Q4 2022 Alexandria Real Estate Equities Inc Earnings Call

[music].

Good afternoon, and welcome to the Alexandria Real estate equities 2022 fourth quarter and year end conference call.

All participants will be in listen only mode.

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I would now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. This conference call contains forward looking statements within the meaning of the federal Securities laws. The company's actual results might differ materially from those projected in the forward looking statements.

Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements.

And in the company's periodic reports filed with the Securities and Exchange Commission.

And now I'd like to turn the call over to Joel Marcus Executive Chairman and founder. Please go ahead Joel.

Thank you Paula and welcome everybody with me today are Alli Kuhn, Peter Moglia, and Dean Chicken I again want to thank you for joining Alexandria, as fourth quarter and year end 2022 earnings call and wishing you a safe and healthy new year and thank you to our Alexandria family team members for their continued opt.

Racial excellence across all facets of our unique business platform, a truly mission driven one of a kind of company.

We have truly exceptional fourth quarter, and a 2022 year end results and by any and all metrics, we're very proud thankful and humbled, while many public reporting companies have really struggled mightily during this past year.

I'd like to take a moment to tick off what I consider to be some of the most notable news.

For Alexandria truly amazing that Alexandria has delivered approximately eight and a half a percent F O for share earnings growth, while continuing to strengthen our fortress balance sheet. The strongest in our history and Dean will give you more details on that against the backdrop of a very deleterious macro market.

This 2022 a year.

And really again, nothing short of operational excellence to the team with our highly leased development pipeline and continued strong leasing and Peter will comment on that Alexandria is well positioned to deliver strong earnings growth again in 2023, we have continued to create long term shareholder value with a total shareholder.

Turned from IPO through the end of the end of the year December 31, 2022, 1673% compared to the MSCI REIT index up 684%, yes, 500% to 628% and NASDAQ 838%.

<unk> a wide margin upbeat.

Alexandra continues to produce stable, increasing long duration cash flows and an increasing dividend.

We're very proud of our approximately 1000 tenant base of one of a kind treasure.

<unk> continues to generate remarkable demand for our Alexandria lab space and Peter O and Dean will highlight more on this but again 2 million square feet leased in fourth quarter over 8 million for the year and almost 18 million for the last two years with rental rate increases last year of about 22% on a cash.

Cash basis pretty pretty amazing staff, and we're very proud of our own tenant base, which is generated by far and away the majority of that lease space.

About <unk> 22 in your in 2022 with another strong quarter by all.

<unk> fundamental financial metrics and a few others and Dean will highlight some of those 100.

Almost 100% on collections from a very strong and durable tenant base I'm very proud of almost 95% occupancy and as we put in a I think very strong same store performance, both for the quarter and the year.

Innovation in medicine hat is but must continue to be a national imperative. One in four of us will develop a neuro degenerative disease, nearly 40% of adult men and women will be diagnosed with cancer during their lifetimes.

And by then the nation's population suffers from mental illness, and we're continuing to see over 100000 deaths due to overdose last year. Despite all of the efforts that are certainly this company is made with our Dayton.

Project, but just a literally a war out there, which it does not seem to be.

In Czech and governments at the federal state and local level need to double down with the vast amount of resources that are inappropriate and over the last few years and really focus on this mental health issue.

A comment about our successful and continuing value harvesting and recycling of our precious capital Peter will detail that but.

Amazingly stellar 2022 with $2 2 billion successfully harvested and then reinvested in a highly disciplined disciplined manner.

And Peter and Dean will also comment on the excellent and steady progress. We've made year to date, just one month and to our 2023 business plan for value harvesting and capital recycling and we're very optimistic about that and then before I pass it over to Hal I want to particularly call out and thank our finance team.

And all those who had a hand in the impressive balance sheet accomplishments set forth on page X b of our supplement.

I'm very proud that we once again have the strongest balance sheet in the company's history, so without a minute turn it over to Holly for further comments.

Thank you Joel and good afternoon, everyone. This is helicon SVP of science and technology and capital markets.

Today, I'm going to provide a recap of the life science industry coming out of 2022 and now into 2023 and how our highly unique approximately a thousand tenants remained resilient with the volatility of the current macroeconomic environment.

As Joe mentioned and as we often talk about the 90% of 10000 diseases remains an incredible opportunity and unmet need and the fact is many of these do have treatments.

Are far from solved.

Take type one diabetes.

Well it was a death sentence before the discovery of insulin over 100 years ago, its still carries an immense burden.

A person with type one diabetes makes an average of 180 health related decisions a day, some of which have life or death consequent that.

Now looking back at 2022, the stat strict truly speak for themselves.

Regarding the enduring strength of the life science industry of which I'll highlight three.

First despite widespread commentary that VC funding hit the pause button in 2022 life science venture deals totaled nearly 58 billion other than 'twenty 'twenty. One was a record year. It was the second highest amount of capital ever deployed.

Of note over 70% of V. C dollars deployed went into in Alexandria cluster.

And what do you see funds across tech and life science, raising nearly 160 billion in 2022.

Our record eclipsing 'twenty 'twenty 150 billion significant dry powder on hand to deploy over a multiyear time horizon.

Second large pharma continues to be one of the best performing sectors in the market in a year, where total returns for market indices, such as the NASDAQ and Dow ended the year down 10%. The top 20 Biopharma ended the year at an average 12% with eight of the top 20 pharma ending the year with total returns.

Over 20%.

With historic levels of cash on hand over 300 billion to deploy into R&D and M&A Biopharma has the firepower to continue to innovate and crowds.

And lastly, the pipeline of early innovation to commercialization continues to deliver to patients with 37 novel F. D. A small molecule and biologic approvals.

