccines against the novel target will also augment future surveillance testing in our nation's pandemic preparedness overall.
Just to touch on another topic on the NIH and FDA leadership. The pandemic could also underscored how critical these agencies are and that strong support for these key federal agencies is paramount for national security for ensuring that the U F maintained its leadership in advancing scientific and biomedical innovation and for maximizing our ability to address.
And future health challenges.
So interestingly over the past several weeks in leadership positions with these two agencies have received a creeping attention.
October 5th long tenured NIH director, Dr. Francis Collins announced that he'll be stepping down as a director of the agency by the end of the year, Dr. Collins and the longest serving presidentially appointed NIH director, having served three U S presidential for more than 12 years.
During his tenure the NAA agents are steep increasing bipartisan support and the agency's budget grew from $30 billion in 2009, when he started to nearly $50 billion in the upcoming fiscal year.
And if I'm an administration that is.
Is undergoing a formal process to name Collins replacement, which is expected later this year or more likely early next and we're optimistic that his successor and will continue to bolster our biomedical and public health research in this country.
As for the FDA.
I think commissioner Dr. Janet Woodcock is likely agencies at the beginning of the vitamin administration under her leadership. In addition to the Covid related emergency use authorization that I just spoke about the FDA Cedar has approved 40, new molecular entity.
Through the third quarter, putting the agency on pace to meet 2000, Twenty's near record high of 53 approvals.
Dr. Janet Woodcock charter expires on November 15th the administration now needs to select and appoint a new commissioner in the coming weeks. So similarly on October 14th the bite and administration announced it is likely to nominate Dr. Robert <unk> as the next commissioner of the FDA.
After calif as a cardiologist by training on current head of clinical policy and strategy for Burley uncle's House Dr.
<unk> also served as FDA Commissioner from 2016 years 2017 under the Obama administration after being appointed Deputy Commissioner in 2015, Dr. Payless is also very well known in Deer Park at Alexandria, as a regular participant in the Alexandra Amit for the past several years and a partner in our 115 project to address the opioid epidemic as Joel just spoke about.
Dr. Kenneth nomination would be viewed very favorably by the life science industry key investors and stakeholders.
Clearly the strength of the FDA is instrumental for ensuring the continued pace in vitality of biomedical innovation in our country and I just wanted to highlight in addition to the COVID-19 related updates that we'll likely see in the fourth quarter. The FDA will also announce a handful of major approval decisions before the end of the year decision.
Decisions that if positive will bring critical new drugs to patients as well as billions of dollars of additional revenue to the sector. For example, Eli Lilly is expected to submit an application for accelerated approval of an Alzheimer's therapy, known as <unk> that amount and given all the controversy surrounding ftes, how that approval of Biogen added Hallum.
The same application the approval of Lilly's drug would likely inform future approvals in this area.
So a major decision regarding a new class of drugs for severe atopic dermatitis from Pfizer and Abbvie and several other awaited approval for growing biotech, including me prove up collector.
For the treatment of bipolar disorder from long standing Alexandria tenants investment intracellular therapies.
So just to wrap up before I turn it to Steve I wanted to share a quote.
From former FDA Commissioner Dr. Scott Gottlieb in his new book uncontrolled spread by COVID-19 cross stuff and how they can defeat the next pandemic.
His book Gottlieb rights.
The brief history of Covid shows that innovation cannot always be predicted we don't know which platform will yield answers for future threats.
As part of our National preparedness, it will be important to stockpile counter measure to some of the known risks, but it's equally important to support the development of novel technology platform that have broad applicability of our range of potential threat.
The use of mrna to customized synthetic vaccine show the value of having agile competency that's already because of the technologies, we will need to produce our nation vulnerability.
So does this opportunity focus and unique ability and responsibility of the life science industry that continue to reaffirm why Alexandria has dedicated our business our passion and our purpose to help drive this mission critical industry forward and with that I'll turn it over to Steve. Thank you.
Thank you Janet and good afternoon, everyone.
Alexandria is brand power in the market is not only delivering the exceptional results today that you've seen but also provides clarity for the potential and trajectory of the company's future growth and enhanced dominant position in the life science ecosystem Peter.
Peter and I, just completed an intensive on the ground tour through a few of our cluster markets and.
In the energy and enthusiasm for Alexandria, as an entirety of offerings as an integral part of the life science ecosystem was abundantly evident the class a plus quality and the mission critical nature of the facilities that is so important during this time of COVID-19.
Coupled with the creation of true Renaissance like science centers or Mega campuses provides for a set of highly desirable and sought after destination.
And the numbers the team are posting bear out this leadership position the highlights include.
<unk> leasing milestones year to date leasing is five 4 million square feet, the highest annual leasing run rate in the company's history achieved during just the first three quarters of 2020 and deployment.
And as noted earlier by Joel featuring the largest lease in the company's history, Tim O'hara at 325, Binney Street for their 462000 square foot state of the art headquarters.
It's critical to note two important aspects of this leasing activity one it is occurring in our core Submarkets, where we have high barriers to entry low vacancy and a first mover advantage.
