Q2 2022 Alexandria Real Estate Equities Inc Earnings Call
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I'd now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.
Thank you and good afternoon, everyone. This call contains forward looking statements within the meaning of the federal Securities laws. The company's actual results might differ materially from those projected in the forward looking statements additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in the companys.
Periodic reports filed with the Securities and Exchange Commission and now I would like to turn the call over to Joel Marcus Executive Chairman and founder. Please go ahead Joel.
Thank you Paula and welcome everybody. Thank you for joining Alexandria second quarter.
2022 earnings call with me today are Holly Kuhn, Steve Richardson, Peter Moglia, Ding Ding chicken AGA.
In a very challenging macroeconomic environment for sure we're very blessed and thankful to have a truly one of a kind of public company, which has a uniquely visionary mission to create and grow life science ecosystem and clusters.
At ignite and accelerate leading innovators to advance human health by curing disease saving lives and vastly improving nutrition our mission for sure.
We at Alexandria have worked tirelessly to earn.
The trust and have carefully and meticulously constructed our client tenant base within our best in class asset base and 1994, we uniquely set out to be the trusted lab space real estate partner for life Science companies. Today 28 years later, we have earned the trust over 1000 of over one.
<unk> diversified.
High quality companies, who have chosen our brand and rely on us to deliver on our reputation.
Daily they entrust us with their most precious.
Assets their talent thousands of hardworking science technology and business professionals rely on our lab space and on the life science ecosystems, we cultivate to attract and retain the best talent to advance their science, we provide them with a truly inspirational and healthy place to work daily They entrust us.
With billions and billions of dollars of research and development platforms to be safe secure and operational.
Daily they entrust us to be aligned with their mission to partner together at the highest level of operational excellence to improve human health.
In this market our results really standout in the macroeconomic environment, we're all experiencing a slowing economy, the weakened consumer higher interest rates and raising and raging structural inflation.
Huge congratulations to our Alexandria family on a great two.
Q 'twenty two report.
As Dean will talk about in a while we've updated guidance for the second quarter to $8 41.
<unk> per share representing an almost eight 5% growth.
For this year and combined with a 3% plus dividend, we think thats an excellent combination of 11, 5% in this macroeconomic environment.
We've experienced very powerful continuing rental rate increases in leasing activity, it's important to remember 87% of our existing of our leasing comes from our existing tenants.
We have uniquely crafted our own demand driver.
More than 1000 tenants and 92% above the first half of 2022 leasing comes from this tenant base.
Two 3 million square feet were signed in the second quarter or third all time high.
Cash all time high of 34% rental rate increase highest ever and up 45% GAAP rental rate truly epic and historic and then keep in mind, 50% of our annual rental revenue is from investment grade or big cap companies public companies and <unk>.
80% of our tenants are not private or development stage biotech companies.
Peter will discuss in detail, our outstanding progress and capital recycling to the tune of about a half a billion dollars in the second quarter as we harvest great value, which we have created over the last decade.
He will also talk about strong external growth engine, which we fine tuned in the new economic environment.
Dean will discuss our fortress balance sheet and strong liquidity.
More important now than ever with turbulent capital markets and Fortunately with our great team, we have no debt maturities until 2025, so no F F O dilution due to refinancings.
Steve will.
Gus very strong internal growth and make sure to look at page 33 of the supplement and also Dino mentioned the burn off of free rent, providing strong visibility for future growth.
Our margins continued to be strong at 70% and we're very proud of our tenant collections.
At 99.9%, so no real credit issues whatsoever.
Holly will speak to our awesome and non rock.
Non replicable tenant base of over 1000 tenants and the continuing health of the broader life science industry. The life science industry is not synonymous with simply early stage biotech Alexandria, and its best in class tenant base is very well positioned and prepared for this shifting.
Environment.
With our best in class assets decades long relationship. We in fact beat the so called competitive product and much future theorized product, which will never be built.
Last but not least I want to make a couple of comments about Steve Richardson, our retiring co CEO .
Want to express on behalf of all the extended family here at Alexandria are profound. Thank you for the last 22 years, the best ever your humble service leadership has set the bar for all of us.
We and Elizabeth recently talked about leadership at her.
Birthday celebration in which and you exemplify these words precisely finding ways of encouraging people to combine their efforts their talents their insights their enthusiasm and their inspiration to work together.
And if I may just finally make a quote from the famous movie band of brothers of course could be all genders of course and the Requiem for a soldier. We're all one great band of brothers and one day, you'll see we can live together when all the world is free.
Have you lived to see all you gave to me you in fact have your shining dream of Hope and Love. We're all one great band of brothers and with that I want to turn it over to <unk>.
Yeah.
Thank you Jill and good afternoon, everyone, I'm, Hallie SVP of science and technology and capital market.
Today, I'm going to start by covering the bedrock of Alexandria.
Specifically as Bill mentioned, Alexandria is world class and leading stable of over a thousand tenants.
As part of this review I will cover the health of the life Science industry and then is it through a number of recent FDA approval that reflect the industry's collective drive to develop lifesaving therapy.
The life science industry is large diverse and complex.
Alexandria tenant base reflects this diversity with over 1000 tenants that span multinational pharma public and private biotechnology company.
Lifestyle products, such as enabling research tools and manufacturers are complex medicines.
Top tier investment grade companies and institutions.
So let's break this down segment by segment, starting with multinational partner.
Alexandria is proud to call 17 of the top 20, Biopharma companies are tenants, including BMS, Eli Lilly Fantasy Takeda, Merck and Pfizer just to name a few.
Looking at large cap indices, such as the Dow Jones U S. Select pharmaceutical index, you'll see that these companies continue to outperform broader indices, including the Dow S&P 500, and NASDAQ Biopharm.
Biopharma deployed over 200 billion into R&D in 2021, and the top 20 Biopharma have an estimated 300 billion cash on hand to put towards M&A and partnerships as they look to bolster their pipelines with innovative new medicines.
Next public biotech companies.
With small and mid cap companies have gotten outsized focus over the past several months as indices such as the XD I have tumbled.
This segment contains many of the most innovated and well funded large cap companies in the industry with names such as Alexandria tenants on the island and vertex.
Indeed, the majority of our air across public Biotechnology company, it's been doses marketed or approved products.
Cross pre commercial company, we are a deeply technical and experience science and technology team that employs a rigorous underwriting and monitoring process to select the fastest growing and less promising companies are.
Our over decade long relationship with <unk> is a great example, just three years ago Madonna wasn't this pre commercial category and is now a leading global commercial stage biotech.
On the private biotechnology, while funding has slowed across all industries compared to 2021 due to macro market conditions.
Venture funds continue to raise the historic levels of capital and deploy it at a sustained pace.
30 billion was deployed into private biotechnology companies in the first half of 2022.
Compared to our record breaking 39 billion in the first half of 2021 and still up over 50% compared to the first half of 2019 and 2020.
Indeed companies like incoming New York and Bay area tenant icon therapeutics with a stellar management team and highly differentiated platform.