Every gene therapy approval and a novel cell therapy approval of which nearly half were developed by Alexandria tenants.

Moving to Alexandria, unrivaled life science tenant roster, we wanted to provide additional color on our business segments and some examples of Alexandria tenants at the forefront of life Science innovation.

Starting with large pharma 260 billion was reinvested into R&D in 2021 and analysts estimate that including leverage pharma has over 600 billion to deploy into M&A and partnership.

The next several years, indeed decade, we're gonna be framed by large pharma has continued pursuit of innovation and product patents expire and new types of medicines, such as mrna in cell therapy is transition from large preclinical and clinical pipeline to commercial stage.

Alexandria tenants Pfizer is a great example, with preclinical and clinical sorry with over 110 programs spanning early to late clinical development.

And an estimated 19 products launching in the next 18 months.

The company also noted in there for Q earnings. This morning, they are targeting an additional 25 billion in revenue to come from M&A activity by 2030.

Transitioning to public biotech our tenant base and creates a majority commercial stage companies, which brought in nearly 150 billion in revenue in 2020 one.

Tenants such as Amgen vertex have large diversified pipeline driving long term growth.

The note vertex is also leading the next generation of type one diabetes treatment with a novel clinical stage cell therapy that addresses the root cause of diabetes.

For a clinical stage biotechnology companies data is king.

And those that have met and will meet clinical milestones in 2023 continue to see stock recovery and ability to access capital through follow on financings.

While the public markets are still recovering life science follow on financings reached nearly 17 billion in 2022, which is right on par with the average life science follow on financings over the past decade.

With respect to life Science products service and devices. This segment largely consists of commercial stage tenants well.

While not immune to higher interest rates and supply chain challenges. This is a big business segment that both drives and respond to the needs of researchers across academia, biotech and large pharma, which continue to grow and innovate.

A notable development in the space is the rapid drop in the price of genome sequencing driven by a healthy increase in competition.

100 million to sequence the genome in 2001 and dive into $1000 per genome in 'twenty 'twenty. We are now looking at the 200 dollar genome, enabling access to critical sequencing data that saves lives.

So where are we headed in 2023.

In the face of persistent economic headwinds all industries are forced to double down on the areas of greatest value.

As part of the reset their companies that won't make it and we'd argue that that's in the long run as healthy as capital is deployed more efficiently.

They will continue to be further separation of haves and have nots, but companies like those on Alexandria tenant roster with differentiated technologies, a clear roadmap to key inflection points, such as generating clinical data and tenured management teams will continue to raise capital.

As history has shown time and time again some of the most successful companies are those created in the depths of the financial downturn.

Ultimately the life science industry is not built on technology is looking for a problem, but instead thousands among thousands of devastating problems I E diseases that this incredibly innovative industry is poised to address over decades to come to.

To end on a note of hope from former FDA Commissioner Scott Gottlieb are engineered he drives are hopeful innovation, but its our compassion for each other that inspires us to apply these advances to the purpose of reducing human suffering.

With that I'll pass it off to Peter.

Thank you Holly.

2022 plus quite a volatile year in the macro markets. A reminder, that all businesses are subject to cycles, some more than others. The pruning we see in the tech industry today is not a surprise to anyone who has been around since the turn of the century. However, much like a broken bone it'll come back stronger after it heals.

Unlike tech developing products and services to address diseases hard and it takes a lot of time.

Much harder and more time consuming than creating the next app to book, a reservation or share recipes.

Because of that there is more discipline and life science investment discipline, Alexandria has mirrored in our real estate strategy.

Which is why the through the dotcom bust to the financial crisis to whatever you want to label today's conditions. Our business remains sound as you can see in our results this quarter and during those historic down cycles.

Despite the macro headlines we remain optimistic and excited for our business as we are in the early innings of the Golden age of biology.

We have only had the blueprint of the human genome for 20 years and in that time, we've developed more new modalities to attack disease than in the previous 100, it's gonna be hard and it's going to take time, but the industry is going to have options for people with Alzheimers, it's going to perfect technology.

<unk> to detect pancreatic cancer in time to save lives and much much more.

Let's all remember it's hard it takes time and patience and then you will understand why life Science research and development continues through the proverbial thick and thin of economic cycles, making our business resilient and essential.

With that said I'll briefly touch on our development pipeline progress update you on construction trends discuss our leasing and update you on investor demand for life Science real estate.

In 2022 are best in class development teams continued to deliver high quality purpose built laboratory space to our tenants on time and on and on budget in a very challenging construction environment, which I'll touch on in a moment.

During the fourth quarter, we delivered just shy of 500000 square feet with $28 million in annual NOI commencing during the quarter for the year, we delivered 1.77 million square feet spread over 15 development and redevelopment projects with annual end of NOI of 119.

Point 2 million commencing during the year.

Initial stabilized yields for recent deliveries averaged six 8% and six 3% on a cash basis, reflecting the healthy contractual annual increases embedded into our leases.

As of year end projects under construction and near term projects expected to commence construction over the next four quarters totaled $7 6 million square feet and are 72% leased approximately 77% of that leasing has come from our approximately 1000 existing tenant relationships.

New projects added this quarter include 14, 50, Owens, which is approximately 213000 square feet and will be 100% funded by our joint venture partner and 10075 Barnes Canyon Road in Sorrento, Mesa, which will be 50% funded by our joint venture partner both.

<unk> are under active leasing negotiations.

Deliveries, primarily commencing from the first quarter of 'twenty three through the fourth quarter of 25 are expected to add $655 million in annual incremental NOI, reflecting a strong pipeline driven by consistent demand even in this volatile time.