Two it is also occurring in the development and redevelopment pipeline and an accelerated rate with the 1 million square foot of leasing in this segment during Q3, reaching the second highest leasing level for development and redevelopment projects further validating Alexandria strategic and a robust acquisition.
<unk> activity during 2021.
Let's turn to the strategic expansion of our asset base Q3 was a very productive quarter with completed acquisitions totaling $5 6 million square feet.
And a number of key aspects of this expansion of our asset base included the following.
$4 9 million square feet of this total were highly accretive value creation opportunities.
We are also able to continue either doubling down in our core submarkets.
As evidenced by 325, Binney street or strategically expanding the boundaries of these submarkets.
These critical decisions on acquisitions are informed by our unrivaled network of 750 tenants to meet their current needs and provide a path for future growth.
In total we have now increased the total asset base from 47 million square feet to 64 million square feet. During the past four quarters, a significant increase of 36%.
The core is also outperforming as renewal and re leasing spreads of 19, 3% cash and 35, 3% GAAP during Q3 are impressive.
Also want to underscore and highlight that our mark to market across the portfolio has moved up to 25% on a cash basis today nearly doubling in significantly up from 13, 6% in Q1 of 2019.
Our balance of 99, 4% in October.
Our hard work there and we really do have a dream team and the operational realm, and a big shout out to the folks who make this happen every day.
Occupancy is increasing as we've noted throughout the year, we expected occupancy to increase excluding the recently acquired projects with vacancy and we've delivered on those goals. We were at 97, 1% as of June 2020.
And we're now at 98, 5%.
Turning to market health.
On the demand side Joel agenda highlighted the key components driving demand in the life science industry.
Wherever the seasoned executive life Science management teams driving this demand are requiring high quality facilities and deeply experienced operational teams.
Clearly evidenced by our leasing volume and velocity.
These companies are investing hundreds of millions of dollars in life changing therapies and require exceptional performance from our world class team and technically sophisticated facilities downtime or mistakes that may destroy experiments and years of work are unacceptable risks.
Alexandria as the pioneer of this life science niche has earned a reputation as a trusted partner to provide operational excellence for these mission critical facilities.
On the supply side as I mentioned earlier, Peter and I recently toward a few of our regions firsthand to also evaluate the competitive supply on a granular level and it is clear that there is no aggregation of disruptive large scale projects delivering during the 2022 2023.
<unk> timeframe.
There are in fact, a handful of one off buildings in the market, but we have seen are qualitatively superior mega campuses compete very well against this type of offering.
We're also closely monitoring the potential for projects beyond this timeframe to definitively advances genuine life science competition competition.
But in many cases, they require many quarters or even years of entitlement permitting and horizontal infrastructure work before any decision to go vertical might be made.
So in conclusion as we closed towards the end of 2021. The first three quarters of this year have yielded a tremendously productive foundation to continue the company's integral an indispensable role in the life science ecosystem.
With that I'll hand, it off to Peter.
Thanks, Steve and Hello, everybody.
To update you all on our high value creation development pipeline and construction cost trends and then I'm going to comment on our recent partial interest sale in mission Bay and some market activity that we believe represents overzealous behavior by new entrants in the life science real estate market that should lead the challenges for such groups.
As Joe mentioned in his opening historic demand for our differentiated life Science campus has continued in the third quarter and we expect this to continue through at least the near to medium term as record levels of government venture capital on Biopharma investment continued disseminate into Alexandria cluster markets to disk.
<unk> developed and manufactured new modality, such as cell gene in RNA and DNA therapies.
The resulting growth of our underlying industry gives us high conviction to continue at an elevated pace of development and redevelopment and to acquire assets to backfill the pipeline we are advancing today.
This historic demand paired with our long tenured development experience and expertise resulted in another outstanding quarter for Alexandria, We delivered 238163 square feet spread over six assets, including Arsenal on the Charles in Watertown, which continues to be one of the hottest markets outside of Cambridge.
31, 60, Porter drive, which is now materially oversubscribed with tenants looking to tap into this unique partnership we have with Stanford and our two ground up developments and research triangle, which are capitalizing on strong demand for research development and manufacturing space from therapeutic in agricultural technology companies. These.
<unk> will contribute $14 $3 million in NOI over the next year.
And as Joe and Steve noted in their comments during the quarter. We were very excited to add 325 Binney Street to our under construction pipeline. This new 462000 square foot high performance development targeting lead zero energy certification showcases Alexandria climate resilient design.
Solutions as well as our mission critical efforts.
<unk> positive change to benefit human health and society. It is 100% leased similar Donna an example of a highly disruptive and visionary company that has grown with Alexandria and shortly after it was founded.
Early on we identified the team and the transformational potential of its mrna platform and we have both invested and provided the company with mission critical real estate over the past 10 years. This is truly a testament of our ability to recognize and become a trusted partner of the most impactful.
Life science companies in the World.
