Q1 2022 Alexandria Real Estate Equities Inc Earnings Call
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Good afternoon, and welcome to the Alexandria Real estate equities first quarter 2020 conference call.
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After todays presentation, there will be an opportunity to ask questions to ask a question you May press.
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Please note this event is being recorded.
I would now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. This conference call contains forward looking statements within the meaning of the federal Securities laws. The company's actual results might differ materially from those projected in the forward looking statements additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in the companys.
Periodic reports filed with the Securities and Exchange Commission and I would like to turn the call over to Joel Marcus Executive Chairman and founder. Please go ahead Joel.
Thank you Paula and welcome everybody to today's call April 26th 2022, previewing are highlighting our first quarter.
And I want to also a letter but he now with me today are deemed chicken I got Peter Moglia, Steve Richardson, and I don't want to make a shout out happy birthday to someone very special listening here today want to welcome and thank you for joining our first quarter earnings call and want to wish everyone a god bless them.
And just watching the war in Ukraine gives us pause to appreciate everything we have.
The good to great author, Jim Collins has spoken about Alexandria, we have achieved three outputs that define a great company superior results distinctive impact and lasting endurance I don't want to congratulate the entire Alexandria family team.
On our first quarter earnings performance really by all metrics exemplifying Alexandria exceptionalism at its finest or in fact as Jim Collins said, our superior performance want to thank the entire family team as well for.
What they do each and every day for this mission driven company profoundly committed to driving forward our distinctive impact approach to address some of society's most pressing challenges through our long standing.
Bedrock social responsibility peer pillars.
As Jim said, our distinctive impact and.
We have worked in these pillars accelerating groundbreaking research medical research harnessing the agrifood ecosystem to combat hunger empowering underserved students to achieve long term success bolstering the resilience of our military conquering the opioid epidemic building a model for.
Comprehensive and sustainable solutions to address homelessness, one of our newest programs.
Dressing the mental health crisis, with a focus on helping children Copa suicide loss.
Another new focus and supporting museums to preserve our history and honor our greatest heroes also.
A new focus pillar.
I want to also share that next month May 2022 we'll celebrate our 25th anniversary of Alexandria, as well initial public offering since our IPO in 1997, we've maintained the highest standards of excellence and continue to drive long term value for our stockholders significantly outperforming major indices.
And companies with a total shareholder return.
Through the end of the year from 97 two.
2000 and 532%.
Which is beat the NASDAQ average for that time of 1200, and 91% we'd be Warren Buffett, Berkshire during that time at 953%. The MSCI REIT index, all REIT index at 939% the S&P 500 for that timeframe, 790% the Russell 2007 hundred.
21% and the FTSE NAREIT office index at 552% as Jim Collins said Alexandria lasting endurance.
I want to move to the first quarter characterized by our Alexandria is preserving its very strong core while stimulating strong and continuing future growth.
Alexandria continues to have pricing power in each of our core markets as Dean will talk about our very strong NOI growth in the first quarter and out of a sense of conservative conservatism, we raised our midpoint of our guidance to sense, given the macro environment, but on the other hand, we have very strong conviction for the coming.
Three quarters of 2022, and the delivery of strong NOI growth, both internally and especially from our stellar external value creation pipeline, Steve will highlight our second highest leasing quarter in the company's history and Alexandra continues to experience the strengths across each and every one of our.
Markets.
Here in here in.
Our overall.
Portfolio.
Dean will highlight our very strong same store performance and increased guidance as we continue to see positive occupancy gains and strong rental rate growth.
With our extreme attention to each and every detail of our unique and special life Science real estate business, we're seeing modest increases in our development yields as well as we're highly focused on tightly managing all aspects of our business with a tough macro environment and.
And with rising recession Russ.
<unk> reminds me of 1979 with government policies failing the American people.
Alexandria has been very focused on tenant quality and 50% of our annual rental revenue is from investment grade or publicly traded large cap tenants I think it's pretty amazing that Alexandria tenants have made an astounding have made astounding progress on developing groundbreaking medicines, 48% of F. D. A novel.
Therapy approvals have been granted to Alexandria tenants since 2017, almost half a ball approvals.
Life Science industry is seeing the explosion of biotech over the last over the past decade.
From 2013 to 2021 with funds blows up generally five times historical averages and Vance advancing broadly innovative pipelines for large unmet medical needs. In every one of us knows either a family member or friend, who suffers from some form of disease.
Ill not treatable effectively with today's medicines.
The move in inflation.
Starting in the first quarter of 'twenty, one now we're five quarters into what coupled with the myriad of problematic U S policies and macro threats have ended that boom and over the last five quarters. What has emerged are the haves and have nots. The have nots are a range of small and mid cap biotech companies with programs that are preclinical.
As well as many are in the clinic have seen their values drop and the open market over the last nine years by and large are closed the habits are large biotech as well as biotechs that have reached commercial stage together with big pharma and are as flush with cash as ever being estimated to.
Over $500 billion of available immediate cash Alexandria tenants election has been a cornerstone of our unique business model and has enabled us to select and grow with the best.
Highest quality and most innovative.
Tenants one of the absolute bedrock.
Bed rock of our.
Really our business model and with that let me turn it over to Steve for some details on the quarter on the growth side.
Thank you Joel and good afternoon, everybody, Steve Richardson here.
And as we bring Q1 2022 to a close I'd like to highlight two critical factors driving the continued momentum and success of Alexandria.
One is the demand for Alexandria is unique and highly differentiated facilities.
Operational excellence services and Mega campus offerings continues at a very Covid and post COVID-19 level with leasing during Q1 totaling 2.5 million square feet.
And within that total one 4 million square feet in our development redevelopment pipeline. This activity is the second highest quarterly leasing volume in company history and each of these two categories.
Following historically high leasing during 'twenty, 'twenty, one and particularly Q4 2021 .