<unk> raised over half a billion dollars.
This is not to say that investment theses haven't shifted with downward pressure on valuations and a refocusing toward the most innovative companies with experienced management teams.
But market research or ultimately healthy for our sector in the long run as companies are forced to double down on their core strength and talent is diverted to the most promising application.
Now for life science products services and devices.
This diverse set of companies enables breakthrough research from the bench to bed side.
It is the company's like alumina developing cheaper faster and more efficient research tool to understand the genetic underpinnings of disease. It's companies identifying diseases at the earliest stages when treatments can be more effective and it's the contract manufacturers producing complex medicines for next Gen therapies.
The picks and shovels so to speak of the industry. These companies business models are not the same as those developing novel medicines with a quicker path to market and revenue.
So while there is no simple index a measure that is a perfect proxy for the strength of our top tier tenant base.
From the beginning of the year for the second quarter, the Dow Jones U S select pharmaceutical index, which captures many of our top 20 tenants out.
Outperformed the Dow by 11 points, the NASDAQ by 25 points and the <unk> by 29 points.
Moreover, the life science industry is less cyclical than other industries as products are developed over a longer period with novel medicines, taking an average 10 years from early development to commercialization.
Developing new medicines is not easy and market dynamics aside companies will experience challenges and even failures, along the way, but with a 1000 tenants and over 87% of leasing stemming from preexisting relationships, our unique model and deeply experienced team positions us to proactively manage potential risks and bumps in the road.
Good.
And I'd like to take a step back and acknowledge the mission critical nature of the life science industry to our society.
Each approval from the FDA marks a potential for a healthier longer life for each of us listening on the call today and our loved ones.
New therapies improve and extend the quality of life.
Costly hospitalizations, and ultimately reduce long term health care costs.
We are proud and humbled that of novel therapies approved by the FDA in 2022 half or by Alexandria tenants.
That holds true for the past decade.
Approvals from tenants. This quarter include an RNA based treatment of hereditary transfer I reading mediated amyloidosis.
Small molecule treating obstructive hypertrophic cardiomyopathy, and a first in class immunotherapy targeting metastatic melanoma.
To paraphrase Roger Perlmutter, former CSO of Mark and the CEO of the previously mentioned I cant there therapeutics.
Novel Medicines can change the world and most have yet to be discovered.
And with that I'll pass it over to Steve.
Thank you Holly.
The second quarter of 2022 was an absolute blowout quarter nearly every regard the demand and really the intensity of the strong commitment.
Alexandria is bringing to the highly differentiated mega campuses and operational excellence continued to provide for superior financial outperformance.
A big shout out to the entirety of the Alexandria team.
Following the results are amongst the best in nearly every category as.
As Joel noted the injury is truly a one of kind one of a kind company.
As definitively proven its ability to deliver excellent results.
<unk> what it is.
Macroeconomic conditions.
As we've discussed and how he referred to as well a number of times over many years the companies in the life science industry have a long term horizon.
For their pursuit of commercial lot lifesaving and life changing novel medicines and therapies research and discovery in the laboratory.
Multi stage clinical trials commercial rollouts can and do take a decade or more.
<unk> unique capabilities and team had successfully identified the most promising life science companies.
Okay.
Attracted the world's leading investment grade pharmaceutical with big biotech companies.
Its mega campuses in AAA locations adjacent to the country's leading research institutions.
Second quarter exemplifies this powerful combination of trusted relationships with high quality companies in their long term horizons to consider the following.
87% of the leasing activity overall was from Alexandra has existing relationships and absolutely essential and <unk>.
<unk> to Alexandria only.
Enabling success during turbulent macroeconomic quarters.
And during Q2, 88% of the leasing activity in the development and redevelopment pipeline was from Alexandria as existing relationships considered how powerful that statement is for successfully grown the company's high quality on Delaware opportunities not only for a few quarters, but for many years.
The stability and trusted nature with Alexandria has become a bedrock.
Consideration for our tenants.
And as the company has grown to more than 1000 tenants clustered. This presents an exceptionally powerful competitive advantage for the company's future growth.
Any substantial barrier for others it would be dabbling in the highly sophisticated and technical nature of mission critical life Science real estate.
Beyond the ground reality for Alexandria this quarter.
Vigorous and highly productive effort from across the entire company.
The leasing activity of approximately $2 3 million square feet is it the third highest quarterly leasing volume in company history.
Record rate increases.
With renewal leasing spreads of 45, and GAAP, 44% cash represent the second highest in the highest rental rate growth in the company's history, respectively.
The portfolio Mark to market remains strong.
Seven point percent.
As we noted the last two quarterly calls this is significantly greater than the mark to market of 17% at the end of 2020 and in line with the end of 2021, 34%.
Accounts receivable for the entire Q2 was 100%, including a 100% for publicly traded biotech tenants and that continues as we've achieved 99, 9% so far during July .
Early renewals for this quarter were similar to Q1 at a rate of 50% of leasing a strong validation again, the health of Alexandria as tenants in their long term planning horizon that we noted at the start of my comments.
We have exceptional health of our value creation pipeline with a total of more than 900000 square feet of leasing.
Which contributes to a highly derisk nature of the pipeline is 78% of the $7 8 million square feet, which is projected to generate $665 million of incremental revenue.
As leased or negotiating.
And can you provide additional detail and color.
Declined during moments as well.
Let's move on supply and demand.
Consistent with the past three years with no if we can't drive.
Sure.
We do see the demand in the more highly screwed in.
Science projects in the market the actual each got capacity.
Actual capacity.
Actual operational experience.
The experience.
And operator might have coal hill.
Alexander.
We continue to monitor supply at a very similar level, including the actual asset.
Because differences between purpose.
Facilities and class B class purpose built.
We also look at the Peter since or any new one off bill.
Well look at capital sources, they will actually decision.
So we go forward.
The basis for this new.
Yes.
So, let's build up the specific reality in the field and simple.
Brinci.
They can see rates to be very tight with.
Let's see.
And our core clusters.
It is really less than 1%.
Which is generally consistent with market conditions during the past several years.
There is not significant sub leases.
Yet.
Which is the contrast general often get and if they are of high there.
Very quickly.
As we look at the 2022, the unleash new supply is adding very incrementally.
1% to 2% or Kmart.
Turning to remember earlier comment on healthy demand. So we would expect the supply would be substantially leased by year end.
If we look ahead to 'twenty three.
Again, we drill down on each and every project in our core markets and determine which projects are actually vertical and well underway.
Under leased 23 deliveries will be in <unk>.
3% to 5% availability to the total market size.
And again, we expect these deliveries will be further reduced during the next six quarters.
Beyond that 2024 and beyond we.
We do closely monitor hand, waving and Flyers in the market that indicate creative tech space for life Science space alternatives.
As of today, we do not see a large disruptive set of class a lab projects well underway in our core markets that are preparing to go vertical on a purely speculative basis.