<unk> three to five Binney, we have added over one 1 million square feet of new developments to our pipeline and net of deliveries increased assets under construction from three 4 million square feet to four 3 million square feet. This increase in our pipeline as warranted by the demand I mentioned previously and evidenced by.
The tremendous leasing activity of over 1 million square feet for the quarter truly a historic demand from the life science industry and tremendous execution by our leasing professionals.
I'll now comment on cost trends as reported over the past two quarters construction costs remain elevated driven by supply and demand dynamics for materials, but two other factors have begun to exacerbate the problem labor shortages and supply chain problems nine months into 2020.
One previous year projects that had been put on hold due to COVID-19 and new 'twenty 'twenty. One projects have created a double barrel demand for construction resources at a time when fabrication shops are struggling to procure raw materials and restart due to labor shortages.
<unk> has been record escalation for concrete steel would aluminum and glass. Most of these commodities are sourced from the United States, but there are still a number that come from foreign sources, such as steel from Canada, Asia, Mexico, and Brazil glass from Thailand, and resins used for pipe and specialty products such as <unk>.
Stops for labs from Asia, and Europe as.
As we all know there've been significant supply chain disruptions around the world none more apparent in the backlog of cargo shifts in southern California, which last Tuesday reached an all time high of over 100 ships waiting to unload thousands of containers outside the ports of long Beach and Los Angeles, a bottleneck that is expected to.
<unk> into next year.
In addition to supply disruptions construction costs are being impacted by labor shortages. There is a lack of skilled workers to keep up with the accelerated demand caused by a number of factors, including GC finding that some of the workforce laid off referred load during COVID-19 are not returning because of retirement or finding other jobs.
And it could get worse, if osha adopt vaccine mandates as the construction industry is one of the highest unvaccinated workforces.
Unfortunately higher costs are not the only consequence of material and labor shortages material shortages caused longer lead times that can delay deliveries.
Based on our deep experience and expertise lead times have generally increased by six to eight weeks for most common materials even longer for materials that are comprised of metal and PVC or have a need for computer chips, such as building control.
Alexandria is employing a number of mitigation measures to offset these impacts and to date, we've been very successful and staying on budget and schedule at the vast majority of our projects increases in rents have enabled us to maintain our yields but future projects may trend slightly lower as escalations in longer lead time.
<unk> impact or underwriting. However, we are fortunate in that the demand for life Science real estate investments continued to drive lower cap rates for stabilized buildings, allowing us to maintain our spreads and.
And speaking of cap rate compression during the quarter, we sold additional interests in our 490 499, Illinois in 2500 Owens assets, while recapitalizing them with a new partner.
In our original recapitalization done in December 2015, we achieved a total valuation of $1021 per square foot.
And a blended cap rate of four 6% in this transaction, we achieved a blended cap rate of four 2% and a price per square foot of approximately $1300 13, $162, representing 33% appreciation over the whole period to date, we've achieved a healthy unlevered.
The IRR of 10, 4% on those assets.
Finally, an observation on those clamoring to position themselves to capture the growing life science real estate demand I referenced earlier.
City office REIT sale of two parcels in Sorrento Mesa Sterling Bay in Harrison Street for $576 million illustrates a gold rush mentality proliferating across our market Citigroup.
City routes announcements stated that the south portion of the site was allocated $181 million purchase price a rendering of the site shows a very tight to point out our density of development that would imply a purchase price of $261 per square foot of land to give you some context.
Our basis in the recently acquired land at $62 50 to $64 60 sequence drive.
Our superior location in the same Sorrento Mesa Submarket would have a basis of approximately 25% of that if we were to build it to the same density our plans contemplate a much more inviting campus with open space and amenities. So our basis will be more like 50, 50% of theirs, but you get the point.
This is a great example of why we are in and credibly in an incredibly advantageous position to capture any tenant requirement. We want to capture we are highly disciplined and have superior locations superior basis.
Pierre your execution and the superior brand.
With that I'll pass it over to Dean.
Alright, Thanks Peter.
Dean <unk> here good afternoon, everyone.
Year to date 2021, really hasn't been an exceptional year financial and operating performance for Alexandria are brand trusted partnerships with some of the most innovative life science entities combined with operational excellence has allowed our team to generate strong results. Our internal growth has been very strong statistics from our pipeline of development and redevelopment project.
That's a record breaking and provide visibility for growth into the future total revenues net operating income and adjusted EBITDA for the third quarter were very strong and were up 20%, 21% and 22% respectively over the third quarter of 2020, all really amazing and impactful results and I should point out that.
That's.
Exclude the impact of the termination fee that was recognized in the third quarter of 2020, no internal growth and operating results continue to reflect the strength of our unique and differentiated business model and strength of our brand.
Our same property performance represents one of the highest quality growth engines within the REIT industry of which we are immensely proud we have one of the highest quality tenant rosters in the REIT industry with 53% of our annual rental revenue from investment grade or large cap publicly traded companies and an important statistic that should be noticed.