And two importantly, the exceptional quality and long term nature of Alexandria, as leasing results overall, and especially this quarter is truly noteworthy and wanted to double underline.
We signed a long term lease for a ground up class a laboratory office flagship facility, comprising 427000, rentable square feet with Bristol Myers Squibb, a company with a market cap of $164 billion as they chose Alexandria to design build and operate their mission.
Critical innovative research hub and our campus Pointe Mega campus.
Let me just say that this type of outcome is the result of Alexandria as historic pioneering efforts and establishing the life science asset class. We started working with BMS. During 1998, So 24 years ago and began building trusting confidence at every level of the organization first of all Mike.
Squibb as network top tenant and president and five of Alexandria, as core clusters, he truly unique partnership and a distinct and compelling competitive advantage the.
The entirety of Alexandria, as brand value and Bms's decision to select the Alexandria was crystallized with this inspiring each evening.
<unk>, a deep and meaningful trusted and mutually respectful historical relationship was further cemented second the unique ability to scale in a single mission critical facility featuring cutting edge design and infrastructure was realized and third a marquee destination of campus.
<unk> point with a highly curated and first class suite of amenities to meet BMS is imperative to retain and recruit the absolute best talent sets.
That's a new Mega campus gold standard.
We also signed this quarter another class a plus laboratory office facility, comprising 334000 rentable square feet at our C Seaport campus with Eli Lilly.
A company with a market cap of $280 billion for their stated the art Institute for genetic medicine.
Lilly is a similarly exceptional story our teams first worked with Lilly during 2000 and embarked upon a journey together to create World Class Laboratory office facilities in five of our core clusters as well.
As the willies team pursues its cutting edge research.
The foundational work during these past 22 years provided a bed rocker trust and.
And enabled our teams to envision a profoundly positive impact upon <unk> ability to compete for the best and brightest scientific and entrepreneurial talent in the greater Boston cluster with the Premier high visibility waterfront site offering expansion Optionality adjacency to transit.
And unparalleled amenities and iconic design certain to be a landmark for generations.
These are showcased examples of Alexandria is formidable and irreplaceable position deeply embedded within the life science ecosystem. The strength of our internal growth engine is unassailable, we have now more than 1000 tenants, providing us with unmatched insight into not only their current and future space needs.
But more importantly, the ability to stay ahead of the curve to deliver sophisticated operational expertise for these mission critical facilities and to read the precise amenity mix to drive the holistic recruiting and retention of talent platform essential to these innovative company success.
These leasing accomplishments are a testament to the entirety of the Alexandria team's passion commitment and unwavering work ethic towards our shared mission.
And the continued demand for our facilities is also borne out by the following sterile stellar results.
Growth within the core provides critical and immediate value to the company with impressive renewal and re leasing spreads of 23, 2% cash and 39.8% GAAP when excluding the block of short term swing space for BMS as we began construction on their flagship facility noted earlier.
<unk>.
The portfolio Mark to market remained strong at approximately 30%.
And as we noted on the last quarterly call. This is significantly greater than the mark to market of 17% at the end of Q4 'twenty 'twenty.
Accounts receivable for Q1 was 99.9% and again huge kudos to our best in class operations team.
Early renewals for this quarter were 51% somewhat below our historic rate, but a clear sign that our tenant base continues to actively seek to lock down their valuable laboratory office facilities.
Healthy demand is also evidenced by the exceptional health of Alexandria as value creation pipeline as mentioned earlier, the one 4 million square feet in the pipeline as the second highest total in the company's history and further contributed to the highly derisked nature of the pipeline is 77 per.
<unk> of this 8 million square feet, which is projected to generate $665 million of incremental revenue is leased or negotiating Peter will provide additional detail and color on the pipeline during his comments as well.
Moving on to supply and demand.
Demand overall as we highlighted during Investor day back in December and again on the Q4 'twenty one earnings call and now on this call.
For Alexandria, as Mega campus continues and our irreplaceable set of relationships and central role in the life science ecosystem positions us very well to engage and secure the very best innovative companies in the country.
Market supply.
We continue to monitor market supply in a granular level, including the actual assets the operators and the capital sources behind potential projects. When we look at 2022.
Important to note that the vacancy rates are very low in each of our three largest clusters in the overall new supply is either leased or adding very incrementally see 1% or so in our key markets.
In 2023 projects that are actually and why not and I want to emphasize actually under construction.
There are much more modest see 25% of what various broker reports might indicate as those reports include planned or proposed projects.
The 2023 deliveries are again, either leased or contributing just read a 4% of availability to the total market size, which will likely be further reduced during the coming quarters.
And in 2024 and beyond in these three markets. There are no projects actually under construction with delivery dates in this timeframe.
Yes, there are a number of planned or proposed projects or dirt being moved around.
But we'll have to see if the operators and more importantly, the capital partners behind these projects actually commit significant capital to the projects on a purely speculative basis.
They're often time inexperienced development operators.
And let me finish this supply summary, with a reminder of the significant difference in highly valued difference by quality life science tenants between Alexandria is class a plus facilities as part of our fully and monetize mega campuses.
And one off buildings in commodity locations.
So in conclusion, the first quarter of 2022 was a very strong quarter and positions the company very well to drive immediate and long term value through our core operating base as well as or substantially leased negotiating 8 million square foot REIT, leading development redevelopment pipeline.
With that I'll hand, it off to Peter.
Thank you, Steve I'm going to update you all on the value creation pipeline discuss the continuation of construction costs and supply chain macro issues and comment on the 100 Binney disposition.
Leveraging our unique market industry insights and the proven expertise of our best in class team our value creation pipeline is tactically broadening our core clusters to meet the needs of our world class tenant roster, reflecting the continuing strong demand referenced in steves comments and our ability to capture it due to our trusted brand.
