Q3 2022 Alexandria Real Estate Equities Inc Earnings Call
Right.
[music].
Good day and welcome to the Alexandria real estate equities third quarter 2022 conference calls.
All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. 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 forward looking statements is contained in the company's periodic report.
It's filed with the Securities and Exchange Commission.
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 the Alexandria third quarter earnings call with me today are Peter Moglia deemed chicken AGA and Halley.
First of all thank you to our Alexandria family team for their continued exceptionalism in the face of a challenging macro environment, mostly self inflicted by a really deleterious set of government actions and policies coupled with the fed which has been slow to act I.
I think we I would characterize our third quarter is really an exceptional quarter and when you look at earnings are in this challenging macro environment, delivering 9.2% and eight 3% a F F O per share growth for the third quarter, and then 2022 year to date is really excel.
Personal, especially again, given the size and scope of the company with almost 75 million square feet and its total asset base.
I'd say be health and resilience of the broad and diverse life science sector, the niche, which we pioneered.
Remains strong and that there is a continuing strong R&D investment Halley, who will speak to this but in general we've seen life science R&D funding in 2021 approaching almost a $500 billion I think the number is actually about 480, which is astounding.
And 1.8 trillion dollars since 2017, and we expect totals in 2022 to be very strong a continuation of that.
I think it's also important to recognize that the strong life science sector employment trends remain positive.
And the core strength of the life science industry, and our key cluster markets.
Remains resilient and continuing strong and I think the over riding a macro.
Observation would be the long term health care needs of this country, certainly arent going away innovation in medicine is really a national imperative.
Just look at the mental health problem across this country is one simple example, and as I've said many times before there are about 10000 known diseases to humankind and really we've only addressed as a as a society about 10% with addressable therapies I'm very few.
Real cures.
Biotech I think remains resilient clinical data regulatory updates in M&A can be idiosyncratic events that really are unaffected by the economic trends and a healthy I'll talk about that I think demand continues very solidly for our high quality.
And well located assets, which are really powered by asset level operational excellence second to none.
Alexandria has the greatest knowledge and I think this is pretty unique experience and expertise by orders of magnitude with respect to life science real estate niche, which we created and informed by our over 1000 client tenants were 87% an important number to remember of our leasing comes.
From we have a level of knowledge and understanding of the true life science real estate demand that just isn't out there if you hang a for lease sign and hire a broker.
Alexandria continues to experience strong leasing spreads and rental rate increases and I think you know we're very proud that our we've got 99.9% collections this quarter a truly stellar.
Our industry, leading roster of the thousand tenants Creek drives and create stable long term duration cash flows and our high quality and diverse industry mix is really unmatched.
And I think one of the great stories of the day I'll talk about in a moment will be the balance sheet, but among industry, leading fundamental metrics for the third quarter, which are notable and Dean will talk about some of the details there are a 10.6% same store NOI growth increasing over the last few years and the significant.
Strategic value creation harvesting of over $2 billion, which Peter will detail and I think something we're very proud of having lived through the O eight or nine.
Hum.
Really the financial crisis and with the with this team steering this ship as an unrated REIT in those days today, we have matured and really have a fabulous fortress balance sheet. We've worked very hard to put together over many years.
It's important to note Alexandria out of 127 rights as of June 30th as the second best debt maturity profile of all of them.
And that's pretty amazing Dino highlight our liquidity of over $6 billion and I think we were both Ah I think strategically inform Dan I think execution Lee are aware, when we timely executed both equity and debt.
Transactions in both January and February of 2022 earlier this year before the Ukraine invasion.
And again almost coming to the end of my comments the.
Our strong and flexible balance sheet. In addition to I think fabulous liquidity. Our remaining debt term is over 13 years. Our average a weighted average interest rate is about 3.5% and we've got almost 96% of our debt, which is a fixed rate and again no debt maturities into 2025.
And I think as a as many of you know and we're working on we are crafting a well thought through set of alternative plans for 2023, which will unveil at Investor day, and as you look out at the World Today and you just look at.
What happened at the P. R C.
Meeting this past week, where the president actually had his former.
Person, who turned over the reins of power to him it kind of ushered out a little bit.
In front of the entire.
The party Congress there in it.
It.
Creates the impression that we might not only have a ground war in Europe , but we might have a friction over Taiwan in AR and AR kinetics out and so that's something to think about and so we're planning hard about all been all eventual outcomes.
That could be very significant black swan events to the United States of America, So with that let me turn it over to Holly.
Yeah.
Thanks, Joe and good afternoon, everyone. This is Alexander SVP of science and technology and capital market.
As Joe mentioned today I'm going to provide an update on the life science fundamentals driving our long term growth of the industry.
Tenant health and how Alexandria proactively works at the Vanguard of this highly dynamic industry in a challenging macro environment to continue to grow our one of a kind and truly world class company.
First and foremost while we are in a cyclical downturn innovative medicines take on average over 10 years to develop meaning.
Meaning that the life science industry is not cyclical, but it's largely a banking product driven.
And the life science industry is still in its early innings and poised for growth.
The recent expansion of complex modalities, such as cell and gene in RNA based therapies reflect.
The pursuit for new and better medicines, it's truly the growth industry in this country.
There still remains immense challenges to solve.
Everyday in the U S and approximate 1670 people well passed away from cancer every four minutes today, an individual will die from a stroke.
And every 37 seconds someone who passed away from heart disease.
Not to mention the 90 per cent I've known diseases that have no available treatment.
The macro market conditions are not to be taken lightly the life science industry is in a steep.
Long term growth trajectory.
So where do the fundamental stand to drive and sustain long term growth.
I'll start by walking through the multiple sources of life science funding.
Notably for the third quarter at 2022 venture capital funds have raised an all time high of 149 billion.
Eclipsing 2021 historic year with 144 billion Reais.
Given the average funds investment period is four to five years.
A significant amount of dry powder will continue to translate into well funded private biotech company for years to come.
Companies with the most innovative technologies and experienced boundaries and management teams continue to successfully raise capital and we continue to see healthy demand across the segment.
Moving on to the equity markets, while the IPO window largely remains closed.
The market is responding positively to meaningful data readouts.
As an example, two tenants in our San Francisco Bay area region recently announced positive phase one and phase one two clinical data pending shares at 60 and 70% respectively.
And just as a reminder, within the public biotech tenant category. The majority of our air or comes from tenants with marketed products, including many large cap tenants with strong balance sheet, such as vertex and Laguardia.
Next large farmer Mac continues to outperform the broader market with significant cash on hand to put towards internal growth and external M&A and partnership which is critical for biopharma as it looks to backfill their pipeline with innovative new products.
I have a pharma R&D spend totaled 262 billion in 2020, one with the top 20, biopharma, putting on average over 20% of revenue back into R&D.