And occupancy has been very strong and improving this year to 98, 5% up 80 basis points from the beginning of the year, excluding the impact from vacancy and recently acquired properties. Now importantly, one 4 million rentable square feet of vacancy from recent acquisitions represents about four 1% of our operating rentable square footage.
And as a significant opportunity to increase cash flows.
Additionally, 41% of this $1 4 million rentable square feet of vacancy is leased or under lease negotiations and as Joel as stated earlier, we are seeing increasing leasing demand in a number of our key for key.
<unk> life Science cluster markets now.
Same property NOI growth was strong at four 1% and seven 3% on a cash basis and headed toward the upper end of our ranges for 2021 guidance.
Same property NOI growth projected for the full year of 2021 is very solid and is up 100 basis points and 70 basis points on a GAAP and cash basis, respectively from our initial guidance for 2021 really highlighting the improvement in our outlook since the beginning of the year and once again very proud of the strong internal growth engine, we have leased.
<unk> executed in the nine months ended September 30th at over $5 4 million Rentable square feet. Another company record and this leasing volume was completed with exceptional rental rate growth up 39% and 22, 3% on a cash basis now let me take a moment to highlight the seasonality of operating expenses related to higher utility.
With warm summer weather, we had higher repairs and maintenance in the summer months versus what might occur during the winter months and higher property insurance premiums where their policy renewal, which took effect June one now with 92% of our leases being triple net these increases are generally recoverable from our tenants and therefore have minimal impact on net operating income.
However, the increase in operating expenses as a slight and only temporary negative 1% to 2% impact on operating and EBITDA margins for the quarter.
Additionally, vacancy from recent acquisitions also slightly reduced margins.
It's important to recognize that our adjusted EBITDA margins remained one of the top within the REIT industry and we expect to favorably resolve vacancy from recently acquired properties over the next number of quarters.
Now turning to real estate, our trusted partnership with key life science entities, our brand and operational excellence. Among many other items is really standing out today as highlighted by strong demand for our pipeline of development and redevelopment projects.
We have $7 7 million rentable square feet, either under construction or construction commencing over the next six quarters with projects approximately 80% leased or under negotiation, highlighting continuing historic demand, 93% of which represents transactions with existing relationships.
<unk> a number of deals coming from our tenant base of over 750 entities now the $7 7 million Rentable square foot pipeline is up 731000 rentable square feet over June 30th and some of the key highlights in the quarter included and we commenced construction on $1 2 million rentable square feet that is on average 60% leased.
Or under negotiation, including 325, Binney Street, which is 100% leased and 751 gateway in South San Francisco, which is 100% under negotiation.
He's a pretty amazing leasing statistics, and we just commenced construction.
And in both cases stellar existing relationships resulted in full building users.
Now we added approximately 480000 rentable square feet of space targeted to commence construction over the next six quarters. That's about 20% of this space is under LOI negotiations today and importantly, our team executed 1 million rentable square feet of leasing in the third quarter related to the development and redevelopment space.
Including the 462000 rentable square foot lease for with Madrone for 100% of 325 Binney Street.
And we expect demand from our development.
S sites and projects will provide us the opportunity to commence construction of other development and redevelopment projects.
Now turning to our venture investments just want to shout out a huge thank you to our science and technology team for their leadership and underwriting life science industry trends and high quality investment opportunities now our venture investment cost basis. We're only represents about three 2% of gross assets and unrealized gains were $930 million on a cost basis.
About $1 billion in the <unk>.
Third quarter, we realized individually significant gains from three separate transactions aggregating $52 4 million and year to date through September 30th we realized individually significant gains from six separate transactions aggregating $110 $1 million.
Now this represents over $100 million of capital that we did not anticipate at the beginning of the year that we were able to reinvest into our business and our team is very pleased for recognition of the overall improvement in our corporate credit profile S&P, just upgraded our rating to triple B, plus with a positive outlook, highlighting our unique and differentiated.
Business model strong brand and execution high quality cash flows and strong credit profile. Among many other items. So thank you to our entire team for continued solid execution across all areas of our business.
We remain on track for net debt to adjusted EBITDA at five two times at fixed charges greater than five times by the end of the year as we close in on the end of 2021 were focused on wrapping up several key partial interest sales in high value low cap rate transactions and other dispositions each transaction is moving along as expected.
We are targeting completions completion of the sales later this year, which will generate about $1 $7 billion in capital the timing of a couple of the key dispositions were subject to lease negotiations before we were able to put the deals in front of potential investors and therefore are targeted to close in the fourth quarter.
As our team continues to focus on making a positive and lasting impact on the world. They're very pleased for continued recognition of leadership in ESG MSCI, just released results highlighting an a rating for Alexandria, representing one of the top ratings within the REIT industry.
We also recently released results of the 2021 assessment, highlighting Alexandria, as a global sector leader and a five star rating in the diversified sector for buildings and development and one of the top two in the science and technology sector for buildings in operation.
And our team commenced construction of the $3 25, Binney Street, which is the ground up development fully leased the Medina and is designed to be the most sustainable laboratory building in Cambridge.