AAA locations inspiring aesthetics operational excellence curated amenities and capability to elevate the tenant experience our value creation pipeline of projects that are either under construction or expected to commence construction in the next six quarters has increased two 8 million square feet that is.
Projected to add more than $665 million in annual rental revenue, primarily commencing from the second quarter of this year through the first quarter of 'twenty five a $55 million increase over what was discussed last quarter.
As of quarter end, 77% of this remarkable pipeline was either leased or under negotiation, which means we have an executed LOI.
With an astounding, 94% of the activity coming from existing relationships highlighting the incredible loyalty to our stellar brand.
Our tenant base is in a war for talent and recognize that space and in Alexandria campus is mission critical in that fight without question, our ability to offer our tenant base scalability and comprehensive amenity offerings through our Mega campuses is a truly unique differentiator and why Alexandria.
<unk> is the clear choice to provide mission critical facilities to the lifestyle and life Science industries, most innovative and successful companies.
During the first quarter, we delivered 566655 square feet from 10 projects located in eight different submarkets, reflecting the diversity of our pipeline made possible by strong demand across all regions.
Deliveries provide strong GAAP yields at approximately six 7% translating to approximately $36 $1 million of annual NOI.
Alexandria has tremendous execution on our value creation pipeline represents a key component of our compelling growth engine and an example of this is the extraordinary job are highly seasoned development teams are doing in managing cost escalations and supply chain disruptions that continue to proliferate throughout the construct.
As an industry.
Approximately a year ago, and our first quarter call for 'twenty 'twenty. One we included commentary on construction cost trends because construction cost inflation was anticipated to be outsized did a double demand for materials and labor caused by the Samuel teams. This restart paused and new projects combined with.
<unk> materials and labor due to closing of mills, and fabrication shops weather events and a loss of workers who migrated to different careers.
All expected to be transitory and even last quarter, we noted expectations for things to start normalizing in 2023.
However.
War Covid in China, and transportation issues have become the latest antagonist in this story and reversed any thoughts in the near term stabilization.
Warren Ukraine's biggest impact on construction cost is an astronomical increase in fuel costs sustainability experts will tell you that the embedded carbon of constructing a building is equal to the carbons used to operate the building for 30 years much of it coming from fuel earned by the trucks delivering materials to this.
Site and the machinery that produces the earth work on the Bill.
In addition to fuel the war has reduced the supply of critical semiconductor materials, such as palladium and nickel exacerbating the ship shortage, which affect such things as building control systems and emergency generators, the latter of which can now take up to a year to deliver.
Other raw materials that come from the area are used to make certain metals like aluminum and contributing to their inflation.
Transportation issues proliferate throughout the economy and construction is no exception if you spend any time on a construction job site you will Marvel at the amount of coordination that needs to take place as trucks come in and out of the job delivering materials are hauling things away in.
In addition to the cost of fuel inflationary pressures coming from an estimated 50000 to 80000 trucker shortage emanating from outdated compensation models and the allure of last mile delivery companies, reducing the pool of candidates in.
In addition to trucking, we're keeping our eye on labor negotiations for over 22000 dockworkers on the West Coast.
Deadline to reach an agreement is July 30th and if they strike it could place pressure on alternative ports and further delay delivery of materials.
Specific material problems today include steel copper and aluminum roofing materials elevators, HVAC equipment, switchgear, Transformers, and emergency generators materials and equipment are both expensive and tough to get many of these items take twice as long.
To get that in normal times and continue to go up in price by double digits.
Rest assured we are tightly managing these conditions as mentioned last quarter. The biggest asset we have to leverage is our decades of experience in developing purpose built laboratory buildings, enabling us to mitigate delays.
Currently approximately 82% of our cost for development and redevelopment projects aggregating to five 4 million square feet are subject of guaranteed maximum or other contracts that enable us to mitigate the risk of inflation.
We have contingencies behind those contracts to account for scope creep and unknowns. The other 18% is from projects that are currently pending guaranteed maximum contracts that are in process and those disclosures include larger contingency allowances.
The voracious demand for high quality life science assets in key cluster markets led to a highly competitive bid for 100 Binney asset are excellent execution led to our third asset sold with a valuation exceeding $1 billion and the fourth to achieve a sub 4% cap rate.
We sold a 70% interest in the 433932 square foot lab office building anchored with long term credit tenants for a purchase price based on a total valuation of $1 billion $20 million through which we received proceeds exceeding $700 million.
Cash cap rate was a record for our capital recycling program at 3.5% and enabled us to harvest a profit of approximately $410 million.
<unk> per square foot of 2000, and $356 exceeds the record price, we set last quarter and the sale of 50 to 60 Binney by three 7%, which is meaningful considering the uncertain interest rate environment, we were and continue to be in during the quarter and the disruption caused by Russia's invasion.
Of the Ukraine that happened on February 24.
With that I'll pass it over to Dean.
Thanks, Peter Dean <unk> here. Good afternoon, everyone. We reported very strong operating and financial results for the first quarter of 2022.
Highlighting that we're off to a great start and on track for 8% plus growth in <unk> per share now this is.
Rest of considering the consistency of Bottomline growth year after year and following a historic year in 2021 of operating and financial performance and significant achievement of historic milestones.
We reported first quarter 2022 revenues of $576 9 million or $2 3 billion annualized up 24, 4% over the first quarter 'twenty, one and NOI was up 22, 7% over the first quarter of 'twenty, one highlight and very strong growth and outstanding execution by our team bottom line.
We beat consensus this quarter and raised our outlook for <unk> per share growth to 8% more on this in a moment.
Alexandria has tremendous scale in key innovation clusters submarkets across the country that allows us to provide optionality for innovative life science entities looking for high quality laboratory space from a trusted partner we.