Ultimately Alexandria has significant differentiation in the market and as I mentioned at the outset of my comments. This scrutiny of projects is only becoming more intensive and accelerating.
<unk> needed a trusted eminently capable operator for the mission critical operations.
So we actually see the difference between Alexandria as class eight facilities as part of our fully amendment ties Mega campuses.
And one off buildings in commodity locations, becoming more highly valued.
So in conclusion, the first quarter of 2022 was a very strong quarter and now the historic strength of the second quarter.
<unk> to definitively highlight Alexandria is positioned for the near term and the long term.
Life Science companies intrinsically have a long term horizon and their mission critical laboratory facilities are essential for their success.
Alexandria is combination of the tenant roster that has both a long term horizon and high quality investment grade.
Credit portends, a very bright future for the company.
And as this is my last earnings call with the announcement of my retirement.
I want to say it has been the honor of my life to work shoulder to shoulder with the entire Alexandria family.
This one of a kind company.
I have the highest regard and deep affection for this incredible team.
Our unique culture of respect for one another high expectations for one another.
Passion for the company's mission is a rare blend that has enabled us to thrive and work as a trusted partner with one of the country's most strategic and cherished industries.
I also want to thank the broader investment community for your deep engagement and support for the company.
Over these many years, we worked with one another.
And finally, it has been an exceptional privilege in particular to work so closely during the past 22 plus years with team.
An extraordinarily insightful and imminently capable leader.
Peter <unk>, who is the ultimate co CEO , providing the heart and soul of the company and perfectly complementing my shortcomings.
With his formidable talents.
Joel and inspirational leader.
Genuine line of the industry.
And a once in a generation founder and American business.
It's been truly blessed with.
With that I will hand, it off with energy and enthusiasm to my brother Peter.
Yeah.
Thank you Steve I'd like to start by thanking you for teaching me so much about teamwork managing people operational excellence.
The necessity of taking a deep breath every now and again, expanding my vocabulary and being a sounding board and confidence throughout our partnership.
I started this co CEO relationship with alacrity.
The use of that word is an example of your influence in.
And that was not disappointed.
Will greatly Miss a regular chats, but I'm glad you'll be around when a good talk as needed.
With that said I'm going to update the audience on the progress being made on our value creation pipeline and related construction costs and supply chain trends, then conclude with remarks on the dispositions completed this quarter.
As holli referenced in her overview, our thousand plus tenant base is of the highest quality as it includes 17 of the 20 Biopharma companies. The most innovative and well funded large cap public biotech companies in the world and a stable full of the most promising and fastest growing private companies in the industry.
<unk>, which have been rigorously underwritten by a deeply technical and experienced team. This highly curated tenant base provides opportunities that have been consistently fueling our external growth for over a decade and if you connect the dots. It's no coincidence that 87% of our leasing activity comes from it.
The best companies or those that grow and we have grown along with them.
The past quarter, we completed over 915000 square feet of leasing in our development and redevelopment pipeline, which aggregates to in excess of $2 3 million square feet for only half a year at a time when people are worried about the product type, we invented because others pretending to be equals or struggle.
With their tenant base.
Our results in the wake of others struggling should tell you something.
Life Science real estate is not for everyone.
Success takes years of experience in designing and building the right product in the right location deep relationships with the highest quality life science companies and company creators operational excellence and most important during times like these a very deep understanding of the industry.
We delivered 375394 square feet in the second quarter spread amongst six projects, including the folder ever deliveries of eight and 10 Davis part of our Alexandria Center for advanced technologies in the research triangle and $55 five Morehouse driving.
Sorrento Mesa the weighted average yield of these delivered projects was a healthy seven 8% and they will contribute over $26 million and net operating income moving forward.
The remainder of the pipeline that is either under construction are expected to commence construction in the next six quarters has decreased by approximately 200000 square feet from last quarter, but is still projected to add more than $665 million in annual rental revenue over the same number of quarters.
<unk> higher revenue per square foot developed.
As of quarter end, 78% of this remarkable pipeline was either leased or under negotiation, meaning we have an executed LOI.
With 95% of the activity year to date.
Coming from existing relationships reinforcing the quality of our tenant base given that this category of leasing is typically driven by consolidation necessitated by growth.
It also highlights the extraordinary loyalty of our tenants and the trust we have earned through many years of high quality service.
I'm also pleased to report that despite continued volatility in construction cost and supply chain disruptions are pro forma yields are neutral to slightly improving relative to last quarter and there have been no adjustments to our delivery timing.
That is a good transition to our construction costs and supply chain update the bad news first.
There is still upward pressures on construction and material prices stemming from high energy costs and now labor costs are becoming a bigger issue than in the past as the U S exports more natural gas to Europe . It becomes more expensive here in one direct impact has been an increasing glazing costs of 20 to 40 <unk>.
<unk> in addition to a 35% increase in aluminum over the past 12 months glazing is impacted by the cost of natural gas as it is heavily used in its production.
As mentioned last quarter elevated diesel prices have a significant impact on construction costs as Earth work machine as Earth work machinery runs on it and our contractors have been seeing fuel surcharges in the billings from these subs crew.
Crude oil was up 71% from February 'twenty, one through February 22, and although pricing has slightly improved since then it's not providing any significant relief.
Other costs that continue to be overly elevated over the past quarter include construction machinery, which has doubled.
<unk>, which is up over 500% one of our contractors blame this on elevated housing construction, which uses about 50% of the supply.
Semiconductors are up 276% due to heavy demand by the automotive industry and switch gear and other industrial electrical equipment is up 73% due partially to demand and partially to elevated cost of components that go into that equipment.
Labor.
Which accounts for approximately 60% to 70% of construction cost has been relatively stable over the past couple of years due to prearrange wage increases negotiated into labor agreements, but many of those are now up for renewal and negotiations are reported to be intense.
Due to career changes for many in the industry. After layoffs caused by COVID-19 work stoppages. There is a smaller pool of labor and combined with the higher cost of living wages are expected to be much higher in the future.
Supply in it supply chain issues remain despite improvements in transportation, mainly due to the war in Ukraine, and a ripple effect from shortages in components.
Yeah.
One of our surveyed contractors closely track supply chain related impacts to their jobs nationally and found that from September of 2020 through February 20, <unk> of this year supply chain impacts averaged $5 89 per day.
But from the beginning of the war on February 24th through June eight of this year there have been $38 one two impacts per day.
As a result extraordinary lead times remained for equipment used in our product type, including generators building controls Transformers switch gear electrical panels air handlers, and Chillers all of which have lead times that are double what they normally are many exceeding a year.
Much of the delay is due to a ripple effect of missing components, a generator can be 90% complete but can take an additional six months to finish because of the missing component or too from a vendor with a huge backlog.
The good news is that despite the shortage in skilled labor productivity is improving contractors are starting to see cancellations or projects being put on whole lightening their backlogs, which will eventually reduced demand and ease both pricing and supply chain problems. This can be seen and expect.