Notably at the end of the third quarter 17 out of the top 20, Biopharma, where Alexandria tenants.
That that as of today has increased to 18 of the top 20 Biopharma.
Well M&A has largely focused on bolt on acquisitions partnerships continue to be an important source of non diluted funding for private and small to mid biotech companies.
With respect to government funding NIH budget continues to increase year over year with broad bipartisan support.
The proposed 2023 budget is 49 billion, a 9% increase over 2022.
This base total does not include an additional 12.1 billion proposed for pandemic preparedness and an additional $1 3 billion for program evaluation, which would bring the total NIH budget for 2023 to 62 and a half billion.
With respect to notable clinical and regulatory development. This quarter saw a critical late stage clinical readouts.
And the accelerated approval for indications in schizophrenia, Alzheimers and E. L. F. All of which are devastating diseases with limited treatment options.
Tenant beyond Tech also published promising early clinical data demonstrating their novel mrna therapies can train the body's immune system to identify and kill cancer cells.
Testament to the opportunity of mrna technology beyond Covid vaccines.
On the regulatory front the FDA continues to approve new therapies at a sustained pace, including 28, new drug approval from the Fda's drug Division Cedar This year.
The Fda's biologic Division Bieber I prove to gene therapy is just this quarter, increasing the total U S gene therapy approvals from two to four and there are an astounding 500 cell and gene therapies in clinical development.
The fundamentals remain strong amidst the backdrop of a volatile and uncertain economic conditions.
Switching to tenant health other 99, 9% <unk> collections and historic tenure occupancy of 96% of task our.
Our asset base because in a great position as you can see on page 17 of our stop our life science tenant roster is diverse spanning multinational pharma life science products service and devices public and private biotech and institutions and benchmarking aerie to just one of these segments does not capture the string.
And depth of our asset base.
Critically maintaining the health of our over a thousand industry, leading tenant roster is not a static process, but a highly proactive effort that incorporates our deep understanding of the life science fundamentals.
Intimate knowledge of our tenants work preexisting relationships and a dedicated and passionate team focused on best in class operational excellence.
Our job is to engineer outcomes.
That's where it comes in many shapes and sizes, whether it's creatively utilizing our over 40 million square feet operating asset base to provide critical space to accompany ahead of a future deliberate or swapping of good, but perhaps magnet tenant with a fast growing tenant and taking advantage of the nearly 30% mark to market rental increases across our.
Asset base.
All with the goal of continued optimization of leases to innovative high credit tenants.
I'll leave you with a quote from David Rex CEO , Eli Lilly, who we had the pleasure of hosting for not one, but indeed to ribbon cutting celebrating new Eli Lilly spaces at Alexandria properties, just last week.
In regards to the life science industry. He said the games for winners are bigger than ever being nimble fast and attuned to the outside world and having the right people all these basics matter more than ever.
Indeed, this is a sentiment that applies broadly beyond the life science industry and it's one we hold deeply at Alexandria.
With that I'll pass it off to Peter.
Thank you Halley I'd like to start by thanking all the teams of the company for your never ending dedication high quality work product and collaborative spirit that made Steve's transition to retirement seamless as we all expected it would be Steve.
Steve continues to be actively involved in certain projects and we consider him an invaluable resource to the executive management team since Steve is no longer on the calls I'll cover leasing as well as updating you on other key topics of the day, such as the development pipeline construction costs and the harvesting of our value creation.
As we sit here today, Alexandria has an equity market cap and credit rating in the top 10% among all publicly traded U S equity Reits, our North American asset base of $74 5 million square feet 431 properties in operation development or redevelopment.
And over a thousand innovative tenants to inform our investment and operating strategies. We should note that it has taken over 28 years to reach these milestones one cannot create such a dominant position in an industry overnight and it takes far more than great real estate to do it our vast network operational excellence.
Technical know how are just a few of the many reasons. We are one of the of a kind company in a class by ourselves.
Life Science industry has grown significantly in recent years with the success of new modality, such as mrna in cell therapy, and we have grown along with it by capturing the majority of investment opportunities that have come about from those inventions and others.
With the onset of market volatility, we are seeing a normalization of demand and although in the near term. We don't anticipate seeing the same level of activity. We saw in a record breaking year in 2021, we continue to see healthy demand manifesting into solid leasing numbers.
Yeah.
With respect to the leasing of our value creation pipeline, which is expected to add approximately $645 million in incremental annual rental revenue from <unk> to 'twenty two through the third quarter of 2025, we leased approximately 330000 square feet in the third quarter, although that total is.
Currently one third of the record breaking 2021 quarterly average it is 18% higher than the previous five year average, indicating we have returned to a normal run rate of leasing.
With that leasing are seven 6 million square feet of projects under construction and pre leased near term projects leased or reached 78% leased up 4% over last quarter during.
During the quarter, we delivered approximately 330000 square feet at a weighted average yield of seven 1%, which will add approximately $30 million in annualized NOI to our P&L.
Transitioning to overall leasing the third quarter results continued to demonstrate Alexandra <unk> ability to outperform even in turbulent times due to our significant differentiation among all who seek to person dissipate and life science real estate, which can be summarized with four unassailable attributes irreplaceable.
AAA locations adjacent or in close proximity to the country's best life Science research institutions operational excellence in the running of our tenants' mission critical facilities.
<unk> campuses, providing highly valued optionality scalability and amenities.
And a curated roster of over 1000 tenants, including the most impactful and creditworthy research companies and entities in the world, providing unmatched industry insight.
Despite current macroeconomic conditions demand for Alexandria is best in class facilities continues to be at pre 2021 normal run rate. Examples of this include in the third quarter leasing volume was $1 million 662069, rentable square feet, which is above our 10.
And year quarterly average of one 3 million square feet and well above our pre 2021, five year average of $1 1 million square feet.
Year to date leasing volume of $6 4 million square feet is above our five year average of 6 million square feet and we still have the fourth quarter to add to these totals.
In the third quarter cash and GAAP increases continued to be very healthy with 22, 6% cash increase and a 27, 1% GAAP increase.
And our operating asset Mark to Mark continues to be a help to be healthy at approximately 30%.
And our quarterly examination of construction costs the theme that jumps out at US is that overall costs and supply chain issues are starting to ease, but contractors don't trust what may happen tomorrow. The disruption brought about by Covid and 2020 was exacerbated by the stimulus employment.
<unk> to mitigate it and as we all know has led to inflation not seen since Jimmy Carter's presidency. This inflation caused serious losses to the construction industry as contractors were legally bound to deliver projects within lump sum or gross maximum budget that had become grossly underfunded with every passing month as the.
Enemy opened and pent up demand for construction materials and labor through the system violently out of equilibrium.