We have a very high quality and diverse tenant roster consisting of over 1000 tenants that provides area unique and strong position to address current and expansion space requirements. We continue to reap the benefits from these attributes as shown in our continued strong operating and financial results, we generated a REIT industry, leading adjusted EBITDA margin of 17.
1%, highlighting highly efficient execution by our team.
Occupancy was up 70 basis points to 94.7% since December 31.
And our team is on track to achieve our exceptional growth in occupancy by the end of 2022 of 150 basis points in comparison to 12 31 21.
Now the key takeaway from our leasing activity in the first quarter beyond achieving the second highest leasing volume in the company's history.
Is that the strong rental rate growth in the first quarter of 39, 8% and 23, 2% was higher than the annual rental rate growth reported for the full year of 2021 and 2020.
We are also on track to hit our very strong rental rate growth projections for 2022, ranging from 30% to 35% and 18% to 23% on a cash basis.
Same property NOI growth continues to benefit from strong demand from our tenants as they look to renew and expand with Alexandria.
We reported same property NOI growth of seven 6% and seven 3% on a cash basis.
Primary driver of this exceptional performance with strong rental rate growth on renewals and releasing of space in recent quarters.
A larger impact this quarter from a number of leases.
And same property NOI in the first quarter also benefited from a 110 basis points in growth in occupancy.
And for the full year of 2022, we expect a total of 150 basis point increase in same property occupancy.
During the first quarter $36 million of annual net operating income commenced on average on February 14th related to the 567000 rentable square feet of development and redevelopment projects that were completed and placed into service, including a couple of projects that can put that were completed earlier than projected.
We completed acquisitions in the first quarter aggregating $7 3 million square feet of development and redevelopment opportunities acquisitions in the first quarter also included some operating rentable square feet that added $75 million annual net operating income that commenced on average on January 23rd.
Now looking forward our team is uniquely positioned to alexandru excellent visibility of growth within the REIT industry with $665 million of incremental annual rental revenue to commence from the second quarter of 'twenty two.
Through the first quarter of 'twenty five now this represents significant year over year growth in net operating income for 2022 'twenty 'twenty, three and 'twenty 'twenty four from deliveries of development and redevelopment projects over the next 12 quarters. This represents 8 million rentable square feet that is 77% leased under advanced lease negotiations.
Go station or subject to an executed LOI.
We are pleased to have a super strong and flexible balance sheet with credit ratings that ranked in the top 10% of the REIT industry as of March 31, we had $5 7 billion of liquidity, our net debt to adjusted EBITDA is forecasted to be five one times by the end of the year, representing a slight improvement from five two times as of the beginning of 2022.
And our fixed charge coverage ratio is expected to be very solid at greater than or equal to five one times and.
And we remain disciplined with our strategy for long term funding our business with a focus on maximizing bottomline growth, maintaining a strong and flexible balance sheet and reinvesting capital from real estate dispositions and personal interest sales and intend to minimize the issuance of common stock.
Typical operating property at stabilization of NOI for Alexandra will generally require long term funding with 35% to 40% debt and 60% to 65% equity capital now the 60% to 65% of amount of equity capital is much higher than Alexandria, as average common equity issuances over the past.
Five years, which is range roughly between 40 and 45% of our capital plan.
The key reason for a lower amount of common stock issuances and due to the significant amount of value, we monetize the real estate sales and partial interest sales for reinvestment into our business importantly, common stock issuances for 2022 is projected to be lower than the five year average of 40%, 45% of our capital plan due to the continued.
Execution of real estate sales, both 100% outright sales and partial interest sales.
Peter Moglia highlighted 100, Binney Street achieved a record $1 billion valuation based upon the partial interest sale of 70% of the property we generated almost 140% profit on this development project that we built a handful of years ago truly spectacular value creation and opportunity to reinvest capital back into our business. We also.
I have another advanced negotiations for a sale of approximately $350 million range plus up to an additional $1 5 billion plus in real estate sales and partial interest sales targeted for the remainder of the year.
We are very pleased with a very proactive and opportunistic bond offering consisting of $1 8 billion and 30 year and 12 year unsecured notes with a weighted average rate of 3.28% and a term of 22 years now to put this into perspective, if we had to issue 10 year and 30 year unsecured notes today the rate would be in the low.
4% and mid 4% range respectively.
Importantly, we remain on track for continued improvement in our balance sheet and credit profile now.
Now realized gains included in <unk> from venture investments were to $23 1 million in the first quarter and over the last four quarters were $104 4 million or $26 1 million per quarter unrealized losses. This quarter were $264 4 million, reflecting the decline in fair value of venture investments.
Importantly, unrealized gains on our venture investments were 533 million as of March 31st.
Our team continues with their journey and leadership in ESG. Our next annual ESG report will be released in a couple of months in June .
E. S. D leadership highlights since year end include Alexandria is ranked number the number five.
Reading Barron's 685 gateway located in South San Francisco, Submarket, which is on track to achieve zero energy certification was awarded and recognized for excellence in Wood building designed by Woodward's.
Alexandria earned the first ever sit well life Science certification at 300 technology square located that the Alexandria Technology Square Mega campus in Cambridge Submarket.
We received LEED platinum certification at 90, 880 campus point drive, which is home to great labs, a dynamic proprietary platform purpose built to accelerate the growth of promising life science companies.
And our team is executing on the construction of what has been designed to be the most sustainable laboratory building located at 325 Dentistry in Cambridge, Massachusetts.
They have strong operating and financial results for the first quarter supports our improved outlook for 2022 with EPS diluted ranging from $1 eight to $1 18, and ethical per share as adjusted diluted from a range from $8 33 to.
$8 43 up eight plus percent over 2021 at the midpoint of guidance now we increased GAAP same property NOI growth by 40 basis points to a range of five 9% to seven 9% straight line rent is up 4 million to a range from 154 million to $164 million and we increased the upper range.