Good Escalations from one of our major Gcs, who project them to be 6% to 8% this year with a bias towards the longer end, but a reduction of 4% to 5% in 2023.
We continue to closely manage these conditions and approximately 80% of our cost for development and redevelopment projects under construction are subject to guaranteed maximum or other contracts that enable us to mitigate the risk of inflation.
We have contingencies behind those contracts do account for scope creep and unknowns.
The other 20% is from projects that are currently pending guaranteed maximum contracts that are in process and those projects include larger cost contingency allowances and their performance.
Moving to our asset sales.
Interest rates are certainly influencing real estate pricing broadly and we've been told by our investment brokers that they are seeing a 25 basis point widening in other hot product types, such as industrial So we may see it with lab office assets as well. It is certainly reasonable to expect that may happen, but we do bill.
Please that the scarcity of well located class a lab office assets will help mitigate that you can certainly find industrial product almost anywhere but for sale class a lab product is still very hard to find so despite the increasing interest rate environment. There continues to be strong demand for life.
Science assets demonstrated by our partial interest sales in Cambridge, and mission Bay and or outright sale of 12 assets in the route 128, and $4 95 suburbs of Boston the.
The partial interest sale of 303rd Street in Cambridge closed at the end of the quarter and was sold to an existing partner relationship for a four 3% cash cap rate at a price per square foot of $1802, a $113 million gain over book value.
As of the sale date, we have achieved an 11, 6% unlevered IRR on this asset.
The partial interest sale at $14 50, Owens and mission Bay was also purchased by an existing relationship and as a development asset that included reimbursement for infrastructure and pre development costs parsing those reimbursements out yields a land value of $324 per.
Buildable square foot indicative of the high value of our land Bank Lastly, our 12 asset suburban portfolio sale in greater Boston sold at our strong cash cap rate of five 1% and our sales price per square foot of $542.
Although these assets served our tenant base well for a number of years. We believe we can create more value long term with the capital from the sale by reinvesting it into our development and redevelopment pipeline focused on the creation and expansion of our Mega campus platform.
The great progress made on the construction and leasing of our high quality value creation pipeline paired with our ability to realize strong exit cap rates during the quarter. Once again demonstrates our ability to create significant long term enduring value for our shareholders.
For listening and with that I'm going to go ahead and pass it over to Dean.
Alright, Thanks, Peter Dean <unk> here good afternoon, everyone.
Our team is very pleased for their seventh year of recognition as winner of the large cap NAREIT communication and reporting Excellence Award six time Gold Winter plus one Silver award, which is truly awesome. So congratulations team at the end of June our team published our annual ESG report highlighting key areas of our leadership in ESG.
And our focus on making a positive and lasting impact on the world.
Key topics included in our ESG report include among many others first managing and mitigating climate related risks, including continued development of our science based targets to reduce emissions to highlights of the design of what is expected to become the most sustainable lab building in Cambridge and to future.
All electric buildings in our San Francisco Bay area market.
And then three or eight unique an important social responsibility pillars now turning to the quarter in the first half of the year.
Our first quarter and first half results were very strong and significantly beat consensus. We also raised our strong outlook since our initial guidance for 2022 by <unk> include.
Including <unk> for the second quarter results share.
Our projected growth in <unk> per share was very strong at eight 4% over 2021 total revenues for the first quarter and the first half of the year were strong and up 26, 3% and 27, 2% respectively over the same periods for 2021.
<unk> per share for the second quarter was strong at $2 10.
Eight 8% over the second quarter of 'twenty one.
Huge thanks to our entire team for truly exceptional execution in 2022, we have generated one of the most consistent and strong operating and financial results quarter to quarter and year to year within the REIT industry.
Now as you've heard from US today over 1000, plus tenants and other life science industry relationships is really driving strong demand for <unk> brand.
Aerie is the Goto brand and the trusted partner to the life science industry, we have the best team the highest quality facilities, the best locations and tremendous scale for space Optionality to address demand.
Our EBITDA margin was 70% and as one of the best in the industry. The strong EBITDA margin also highlights the efficient execution of operational excellence by our team we had strong occupancy at 94, 6% up 60 basis points. Since 12 months 31, 21, and our occupancy guidance range for 2020.
Two from 95, 2% to 95, 8% highlights continued strength in occupancy growth.
Leasing volume and rental rate growth for the second quarter.
Of the 45, 4% and $33 nine on a cash basis.
And really strong rental rate growth outlook for the entire year at 32, 5% and 25% on a cash basis, highlighting the strength again of our brand and execution we.
We had very high collections of July rent at 99, 9% as of July 22nd which was about three weeks into July and consistently low at $7 1 million as of June 30. These are pretty amazing statistics for one of the largest Reits in the industry and not surprising given the high credit and diverse tenant roster.
Our team has curated over the years.
Our strong same property NOI growth for the second quarter was seven 5% 10, 2% on a cash basis. This strong performance highlights the strength of our brand and trusted partnerships that continue to drive strong demand for lease renewals and releasing of space and expansion of space with Aerie now.
Same property occupancy was very exceptional for an asset base with consistently high occupancy, but it was up 140 basis points in the second quarter compared to the second quarter of 2021.
Now turning to our strong and flexible balance sheet.
We have one of the top overall credit ratings in the REIT industry ranking in the top 10%.
We've got no debt maturities until 2025 over 98% of our outstanding debt is subject to fixed interest rates, we had $5 5 billion of liquidity.
The weighted average remaining term of outstanding debt was 13 six years and one of the highest in the REIT industry.
Our net debt to adjusted EBITDA is on track to hit five one times by year end really highlighting our focus on continuous improvement in our balance sheet and credit profile.
Forecasted cash at the end of the year of about $250 million is expected to reduce our incremental debt capacity our capital needs for 2023, and this is really important in this higher interest rate environment.
And then we really have achieved really strategic execution in 2022 on our capital plan with only slightly above 10% of our overall growth sources of capital remaining for the rest of 2022 now at the midpoint of guidance for this year on dispositions, we have $740 million remaining.
And we have the potential to exceed the midpoint of that guidance.
Our updated capital plan reflects a significant reduction in uses of capital for the second half of the year Agri.
Aggregating about $635 million across both acquisitions and construction spend as we prioritize our allocation of capital.
On acquisitions, and it's important to recognize that activity has been and was expected to decline as a result of having a very attractive pipeline of land for future development in each of our key submarkets combined with the considerations for the year overall challenging macro environment and capital markets.
Now briefly on our dividend policy. Our board has been very consistent with their policy and really is focused on sharing our high quality growth in cash flows from operating activities with shareholders. While also retaining a significant portion for reinvestment into our highly leased pipeline of development and redevelopment projects.
We are on track to reinvest about $2 billion of cash flows from operating activities. After dividends over a 10 year period ending on December 31, 2022. Now. This includes about $300 million in cash flows from operating activities after dividends at the midpoint of guidance for 2022.