Key items of the design include use of geothermal energy for heating and cooling and innovative building envelope and building management system and other sustainable attributes that is designed to eliminate 95% or more of fossil fuels and achieve leads or energy. There's building has also been designed to mitigate risk associated with flood precipitation under a business as you.
As you'll scenario and we're extremely excited to be an important strategic partner to madrone for about a decade now and Super pleased that they selected <unk> to assist them with their strategic priorities, including development of their next Super innovative and sustainable lab building now.
Now turning to guidance, we updated our conservative guidance for 2021, including narrowing the range for EPS and <unk> per share from a range of eight cents to a range of <unk> <unk> per share our 2021 guidance for EPS diluted as a range from $3 91 to $3 93, and <unk> per shares adjusted diluted to a range of four excuse me $7 17.
<unk> <unk> to.
The $7 76 with no change in the midpoint of $7 75.
No. We had continued strong demand for space in our asset base has increased our outlook for rental rate growth on lease renewals and releasing of space by 2% and 1% on a GAAP and cash basis, respectively.
And we also updated our 2021 guidance for dispositions and have four transactions in process that will generate one 7 billion as highlighted a moment ago.
We updated construction spend for an increase of about $200 million at the midpoint, primarily due to acceleration of leasing and tenant space requirements related to our development and redevelopment projects and as a reminder, we are about five weeks away from issuance of our detailed guidance for 2022, and therefore, we are unable to comment on 'twenty to 2022 guidance related.
Matters.
There and turn it back to Joel.
So operator, if we could go to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
If at any time your question that's been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble Iraq.
Our first question will come from Manny Korchman with Citi. Please go ahead.
Hey, good afternoon, everyone.
The topic of.
Labor and materials potentially being an issue has come up with I think a couple of times in this call I was wondering just from your tenants perspective as labor an issue there.
Certainly this is a hotspot within the economy and these companies are doing well, but are there enough scientists and.
Are there other talented staff members to staff, all these up and coming companies.
Yes. So many welcome this is Joel and so I alluded to that in my comments that there is in fact truly across the U S for.
Many industries kind of a war for talent and this is true in the life science industry. So far we haven't seen any egregious shortages, but what I did say is that if somebody is going to not only create a company, but try to scale a company you've got to be in the critical.
Key existing clusters, you can't wander off and try to scale, a company in Chicago, or Denver, or someplace like that in a way that would be.
That you could otherwise do see in our Boston or San Francisco. It just doesn't work that way the pool of talent doesn't exist. If you look at R&D commercial clinical et cetera. So at the moment of the existing clusters theme.
Yes.
Things seem okay, but there clearly is a war for talent.
Joel just taking that one step further it's Michael Bilerman here with Manny.
Afternoon.
As you think about sort of just the overall space.
Science facility.
Outside of people Theres, obviously, an increased use of robotics.
Other things that.
<unk> just gotten smaller over time, and I think about our Pcs that used to be the focus on our desk.
And are now in our pocket.
How do you think about sort of just the evolution of what's being done in your labs and life Sciences building just from an efficiency standpoint, and could you see that evolve lifestyle law libraries.
The window is there is that at all a risk or not.
Undermine the banana business I understand that side of it very well, but I'm just trying to think about the use of space.
Use of robotics, and all of that to do more in less space.
Well I think that trend has been going on for quite a while there is a.
A whole lot of innovation that have made things that are repetitive and.
By nature lend themselves to a more automated approach but.
Science is in fact a.
Executed by people with pretty sophisticated backgrounds, and so forth and so the need.
Not only can't you do science at at home, but you can't do science purely Robotically, you've got to make a lot of judgments and a lot of.
Insights and I don't know <unk>.
Worked at the bench, so maybe you can comment directly.
Yeah, I think on that point I wish I can say that I think robotics innovation broadly I think a lot of lot of these companies to build larger and broader and more robust platforms. So companies are working more efficiently, but theyre working on kind of parallel streams.
That one so I don't really think that that.
Well, I think robotics with enhanced well company.
As always before but not really change necessarily.
Real estate I think just a hole.
The entire.
The entire industry.
I don't think that's material.
Threat that youre sort of mindful of.
No.
Okay. Thank you.
Yes.
Our next question will come from Rich Anderson with <unk>. Please go ahead.
Hey, Thanks, Good afternoon, everyone. So I wanted to ask my first question on Capex and I looked at your supplemental it looks like its a lumpy number.
<unk> been running anywhere from 20% to $50 million in the past 50 quarter $5 excuse me.
I'm wondering when you think about the triple net nature of your portfolio the relative newness of your portfolio born from your own development, largely and just the strength of the lifestyle marketplace do you feel as though that capex, which seems to be all over the map from the sell side perspective too is trending down.
<unk>.
Or relatively speaking to the size of your company.
So dean do you want to take on that.
Peter and Steve you can chime in there.
Hey, rich, it's Dean here I would say.
Theres one overlay to your question Rich I think what you're highlighting is the newer assets may have a little longer time before it starts to.
Generate some requirements for for capital.