Transitioning to leasing.

The fourth quarter results continue to demonstrate the strength of our unique one of a kind company with leasing volume of 2 million 322 square feet leased in the quarter.

Fourth highest total in company history.

The 8 million and 405587 square feet leased for the year is the second highest annual total in company history.

As you can see in the supplemental the guidance our guidance for strong mark to market growth remains unchanged from Investor day, with a range of 27% to 32% on a GAAP basis, and 11% to 16% on cash.

These results are certainly reflective of how his commentary on the strength of VC funding and a stellar 2022 performance of large pharma with 300 billion in cash on hand, we anticipate further investment in growth from this high credit tenants sector in 2023, and the successful conversion of early innovation and commercialization.

<unk> reflected in the 37 F D. A approvals in 2022 will incentivize continued investment in new and existing companies that have sound business models and underlying science a court a cohort of companies Alexandria has a unique ability to identify.

The highest quality life science tenants always consider occupancy and the best assets as an imperative their facility in campus are not only used for research and development, but as a critical tool for them to recruit and retain the best scientific and management talent in the world, which is by far their greatest asset therefore demand.

For Alexandria facilities, and our unrivaled Mega campuses remains healthy as the field facilities are a plus and our operational excellence is highly sought after.

Moving to construction cost trends at a high level. It appears the construction industry is on the cusp of slowing down one of the leading economic indicators of the industries. The AIA architectural billings index that leads nonresidential construction activity by nine to 12 months.

Design work is at the front end of projects. So architecture at the for our the first consultants to slow down.

Recent numbers show three the 3% moving average heading towards no growth in billings and commentary from the Ey was that fewer clients are expressing interest in starting new projects for the first time since the post pandemic restart of construction projects, which was the genesis of significant cost inflation in <unk>.

Supply chain problems, we're starting to see some signs of materials pricing flattening out and general contractors and subcontractors looking for work.

That said there are still items, such as aluminum rebar copper and glass of 16% to 21% over this time last year and it's still very difficult to obtain electrical switch gear emergency generators building controls and smart air handling units because despite an improvement in the availability of chips there are.

More products using chips than ever before so demand for them is still ahead of supply.

Laboratory buildings are heavy consumers of these hard to get items. So to keep a laboratory construction project on time and on budget is a difficult task Alexandria has the Intel inexperienced needed to make quick decisions and relationships with critical vendors to ensure we have access to the materials and labor needed to meet our schedule and.

Budgets.

Despite the continued construction market pressures as mentioned, we do believe the industry is on the customer slowing down and we do expect cost escalations to reflect that in 2023, reducing from 9% to 10% from the range of 9%, 10% experienced in 2022% to 4% to 6% and <unk>.

2023.

However, the $2 three trillion dollar infrastructure spend over the next eight years will continue to put pressure on costs and labor. So we will continue to conservatively underwrite and manage our value creation projects as of the end of the year, 81% of our active development and redevelopment projects aggregating $5 6 million square feet.

Our under G N P or other fixed contracts, which is consistent with the run rate. We have maintained during these volatile times.

Anticipating yearend volatility in the real estate investment markets, we completed our 2022 value harvesting in asset recycling efforts in the third quarter with impeccable execution as we laid out at Investor day overall.

Overall, we completed $2 2 billion of value harvesting with improved properties, achieving a weighted average cap rate of 4.4% realizing a total gain of $1 $2 billion and a value creation margin of 107%.

This is a tremendous achievement considering the volatile interest rate environment in 2022, with many real estate investors on the sidelines. It speaks to the desirability of our assets, which are in the best markets with high quality tenants and managed with the operational excellence.

High quality life science assets are scarce and that is reflected in the pricing.

We have started working on and are making good progress on 2023 value harvesting in asset recycling and will update you on that next quarter, but in the meantime, we'd like to report on three notable non Alexandria sales that illustrate that there is still strong demand for life science real estate product.

First is the sale of 1828, El Camino real and Berlin game in the Bay area.

Anchored by three non credit life science tenants. The property is 98% leased but is extremely low quality with limited window line, no shipping and receiving no backup power and venting through the windows to get adequate HVA see despite this and investor paid $902 per square foot for this asset at a cap.

Rate of five 8%.

The second trade was in the route 128, Submarket of Lexington mass, where a single non credit tenant occupied 101310 square foot manufacturing building at 20 Maguire Road sold in October for $878 per square foot and a six 2% cap rate.

The third comp, which closed last week is an R&D campus known as the gauge and Centerpoint and the route 128 Submarket of Waltham, It traded for $983 per square foot and a 5% cap rate.

It was reported that some of that some vacancy existed at that property and that the stabilized return is likely to be in the high fives.

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 source.

Yes.

With that I'll pass it over to Dave.

Alright, Thanks, Peter Dean Chicken allergies here good afternoon, everyone, we'll jump right in here.

Our team is very pleased to have the strongest balance sheet in the company's history as of December 31st and this really is a result of disciplined execution of liability management year to year over the past decade.

Key highlights include you know, we really have earned our corporate credit ratings that rank in the top 10% of the REIT industry today.

We ended the year with tremendous liquidity of $5 3 billion that provides us important flexibility in this macro environment.

No debt maturities until 'twenty 'twenty five a statement only a small handful of reach can make today and a weighted average remaining term of down to 13.2 years now.

Net debt to adjusted EBITDA was five one times on a quarter annualized basis 5.2 times on a trailing 12 month basis. The fixed charge coverage ratio was very strong at five point out times and 99.4% of outstanding debt is subject to fixed interest rates.

Our team had outstanding execution in 2022 on our strategic capital plan key highlights include 1.8 billion of 12 year and 30 year bonds with a weighted average rate of 3.28% a term of 22 years completed in February of 2022.