Turning to our venture investments this program and component of our business has really been consistently generating realized gains realized gains for the second quarter were $28 6 million and $51 8 million for the first after the year and we're on track with projected realized gains for 2020.
Two that should be consistent with the $105 million in realized gains in 2021 or almost $26 million per quarter now the mix of realized gains is vary period to period. However on average over the last five and a half years gains from our investments in publicly traded securities represented only 30% of our total <unk>.
Realized gains now historical gains over the years were most often triggered by traditional liquidity events, including M&A activity and Ipos.
From a balance sheet perspective, we've got strong gross unrealized gains of about $565 5 million relative to our cost basis of $1 1 billion.
Now our team has delivered very strong operating and financial results in the first half of 2022, and our improved outlook for the year remains very strong with EPS diluted ranging from $2 14 to $2 20, <unk> per share as adjusted diluted from a range of $8 38 to $8 44.
<unk> per share is up <unk> <unk> from our initial guidance provided at Investor Day on December one of 'twenty, one, including the <unk> <unk> increase with second quarter earnings here and we expect strong per.
Per share growth of eight 4% now for 2022 over 2021 now we refined our capital plan for the back half of the year, including the following island items were really just focus on real estate sales for the rest of the year, we have no equity required for the remainder of the year and we significantly reduced our forecasted uses of cash.
<unk> by $635 million.
Really on the back half of this year, which is a reduction of forecasted acquisitions and construction spending.
Please refer to page six of our supplemental package for detailed underlying assumptions included in our outlook for the full year of 2022 with that I'll turn it back to Joel.
Thank you very much and I want to apologize Steve was on cell phone and his line cut in and cut out we will work with the transcript providers and make sure the blanks or fill them with that like to go to questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
And our first question will come from Anthony <unk> of Jpmorgan. Please go ahead.
Hi, Thanks, and first best wishes to Steve and thanks for all the help over the years. So I appreciate that.
My first question is as it relates to just the demand you guys continue to see in the portfolio.
Do you think the $3 billion and development spending.
And effectively roughly about the same amount of deliveries is sustainable and how we should think about.
What things look like going forward or is the second half of the year.
Drop in.
Spending likely to persist into next year and kind of indicate just slowing the pipeline.
Yep, So dean do you want to take that.
Yes, Tony it's Dean here.
When we did look over the last.
A couple of months here at our capital plan around construction spend.
Good.
Announced a significant reduction in spend here for the back half of this year, but as you would expect.
We look very carefully at spend for 2023.
There were significant reductions there, but I don't want to get into the details of the capital plan specifically for next year, we will get into that at Investor day.
What we are focused on though Tony as you can tell from our disclosures.
The $665 million in incremental annual rental revenue is what I'll call our priority focus.
That's a fairly significant pipeline both in revenue, but also $7 8 million square feet. Most of that as you guys know us.
Please turn negotiating at roughly 78% so.
I'd call. It we've refocused where were paying attention to on allocating capital in.
This pipeline is super important to us so yes.
There is.
That we will incur as we look into 'twenty three related to that but we're being mindful and disciplined and scaling back where we can.
Okay got it and then just.
In terms of in the portfolio can you maybe take us inside some of the space and give us a sense as to.
How tenants are utilizing their space and whether or not just their own funding environment being more challenging is slowing up there they are hiring or our growth plans or just anything you see on that side.
So when you ask about how they're using their space you mean.
Sure.
Hi.
Not quite sure what you're asking the laboratory.
Laboratories are operating full time.
Said as you know many times you can't do lab work from home most of the life science tenants have a flexible work from home schedule. So there.
White color.
Folks are in several days, a week and kind of move that around I think that's kind of.
The norm and but.
There have been I was at one.
One of our Mega campuses, not too long ago, and the parking lot was GM. So people are back in a pretty important way, but I think the the office part of the components still is.
Kind of a hybrid work schedule, if that's what you're asking.
I'm trying to think through if capital was last plant to full when they have growth plans do they slow up the need to take down as much space as maybe they would have otherwise right now, but you have to go back yes, Tony you have to go back to what <unk> said the industry is not a cyclical industry. The industry is a mess.
Driven and if one is working on a particular blockbuster drug or whatever they're going to allocate capital as proof, obviously as prudently and as disciplined fashion as possible, but theyre going to have to move forward, because thats, where the value of the.
The pipeline is part of the key value. So I think it's different than other.
Other sectors, whether you're what firm or.
Financial sector, where you can move a whole bunch of things around because of just macroeconomics, but this is a very different industry. So I don't think you can kind of compare the two.
That tech tenants are well known obviously those guys clearly have slowed the pace of hiring some of them have done.
Some layoff work and so forth and so we see that we've got what 8% or so less than 10% of our portfolio is tech related. So so that is I think well characterized out there.
Okay, sorry got thanks Yep. Thank you.
Our next question comes from Jamie Feldman of Bank of America. Please go ahead.
You may be on mute.
Oh, thank you.
To start off just congratulations also to Steve it's been a pleasure to work with you. All these years and we wish you the best going forward.
I guess, we appreciate all the color.
The additional disclosure on tenant segmentation.
But can you talk maybe.
Let's fast forward six months nine months here, and we look back and I'm sure there's going to be some.
Distress or something of some sort in your portfolio like what do you think that actually it looks like.
In terms of what the cycle does actually brain.
Well I think.
It's pretty clear if you go back to the <unk> nine timeframe that there will be tenants and often times they tend to be <unk>.
Small publicly held companies.
Either preclinical or into the clinic.
Have a certain amount of cash they are trying to kind of.
Manage their resources to get to value inflection milestones. So they can either finance further or potentially reach a milestone that they could partner or sell either the company or the product too.
A bigger company and so I mean that goes on all the time and I'm sure we'll see that.
Evolve from time to time I mean, the Great example, that I'd like to use as a company.
Have that problem back in <unk> nine.
They moved out of a big actually they have the entire building at 500 Forbes we were they moved out on one day the next day.
Genentech Roche took that entire space.
And I think that's what you see we've described I think last time, Steve described.
On the last call attended in San Diego or maybe we've done that on some of the analyst calls.
Wanted to leave I forgot 20000 square feet or so.
We brought in another tenant who wanted that space and the mark to market on the new lease was 50, 50%. So we expect to.
Be able to manage those kinds of issues, but I think we're going to be much better well set than almost anybody else because of the discipline. We've used in leasing space in the first place now we buy an asset where we have an existing tenant that actually happened at 500. Forbes then we have to just manage that.
In a way that is.
As best we can because we hadn't underwritten the timid.
In a sense of choosing that.
Bring them in or not obviously as part of the acquisition, but so far if you look at collections receivables and just the general situation across the portfolio, we don't have any credit issues at the moment.
Yes, and Joel and Jamie if I could add it's dean here.
Just to put things into perspective, just from one simple statistic if you look at occupancy.
From the end of a way to the end of 2009 occupancy declined 70 basis points. If you brought in that time period, just a tad and you look at the end of <unk> seven to the end of 2009 occupancy actually grew by 30 basis points and I think the one fundamental difference between that.