These losses have caused contractors to keep pricing high despite anticipated reductions in costs. Therefore, we need to remain cautious about projecting any easing of conditions until the construction market can be confident another shoe is not going to drop and that time has not come yet.
It's easy to understand this mindset because evidence of an easing is only anecdotal at this point steel copper lumber and labor costs had shown signs of leveling off but escalations from the third quarter of 21 to the third quarter of 22 totaled 12, 3% well above normal and lumber just spiked.
Again, two weeks ago.
That said supply has started to catch up with demand inventories of materials are still low, but improving freight transportation is trending down contractor backlogs those strong through 'twenty three are finding openings due to canceled projects and fewer new projects are starting this opening up of capacity.
As slowly return the ability for general contractors to get three bids for some subs.
Grassroots to normalization you could call it but there are storm clouds on the horizon in the form of billions of dollars of work anticipated to build Mega chip factories, and the $1 two trillion dollars of infrastructure investment and jobs Act signed into law last November which could roll back any easing of construction.
And supply chain conditions.
Overall, we do expect construction cost to begin reverting to the mean due to the easing of contractor backlogs and relatively better availability of materials, but Alexandria will continue to conservatively underwrite construction cost escalations in our pro forma is we have a deep and experienced team that works in lock step with.
Our underwriters to ensure we are accounting for the latest trends in our current and future projects.
Interest rates continue to wreak havoc on investment markets and we feel fortunate that our scarce product type continues to be in demand during such a turbulent time evidence of this can be seen on page five of the supplemental where we present the results of certain asset dispositions, which have raised $2 2 billion.
And capital to date, including 1.2 dollars 6 billion in the third quarter <unk>.
Included in those dispositions was the completion of the previously announced partial interest land sale at 14 50 Owens in mission Bay to a development JV partner for a land value of $324 per buildable foot.
The sale of a portfolio of asset spanning the submarkets of South San Francisco and greater Stanford for a five 2% cash cap rate of one off asset along the I 15 corridor or a five 3% cap rate two assets on Carol Road in Sorrento Mesa for a four 6%.
Cap rate a partial interest sale of a campus in Sorrento Mesa for a four 6% cap rate and the partial interest sale of our high quality asset and Mary field ROE in Torrey Pines.
For a four 1% cap rate.
Low five cap rates achieved in the San Francisco portfolio and the I 15 sale in San Diego are indicative of the age of the assets still attractive workhorse assets. They do not reflect the higher and profile of our core the strong sub five cap rates for the partial interest sale of the summers Ridge campus.
And then Carol road assets are more representative of our asset base.
The Mary field ROE assay is purpose built lab by Alexandria, and like many of our other purpose built assets is one of the best located and most attractive assets in its submarket and this case Torrey pines. The four 1% cap rate was influenced by the growth in rents and Torrey pines since the lease was signed but the leases almost 12.
Years of term remaining before that upside can be realized so it's quality and location really drove the value I'd.
I'd also like to note that the scarcity value, we talked about being a driver for keeping our cap rates lower relative to other product types can be seen in transactions by others. Just last month Biogen completed a sale leaseback in Cambridge for $2185 price per square foot value and the Carlyle groups.
Sold the 77000 square foot Blackstone Science square building in mid Cambridge for a four 1% cap rate at a price just short of $2000 per square foot.
As the fed continues to pull levers to battle inflation, we expect we will see cap rates move up but much less on a relative basis to other product types and thus we remain well positioned to fund our value creation pipeline efficiently and at a relatively attractive pricing by harvesting our value creation among other sources.
With that I'll pass the call over to Dean.
Alright, Thanks, Peter Dean here good afternoon, everyone. Our team delivered on truly remarkable results for both the three and nine months ended September 30, total revenues were up 25% and 24, 8% for the three and nine months of 2022 in comparison to 2021 <unk> per share diluted as adjusted for the three and nine months.
Was $2 13, and $6.28 up nine 2% eight 3% over 2021, and importantly beat consensus the strong financial and operating results reflects the strength of our brand our scale high quality and well located properties and operational excellence, serving the mission critical needs of some of them.
Innovative entities in the world.
Congratulations to our entire team for truly outstanding executions over many quarters.
This really stands out within the REIT industry, especially during this very challenging macro environment.
Our strong balance sheet and liquidity management highlights truly awesome execution by our team over many years. Our team is very pleased to have earned our corporate credit ratings that rank in the top 10% of the REIT industry.
We are also very pleased to have further improved the strength of our balance sheet in the third quarter with a significant increase in liquidity.
We completed an amendment to our line of credit increase in aggregate commitments to $4 billion up $1 billion over the prior credit facility.
A huge thank you tore important lending relationships providing.
Providing significant liquidity for our company.
Our total liquidity as of September 30th is now very significant at $6 4 billion.
We are one of the very few Reits with no debt maturities until 2025, 96% of our outstanding debt represents long term fixed rate debt and the percentage of fixed rate debt is expected to be even higher by the end of the year net debt to adjusted EBITDA is on track to hit our 5.1 times target by year end.
Our total outstanding debt has a weighted average rate of 352% and a weighted average maturity of 13.2 years.
The execution of our capital plan. This year was exceptional given the macro environment.
We did $1 8 billion or 12, and 30 year bonds with a weighted average rate of 3.28% on a term of 22 years, which was completed in February .
Most of our common equity for 2022 was completed in the first quarter and entirely completed by June 30th then we turned to continued execution of our strategic value harvesting through outright sales and partial interest sales of real estate through September 30th we've completed $2 2 billion in sales, including 1 billion in the third quarter with gains.
<unk> or consideration in excess of book value of $1.2 billion, which is really significant value creation now our focus on real estate dispositions for 2022 leaves us with an advantage at year end was about $250 million of cash that will reduce our debt needs for 2023.
As we look forward, we will remain disciplined and careful with our allocation of capital.
Briefly on dividends, our board has been consistent over the past decade with growth in common stock dividends year to year supported by strong growth in cash flows and our low <unk> payout ratio, which is generally in the range of 55% to 60%.
Cash flows from operating activities after dividends are projected at the midpoint to be about $300 million for 2022 and to put this into perspective over an approximate three year period. This represents approximately $1 billion for reinvestment.
Now Eric pioneered our favorable lease structure with contractual annual escalations approximately 3% triple net leases that provide for the recovery of operating expenses and the recovery of major capital expenditures.
Our team also curated a tenant roster of high quality tenants, including 49% of our annual rental revenue from investment grade and large cap publicly traded entities Aki.
Occupancy is up 30 basis points since the beginning of the year and is expected to continue to increase by year end.
Lighting, the strength of our brand and trusted partnership with our tenants.