Outstanding execution by our team as Peter highlighted on outright dispositions partial interest sales.

Aggregating $2 2 billion with an amazing 1.2 billion in gains or consideration in excess of book value.

4.4 cap rate on cash NOI, all exceptional statistics and significant value creation tap for reinvestment.

We had disciplined issuance of common equity with proceeds aggregating $2 5 billion at an average price of $189 per share, including 105 million sold under forward equity sales agreements in December of 2022.

On a blended basis for the year, we felt comfortable executing on the modest 105 million under the equity under our forward equity sales agreements in December at roughly $150 per share.

Now briefly on the bond bond market at the beginning of 2023 has been positive for high quality issuers like Alexandria overall pricing for 10 year bonds for Alexandria has significantly improved and as of yesterday was in the upper 4% range or just below 5%.

For 2023, we will continue to focus on execution of real estate dispositions and partial interest sales or joint ventures.

A significant component of our 2023 capital plan.

Two transactions or under executed LOI to bring in a partner on a portion of each asset. These transactions will provide approximately 370 million of equity type capital in 2023, and there are other transactions that we expect to complete this year.

Turning to operating and financial results really congratulations to our entire team for outstanding execution. This year or in 2022 during a very challenging macro environment. We reported total revenues of $2 6 billion up 22.5% over 2021 with <unk> per share as adjusted of $8 42.

<unk> up eight 5% over 2021 and outperforming our initial outlook for 2022 of 836 by six cents and ahead of consensus both for the fourth quarter and the full year of 2022.

Diving into key highlights from our truly amazing operating and financial results for 2022.

Strong rental rate growth leasing volume and occupancy growth drove record same property NOI growth in 2022 of six 6% and nine 6% on a cash basis exceeding our 10 year average same property NOI growth prior to 2022, 6% and two 9% on a cash basis.

The last four years of rental rate growth on lease renewals and releasing of space had been the highest in the company's history, including rental rate growth of 31% in 2022 over the last two years cash rental rate growth has been the highest in the company's history, including 22, 1% for the full year of 2022 leasing.

Volume in the fourth quarter was robust relative to the quarterly average volume in recent years in the range of one one to 1.3 rentable square feet per quarter, highlighting the continued demand from our client tenants.

Last two years have generated the two highest annual periods of rentable square feet leased including $8 4 million rentable square feet in 2022.

Three of the last four quarters represented the highest quarterly periods of rentable square feet leased including 2 million square feet in the fourth quarter.

Now turning to occupancy occupancy was up 80 basis points since the beginning of 2021 to 94, 8% as of December 31 now.

Now looking forward into 2023, we expect a slight decline in occupancy in the first half of the year with recovery expected in the second half of the year, we had a similar dip in occupancy in 2022, specifically overall strong occupancy in the year, but we did have a 40 basis point decline from the first quarter of 'twenty two to the.

Third quarter of 'twenty two.

For 2023, we expect temporary vacancy beginning in the first quarter related to spaces that on average are expected to generate significant rental rate growth greater than 60% on a cash basis. Now. These spaces are forecasted for occupancy over the next five quarters. This includes a mix of small redevelopment space I E. The.

First time conversion to lab space normal lease expirations and a few early tenant departures importantly, consistent with our general quarter to quarter growth enough a vote per share for many years, we expect quarter to quarter growth in <unk> per share in 2023 now.

Now a few of the key highlights 90% of our annual rental revenue is from investment grade or large cap publicly traded.

Companies within our top 20 tenants highlighting the high quality list of client tenants that our team is curated over the years 99, 4% of collections of January rent through January 27th just highlighting the continued strength of rent collections and we had a very strong adjusted EBITDA margin of 69%.

Highlighting execution of operational excellence by our team.

Flows from operating activities after dividends for 2023 is expected to be very strong at 375 million at the midpoint of our guidance and will continue to support growth in our annual common stock dividends per share our <unk> payout ratio was very solid at 58% for the fourth quarter.

And at this pace cash flows from operating activities after dividends over the next three years should generate over $1 billion and that's an amazing statistic and very efficient capital for reinvestment.

Now turning to a couple of important real estate highlights construction in progress otherwise known as CIP is forecasted to peak in the first quarter. Then declined slightly through 2023 is the dollar amount of deliveries are expected to exceed additions to C. O T a quarter to quarter, highlighting the significant volume of Dill.

Memories over the next couple of years as Peter highlighted we have $7 6 million rentable square feet of projects that are 72% leased on projected to generate $655 million of incremental net operating income over the next three years.

In the fourth quarter, we recognized impairments aggregating $26 2 million.

On real estate, primarily related to a few assets we plan to sell in 2023, each asset is small and represents noncore assets no longer strategic for Alexandra to own and to put this into perspective. The book value of assets held for sale was approximately 120 million as of December 31st the key takeaway is that from time to.

We review our asset base and proceed with selective sales that continue to enhance the quality of the remaining asset base.

Briefly on venture investments.

<unk> per share as adjusted over the last two years has included an average of 103 million of realized gains each year from venture investments or approximately 26 million per quarter now quarterly gains from venture investments in 2023 are expected to be up slightly in comparison to this recent quarterly run rate as of December 31.

2022 we had gross unrealized gains of $506 million on a cost basis of 1.15 billion highlighting significant significant value in our venture investment portfolio now.

Our investments in our venture portfolio have been very modest at less than 70 million in aggregate over the last five years, including 25 million that we recognized in the fourth quarter.