And today.
The life Sciences industry, and particularly the biotech industry has really gone through this.
Period, where I think you can almost call it the golden age of the biotech <unk>.
History today with tremendous <unk>.
Innovation going on relative to 2008.
Much more exciting and vibrant environment for the biotech sector.
Alright, great. Thank you for that and then I guess, just thinking about the cap rates on the asset sales in the quarter.
How are those or how are they not representative of the broader portfolio. We've heard from brokers that maybe life science could still be trading in the threes I am just curious if that's just no longer effect or maybe the binney acid in particular that you sold is not is not a great comp to talk about kind of the best of the best in the portfolio.
Well I'll, let Peter take that but let me just say if you remember the Binney corridor and I think you've toured that Jamie.
It took us about a decade to assemble.
Entitle and build.
Over 2 million square feet there.
300, <unk> was asset we purchased before all of that it was actually.
And older buildings that had been built for palm.
<unk> converted asset so it doesn't really represent what we developed along that corridor, but that corridors I think representative of.
A.
A big kind of Mega class a campus. So I think keep that in mind as you think it's not a one off 100 Binney isn't just a one off class a building it actually represents all two plus million square feet, there, but Peter you can give some details for sure.
Yes sure Jami.
Fair question, you saw the three and a half print last quarter and this is it.
Four three buildings are next to each other location Ali.
I would assess the difference Joel touched on it.
Maybe starting from where I was in my comments.
I think there were a number of factors that would include interest rate creep.
Since that trade certainly rates have gone up since the sale of 100, Binney, so that I'm sure factored into it the age of the building.
300, <unk> was built in 2000 and as Joe mentioned.
It was a build to suit for palm.
100, Binney was built in 2017, So 100 100 Binney is very new state of the art.
We're 300 was not purpose built for lab.
I've talked in during other quarters.
Commenting on non purpose built buildings and this one has similar challenges.
Two others.
We have seen in the market, namely.
Because of their low ceilings there or.
Or the low Florida floors, there is $8 five foot ceilings.
We typically have 10 foot ceilings in our space. So when you shrink the ceiling down like that it's just it's just not as nice of an environment.
And it has some other weird things like there is a the parking lots on the second floor of the building and that just creates some operational inefficiencies when youre dealing with chemical storage and things so.
So you have that and then I'd say, maybe one other item is it's subject to a ground lease versus 100, Binney, which was a fee simple asset and there is certainly a little bit of a discount for that so I think all of those things kind of aggregated.
Two a $4 three but I would also say in this environment of four three is still pretty good.
Really good.
If you factor in also that.
300, Binney is subject to a long term lease and the buyer is not going to be able to market to market for quite a long time. So they certainly saw great value in the future appreciation.
And a great tenant island.
Yes, yes.
Okay, great. Thank you.
Thanks, Jamie.
The next question comes from Michael Carson of Citi. Please go ahead.
Thanks, I appreciate you having me on the call this quarter and Steve Congrats on a well deserved retirement.
Just wanted to touch on the suburban portfolio dispositions can you maybe give some color as to why it made sense to sell these assets and could you see a potential sales from other similar properties in the future.
So I'll, let Peter comment again on some of the specifics, but I would say and welcome to.
To the call.
We aggregated those assets actually 60 West view, if I'm not mistaken was the first asset we ever bought in the Massachusetts.
Cluster and we aggregated those assets many of which kind of early on in our attempt to try to build a presence in the greater Boston region in those days, we didnt have enough money to buy anything in Cambridge and we.
Over as I say well over a decade, we aggregated a nice group of suburban assets well maintained well operated actually pretty good credit throughout the.
Those assets, but it comes at a time when you see values there to harvest and to reinvest and also our move to the really the Mega campus strategy in the greater Boston region, with our really big Mega campuses, Thats, where we wanted to focus our capital and.
We have obviously a whole host of needs. So it was a pretty easy decision.
The timing was up I think pretty darn good, but Peter you could comment I don't know if theres anything specific.
Yes, I'd just say that.
I think the time was right.
Those there were 12 buildings in that portfolio. They were really good work where of course buildings, but.
Relative to the rest of the assets that we have in that market. They were on the lower spectrum of quality.
And given the appetite for life Science real estate I think we were able to get the pricing by selling them today that.
That was very attractive and as Joel mentioned and I said on the comments great opportunity to reinvest that into our value creation pipeline.
So I.
I don't think Theres really.
I think it is just really that simple just really opportunistic time to sell assets and and get maybe more for them than you would.
In another era.
Yes, and I would say we don't we don't also have a.
Set of suburban assets like that really.
How they how they kind of originated and stuff really in any other market. So you can't really say Oh do you have other suburban portfolios like in the Bay area of.
Our portfolio, we would probably exit would be the east Bay, but.
But we exited those before so we don't have those kind of assets by and large.
Great I appreciate the color on that and then just maybe stepping back a bit and you know obviously given the continued demand for life science are you noticing more entrants coming into your markets, particularly.
On the conversion side of traditional office to life science product.
Well I think as Peter said the reality is data centers have been hot obviously <unk> been hard.
Industrial hub logistics has been hot and life Science has been hot but life science is a very it's a more.
Much much smaller.
No.
Overall asset base.
Countrywide and so the scarcity is.
An important part of things and as Peter said I think a number of important high quality investors have sought to look at these scarcity assets, but obviously, sometimes people make a decision they don't like the asset. They have so they are looking at somebody else and saying Gee could we try to convert and do that insurer in.
In markets there are those kind of people, but by and large I mean, we've heard pretty big horror stories on some conversions in the Boston region by people, who have no idea, what theyre doing and tenants who are desperate to get out so that's.
That's a story that will unfold pretty sadly for those folks.
Got you that's it for me thanks for the time.
Yes.
The next question comes from Rich Anderson of <unk>. Please go ahead.
And Steve Good luck honor and privilege to work with you I'll look for you on celebrity row at Warrior games going forward next season.
So.
On the topic of conversion activities.
It's interesting a lot of your office peers is.
The bulk of their development or redevelopment business.
Peter to your comments about development costs going up and all that.
Again, despite what you just said.
Joel about some of the horror stories do do we expect the conversion business to start to whittle down or is it whittling down even though you don't consider it a competitive force for you guys is that something that could be an out and out take from all of this.
Disruption here, yes, so Steven Peter you guys want to comment.
Steve you want to go first.
Yes, sure maybe I'll jump in here rich.
Thank you for the kind words there.
Yes, we're already seeing that and that's why I tried to break it down in terms of the <unk>.
Properties themselves. So you look at these conversions and then you look at the operators who are new to this.
With a one off building and then ultimately there.
Capital partners and we have seen now projects that have been put on pause.
That those will ultimately be put on ice and we just don't see capital that enthusiastic about.
Committing significant dollars to these types of conversions given the overall macro environment.
<unk>.
<unk> lack of any tenant base.
Mixed with lack of operational experience so.