But our portfolio has a range of assets generally much on the newer side, but if you look back over an extended period of time our capex.
I'll call it the bad bucket of Capex anything except for redevelopment and development Capex has ranged anywhere from 10% to 13%, maybe just a tad beyond that in a given year.
So I don't think it has generally moved in any one particular direction in the last five or eight years.
It's been relatively consistent in that direction rich okay.
And while I have you the.
The $1 7 billion of dispositions targeted for the fourth quarter is a key variable.
Getting to your leverage target I assume.
What is the risk that one or some of that can kind of fall off completely or delay into next year, you'll have to sort of explain.
A little bit higher at least temporary leverage position until they get done.
Well I mean, the reality is there's always some risk, but I think we.
We've moved the transactions along.
Good fashion and have expressed expectations with from both sides really.
To bring closer to these transactions. This year, so we feel comfortable rich, but we need to get them done as you point out Okay, and just a quick one maybe for Joel Dr. Calif, new incoming ft.
FDA commissioner sort of a friend of the firm.
Obviously, he's going to do his job not play favorites I'm, not suggesting that but what is his awareness of Alexandria is there is there any anything beneficial that can come to you as a result of that relationship that you have or is it just business as usual.
No I mean, I think that that's something we would never even think about or have a mindset about I think the relationship. We have I mean, Rob was a practicing cardiologists. He worked at Duke for many years. So he has a wide network across the United States and I think how we look at him.
He has served in the position before he is well liked he's a very smart guys very compassionate.
And I think that that nomination or if the nomination happens he seems to be at the top of.
The administration's list I think would be very good for the industry as a whole not singling us out in any way shape or form because he has been there.
He has been at the FDA he knows how to get things done and I think that's the big benefit for the industry as a whole.
Okay. Thanks, very much yes, thanks rich.
Our next question will come from Anthony Petrone with J P. Morgan. Please go ahead.
Yes. Thank you.
My first question relates to just the Mark to market just listening to Steve's comments about how that's changed and then also just looking at your guidance for cash.
Cash leasing spreads over the last several quarters. It seems like the market rents have been moving the last couple of years.
High single digits annually and so I guess my question is one do you think it continues at that pace and then too.
It would seem that we haven't seen your peak mark to market leasing spreads yet is that is that fair.
Yes, so maybe Steve do you want to comment on that because I think.
There's some pretty good observations there.
Sure.
Tony Steve Here look this is across the entire portfolio. So this number one is very broad based I think thats important to emphasize here.
And as we've been saying.
When you see these leasing statistics and.
The acquisition, we're doing it's responding to the industry. So with that we will see what's to come in the future.
We do have a lot of confidence.
Upon our network.
What the future holds and that relates to the mark to market as well and the potential for further increases.
Okay and then.
For Peter in the past you've done a nice job going through cap rates can you can you maybe touch on that through your markets.
I mean, I guess I'd broadly you'd say that.
A couple of years ago there.
We're.
Market like research triangle, or Maryland, where people thought.
You know you were in the six and a half to seven and a half range.
I would say today I would doubt that there'd be any asset we would sell on our balance sheet in any market that wouldn't have a cap rate with it.
With.
Ah handle greater than I thought.
That way, we're going to you're going to see sub for cap rates youre going to see.
Nothing really go be I mean until interest rates go up and.
All real estate kind of gets hurt by that I don't think you're going to see anything above a five.
Cap rate at least in the life science for the near future.
In the core cluster markets.
Correct Yeah.
Got it so I got it thank you.
Our next question will come from Sheila Mcgrath with Evercore ISI. Please go ahead.
Hi, Yes, good afternoon, Joel I was wondering if you could give us more.
Detail on your thought process or strategic thinking on which buildings or which markets youre choosing to sell partial interest in is it.
Are you looking to lighten up in California, given the business environment, just a little more color on that.
Yes, I want to be real careful there because we have.
Transactions underway, so maybe I would say defer that to the next quarter, where we could comment on the full year.
I think the.
The mantra that we have is.
Where we have assets that are.
Where we really maximize value for Alexandria in a sense are ones that we certainly think about and look at but it's a sophisticated set of.
Issues and thoughts.
We go through but I think I don't want to comment given just pending transactions.
Okay, and then if you could give us some insights on the recent entitlements that you received at Fenway Park was the timing and square footage in line with your expectation and will this extra 450000 square feet near term project.
Yes, so Peter you could comment on the underwriting.
Yes, Sheila we we actually underwrote.
A lower amount of more conservative amount is that they are that we would get on that additional sites. So we're quite pleased with with.
With the outcome and we are.
Already set to design a project.
On that site.
It's underway the leasing that was done at the current development on the site there.
It has been.
Terrific.
We're in the in the 90%.
At least in negotiating and we're just wrapping up.
Any leases that we haven't wrapped up so far over the next quarter. So the fenway.
Fenway market is exceeding our expectations the outcome of the entitlements was tremendous.
To capitalize on that in the near future.
And you guys, either Steve or Peter you can comment on.