Turning to guidance, we reaffirmed guidance for 2023 that was initially provided in connection with our annual Investor Day on November 30th with one minor update we updated excess cash held from bond proceeds to 300 million, representing a $50 million increase from the midpoint of our prior guidance, our 2023 guidance for EPS diluted as ranch from.

$3 41 to $3 61, and ethical per share as adjusted diluted is a range from $8 86 to $9.06 with no change in the midpoint of $8.96.

So under the current common stock distribution agreement, we have in place otherwise known as our ATM program. We have approximately 142 remaining available we expect to file a new program in the first quarter a 23.

Please refer to page six of our supplemental package for details on underlying assumptions included in our strong outlook for the full year of 2023 with that let me turn it back to Joel.

Thank you operator, you can open it up for questions. Please.

We will now begin the question and answer session.

Great question.

Star then one on your telephone keypad.

If you're using a speaker.

Paul.

A couple of your handset.

Okay.

Yeah.

Question. Please press star two.

At this time, we will pause momentarily to assemble the roster.

And our first question will come from Steve Farquhar of Evercore ISI. Please go ahead.

Yeah. Thanks, Good afternoon, everybody I'm I guess I wanted to just circle back to some comments that Dean you made about some.

Some of the pending sales and joint venture interests I'm, just wondering if either you or Peter could provide a little bit more color on you know what the institutional market is sort of looking for maybe how pricing has changed over the past six months and can you give us any sort of flavor on the timing of when some of these transactions make it up.

With the finish line.

Yeah. This is Joel I think we will try to be <unk>.

Rolling that are given that we have where at the letter of intent stage on a number of transactions, but maybe Peter you could give kind of a topside view.

Sure.

Obviously.

There's only a few product types out there that people are comfortable in investing in right now.

And obviously life science real estate is one of them. So we are I mean I.

Been receiving calls them on a fairly regular basis from some existing partners that are excited to see what we have going.

This year.

As I mentioned during my comments cap rates are expected to rise from the peak.

But as I've also said in the past.

We don't anticipate on a relative basis to be.

Very.

Hi.

<unk>.

And you know I'm not going to speculate right now on where there'll be we'll we'll start reporting once we have more data but.

They will be sticky.

Given the scarcity of opportunities for life Science real estate.

Okay, and then just a second question Joe you know I know acquisitions are not you know a huge part of the plan right now, it's mostly development, but maybe could you just comment on the two deals that you did announce in the quarter and kind of the strategic rationale for for both of those projects.

And you know how you think about pricing on those versus your development opportunities.

Yeah. So each one of those was unique in and of itself.

You don't want to get too granular, but I think the one in.

The route 128 corridor really enables us to piece together, a three different products and do a more than 1 million square foot Mega campus.

And we have some great activity from our thousand tenants are to help fill that so we're very optimistic on that and feel like that was very strategic it's also under a lease back for a number of years, so it'll be continuing to cash flow.

The other acquisition was a unique acquisition.

In downtown Austin, we felt that it was a superb location.

It's also under a lease back for a period of time. So we will continue to generate good revenue and you know I won't comment on what our future business plan is for that but we think there's a really great opportunity to do something unique in that spot.

That's helpful.

Great. Thank you that's it for me Thank you Steve.

The next question comes from George do you think gosh.

Security. Please go ahead.

Oh hi, Thank you for taking my question. So I was wondering what are your thoughts on the sublet market into the sector and have you seen an uptick with more companies subleasing space.

The board and specifically in your markets and could you. Please remind us what percentage if any of your portfolio is currently sublease.

So Peter do you want to maybe comment generally on that.

Yeah I.

I I've got some suddenly statistics.

For our our larger markets I will say that the.

The amount of sublease space overall, it's come down and the over the last couple of quarters.

One of the reasons for that is.

Built out lab space is a very attractive, especially for companies today.

Today that want to try to limit their out of pocket investment in this space. So Boston is at about four 7% right now sublease and again anything.

Of quality and that's built out.

Moving fairly quickly San Francisco has been reduced to 3% and San Diego only has 2.1%. So these are all very.

Our normalized numbers for any any cycle.

Okay.

Great. Thank you and could you comment on your specific portfolio.

It's less than that.

Okay and just my second question on Sanofi, we noticed that the square footage of D. N. A drop by about 30000 square feet quarter over quarter. I was wondering if you could provide some more color on that.

Okay.

I don't know gene if you're if you know that what asset that was or we won't even know its such a small number I'm sorry, guys. We don't I don't have that at my fingertips, Yeah, I don't either.

It's 30000 square feet on our 40 million square foot portfolio, sorry, George.

Okay. That's all for me. Thank you okay. Thank you.

The next question comes from Michael Griffin of Citigroup Global markets. Please go ahead.

Great. Thanks, maybe going back to the the Regal in 28 acquisition you know Peter you touched on some some pretty favorable pricing it seemed like with some transaction comps I feel like that's probably one submarket, but maybe theres been war more worries around supply with so maybe you can expand on sort of what you're seeing out there has had symptoms.

Changed you know for that suburban market I mean, obviously, when we think Boston, we think Cambridge being the highest quality market there, but maybe you have some sentiment shifted in and more of the suburban product. Yeah. This is Joe Let me, let me make a topside comment and then I'll turn it over to Peter.

I think you have to if if you're asking about general sentiment you know.

Peter will comment if you're asking about our sentiment.

It's different because we generally have.

A certain targeted demand from our existing client.

Client base, and therefore by making the acquisition. We did we're doing things that we do to create an environment where companies want to go it really is.

Focus on our Yep.

Our kind of game plan, but if youre looking at a topside view I don't know Peter you could share.

Topside view on wall for them generally.

Oh Waltham Lexington in the other surrounding areas I think the sentiment is.