EBITDA margins are okay.
69% really reflects the operational excellence and operating efficiency of our business and this also represents an industry leading statistic leasing was very solid in the third quarter at $1 7 million rentable square feet with rental rate growth on lease renewals and releasing a space of 27, 1% and 22, 6% on a cash.
Basis.
Leasing commissions on lease renewals and releasing of space for the nine months were down about 20% in comparison to the full year of 2021.
In the third quarter included two long term lease extensions of roughly 10 years with a 47% increase in net effective rent <unk>.
Excluding these two long term leased extensions with somewhat elevated ti's and leasing commissions in the third quarter.
Ti's and leasing commissions would have been relatively minor at approximately $25 per square foot.
Same property NOI growth has been very strong for the nine months ended September 30th at 7% and eight 9% on a cash basis and to put this into perspective, our 10 year average same property NOI growth was three 6% and six 6% on a cash basis. The outperformance in 2022 relative to the 10 year average was driven.
<unk> bye.
110 basis point year to date growth in occupancy with about a two times benefit to net operating income.
And then really outsized benefit from significant early lease renewals that commenced very early in 2022, providing for a full year benefit this year.
Now we continue to make excellent progress on leasing contractual lease expirations for 2000 2023 represents only six 6% of annual rental revenue down from 9% as of the second quarter. Now importantly, 2023 contractual lease explorations, representing only 70% or four 6% of our app.
Annual rental revenue remains in the category of too early to tell meaning not already leased not under negotiation or not targeted for redevelopment.
Turning to venture investments. These investments have generated consistent gains averaging about $25 4 million, which is included in <unk> as adjusted over the last eight quarters.
This is very solid and very consistent now it is important to highlight that on average over the last six years only about only 30% of the realized gains included in <unk> were generated from our investments in publicly traded securities 70% were generated from investments in privately held entities.
Gross unrealized gains as of September 30th were $529 million, including $102 million and $427 million from publicly traded and privately held entities respectively.
Lastly on guidance, we updated our guidance for 2022 and narrowed the range for EPS and <unk> per share from a range of six cents to a range of <unk> <unk> per share our 'twenty two guidance for EPS diluted as a range of $5 70 to $5 72, and <unk> per share as adjusted diluted is a range from 840 to 842 with no change in the midpoint of $8 41.
As a reminder, we are about four weeks away from the issuance of our detailed guidance for 2023, and therefore, we are unable to comment on details for 2023 with that let me turn it back to Joel.
Thanks, Dean and if we could go to questions. Please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone and if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Michael Chris <unk> from Citigroup. Please go ahead.
Peter It seemed like you talked pretty favorably about the properties the attractive cap rate, particularly at the Merriweather asset in San Diego I'm curious if these properties are so attractive why did it make sense to dispose of abuse.
And just.
We have a number of properties on the docket to do the same thank you.
We're recycling capital and putting it back into great projects, we have in our value creation pipeline. So it was sufficient capital to harvest and and reinvest.
Well I think one of the other things is we have some.
Fabulously large opportunities upon the Macy and Torrey pines.
Two very large scale development sites that we're working on and so we have no shortage of class a opportunities and the best Submarket in San Diego.
Thanks, Nick.
Nick Joseph here with Michael.
You touched on the macro concerns are black Swan events and disruption in the construction market. So when you blend that altogether, how do you think about the impact on development plans at <unk>.
In the near term.
John you've taken that.
So could you repeat the question.
Yeah. It's on development starts and I think in your prepared remarks, you kind of laid out some of the macro concerns you talked about China, you talked about potential for black Swan events, and then later you talked about disruption in the construction market and maybe not seeing pricing come back yet.
Im wondering how that plays into your expectations on near term development starts.
Yes, I think we will.
If you'll hold your question to Investor Day, I think we'll be able to give you a.
A very good view of that and I think we have.
Interesting set of alternative plans, given what may unfold in 'twenty three.
Given how we think about.
Plan, a plan B and plan C that might unfold out in the general economy, but I think it's fair to say and Dean can comment.
Where we have.
Very strong leasing opportunities, we'll clearly look for ways to accelerate those opportunities.
And fund them carefully with the best sources of capital, but Dean I don't know if you want to come in and be further I think we wait till investor day to give you up.
Yeah.
Hey, eyeballs view of that.
I think what I would just add to it.
Phil's comments is that we sit in a pretty unique position.
Well, we have the benefit of some of the best located land parcels for life Science use these core cluster markets.
And really.
Positioned from the standpoint of Optionality is the best way of thinking about it meaning.
We have the tenant roster.
As Joel mentioned, 87% of our leasing activity comes from.
We have the land sites. So we really have the option to meet the demand. So we have that flexibility.
And so I think that's the best way of thinking about our pipeline. It gives us it gives us options. We don't have to address it gives us plenty of options.
Thanks, maybe just to follow up on that just with the impairment charge in the quarter can you walk through that project and kind of the decision to walk away from it.
Sure it's dean here so.
As you know the disclosures, we had about a little bit more than 38 million in impairment charges.
It was primarily related to one project.
Which we no longer chose to proceed forward was it was a development project about 600000 rentable square feet.
The parcel was located in California, we.
We did not own the land.
We had pretty significant cost incurred.
But it was really our investment to date, which was significantly related to entitlement work for the site.
And the reason for not moving forward with the project was very specific to the financial outlook for the project.
There was no lease released negotiation related to the project to be clear.
And beyond that I guess, you know we're not in a position to comment much further on the project, but as you've heard from US on this call and over the last several quarters, it's really important to keep in perspective that.
We did loose about.
$2 7 million rentable square feet of development and redevelopment space just in the first.
Three quarters of 2022.
Yeah. So it was very specific to the project.
Thank you very much.
Yeah.
The next question comes from Anthony Pallone from J P. Morgan. Please go ahead.
Thanks, and hi, everybody.
Your seven near term development projects that you plan to start are those yields locked up or is there any room for movement. There if the environment changes here, given what's happened to rates or where do those stand.
So Dan do you want to comment on that yes by and large they're getting close to being locked up in the sense of.
As you go through a lease negotiation and execute a lease.
And both sides of the relationship landlord and tenant will work through.
A fairly detailed budget once the leases executed the tenant moves forward with their side to refine.
Their cost estimates as they get into really the details.
So big picture, we have a sense of the deal.
The exact yields will be refined as the tenant finalizes the extreme details of their build out.
And then on the cost side as you've heard from us for many quarters now we do build in contingencies.
To protect us from construction cost escalations.
And as we usually do we will make disclosures of those yields as soon as we can and.
And generally that timeline is consistent with once.
The tenant finalizes the details of their project design, so it usually lags disclosures of lease up.
But I think the important thing to recognize is.