The leasing that was done there from when we started early in the year till now and how we've been able to really bring our.
Our client base to that project.
Yeah.
Start with them, Steve you can add anything but one of the things when we bought that asset.
The.
The one that was underdeveloped was 17% leased at the time and within I think a quarter I was looking at the.
<unk>.
When we were preparing our supplemental what.
I called up.
Our team and I said guys like you are making incredible progress what is going on in.
And what they told US was what they've been.
They were told by the market was essentially.
This is a great project and the developer was very very good developer, but not a lab developer and that the market was waiting to see who was going to acquire it and once they start with US then people you know we're ready to commit to it. So we went again from 17% to.
Now in the nineties.
At least in negotiating.
I think within two quarters and it was all because our brand was put on the building that people could trust.
We would do an excellent job of not only finishing the development, but operating at down the road.
Okay, great. Thank you.
Thanks Sheila.
Our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Thank you.
Steve in your remarks, I think you had commented that you and Peter just kind of made the rounds around the markets and felt very good about supply through 'twenty two 'twenty three.
Can you talk more about some of the details of what gives you that comfort.
Sure Jamie Steve here.
I think.
As we tour through the markets and you drill down on a parcel by parcel or building by building basis.
As I did comment there are a number of.
Single buildings that maybe either redeveloped potentially from office to lab or being advertised for that.
Or are you may see a <unk>.
Project or two that has some horizontal work going on and people are talking about vertical for lab.
<unk>.
That that timeframe is here and now so you actually have to see that activity to have a true delivery in 'twenty, two or 'twenty three.
A lot of what is being talked about still needs to be entitled still needs to be permitted still needs to actually have the horizontal work done before someone's going to make the decision to go vertical and potentially go vertical without an anchor tenant. So I think it's just important to really bracket the timeframes here.
And we just saw that time and time again in each of these submarkets.
Really on a specific building in parcel by parcel basis.
And I think if you overlay that Jamie with what Peter said about construction issues. It makes it all the more unbelievable that people could may be broadcast something when in fact, they couldnt accomplish it so I think thats the reality as well.
Okay.
Maybe I would just add I'm sorry.
It's Peter I, just would add that we really didn't see anything that was going to reach the scale that we can provide our tendency is.
As Steve mentioned.
Lots of private projects named but they are essentially one off.
As we've discovered over the past few years, we've assembled a mega campuses, there's just a lot of them.
Power.
And attraction that tenants have to.
To that aggregation and what we see in the markets.
Morning.
These insights, but nothing that would compete with us on that scale.
Anyway.
And are there certain market.
That you'll be watching more than others and that maybe it sounds like youre talking about 2024 at this point.
But just generally.
Do you see the most potential supply risk.
No reward tracking each and every one of the markets very closely Jamie.
You know certainly.
San Diego, San Francisco and Cambridge.
<unk> those closely.
It'll Maryland in research triangle as well.
I don't know that there is any.
Any one market right now that is that is most concerning.
Over over the others, we're just monitoring it very closely broad based yes.
And I mean, the other thing Jamie is that.
More than two years out so we don't know what the macro environment will be or the micro demand environment as well so hard to predict.
Okay, and then Joe just.
Listening to your comments at the outset of the call.
A couple it sounds like Youre somewhat frustrated with the political environment.
Can you I think I think every.
That's just not me I think we are speaking about everybody the days the old days of bipartisanship or kind of gone.
And everybody seems to want to railroad their ideas I spoke about the <unk> or the infrastructure package, which is being held up.
<unk>.
As ramp them for this much broader.
Cradle to grave.
Social entitlement thing and if infrastructure is so important why isn't that just done because that is bipartisan, but I've said I think it's the 20th century infrastructure package not a 20 <unk> century infrastructure package and if we don't watch out China is going to eat our lunch here over the next decade or two.
Okay.
I guess just to ask the question I mean, what concerns you the most as it pertains to your business specifically.
Well I mean, I think vehicles the way.
I think the.
The folks that are in everybody knows who they are that are pushing the $3 five trillion, but now slimmed down because of likely Joe mention and Kristen cinema to some number that still seems outrageous.
It's like going into a store buying things and then figuring out Gee I don't have a credit card I don't have a check I can't cover this what am I going to do to pay for this.
What it seems to me that that's a good analogy.
And the items are pretty crazy too.
Okay sure sure.
Certainly we can do we can do much better in a bipartisan fashion not just crazy stuff.
But generally it sounds like Youre comfortable with the life science part of things.
Well I mean, I think early on they are going after all kinds of sources without any regard to policy. This is maybe the point here Jamie its not a policy decision.
Where can we try to get one or two or three or four or five trillion dollars from a bunch of sources without thinking about tax policy or health care policy. If all about let's just steel somewhere and put it somewhere so we can get the goodies, we want that's not how to run a government.
Okay.
Understood. Thank you.
Thank you.
Our next question will come from Tom Catherwood with BTG. Please go ahead.
Thank you so much and good afternoon, everyone.