I think more to come and more to unfold, but that certainly the sentiment that we're seeing out in the market now.
Peter can add to that too.
I would say, we we do quite.
A number of meetings about strategy and market updates.
Now on a weekly basis, we're covering we're never going to long before recovering what could be coming up.
What we heard with all the different regions and.
By and large we don't hear a lot about potential conversions outside of what you might see announced in the press.
Most of it is potentially new development, but as Steve mentioned in his comments.
We only see a limited amount of that 22 and 'twenty three more has been announced we will see if it gets built.
I don't see or we don't see a lot of <unk>.
Conversions outside of going back to the.
The suburbs in Boston, we certainly know of one of our.
One of the office REIT that has a lot of holdings out there have talked about doing conversions.
I am sure are underway.
With a few but.
We're not seeing them.
Proliferate throughout our urban core very much.
At least at this point.
Okay, great I'll yield the floor can get along on the call here, thanks very much team.
Okay.
The next question comes from Sheila Mcgrath of Evercore. Please go ahead.
Yes, good afternoon, Congrats Steve and all the best.
Just a quick question on.
The dynamics of rental rates for new construction.
Assuming as Peter outlined construction costs continue to go up.
And you want to maintain development yields just curious if the new rents on new development.
To justify construction are like above prevailing market.
Various sub markets, yes, so Peter do you want to talk about Blackstone's kind of market high they just signed Takeda.
Yes.
I think what Phil is referring to is I think they were at $137 a foot.
But.
And that's.
By and large one of the things that.
Sets the market, our new developments and so you get a rate like that and then.
Yes.
Our renewal comes up.
Another class a property in the neighborhood and.
And the landlord Alaska for the same rent.
So.
I would say that the new development kind of helps set the market and then the existing assets follow.
So.
It's a good thing.
Okay, Great and then on $14 50 Owen.
That was an interesting structure I guess sort of two minimized construction spend just wondering is that something you would replicate on some of the pipeline going forward.
We've actually done it before but Steve you could talk about the.
Yes, I think.
<unk>.
That was it.
Really great situation for both ourselves and the joint venture partner we had.
<unk> were sold in basin.
Titled to go so we have the nation.
A very attractive entry.
Intrinsic land value plus.
Hi.
Shouldn't work that <unk> done.
And as we looked at partnering.
On that project.
Just.
To lead the additional capital contribution to build the business.
Equaling the interest and value in the Preconstruction work, we had in there. So you are right the debris.
On mutually rewarding way to move forward with that project.
Okay.
Okay, great. Thank you.
The next question comes from Michael Carroll of RBC capital markets. Please go ahead.
Yeah. Thanks, I just wanted to touch back on the suburban Boston sale I guess, Peter you indicated that that portfolio was at the lower quality spectrum. So could you comment on how the five one cap rate would compare to the rest of the portfolio. I mean is there an easy way to understand the cap rate difference between let's say narrow buildings and the rest of the proper.
Yes, the assets and the locations aren't even comparable but Peter you could answer.
Well I think what youre trying to get too Michael is.
I would say that if we had a.
So these are more one off buildings.
But if we were to sell.
Something in the suburbs that was more campus likely.
I mean, San Diego and itself is kind of a suburban market. So you look at something like campus point right, where you have this.
And monetize campus, it's in a suburban spread out environment, but its class a and monetize I mean thats going to have that's going to be a low four cap rate.
If we had something in the suburbs of Boston that was a similar type of development I would expect a similar type of cap rate, but these these were lower quality of these were not these werent really campuses. They were one off buildings.
Significant age and Av.
The credit tenancy.
Tenancy and there was about a quarter.
When you looked over the spectrum of the tenant.
Tenant base. So it's just.
As I as I termed it before kind of workhorse.
Will be leased.
Over time as.
Tenants need 30, 50000 square feet, which is about the average size of those buildings, but.
They're never going to have huge rent growth.
Because theyre just not that appealing.
To have somebody clamoring over it.
Okay, Great and then just real quick I know, we're running short on time I know about 80% I guess, if you're in process development projects are protected in terms of I guess development cost increases can you kind of talk about the near term starts and how that's protected and if theres any risk to those budgets going higher or yield.
Potentially going lower.
Yes so.
Look you can't do a.
Can't get a gross maximum price.
Contract until you actually have something to price. So whenever we start a project. We obviously do a pro forma and then within that pro forma I believe that where.
We have a very conservative approach with allowances for.
Costs that should be adequate and then contingencies on top of that and then we get the entitlements we get permits.
And then we're ready to go out and start buying out the project and it just you don't buy it all out at once you buy out different trades at different times. So.
It's a process, but we do it.
Expeditiously.
And anything that we have that starts out.
Again, we have these.
Underwriting contingencies.
That.
Our in our pro forma so we have a really good idea of what the what the yield would be and more often than not that initial yield can.
Can be done we can do better because as we start to buy things out.
We can start removing some of those allowances and contingencies.
And by the time it is.
<unk> put into the supplemental.
We're highly confident in that yield it may not be completely bought out by then.
But.
It's very close and if it hasnt been bought out it still contains good contingency.
To cover any unknowns or unexpected cost increases.
Okay, great. Thanks.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Hey, Steve.
Thanks for the help over the years, congratulations and good luck as well.
Peter just on the investment sales side, maybe you've touched on a lot of different ways about this question, but when you talk to your JV partners that have been consistent buyers of a lot of your better quality assets are they specifically asking for or indicating that they would be interested in a different type of asset or a different price point at this point in time.
With respect to where that costs are and their ability to kind of finance that spread.
So the nice thing that we have in our in the base of our great partner pool.
And it really truly is a great group of partners that we've established.
Significant relationships with us that when we do these <unk> that are done on an unlevered basis. So.
<unk>.
They're not necessarily be hold into what the rates are for secured debt at the time now many of them may Indeed finance their portfolios outside of.
Asset.
Pacific financing, but it is at a very low level.
Some of our some of our partners that have so much cash to put out that they don't.
Lever really at all so it's been one of the <unk>.
Things that I think has helped us.
<unk> achieved the cap rates that we've achieved and sell things in an expeditious manner. Because there is a hunger for those types of assets and theyre not.
Those purchases arent contingent upon financing so.
We hear stories about.
Deals falling out because of the lender at the last minute decides not to fund that.
Fortunately for US we haven't had to deal with that.
If we did an outright sale and we.
We've had bidders that have put financing contingencies and their offers but we've had enough bidders that were willing to not have that contingency that.
We just so far.
Knock on wood everything that we have.
Put out there we've performed on and haven't had any disruption because of that market volatility.
That's helpful. Thanks, and then maybe just one unrelated question with regard to the Texas investments you detailed I think a little bit more of those this quarter versus last and I think last quarter. Joel you had made the comment that you would want to wait.
I guess just more curious in terms of your thought if you can comment further are you, bringing existing tenants are there tenants in that market that want to be in those locations, what's driving that decision and what's your kind of vision for the investment there.