We had no changes in cost at completion for any of our projects on an unfavorable from an unfavorable perspective neat nor on yields.
We did have one project that had an increase in cost of completion, but it corresponded with the pretty significant increase in revenue as well.
So we're generating a very solid return on the incremental capital.
So our team has done a tremendous job managing.
Cost in a very unusual environment. When you have to consider supply chain considerations and just continued escalations in construction costs.
Okay. I mean should we think about just expected development yields to to go higher given just incrementally higher funding cost or I guess to Peter's point you maybe they don't go up quite as much as rates just trying to think about where where that can go as we start to think about the next round of starts.
I think it's tough Tony to speculate about yields on a specific project because every project is very.
Our unique.
<unk> the.
The nature of the build the complexity of the build and specifically the.
The back and forth negotiation with our relationship tenants.
I would say generally speaking we will do the best we can do to push yields in the right direction upwards.
By managing our.
Construction costs carefully looking for opportunities to become more efficient, but that's not a simple task as we all know you cant just cut cost.
You have to do that very carefully.
And hopefully the rental rate environment continues to support.
Upward movement in that direction, which would translate hopefully into it.
Ongoing upward direction on returns or yields.
But Tony.
Don't want to speculate specifically every deal is very unique.
And we will take those decisions incrementally when they do come up.
Yeah, I mean, Tony the one thing to think about what the.
<unk>.
Discussed about yields how that bears on our decision making is useful to think about our decision not to go forward with that specific project. So that clearly is the waves on our decision.
To go we're not to go in every.
Every single case.
Got it if I could just ask one clarifying question on the accounting the your your gains and losses that are realized on the investment book that go through.
<unk> is that based on the most recent mark against what you realize or your original cost.
Generally it's the original.
Cost Tony.
Unless for some reason over the years, we've taken a write down which is a realized loss R. E N impairment.
But traditionally that's against the more often than not it's against our original cost basis Tony.
And I would also just point out that the key drivers between or around realized gains in.
In our venture portfolio is really driven by liquidity events.
So there are natural events.
Occasionally on the public side, which is only about 30% of our gains historically over the last six years and we ultimately sell a handful of public securities. That's what ultimately drives some of the gains on the public side, but it's a small piece of the overall mix on average.
Okay. Thank you.
The next question comes from Steve Sochua from Evercore ISI. Please go ahead.
Yeah. Thanks. Good afternoon, I was just wondering Peter if you could talk a little bit more about the demand trends that you're seeing maybe by the type of tenant.
By broad industry, and maybe by your key clusters, and you're seeing better demand on the west coast up in Boston and New York, You know any color on regional demand would be helpful. Yes. So this is Joe Steve and welcome back.
Think we'd like not to answer that question at a granular level I think.
It's pretty proprietary and as we said 87% of our leases.
This quarter for example came from our tenant base and I think it would not be useful for us to go into granular detail on that but I can tell you.
And Peter can comment broadly demand is.
Solid in all of our markets at the moment.
Yeah.
Yeah, I'd agree with that and as it.
Consistent with my comments.
I'd say, yes.
It's at a normalized rate that corresponds to the last few years. If you take out 2021, which was which was an outlier but.
It's it's broad.
And it's still we've been talking about it for a while.
How all of our clusters have been doing well that continues to be the case.
So, yes, and I would add Doug glass on that Steve.
Think about what both Halle and I said.
This is not a these are episodic.
This is an episodic.
The street, so to speak not really driven macroeconomically and so demand often is generated by clinical data readouts regulatory.
Readouts and the updates and sometimes M&A, where somebody buys a company and then once the once to expand we've seen that we've seen it on the other hand, where they may buy a company and roll it up but oftentimes companies are bought for their talent unless you've got a kind of a just a product opportunity. So I think thats, how you have to think of.
<unk> it.
Great and then second question, maybe just on the dispose Peter I know you provided a fair amount of detail on the cap rates I'm just curious.
The depth of the buyer pool, and maybe how it's changed and do you have a sense for kind of where our unlevered IRR expectations are for for buyers of the various products that you transacted on in the last quarter.
Okay.
And we've had a consistent.
Buyer pool, and all of our activities over the last few years.
<unk>.
We generally try to keep it limited.
We don't want to.
Disperse too much information to abroad audience and.
It does.
Players have continued to show up for our deals and that has resulted in and the cap rates.
So.
On an unlevered IRR basis.
Yes, I'm sure that it's higher than it was I know.
In the peak times people were underwriting underwriting to a five or less.
I can't tell you what they are doing today, but obviously, it's gone up.
But with our product type you know the rental growth you can pay a four something cap rate and with the annual increases in our leases and with market rent growth.
You can you can exceed.
Six 7%.
Pretty easily on an unlevered basis.
As days.
Great. Thanks, I appreciate it that's it for me.
Thanks, Steve.
The next question comes from Rich Anderson from S. M. P. C. Please go ahead.
Thanks, Good afternoon.
One of the.
Yes.
Things that sort of emerged from periods of dislocation like <unk> seen in the rates in the past as well as in biotech is increased M&A activity and its aftermath, we certainly saw some of that in the REIT space.
Post pandemic I'm wondering if you have a similar expectation in biotech I know theres been some sort of fringe type of activity, but is there is there.
An opportunity to see more in the way of M&A.
As a sort of indicator of emerging health from that space and if so.
Do you see it as a benefit to you.
In terms of future leasing and so on.
Yeah, So maybe I'll comment generally and ask Kelly to also comment I think rich.
I don't think we're going to see any blockbuster M&A deals.
Big company to be company, or even big company, though.
Moderate sized companies that.
The impact what is perceived to be some competitive.
Situation in a in a therapeutic class.
The FTC I think under this administration has been fairly hostile to almost every kind in every industry get together because they claim it's always.
Not competitive or it diminishes competition somehow increase prices. So I think that's I mean, we've seen this play out a little bit with Illumina in Grail, and Grail was spun out of alumina. So.
None of that makes particular sense.
But I think it's fair to say.
We will see and I think Kelly mentioned this.
Continue to see we just saw recently literally just bought a bolt on acquisition of a hearing loss company I think youre going to continue to see a range of bolt on acquisitions for product opportunities.
Sometimes it's going to be a positive sometimes it may not be but overall historically, if we look back at our 25 years as a public company, it's been generally pretty positive for us, but any any other thoughts you have.
Yeah, I agree with everything you mentioned, John and maybe just to say that you know depending on the company and the outcome and you know it's positive for the ecosystem, whether or not there is a real estate at outcome and thinking about some of the bolt on acquisitions, where it really is product driven you know we see those executives go off.
To start new companies, we have deep existing relationships with them. They often go on to establish and grow their next large.