Guidance by $500 million for real estate sales and partial interest sales toy.
So a range from $1 3 billion to $2 6 billion.
Please refer to page six of our supplemental package for detailed underlying assumptions included in our outlook for the full year of 2022.
Thank you and I'll turn it back to Joel.
So with that operator, if we could open it up to questions.
Yes.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Sure.
Please pick up your handset before pressing Ricky.
To withdraw your question. Please press Star then two.
At this time, we will pause.
Charlie Campbell our roster.
Yeah.
Yeah.
Yeah.
And our first question will come from Jamie Feldman of Bank of America. Please go ahead.
Thank you for taking my question.
So I guess just the big picture here, you know theres been a lot of concern on the biotech funding outlook in light of capital markets volatility it's hard.
It is hard to borrow stocks.
The life Science Docs can you just give us your latest thoughts on how this might be impacting demand the funding backdrop any signs of weakness and areas.
And then also I'm just thinking about leasing timing or are you seeing any delay in lease decision making.
How should we be thinking about you know reading the tea leaves here.
Thank you, yes, yes.
Yeah, Jamie Thanks for the question I think you know what I said in the prepared remarks.
I think how you should frame the.
The cornerstone.
And kind of a bedrock demand situation I think you've got to have them have not so the have nots as I said our companies.
Public companies by and large because most private companies are generally well finance in the venture firms have raised.
Mountains of capital so they've got pretty long runways, but I think people who've gone public and some of them went public too soon or caught in a bit of a squeeze.
With cash burn either if there are preclinical or somewhat into the clinic at various stages and maybe don't have early readouts of data and so for those I think you can expect they will not be on track to expand and in fact some will.
We'll contract and reduced their workforce and maybe their space, we've seen some of that in different markets.
<unk>.
But I think it's fair to say that.
The haves are those companies that are the big cap companies Big pharma plus the companies that have reached commercial stage are really very flushed with cash and we see no real change in growth trajectories of those companies plus many of the.
Private side who've raised massive amounts of cash so I think youre going to find that our operators who have leased two and I can think of one group in Boston, who lease to a variety. Thank goodness not us of course lease in new construction leads to a variety of companies.
That are in the clinical stage.
We're seeing I can think of this one building I won't say, who the operator is though it's not in Cambridge, it's out in the Burbs, but theyre going to see many of their tenants.
Either sublease or try to give space back. So I think it's a tale of two worlds and Luckily we are I think extremely well positioned in that.
Hello, operator.
The next question comes from Sheila Mcgrath with Evercore. Please go ahead.
Hi, Yes. Good afternoon I was wondering if you could provide a little bit more detail on the partial sale where in place rents might have compared to market and with a weighted average lease term in that building and what is the pricing set.
Well for the shift in interest rates or just on the timing there.
Yeah, So Peter do you want to handle that.
Yeah sure no the pricing was set during the heat of everything the war a interest rate volatility. So it is reflective of today's market conditions.
The I don't know what the wall I don't have a waltz.
Memorized, but I'm just looking at the top.
Two leases it was very likely close to 10 years, probably maybe nine.
So definitely a long time before you realize any upside than there is upside there probably somewhere in the neighborhood of about 27, 28%.
The rents were overall below market.
But again I think that the.
The prices reflective of the fact that someone's going to have to live with that return for awhile.
The credit there was really good so there's nothing to worry about but.
It was a very fair price considering the amount of demand.
Is looking for high quality projects and that was probably the most high quality project anyone could have found a this year.
Yeah, I mean, perfect great tremendous location in the heart of Cambridge.
Brand new construction more allows and as Peter said pretty good lease duration with the <unk>.
Very strong credit so a real iconic I think investment.
Okay. That's great and then I'm just curious you know inflation that everybody's talking about it wondering like when you look at new projects would you consider.
Most of your leases are with 3% escalators would you consider having a you know a minimum with tied to inflation or that's just not the market.
Yes, So I'll comment and then maybe ask Steven Peter to comment so over the history of Alexandria, we've kept.
Kind of two approaches one is been annual rental escalations generally, 3%, sometimes a little less sometimes it's more but average about three and.
And during different time periods, we have gone to a minimum maximum or minimum three and Max six based on a CPI. We are involved in a number of negotiations were those both of those are being discussed and you will likely see some of those over time, but I don't know Peter Steve If you guys have any other color.
On that.
You know Joel just ankle that its Steve Sheila.
That's exactly what we're doing and we're being very targeted and thoughtful with the particular segments of the portfolio that we might do that for so.
We think it's going to be very fair and reasonable and so far it's been understood and well received so just at the beginning of the process here.
Okay. Thank you.
Yeah.
Our next question comes from Manny Korchman of Citi. Please go ahead.
Hey, everyone.
Peter maybe one for you just how does he think about which assets you want to keep you know you guys have used.
The term of iconic when referring to the 100 Binney how do you think about keeping iconic asset that person is selling iconic assets in.
Especially in a market like that but it's so supply constrained part of me wants to say why not why not keep the longer term upside there and part of it is as youre getting a 25% cap rate. So how do you weigh all that.
Yeah.
Yeah I mean.
As you said.
On the latter part of your comments I mean being able to take advantage of market conditions, where you can get a sub four cap rate and then plug that back into your next iconic asset.
At a six plus it's just it's hard not to do that and remember we are keeping a pretty material a part of each of these assets that we're selling we are also yeah.
Our crew fees.
And so there is some leverage operating leverage that we can achieve there.
So.
It is.
You look at the market you see what you can monetize at the at the best price and you only make that decision now if you have opportunities to reinvest that and something that's special and if you look at our development pipeline today, we think it is.
As you know for the next wave of iconic asset so.
We don't want to get too in love with things that are legacy. We appreciate them, we again don't sell them in whole, but there are other frontiers for.
For us to conquer and such.