Still positive the group that last comp I talked about the campus that are sold for a five cap.

It was reported I think it was co star that had the article that the group that sold it made 200 million on it and they only owned it for two years, so I'm pretty good outcome, and obviously, if somebody's paying 200 million more than.

Someone bought it for two years ago, maybe it was three years ago now.

You know that there.

They are a believer in the rent growth in the market.

So.

The other the other reason that the comps are weighted towards the suburbs is very likely because there's just not a lot of available product by in Cambridge or the seaport are watertown. So the opportunities were just there and I don't know if it's says anything about.

The sentiment.

And probably just more about the availability.

And keep in mind, there will always be demand among.

More R&D light companies for Oh, what route 128 in Waltham band in the heart of Cambridge, That's just how it has been for decades now.

Great. That's a that's helpful and then on the on the $1 4 billion of commitment costs from from joint venture partners. I'm curious are there any kind of restrictions around how that can be drawn down how much. These partners can fund I think you've got some portion of that in your capital plan for this year, but the only thing.

You can expand on that would be helpful as well.

Now I'll ask dean to do that but obviously each and every situation is different but dean upside view.

Yeah, I think the high level.

The concept on the $1 4 billion of commitments for funding from our JV partners that generally speaking these are.

Funding requirements related to our value creation.

Creation pipeline, so construction funding commitments.

Yeah and these.

Commitments do extend out over multiple years out two to three years, depending on the joint venture.

But given the recent.

Increase in.

Projects with joint ventures over the last call. It four to six quarters, we just wanted to be sure that.

The investment community understood the significance of the commitments coming from our partners on just a handful of construction projects.

So we'll continue that disclosure going forward.

Great well that's it for me thanks for the time Yep. Thank you.

The next question comes from Josh generally of Bank of America Merrill Lynch. Please go ahead.

Yeah, Hey, everyone I saw in your top 20 tenants page in the shop.

It looks like there's a footnote on 270 bio saying the in place cash rents are 20% to 25% below current market. It's like that last quarter was $5 is 10% below current market just just curious on.

What's driving that update.

Yeah, but Ian do you have an ear man on that.

Yeah. So it's dean here goes.

So what we did was we looked more carefully at the actual space I believe the prior quarter was slightly.

Lower or showing on a modest mark to market opportunity.

And it was reflective of looking at the specific property overall, but we realized we had to dive into the details a little bit further because it didn't make sense as we were looking at it for the current quarter and as we looked at the space specifically, so a portion of the building and the specific space that there.

All couponing and Theres, a bigger mark to market opportunity. So we wanted to be sure we updated that number in the current quarter.

So nothing changed from a from a from a real mark to market, but previously it was the overall building and today, it's just specifically or this quarter specific to that space that they occupy.

Okay and then.

Just since I'm newer to the story just kind of curious why the disclosure on that.

It looks like it is a small market cap.

Oh, it's really due to that some occasionally there's a tenant in the top 20.

List of tenants that we did not cure rate ourselves or has a a modest.

Our market cap and we just want to provide some incremental color to.

So investors don't go don't need to research the details on their own.

Okay.

No I appreciate that Jim.

Thanks, guys.

You.

Oh.

Our next question comes from Richard Anderson.

NATO Securities. Please go ahead.

You may be on mute rich.

I totally was sorry about that Joe.

So.

Peter.

Talked about cap rates and in your opening comments and I think Dean you mentioned.

Some some partial interests that are are far along in may be announced shortly.

How would you characterize the quality spectrum of what you're looking at for partial interests are we or are we talking very high quality assets like you know the Binney Street transaction, a little while back or more middle of the road, you know and as a as a mechanism to minimize the cap rate, but also you know keep keep hold of.

Your you know your best assets are not not relinquished too much of that opportunity going forward.

I'll I'll start rich the profile of what is going on is is good quality. We don't have much of of anything outside I think of high quality and certainly are some workhorse assets that that we still hold.

We've sold a lot of those so partial interest sales just because of the profile of our portfolio are typically going to be higher.

Higher quality assets and that's what we're working on now and.

I mean are we are we sub five on or you're not you're not talking about pricing just yet or can you give any I mean I don't think it doesn't does as any good really to talk about pricing because we're we're still negotiating with people and so.

Better for better strategy to keep that to ourselves at this point fair enough and then second question for me is for Dean.

You have a.

Average debt exploration I think of 13 years, you said I think your average lease term expires in seven or eight years I'm wondering if if that provides you any opportunity in the future you know in the in the interest of matching liabilities with assets. If you're you know you're you're you're way concern.

If it is in that comparison as it stands today do you do you ever see that that GAAP shrinking, whereas maybe you know the opportunity to raise shorter term debt or Linkedin lease term you know would make sense for the company I'm. Just curious if that's if that spread that you have in place now as something that could wiggle around a little bit.

In the future.

Rich I guess the way to answer the question as I think we find significant value.

In the longer maturity profile and given the size of our company and.

You know we have a <unk>.

<unk> full maturity profile for a big company right or that matches the big companies made maybe a better way of describing it so the longer average debt term gives us a lot more.

Flexibility to manage the overall maturity profile right because if that was more like five years.

With that much debt outstanding that would be a lot to manage year to year on top of any growth capital. So I think strategically the longer term remaining maturity is a is a real positive for us.

Okay Fair enough, that's all I have thanks, thanks rich.

Our next question comes from Tom Catherwood.

Please go ahead.

Thanks, and good afternoon, everyone appreciated how at least comments at the outset about tenant health and funding and the commentary around Pfizer and then they really jumped out maybe Peter or Joel during <unk>.