Biotech so in the long run these events are positive for the ecosystem and there are a number of examples where M&A over the years has led to really sizable footprint yeah.
Ines and San Diego is a great example of that over time with their acquisition of signal at two decades ago, and then Celgene and then as you saw in the first quarter of this year, we announced.
420000 square foot, new development with us in San Diego, So over time, the acquisitions definitely can lead to additional base needs, but it's very dependent on the type of acquisition and again. The overall net positive for the ecosystem is really great as you.
Investors go to put their return to work in terms of new companies in Congress will have to start new endeavors as well.
Okay, Great I'll leave it at that thanks, very much thanks rich.
The next call comes from excuse me. The next question comes from Georgia, 18 cough from Mizuho. Please go ahead.
Thank you.
So I guess you mentioned.
It's hard to hear you so could you maybe speak closer to the mic.
Yeah can you hear me now.
Perfect.
Okay, sorry about that yeah. So you just mentioned that supply catching up with demand. So my question is which markets have the most simple Iot skin, how do you think about competition from <unk>.
Well, that's a complicated question I am not sure we have the time or <unk>.
Ability on this call to go in market by market not sure we want to do it but I mean I think if you look at New York is a great example, we've pine.
Pioneered the first commercial life science.
Center in campus in New York City, there's millions and millions tens of millions hundreds of millions of square feet.
And there are a number of projects that are being worked on there the <unk>.
Demand has been fairly modest it's early stage.
And.
It's pretty clear that literally almost most buildings in new York can't be converted from office too.
To laboratory and probably wouldn't want to be given the market. So thank you have to look at that on a submarket by Submarket basis, I don't even think you could look at it as an overall market by market basis.
And we know from Boston, there have been a handful of conversions. We know in particular, a recent case downtown where somebody kind of jury rigged in office building brought in some smaller tenants and we know the smaller tenants.
<unk> experienced both for the developer who has never done it before and the tenant massive cost overruns on that conversion so.
But as I say lets just look at again, 87% of our leases come from our existing tenants, we feel very good about.
Our ability to continue to generate.
Steady demand in these markets and we've been through the cycles, we are through the cycle.
2000, 2001, the Big Tech Bob bus bubble, if you will and Oh wait no none with the big financial crisis. So we're fully prepared and I think our portfolio our asset base really is in great shape.
Okay, and you kind of you know.
I think a recession concerns how should we think about tenant credit at least among large cap mid cap or small cap biotechs and we are seeing any visco occupancy.
Downturn.
Yes, so we've been very protected I don't know how long do you want to comment on that because you've had a number of.
Conversations about the health of the and the diversity of our tenant base.
The credit quality.
Yeah, absolutely. So I direct you to look at page 17 of our supplemental and which has a breakdown by air or of our business types across the life science industry and as we'd like to stress on other calls and our small and mid cap is a very small percentage of our overall tenant base and what we've done and as well in the past.
Two quarters has broken has broken down our public biotech segment by marketed products versus preclinical and clinical products and as you can see the majority of your marketed.
And these are as I mentioned on the call you know there's companies like vertex Madonna eclipse.
Large balance sheets and cash to deploy and it's important to you to know that our team in our diligence process.
Is truly unique you know we have a number of folks, including myself with Phd backgrounds and across the biotechnology space.
Yes significantly underwrite these companies understand what their risk profile is what their opportunity and growth profile at our and then monitor them.
Extensively as they progress.
All things put together, we have a really strong.
Companies across all of our different business types, which collectively reflect the strength of our asset base.
And this is Peter you should you should harking back to <unk> comments in the beginning where she talked about the fact that it takes.
On average about 10 years to get something to the clinic. So demand for life Science real estate is much more an elastic and can't necessarily be vary due to current macroeconomic conditions. The company's need to continue to press on to get there.
Revenue producing a project to market.
We look we did a look back to the great financial crisis, a little while ago and noticed that the change in occupancy from the start to the end was was negligible I think it was maybe.
Maybe a 40 basis point swing at the trough.
Our business is extremely resilient and and it needs to be.
Just because of the industry's profile it.
We will continue to be nothing's changed from that aspect.
Yes.
Great. Thank you that's all for me.
Thank you.
The next question comes from Dave Rodgers from Baird. Please go ahead.
Yes, good afternoon, everybody Dean I wanted to start with you I realize that you guys are going to wait maybe until Investor day to talk about funding for projects. You haven't started yet I was just wondering maybe if you could give us a little sense of kind of your plan with cash flow cash on hand, and recent sales to fund the stuff that you've already started that you still have to complete going forward.
Hey, Dave It's Dean here so.
I guess.
As you acknowledged we're going to get into the details of our plan for 2023 and about four weeks at Investor Day.
Maybe some high level thoughts on the capital plan that you.
Looking out on our active projects.
For the projects that we've committed in the near term that are released.
So we have about seven 6 million square feet with 78% leased and.
This pipeline can generate $645 million of incremental net operating income which is just spectacular.
If you look at the most recent starts or the stuff that's pending to start near term just call. It you know some projects could take up to three years to finish.
<unk> will commence a quarter to quarter as you would expect even starting next quarter on this pipeline.
I highlighted earlier that if you look out over about a three year period at our current run rate of for cash flows from operating activities. After dividends you know over three years, you've got a billion dollars to.
To reinvest.
Yeah.
Equity capital equity type capital.
For our pipeline includes this.
You know, we'd probably be a sitting on about $6 $8 billion of equity type capital and it's.
There's $1 billion of cash flows that I just mentioned, we got about $1 5 billion outs.
Outstanding forward equity contracts and then obviously.
Our CIP related to just the $645 million of incremental NOI.
Is all that stuff's broad equity type capital.
Some of it's encourage some of it.
The future cash flows.
But if you look at the you know some number approaching almost $7 billion.
But our typical leverage profile, assuming a five one year end target for net debt to adjusted EBITDA.
Yeah.
This pipeline will generate.
Probably three 3 billion or something in that range of debt funding, that's roughly one third two thirds equity.
On a leverage neutral basis. So is the EBITDA starts to come online.
You can fund quite a bit from a debt perspective as well.
And so those are the numbers I would you know keep keep in mind broadly.
We obviously continue to focus on real estate dispositions, given the strength of the private market values and the scarcity of our assets.
As Peter has been highlighting for a number of quarters.
Odd.
Obviously over the next three years each of the years or every year is very different.
And therefore, the fundings funding needs for each year will vary.
Hmm.
Basically there is different.
<unk> from commencement of NOI in construction spend in each of the years.
But it's really important to point out that there is a path forward. If we had to navigate a period without access to the capital market. So call. It at the capital markets were shut for three years.
And I think from a risk management perspective or team analyzes this every quarter and.