So thats a good question so when it comes to Houston.
One of our campus acquisitions was in fact.
Made because of a specific tenant.
And.
That tenant will grow there and will be an anchor to a larger project.
When it comes to Austin.
We have a.
A cohort of.
Important lab tenants both.
Credit and noncredit, who want to be in that market. It is a new market. It is.
One that is not an existing cluster.
Probably we will take.
A a decade to start to gel and then probably another 15 years beyond that to get to the 25 year Mark.
But I think what intrigued us about.
Texas and Austin in General is.
And I made this statement before if you look at what Steve jobs said about the 20 <unk> century. It was the century at the intersection of Biology, and technology and so I think Texas is ripe for.
That intersection and Thats, where this industry is really moving in a.
Industrial fashion. So this is really kind of the first toe in the water with that thesis.
Great. Thank you yep. Thank you.
The next question comes from Tom Catherwood of BTG. Please go ahead.
Thank you Steve Thank you for everything and best of luck.
Just one question for me Halley and Joel really appreciated the commentary on your different tenant segments at the onset.
One thing that's always struck us though is the early insights that the company gets through the Alexandria investment platform and incubators like launch labs.
<unk> early stage side of the business are you getting any leading indicators, suggesting a shift that could drive.
Future changes in trends and is that changing your investment strategy at all.
So.
Thank you for that question.
Not really I mean, I think the.
I mean technology and you saw the.
If you looked at the cover of the press release and sub.
We've highlighted icon therapeutics based on Nobel Prize, winning technology and headed by Roger Perlmutter, who was.
CFO at Amgen. He was also chief scientific officer and head of research at Merck.
And.
This is a great example of it.
Using to some extent AI and the development of new innovative therapeutics. So clearly that intersection that I just talked about that Steve jobs described as we're certainly seeing way more of that today than we did before but I think our early stage efforts are really aimed.
At.
Focusing on the next <unk> or the next <unk> two companies that we became associated with <unk> in 2003 that started in.
3500 square feet Neuroscience hotel in Cambridge.
Madonna that started early on in Tech square.
Couple of years after it had been founded by.
The flagship team.
And our hope is to find those kinds of companies that have just totally disruptive technologies and lots of product opportunities and shots on goal because those are the things that are going to move the dial and move the needle when it comes to human health, Oh and by the way both are.
Huge huge.
Tenants of ours in many respects so it all kind of works out, but thats kind of where our focus sales I don't know if you want to comment.
Thanks to all of this is Holly and I think you covered it well.
And parents <unk> comments from earlier earnings calls, we're really in the early innings.
So to speak of these next Gen type therapy, if there's anything about gene therapy cell therapies mrna therapy is we've seen a handful approved but when you look at the stable clinical and preclinical AD technologies.
Really mind blowing how exponential it is and just that repertoire of types of different therapies and types of different science that companies are working on so I would say, we're early days and seeing kind of what's the next generation of these therapies is going to look like.
I appreciate the color thanks, everyone Yep. Thank you.
Our next question comes from George <unk> of Mizuho. Please go ahead.
Hi, Thank you first congratulations on the strong quarter and Steve. Good luck to you I guess just a couple quick questions for me can you. Please remind us how you think glad you bought the property in the investment portfolio.
I'm sorry, how are you.
How are your assets credit risk in both the property and the investment portfolio.
Oh well that's.
We could write a treat us on that.
When it comes to the investment portfolio, if youre looking at early stage, we're looking at the things Kelly and I just described.
Great management teams.
Strong financial capability to attack some really big problems that have major unmet medical needs I think when it comes to the tenants.
We have a much different kind of focus.
Focus on.
Stability credit opportunity. So so theyre kind of different in that sense, but both are rigorous and we've had a pretty highly disciplined and highly skilled team in place for a long long time, which is why I think we've been able to.
Do a really good job at at those underwritings.
Okay. Great. That's helpful. Thank you and just I guess my second question you mentioned Karl seat utilization is lower and invested in core office tenants, giving back space I'm. Just curious have you seen any life science companies, giving back like fuel core office.
I don't think so but I'd ask Peter Steve have you have you seen that I don't think so.
Well the laboratory the office that is associated with our laboratories houses the scientists that.
Our working in the labs and they need they.
They need that space.
To do their work they can't yes, its not good lab practices to be in the lab, writing things up.
No.
It's typically not possible to just give back lab space or sorry office space because they need it.
They are working in the lab.
Okay, great. Thanks, and then just like.
They are fully integrated.
Okay. Okay got it. Thank you so much that is all for me. Thank.
Thank you.
Yes.
Our last question will come from Daniel Ismail of Green Street Advisors. Please go ahead.
Great. Thank you Steve.
Steve would like to Echo the comments on.
Thank you Amy.
Over the years and best wishes in retirement at Joel just a quick question on a comment you made about the Texas expansion, we haven't seen the migration of lifestyle tenants to the sunbelt like we've seen in the traditional office sectors.
Do you think this is.
A trend that will likely pick up or starts or do you think this is more of a one off and that the growth of our cluster market will take.
The time that you stated earlier.
Well, Kate well first of all I think by the way, we didnt have a slightly okay quarter, we had a really great quarter. So I would ask you to think about your comments on your review piece secondly.
Our intent like it was in New York.
We started in New York There was one incubator in New York alone. There was no other commercial companies really operating there were a handful of companies and we've either built or helped move or really helped create that market and so our intent is to do the same in Texas, we're not waiting for tenants just.
Haphazardly move there somehow but we we have a pretty strategic plan to work with tenants who want to move their remember.
A lot of cities these days and.
You could pick out the names have governance problems homeless problems crime problems high taxes poor governance. So there are a whole lot of folks very interested we've seen that in financial services and citadel, just announcing a big move from Chicago to Miami.
Youre going to see.
No.
With 1000 tenants I can tell you have a whole lot of folks that want to move.
Yes that makes sense I appreciate it.
Copper living a concern for these tenants or the cost of life science rents and these lifestyles.
Very compared to other business, a very small percentage of their overall cost structure.
Thanks, John Peter just the last question for you on bidding terms in the last three months I'm curious as you're out there acquiring assets, we're looking to sell assets.
Yes.
Changed at all.
Regarding competitive more competitive.
What are you seeing in terms of.
Uh huh.
As far as acquiring things I think.
There has been.
Fewer buyers.
In the last couple of months.
As we've been kind of winding up our program, but pricing is for great quality land Hasnt really been moving down at all.
And then in the dispositions we.
We tend to go to.
We kind of select who we'd like to have.
Purchase our assets, our JV with us so it's.
It's hard to say, but I would say the interest in those folks that we typically approach with our opportunities has not waned and theyre still very eager to get more exposure.
Yes, I mean, it's based on a pure scarcity of really high quality well located laboratory assets.
Equation Peters laid out.
Got it makes sense.
Yep. 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.
Okay. Thank you everybody and we'll look forward to our third quarter call we say.
Take care God bless.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
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