Prior M&A cycles in the Biopharma industry, what was the read through for real estate usage did acquire as tend to consolidate the footprint of their portfolio of companies or were there further expansions. Yeah. I can give you my thoughts and Peter can share. He is I think it's hard to compare.

You know past cycles, because the level of technological development in biotech was so different.

Today, it's much more sophisticated.

New modalities. So when you have M&A today it used to be often times you are buying a company for maybe a pipeline and you know you want like to hold onto the people, but maybe.

Space is less valuable going back maybe a decade or two today that space is pretty critical, especially if it's located in a top tier.

Cluster market like Cambridge.

Not only do you want the people for recruitment retention and just working on the projects, but you've also got probably built into the space some pretty sophisticated new modality technologies.

You know both at the lab side and then the.

And then the R&D meant manufacturing, which is kind of integrated so closely. So I think it's harder to tell I think again, there's going to be a whole series of different types of uses of capital a lot of it it'll be partnering which has historically been.

Probably the favorite approach of of pharma there will be some acquisitions you know you've got a federal trade Commission, that's pretty hostile to any acquisition in any industry.

Industry. These days, so you'll probably see bolt on acquisitions, where people will want to keep that that group in that technology.

And Tobey, but I don't think it's.

It is easy to look at say big Mega mergers in the past and think that that has any relevance to the day and I think the key byline for life Science in 2023. In addition to what hollie kind of framed out is what will be the velocity the depth and the focus of this large cash words 300 billion and if your leverage it.

It could be as much as.

500 to 600 billion, but Peter you could comment just historically and what you've seen.

I mean, he used to be if you were to like a one trick pony. It was an acquisition and then you shut it down I mean, a good example was.

Company called Iqos in the Seattle area was bought by they developed CLS. They were bought by Lilly and they completely shut down but.

With the rise of platform technologies, a lot of the M&A in <unk>.

Right.

We're super beneficial to the growth of our clusters.

Company has realized that these teams that they were buying or these companies were much more valuable than just the pipeline, but the teams were extremely important. So there were a number of companies I mean, I remember when I was in Seattle.

Our company got bought by Gilead, There was a fire. It was called chorus pharma. They were 5000 square foot tenant any right. After that they are gilead approached us and we ended up.

Doing a huge over 100000 square foot.

Our deal with them so that they could expand the capabilities of the team so.

As Joel said it you know it ebbs and flows but I think if you look at the fact that.

I think about 75 or.

In certain years about 75% of products that have hit the market started from external innovation.

They end up on it and farmers hands.

Pretty pretty telling that that is a long lasting strategy too.

To call in the biotech world to buy the companies and to keep the teams in place because they generally have platforms in other products behind their initial ones. So.

I think the general trend in recent years has been to keep them in place and to expand.

No that'd be my.

Sally any final comments on that question.

Yeah, just to say that every acquisition is gonna be very unique in terms of the types of products being acquire that talent base that comes along with it.

That's N and so you know we very much are acutely aware of kind of a one off nature of every acquisition and ultimately you know for acquisitions, where you know they may tuck it into the company, we see a net positive in the ecosystem have its a small company that does get folded and those executives to go on to.

Create one more or multiple companies after that.

So we've had some great examples in the past as you know a company gets acquired and then at CEO goes on to build a you know a bigger an even larger company. So all together you know it's a net positive for the ecosystem I would say no matter what the outcome is and a great example, in Seattle as Peter mentioned another great one.

Is.

Celgene acquisition of Juno and then the acquisition by Bristol Myers, That's really one of their most critical advanced you know cell therapy.

Outposts. So again, it's almost case by case rich.

Great I really appreciate the the thoughts there maybe sticking with with Pfizer.

We did.

We did notice that in New York 219, East 42nd Street mood from future developments to intermediate developments. If memory serves me I think there was a six year sale leaseback on that asset.

What are your current plans if any on that building and a potential project. Yeah. So that building, which we acquired had a lease back to Pfizer remember, it's a up I'd say.

Office building for Pfizer, but it's unique in the New York very few.

Our buildings have the bones to be converted to to lap.

We're moving to.

Hudson yards as you know when their leases up I think out about two years or so.

But we do have some internally generated demand for that from our current client base and so we're moving we're moving that along.

Understood. Thanks, everyone. Thanks.

Thanks, Tom.

The next question comes from Michael Carroll of RBC capital markets. Please go ahead.

Yeah. Thanks, I know demand for fully built out lab product is pretty high but have you noticed any difference in the level of demand you're tracking in your development pipeline, where tenants do need to invest a significant amount of cash outlays to to build out that space. I mean has that dropped off noticeably over the past six to 12 months given the.

<unk> in the capital markets.

Yeah, Peter you could comment generally top side.

Yeah, I mean, one of the reasons the sub lease market.

Has stayed in check even when theres been.

Some disruptions to companies is the fact that.

And as we've talked about for now almost two years the high cost of.

Construction is just.

Created.

A much more expensive proposition when you have two to build out lab space.

The the news, though is that there's there's just not a lot of sublease space to satisfy all the demand so.

<unk>.

You know deals where the tenants have to invest space, such as our development and redevelopment deals.

Do you continue to go but I mean there.

If you're a board in your and your company wants to expand and they can go on to 25 to 35000 square feet of existing space, even though it might be in a different building than even the different neighborhood, they're going to they're going to consider that today just given the cost.

We're still doing fine in our leasing of our development and redevelopment portfolio, but you know there is a sentiment that if there is an existing available space to try to grab it.

Okay. I mean do you know if you're like competitors on the development pipeline I mean is that where the drop off in demand is coming from is that first generation type space.

Well I mean, I think that the reason that others arent as successful as just because they don't have our brand I mean, it's you know we've talked about it for <unk>.