And we do find comfort in the result, obviously this is.
Clearly not an operating scenario, we would expect for three years call. It one book end scenario.
That you must evaluate from a risk management perspective.
So I don't want to get into specifics for 'twenty, three but hopefully those broad strokes help you understand that.
We're reasonably well positioned to address the what could become even more challenging environment.
When we look forward to presenting the details of our outlook for 2023 at our Investor Day.
In late November .
Really appreciate that Dean that was helpful.
And just one follow up for me, maybe to Joel or to Peter clearly Youre getting the rent that you need on the development. So that's continuing to grow and keep pace remotely with the.
It sounds like inflation.
What are you seeing on just market rent growth you gave the mark to market earlier, and obviously your spreads continue to grab those those that mark to market, but I'm curious on what youre seeing in market rents, maybe even a band you don't have to go market by market, but what youre seeing kind of across the country.
Yes, so Peter I don't know if you want to comment I think we're still seeing <unk>.
Rent growth.
In.
Almost not necessarily all of our markets, but in all almost all of our markets.
It certainly won't keep pace with the.
Hockey puck growth that you've seen over the last year or two the kind of COVID-19 years.
But I think it remains I mean, just look at.
The numbers, we posted this quarter and last quarter.
As an indication of kind of where things are and how they look like theyre kind of settling out on a normal run rate, but Peter I don't know if you want to comment macro.
I mean, so supply continues to be tight so.
As new opportunities come about.
We are we have continued to increase rents we've.
Well, we typically even in our new developments as we as we lease them up.
If they do tick up a percent or two over time so.
I guess macro wise without trying to predict what the actual percentages are they are still increasing.
At this point in time, and we don't see any evidence that that's going to slow down.
And I think again you have to look at.
That question really almost has to be asked submarket by submarket not market by market.
Dave.
Well I appreciate it.
What goes on in Cambridge is going to be far different that what goes on in Somerville for example.
No that makes sense, we'll look forward to getting into more details probably at the Investor day, So Peter saying Yep. Thank you.
Yeah.
The next question comes from Tom Catherwood from BTG. Please go ahead.
Thank you good afternoon, everyone, Peter maybe looping back on the supply question.
So prior quarters, you mentioned that obviously you track all the planned or proposed development that's out there in your markets and then redevelopment obviously, but <unk> also commented that you didn't think all of those where we're going to make it to market or gets started given the recent movement in rates and then kind of lack of capital availability.
Have you seen any pullback in those starts or do you feel even more convinced that youre not going to see all of those come to market in the near to medium term.
Yes, I mean, we we.
Have.
<unk> been receiving some anecdotes of projects that.
We are on the radar that are not going to happen.
Even a couple that started construction that pause.
I talked about cost Escalations in my prepared remarks.
They continue to wreak havoc and then go into a lot of percentages because I didn't want to talk for 20 minutes, but this year over year from Q2, 'twenty. One I'm sorry, Q3 dollars 21 in Q3 22, they were about 13, 5% so.
It has just become very expensive and I think thats, giving a lot of people are sobering up a lot of people that were ready.
Ready to jump in and try to get involved.
So.
We don't expect there to be a huge.
<unk>.
Supply problem in any of our markets.
From what we see under construction.
It looks to be a fairly normal rate and in a normal environment.
At this point and.
As long as as that continues.
Everyone's being rational.
Should continue to see good rent growth not 2021 rent growth, but not the hockey stick.
We experienced that Joel referenced but.
But good.
Unusually overtime, we've exceeded inflation I'm, not saying, we're going to do that now with the inflation numbers, but as soon as inflation normalizes.
I would imagine that we would continue to exceed it.
But again you have to take.
That does supply issue.
Submarket by Submarket again, what supply might be in Cambridge versus what it might be in Summerville is talking about like night and day out.
A handful of years. So you have to think about.
You can't generalize, even do a market.
<unk> supply, but it's pretty clear in addition to I think the important point, Peter raised about either capital pausing or.
Operators pausing I think it's pretty clear cities are.
Now, having and other jurisdictions, it's just tougher to get things approved they are requiring more concessions residential is becoming a big.
Our big issue, we know in some jurisdictions. If you don't have a resi as part of your project.
You're in a long line. If you have it you may go to the head of the line. So a lot of dynamics now on a national basis that are I think changing and that will be a good check on supply.
Got it thanks, Thanks, Joel and thanks, Peter Yeah, and then.
Last one I appreciate the detail on the stock this quarter on 325 Binney.
Obviously, a lot of color on there.
Have there been any changes recently with tenants increasing.
Their sustainability requirements for their facilities.
It kind of what is the cost differential of going LEED platinum and lead zero energy like 325, Binney versus a more traditional lab design.
So that's one.
Go ahead here, Okay, yes, maybe.
325 is a good example on I think the way to think about this as.
You do have.
Some advantages when you do so.
Stained ability initiatives from the start it's a lot more efficient.
You can.
I think that project.
Incurred something around the 6% to 7% range of cost.
To really end up being able to describe it as.
You know, becoming the most sustainable lab building in Cambridge.
You guys know it's.
Probably the most important and unique feature is taking advantage of geothermal energy for heating and cooling of the building.
Which along with other attributes of the design allows us to eliminate almost all of fossil fuel consumption for the building.
It's an important attribute for <unk>.
The C O E mail their team as soon as the lease was signed literally as soon it was assigned and said, let's get moving and make this one of the coolest most sustainable green buildings in Cambridge, and so they were passionate.
About it.
Most of our.
Large pharma and.
The Bayou.
Tenants have already publicly announced sustainability initiatives so.
They do find it important like lead was in the early days, where you had a cost element to it that we all had to get our head around and we did early on we we had the first.
Core and shell LEED certified building.
And so we were a pioneer there.
Continuing to be a leader in sustainability here in lab buildings.
Yes, I also think you have to pay attention to the time, we're in so I think tenants are given today's.
Inflationary spiral and kind of what's going on broadly I think tenants are may be somewhat depends on the size the nature and so forth bigger tenants are more attuned to this but I think a little less attuned to sustainability today and more focused on.
The.
Recruitment retention and return of their workforce and then also recognizing that if you just read any number of articles on.
China's major ramp up of coal fired plants and coal use.
And certainly in India too.
It's pretty clear by scientists almost no matter, what we do here in the United States until that part of the equation is solved for the planet Earth.
These these measures aren't going to make a difference in global warming.
Got it thanks, everyone.
Leap on that [laughter].
Thanks, Tom.
The next question comes from Michael Carroll from RBC Capital markets. Please go ahead.
Yeah. Thanks, Joe can you provide an update on the New York cluster I know Theres, a proposed $1 6 billion life science hub that could be built over the next decade I mean, it sounds like there is a lot of buildings to build out the science infrastructure here and should we think about these investments as a way to further build out this cluster.