Such as the Fenway, where we believe there's going to be an incredible.
Rent growth and appreciation as well so we need to.
Get the.
Cash to make those accretive investments in.
We pick carefully but.
Strategically.
And then maybe on that deal specifically, how much what was about managing tenant risk if at all with you now.
Selling death, and then having the project will get some coming in at the same time.
I'm, sorry, the tenant risk with.
Was that EBIT about managing your Bristol Myers, our exposure or where did that no no no not at all.
Not at all.
Thanks, Bob.
Yep.
Our next question comes from Rich Anderson of <unk>.
Please go ahead.
So on the topic of dispositions.
As much as $2 6 billion.
Potentially this year.
Last year, you had a whole lot of activity at the end of the year year before I think you did about $1 billion. So youre clearly identifying with some opportunities to raise capital in that format.
But with rising interest rates and all that talk do you think 2022 will be more of a.
And ratable sort of level of dispositions across the year or do you think it could still be lumpy towards the back half of the year maybe.
The sense of urgency to get some things done before interest rates, perhaps do play a role on cap rates.
Yes, Dave.
Yeah.
Rich maybe it's helpful to look back to last year, just to give some context too.
The late year transactions and you might recall our commentary over the last few quarters.
The reason why we had a number of transactions really weighted to December of last year.
Everything to do with.
Specific leases that were significant to the transactions.
Being extended.
And it was super important to complete that.
Before we went out and got deep in the marketing of the underlying asset for sale.
And so a number of those transactions had that.
Aspect, which delayed the.
The transaction for execution until later in the year, but it was an important component to the valuation as well so as you can imagine important.
Get done this year, we don't have that same.
Issue across the transactions, we're looking at today.
So I think you'll see it be a little bit more spread out through the year than you did last year, but by far we don't have those same challenges this year rich.
Great and Joe you mentioned, your haves and have nots comment.
But one one name that jumped out to me when speaking internally with Mike.
Our biotech team was the name like Novartis, which is you know kind of registers as one larger cap names in your top 10 that is.
Seeing some significant layoffs.
I'm curious if you guys have any comment about their situation specifically.
As it relates to demand and any examples of larger cap names that despite your comments might also be considering some significant levels of employee reduction.
Yeah, well I mean, novartis is one of the strongest.
Certainly pharma companies in the World and certainly one of the strongest companies in the world all companies of large size as you know from your.
Long history in this industry go through rationalizations of different groups I mean glaxo as an example, so their oncology group at one point, which was a core seem to me to be kind of an odd thing to do and then later on essentially kind of restarted at different people are suffering shuffling around different lines of.
No says whether they'd be you know.
High value.
Ethical pharmaceuticals or more.
Commodity type products. So I think I would view that as having nothing to do with the.
The industry itself.
The state of the industry at this point, but rather a rationalization of that company's owned operations and you know whenever you get a.
New CEO or a change.
These companies kind of shift focus.
And so that's something else that youre seeing from time to time, but I wouldn't read anything into that in particular, okay.
And then real quick Peter I think you had said or maybe it was even Joel said developed meals are modestly.
Element yields are modestly up for you.
I assume that's not a comment generally about the industry.
So do you have a sense you know based on all the things you talked about about delays about how far down development yields have come for your competition not so much you.
Yeah.
Hey, Joel do you want me to take that please.
Please.
Yeah rich.
I think we just getting back to my comments that our team has done an incredible job and helping to mitigate cost escalations and locking things in early.
And so because of that and because of the rent growth that we've experienced in all of our markets. We've been able to really been able to marginally increase our yields.
As Joel mentioned.
I.
What else what other people are doing I'm not sure they don't.
Certainly don't have the scale.
Vantage that we have and the relationships that we have probably not even closer to the personnel. We have so I'd imagine that they wouldn't be able to do the same thing.
Fair enough thanks very much.
Rich.
Yeah.
Our next question comes from Dave Rodgers of Baird. Please go ahead.
Yeah. Good afternoon, just again with your comments about maybe recession as well as the have not maybe this question is for Peter is there anywhere on the life science investment sales spectrum, that's being impacted by those types of comments or by interest rates and spreads and I guess them.
Just trying to get a better understanding if there's other competitive assets, where maybe we're just not seeing enough of a spread between what's trading in any examples you might you might have off the top of your head.
Ah I can tell you I mean I was looking at our comp database yesterday just.
<unk> seen what changed from quarter to quarter, there's a lot of things are still trading with.
The quality of the tenancy is completely.
All over the place in there and things are getting four cap rates.
Or more just you know certain portfolio that.
I am Ed sold in San Diego.
With a lot of cats and dogs was at sub five cap rate.
So.
There is a lot of demand for exposure to life science assets and so unfortunately for a number of investors tenant quality probably hasn't been.
Our focus.
But we are you know rest assured and anyone who's looking at our portfolio. We are our tenants are highly vetted and that doesn't become a <unk>.
It's more about the location and lease duration.
Tenant quality as usually you know assumed to be great because it is.
Thanks for that and then maybe just one follow up question I don't know if this is for dean or maybe Steve, but it was like Apple and alphabet joined the top tenant list I don't know if that was a function of acquisitions or perhaps sales or just new leases there, but they had some shorter duration. So I was curious if those were added and if those work kind of intermediate.
Term redevelopment opportunities or just kind a good standalone investment.
Yes. This is Joe yes, the answer is yes, and yes.
Thank you.
Yep.
Our next question comes from Michael Carroll of RBC capital markets. Please go ahead.
Yeah. Thanks, just real quick back onto the the have Nots I think Joel you were mentioning that there might be some have not that have to give back space in the suburban.
Markets of Boston, I mean, how much of that could come back to the market is it big enough to alter any of these markets, where you could see vacancy rates kind of uptake or is it just more of a one off type thing.