Great to see the lease with <unk> at 325 Binney.
Dean Thank you for the color on that in the past you've worked with the city to add more density to your Cambridge sites.
With the acquisition of one Rogers and one Charles Park, what's the opportunity for further Densification in Cambridge.
Yes, so we Uh huh.
We don't want to give anybody else a roadmap, but I'd say there are unique opportunities we're looking at and.
We think given our position in that market and our knowledge of that market.
Much like three to five which we were able to substantially up zone, we had actually underwrote that fight for something like two or 250000 feet and we're able to do much better.
I would say.
Just wait and see but there are things that.
We are doing and we will be doing that.
Are pretty amazing so let me leave it at that.
Got it thanks, Joel and then just one for me.
We've heard a numerous examples of life science companies facing challenges with small molecule manufacturing and especially products that have short half lives like radiology treatments.
And in the past you've talked about specialized domestic drug manufacturing as an area of opportunity.
Your current view on on manufacturing.
<unk> build outs or development for Alexandria, and given the mission critical nature of these are tenants looking to own these instead of lease them.
Yes, so Peter your you've got a whole lot of recent experience on the integration of the R&D with the manufacturing so maybe just.
Kind of a quick overview of how tenants think about that.
Yes, Tom.
You were alluding to more small molecule is.
The issue there is more just onshoring.
The materials that go into that and hopefully eventually manufacturing things there, but that's really not the opportunity we've been touting in the opportunity we've been touting the next generation manufacturing.
Cell and gene therapy type of or even DNA and RNA type of drugs like <unk>.
Terna.
Manufacturers.
Those drugs need to be near the research they are living and breathing.
By our biologics that will take constant tweaking until they they can be.
Got it right.
And so the <unk>.
Tennant's tend to need those facilities within <unk>.
<unk> been probably preferably 10 2030 minute drive.
As you know across the country or in an area, where maybe there's cheap labor. So that's the opportunity for us and we've taken advantage of it and acquiring some properties that will be well for manufacturing there is certain.
Attributes too.
Two of building that makes it better for manufacturing, but we've been also very careful.
And setting ourselves and get.
Putting ourselves in a good position to do that by ensuring that where we're buying this real estate and the real estate that we're buying.
It would also work well for R&D.
And so it's easier to do because as I said the tenants want these facilities to be very close to where they are doing the R&D now and so down the line, we have a building or 'twenty in a market that is being used for manufacturing and then.
<unk> become available they could also.
Usually convert to R&D dumb it down the road hopefully that answers your question.
That was really helpful. Thanks, so much everyone.
Thanks, Tom.
Our next question will come from Michael Carroll with RBC capital markets. Please go ahead.
Yes, there was a sizeable increase I guess in your Sop related to projects under construction are expected to break ground over the next six quarters then knowing this up it was about 57 versus 52 in the prior Sop I know theres a lot of moving parts within these numbers, though but my guess my key question is how much.
Of that increase is due to new projects you plan on breaking ground before 2022 versus kind of starting to bleed into maybe at the beginning of 2023 into those numbers.
Yes, so I'll, let dean comment, but I would say keep in mind.
The key driver here is.
Immediate demand.
By our tenants and a path for future growth. So we're trying to kind of juggle boat requirements. So dean you could comment.
Yeah, Michael I think what you were trying to understand.
Understand a little bit as we look at the full year 'twenty two versus something going into 'twenty three.
And I think you'll see us quarter to quarter extend the horizon, a little bit it's nothing to do with timing of transactions slipping you can actually see a number of changes that viewpoint supplemental the supplemental where we.
We had a number of projects across the spectrum from near term intermediate future <unk>.
<unk> accelerated forward in the timeline.
And as we.
Highlights in our commentary all of this has been driven by as Joel mentioned as well demand for the space.
And an acceleration.
Our timing outlook as a result of the requirements that we're dealing with with our tenant base and other relationships as well.
Okay. So I guess, if I'm understanding correctly. This is more of you're seeing near term demand. So youre willing to break ground on our new projects over the next six quarters and Thats driving the large part of that increase.
Yeah, Yeah exactly.
And as I mentioned in my commentary.
<unk>.
All of the activity Youre seeing and has some level of leasing on it so it's.
We're sitting in a pretty nice spot right now.
Okay, Great and then can we talk a little bit more about the fundamental backdrop against particularly market rent growth.
Can you quantify how much market rents have increased this year compared to prior years and is there any big differences among the top clusters, I guess, particularly Boston, San Fran are or San Diego.
So Steve maybe maybe give a topside view of that I want to be careful we don't benchmark each and every market.
Yes.
Well look at it.
Again, it's been broad based I know, we've said that but it really is.
And I think you are probably in the mid to single digits in some of the markets and maybe even.
Double digit low teen growth in some of the markets when we.
We're just going to have Investor day in a number of weeks here. So why don't we push a little bit of this question to Investor day.
Okay, Great I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Joel Marcus for any closing remarks.
Okay. Thank you very much everybody for your time and attention and stay safe and God bless.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.