And kind of the important steps to make this more of a mature cluster over the next decade, or so yes, well I would refer you to and a good question to our September 12 press release, where.
When we talk to.
About a range of issues in New York, New York to vary.
Complicated market it still remains a small company market.
Come back to that initiative in a moment.
Probably 250000 square foot of lease actual leasing last year.
So that's a very small market, we started that market. There were literally only two commercial companies in New York doing research. When we started today you know the number of approaches.
75 to 80 or more.
But it's a slow growth.
Gestation periods 25 years or more we're 12 years into it so that the market is not going to be grown by any supply it's going to be grown by capital.
Helping.
Create companies that's the only way that market is going to grow youre not going to have big farmers like they're doing like we signed these two leases.
A quarter or two ago with Lilly in Boston, and BMS, Bristol Myers and.
San Diego, you'll never see that in New York because of the.
Just the nature of the topography and geography, there <unk>.
<unk> got very high tax burden and you've got some safety issues going on now that hopefully may be the governor and others will wake up to.
But it's that's.
Thats the kind of market. It is it's a it's a small company market, it's a great place.
But it's different than every other market, it's unique compared to all the other clusters with respect to the state and city.
Effort in Kips Bay, there, it's a pretty broad and deep effort much of it is.
Institutional and governmental driven there is a.
Bought a building or a plan to build out.
Tower.
In that area, but probably to get.
Go through the land use approvals will take two plus years and then go through an RFP process and then the development process is maybe a decade away.
But I think what what's really needed is.
Company creation, there to really continue to foster the demand and that's kind of I mean, we know that market because we literally help create that market. So that's the state of play there.
Does that investment I guess improve the longer term outlook for that cluster and maybe increase the likelihood of you doing phase III I mean, I don't know the timeline is probably too early to say, but does that make you more encouraged that things are coming around there.
Well those are I mean, I think it's good anytime you can continue to build.
Infrastructure for institutions and governmental bodies that are doing research or developing part of that is health care delivery services, which we're not involved with so those are all good things that's the east side medical corridor really at its best.
We're anchored between Bellevue and why you and that's why we chose that site. When we responded to the RFP by Mayor Bloomberg.
But I think it's fair to say.
What really is needed as capital and company formation, because that will be the lifeblood that will really grow that market over time and what we've helped grow it over the last 12 years. So that's what it's been.
Okay, great. Thanks for that and then just last one for me with regards to your investment book I know the capital markets are a little bit dislocated right now is a refining better opportunities to deploy capital and that investment book and when you typically look at new investments are they more strategic or are you taking more opportunistic.
Just given where.
Maybe some some opportunities may lie given that it might be difficult for some of those companies.
Tractor capital right now.
Well I think you know.
As Holly said Theres been an all time high venture fund cap.
Capital raise this year.
That.
Is kind of.
Invested sprinkled out over a 345, maybe even longer time period.
And I think it's fair to say that.
Great companies with Great technology high unmet medical needs.
Protected IP good IP.
Just really smart people at the scientific Hellman the business home will generally always attract capital I mean, we invested in <unk> back in 2003, when it was a startup company because we felt that our NII had great promise, but it took 15 to 20 years to prove but.
It was.
Great investment that company has gone on to do great things and as a huge footprint in Cambridge, and then in 2013, which again was before the bull market started to happen. We took an early investment and Madonna and everybody knows the story there so sometimes.
Down markets as as things are valuations are better and they give you interesting opportunities that really are focused on totally.
I would say.
You know ground breaking.
<unk> technologies that may create tremendous.
Opportunities for shots on goal and so many of the diseases that we're all suffering from so that's how we look at it. So yes. Good time do good time to invest.
Okay, great. Thank you.
Thank you.
The next question comes from Joshua Dinner line from Bank of America. Please go ahead.
Hey, guys.
Appreciate all the color today.
I had a question on the guidance.
Due to the high and low end of same store cash.
Guidance and then also same for the capitalized interest guide.
Yeah, So deane.
So.
If you look at our guidance.
Today same property.
Call it the midpoint.
Is.
7% GAAP.
Seven 8% cash.
And I think my commentary earlier.
<unk> highlighted.
We're at 7%.
For nine months on GAAP, So we're right on the midpoint today.
And then we're at $8 nine from the upper end on a cash.
Basis so.
We're at a good perspective for nine months.
And I kind of highlighted the outlier.
Drivers.
Occupancy growth driving a two X benefit to NOI. So we had 100.
Year to date for nine months 110 basis point occupancy growth.
A double impact at least the NOI.
And then early.
Lease renewals early early in 2022, which was also driving strength. So that's the backdrop.
We've got a good.
Good run rate for the nine months.
Which will carry us into a comfortable spot with our outlook for the full year.
What about the capitalized interest upper and lower ranges.
Look I think the way to think about cap interest and interest expense, we don't change those numbers very often.
The run rate that you've seen.
For cash interest this year.
There is probably reflective of.
The volume of construction activities in our business.
Which continue.
An upward trend at the moment, meaning capped interest probably.
On a quarterly basis doesn't peak.
Peak out until.
Probably Q1 of 'twenty three.
So you are still on an upward trajectory as our and that's just a pure function of.
What you would call construction in progress or the.
The basis, that's under construction, which drives the amount of capped interest the interest rate drives it a little bit but so much of our cost are fixed is very little variable cost.
For interest expense, so it's really just a function of.
Spend quarter to quarter, adding to CIP.
At a pace that's outpacing the deliveries.
Which as I mentioned earlier that you will start to peak out here in the next.
A quarter or two.
Thanks.
And for our last question, we have a follow up from Michael Griffin from Citi. Please go ahead.
Hey, Thanks for staying on I'm, just curious obviously, we saw the news about GE moving out at five necco, what are the prospects potentially to tobacco all those space in and would you attempt to sublease it could it be a potential conversion opportunity and are there worries that there might be more of this coming down the pipe.
Your traditional office users I think it's about 8% of the portfolio, but any commentary there would be great. Yes, so maybe ill ask dean to comment, but one thing to keep in mind. There is an existing lease with a credit tenant but dean.
Yeah, I mean, that's.
The key concept and I guess, the other thing to keep in mind, Michael There's always it's interesting the articles that do arise on any company.
And most companies will choose not to comment specifically about articles in the press.
As Joel mentioned, we do have.
The lease with a credit behind it it's somewhere around 8000 square feet in the seaport.
<unk>.
But beyond that we don't really have.
Much to comment on.
Alright. Thanks.
And this concludes our question and answer session I would like to turn the conference back over to Joel Marcus for any closing remarks, well will make it quick thank you and stay safe everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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