Yeah, I don't think it's we haven't seen any sign that it's a material impact.
And we'll monitor that quarter to quarter. So I think right now, it's pretty building and location specific.
And obviously tenants specific.
But we haven't seen anything that I would say material as an overall trend.
This time.
Okay, and then related to that have no. That's I mean I think in your prepared remarks, you said is basically companies that went public too quickly and then what about the small mid cap private companies that you've kind of indicated debate raised enough equity or capital. So they're really not an issue or is it more muddled and that it's kind of depending on the company.
They were talking about.
Yes, so certainly not all companies I would put in they went too went public too early I would probably put those on preclinical. So if you've if you've not even entered the clinic and youre going public probably that's too early I mean, it's obviously case specific depends on what the technology is.
What the opportunity is what your shareholder base is from the private side and so forth, but by and large there is a host of those that were preclinical that just went too early maybe grew too fast and realize they still got the clinical ahead of them and then those that went public in the clinic I think that's generally been a good game plan, but.
Then didn't realize that after nine years I've been saying that for a while.
A nine year bull market and the sector just doesn't continue unabated.
So it tends to rationalize itself and as I said five times the capital.
Volume was being raised and kind of went into the industry, which is a lot on the private side.
Many I mean again, it's very case specific but many of the companies who have blue chip.
Founder groups or investor groups who've raised large pools of money.
Have good runway. So generally a lot of those are not going to suffer maybe some of the challenges that may face the host of the public companies.
And the have nots sector, if you will.
Okay, Great and then just last one for me Steve you kind of highlighted in your prepared remarks that there is no projects under construction that will be delivered in 2024 at least as of now.
When would the developer actually need to break ground or go vertical to achieve the 2024 delivery date do they have another what six plus months or so is that kind of fair to say.
Yeah, Hey, Michael It's Steve Yeah, I think it's within that window.
And the key is whether someone's going to actually.
To start doing that and going vertical to deliver in that timeframe and what we've really done is drill down to the capital behind these operators obviously the operators are going to be.
Positive and bullish but.
We just haven't seen that from the capital sources actually committing capital.
As of today.
Great. Thank you.
Okay.
The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.
Great. Thank you maybe going back to a 100 Binney Street and the cap rate compression in Cambridge, I'm curious, if you're seeing a similar level of price appreciation across markets or are any markets accelerating or maybe.
Maybe moving slower than that clip you guys are seeing in Cambridge.
Well, Yeah, I'll ask maybe Peter and Steve I would say on your end.
Thank you guys need to revisit our N B I think you guys are off.
But in any case I think it's when you look at when you look at many many years in the heart of the.
Kendall square and.
Cambridge epicenter, so the cap rate there is not not real surprising for relatively new construction high credit quality and just an iconic location and building and I think you can see across most of our markets.
Cap rates have held I think very strong and continues to be.
Very positive in our favor.
But I'd ask Steven Peter to comment more detailed.
Yes.
Yeah. This is Peter.
All of the markets that we're there I guess said another way.
None of the markets. We're in would have a cap rate that would have anything greater than a five handle on it.
As a as you know remarkably different from a couple of years ago when.
People were thinking certain markets had six or 7%.
Some of those markets now are in the fours or fives. So.
I would generally just say as Joel mentioned, Cambridge is a special place.
There are gonna be few Submarkets, where you probably go below four.
To the to the mid threes like we just did but you know who knows I mean theres certainly.
A lot of money chasing these assets and the competition for high quality.
That's when the investors are thinking hey, there's there's great rent growth here I'll pay the price for it today.
Got you.
Who knows we could certainly see breaking through for it in other markets, but in general.
Cap rates for elaborate are you now.
Like it like industrial like logistics logistics.
Storage or or apartments, I mean, it's just a hot industry Theres a lot of money out there to be invested and they wanted to bet on winners and winners are expensive.
And maybe to that last point that I didn't hear it across those property sector. As you mentioned, we've been noticing a cap rates go either at or below borrowing costs and I'm curious if that's a similar dynamic.
You're noticing across.
My science as well I assume 100 Binney, it's I believe it's an unencumbered, but you know I would assume that the debt would be close to that cash cap rate or it's not a smidge below.
Well you bring up a good a good point that actually we don't really talk about too much but I mean, yeah. Our our large parcels your sales are done with.
With partners that they do.
We're not buying leverage so.
They're they're putting this money to work in and and not looking.
To lever it up there they're accepting needs.
He is a nice returns.
Frankly, we don't go into the secured market and buy anything on a levered basis, so kind of hard for me to say.
Comment, but I would imagine just seeing where rates are today that a negative leverage is probably the only leverage available. If you want to buy a really high quality asset.
Great and then maybe just last one for me on the Mercer Mega Block can you remind us if the plan was always to bring in a partner and if so why not retain that the entirety of that development for for Aerie.
Yeah, Peter you could comment.
Sugar.
We have a strategic partner in AR.
A couple of nearby assets.
That made a lot of sense for them to participate with us.
I can't really go into the details so become apparent later on but this.
This is a partner that is.
We're in multiple markets with a they have a lot of trust in us they're a great source of.
Capital that's very.
Very attractive compared to common and they were highly interested in getting involved and we're keeping the majority share there, but it's also.
Good opportunity for us to.
[noise] finance something upfront rather than after the fact to.
Yeah.
Keep the capital flowing to others other projects as well.
I would also say we've seen great activity with credit tenants in that for that location.
Got it appreciate the color thanks, everyone.
Yes.
The next question is a follow up from Jamie Feldman of Bank of America. Please go ahead.
Thank you I appreciate your color on the construction pipeline.
Breaking out 'twenty three 'twenty four and beyond would you say that your your appetite for speculative has changed at all in the last six months or so or even the last three months just given it seems to be a growing pipeline and maybe more questions on the demand side.
Well I think Jamie somebody mentioned.
Or if not we haven't really done speculative developments since before the O eight or nine crisis.
When we were forced under contract in New York, We are building two towers, we stop one after Lehman collapsed, but we built the east tower and then Luckily we security light Lilly as our anchor tenant there but.
But we haven't generally built spec since then.
And when we tend to put up if we go vertical we generally always have either assigned lease sign oli.
Why are we have as a case of one project I can think of a series of companies who have told us they need growth at this point and we've decided to go forward and working through the mechanics of documenting that but we wouldn't just put up steel on the hope that.
They will come not because of the current market, but we just haven't done that as a matter of policy in the company for.
Literally more than a decade.
Okay. That's helpful. And then if you think about your investment activity in the quarter at all.
Projects, you bought or even some of the more covered land plays.
Is it safe to assume Theres also tenant interest in those projects or you know the stuff you've been buying really is kind of a future land bank without.
The tenant in mind.
Generally we like to Ah I can think of a number of situations, San San Diego or other markets, where absolutely specifically or.
The Bay area, the peninsula, where we have specific.
Tenant interest remember.
Peter Steve and Dean of all mentioned, we've got now more than 1000.
Innovative tenants so the amount of information in the amount of.
Requirements really come to us in a way that there's nobody else that could marshal that kind of a of a resource and that gives us the confidence to make some moves where we know that we are.
We'll be successful there been a recent.
We're not going to confirm or deny anything better recent San Francisco Peninsula report on something on a project, we're doing there and that we have signed an LOI I mean, that's a good example, and again I won't confirm or deny but that's an example of if that was true where it makes sense to do what we did and that's kind of how we operate.
Okay.
And then I I was going to ask a follow up to my original question on this call, which was you started talking about the haves and have not.
Is there a way to handicap.
You know that the like the percentage of the portfolio NOI that even is what you would consider more at risk type tenants.
Yeah.
When you say more at risk what do you mean, well you had talked about company tenants that either maybe there.
They may run out of capital to fund their pipeline.
I'm just.
No not not as well capitalized and so.
May end up beating some sort of recapitalization of running out of capital.
Now we.
We diligence tenants before we sign leases or even letters of intent and we monitor them oftentimes usually quarterly but you know sometimes monthly and if you look at on page 17 of the supplement we give you a breakdown of our tenants have of our tenants are investment grade.
Large cap.
We've got about 7% of the portfolio, which is private we feel very good about the majority of the vast majority of those companies because they generally well.
Well funded and they've got a a.
Pathway for additional funding.
<unk> got.
You know in our public biotech.
Vast majority of those again are you now.
Well funded with the cash runways that go out often times, you know beyond leases and if not certainly multiple years or are waiting for readouts oftentimes for phase three so we feel pretty good about where we are and if theres anybody that runs.
It runs into a problem, we kind of know about it I mean, a good example might be nektar, which had a.
Ah clinical failures in our mission Bay portfolio.
You know we have watched them for quite a while we're very close to them.
They're going to I think sublease their office space, which is with Kilroy and they've got a chunk of space with us.
That project is partnered.
But we already have demand for back filling that space should they decide to give it up but they said they're going to keep.
Keep a big chunk of their lab space. So I wouldn't expect them to give the majority of that up. So we've already made that might be an example of something you're referring to we're already well ahead of the curve, there and could backfill that that space probably at much higher rates.
Okay, and then at least till 2030 I believe.
Yeah, I don't have it in front of me, but.
So long term lease and you know the truth of the matter is in some cases and I would never say that with specifics to nektar, but sometimes you might hope a company would decided to give up a lease because you could backfill it.
At a much higher rate so some of that you'll see happen I'm sure and.
Mission Bay still the vacancy rate there as well.
Literally zero at this point.
For built out lab space and so the demand is significant and there is a high credit quality in that sub market that has a huge pent up demand for space I'll.
I will tell you that.
Yeah.
Okay, Alright, great. Thank you.
You bet.
Our last question comes from Anthony how long of Jpmorgan. Please go ahead.
Yeah. Thanks, So I just wanted to make sure I understand with the you know again this have have not discussion and then looking at your Mark.
On your Mark to market of the overall portfolio I think it was pretty flat from what you mentioned last quarter, I think 31% and now about 30, so our market rents still going up or have market rents.
Kind of just holding steady at this point and what is the outlook for the rest of the year.
Yeah, So Steve you could comment on that.
Yeah, Hey, Tony Steve here.
I don't know that drilling down on one specific quarter. You know really tells a trend. There you are right generally flat, it's flat from an exceptional perspective, I mean, maintaining a 30% mark to market I think is extremely healthy look again.
Said before we are still in very low single digit vacancies in these core markets.
Particularly.
<unk> for Alexandra Res portfolio as you see with our occupancy.
We continue to see healthy demand. So our expectation is we will continue to see pricing power in the market.
Okay, Great and then just last one for me.
On your Texas investment and before a there can you tell us where you went.
Yes, So let me comment maybe on your first question first and then your second question next so I think if you if.
If somebody owns assets I think the assets and we've seen this in other cycles that.
Are going to be the most at risk will be.
Buildings in non cluster environments.
One of our buildings in suburbs and so forth that are not you know really high quality buildings or in the best locations and so I think those are the ones that you know.
May end up theyre getting the probably the poorest quality tenants and the ones that may have struggled there and Luckily we don't have.
Much of that at all in our entire portfolio.
With respect to Texas, we're still under a series of transactions. So I'm unable legally to comment on that but do hope that at the next call I said that last call, but we're still.
In.
In.
And a pending transaction, but hopefully we'll be able to give you a color on the next call Tony.
Okay got it thank you.
Youre welcome. Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Joel Marcus for any closing remarks.
It's simply to say, thank you everybody be safe and God bless.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Yeah.
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Yes.
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Okay.
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