For years and years and.

There's a lot to be said about the operational excellence we bring.

The management of the facilities to the design of the facilities I think.

To the extent that there's projects out there that are pausing.

Even after they've gone vertical or remain vacant its a number of things one is that the location isn't comparable to ours.

Two they are underwritten very high rents because they.

They need to they their basis isn't very good and three they don't have a reputation to manage these critical infrastructure buildings. So.

I would say that that's really the reason behind a lot of the competitive buildings.

Buildings, not and major overruns on budgets I can think of one project in Boston, where a client.

Went there because we didn't have exactly the space that they needed and then they came back to us when the App developer.

<unk> had a huge overrun on costs. So that goes on all the time.

Okay and then just last one for me I was looking at your current tenant roster versus the prior quarter and it looks like Max our technology just dropped off the list I mean is that a fair read am I looking at that correctly and can you give us a sense of what happened there yeah that that is a project that.

You know, we own where they're rotating out of that and that will be a future development project.

Redevelopment and development.

Okay, great. Thanks.

Our next question comes from David Rodgers of Robert W. Baird.

Uh huh.

Yeah. Good afternoon, maybe this is for Dean, but wanted to talk about the leasing spreads when you excluded the two leases in the quarter, obviously very strong performance for the company overall curious about the guide for this year, which you gave in December reaffirmed last night, but at the 11% to 16% I think you had said that there was some incremental component of that.

That was non life science, maybe but can you give us a sense of kind of that 11% to 16 is that more a function of kind of market rents may be slowing down or is that just a function of kind of more different leases that have been added to that pool.

Hey, Dave It's Dean here lab rents remain healthy as you can tell from our leasing statistics in the fourth quarter.

Hard to.

Hard to really looked out well as you go out into the future and lab rents are trending well as we noted from our results. There is a slight mix at play in 'twenty three.

With certain explorations coming up and certain leasing activity, we expect to accomplish.

Call it non lab product, but that product is a small percentage of the portfolio rental rates overall, even when you blend it altogether, we remain very strong.

Yeah.

Yeah, That's fair and then maybe to follow up Peter and your last question in terms of kind of market rent growth. It sounds like it's bifurcated, even further probably between kind of the higher quality and lower quality assets, what's that spread look like today, maybe across the portfolio or maybe pick the top three clusters in terms of kind of where replacement rents might be going.

Versus where maybe a more traditional kind of a minus asset might be performing today at the end of March.

Rent level.

I mean, I can really only speak to to our rents.

I just don't.

Have a lot of visibility to outside of the asking rents that were hearing from competitive buildings.

R R.

A newer product and our AR and our older product, there's not much of a spread between it tips.

Typically you might see a even a 10% to 15% premium for new new buildings over older buildings.

I think probably the you know the.

The availability of existing space makes the existing space more valuable today.

But it also I think speaks to just the quality of our overall portfolio.

We don't have a lot of B assets that you know that you would.

You could say that you know out in the suburbs the single story.

The stuff that's not you know monetize still the rents.

Can greater Boston the rents out there.

For that type of product or in the or are in the 60 to $70 range compare that to the hundred to 120 in Cambridge, and maybe the 85 to 100 and seaport it's still.

Fairly close but that that you know you do the math and that'll give you the premium.

I think overall, though I would say that rents for lab space have not regressed at all and are still fairly strong and there has not had been in a big movement in concessions like you might be seeing in the office market.

No I I read a lot about the office market and I know that rents for high quality buildings or have held their but concessions are have gotten really really high and that's not the case with us our rents have held well and concessions have remained constant.

Alright, great. Thank you. Thank you.

Our next question comes from John Burzynski of Green Street Advisors. Please.

Go ahead.

Thanks for taking the question and I appreciate the color on some of the transactions that have happened lately, but just curious.

When we look at cap rates for purpose built lab product converted product have you guys seen any cap rate differential between the two.

You know I I don't have any specific examples.

Other than maybe what I just talked about.

You know the comp in Burlingame.

<unk> is a really terrible conversion.

Berlin games are on.

On the peninsula.

It is very close to south San Francisco.

So.

To to get a fully leased comp at a at an almost six cap rate I think.

Probably illustrates.

That conversions arent that appealing.

I would expect you know a good quality purpose built lab.

In burlingame to be at least 100 to a 150 basis points lower than that and in most conversions not all but almost all don't work.

Okay. That's helpful. And then I guess just looking at the supply picture are there certain markets or submarkets, where you're starting to see some.

I pick up and maybe become more of a risk here.

From a supply standpoint.

Yeah.

I mean that the numbers are there.

The numbers for availability or still kind of where they where they've been.

Over the last few quarters, I mean that the biggest.

Supply overhang in any of our markets is in south San Francisco and it remains that way.

That is that has not really changed we are theres a lot of talk about supply in greater Boston majority of of what's talked about hasn't it hasn't broken ground.

Some assets have.

A lot of them are in the <unk>.

Summerville area, which is not competitive to where our product is so we're not too concerned about it.

But yeah I think that the.

Supply story is always one that we have to.

Talk about people are trying to get him involved.

Involved in the business, but.

The best locations that are very difficult to get and so people have tried to fan out in other areas such as Somerville and.

With limited to no success I think at this point.

Okay.

Okay. Thanks, that's it for me.

Our next question comes from Jamie Feldman of Wells Fargo. Please go ahead.

Great. Thanks for taking my question so.

So I know you spoke a lot about you know how differentiated Alexandria portfolio is in leasing demand is but if you look at the markets that.

That's kind of showing some of these markets you're seeing flattish rent.

And confessions rising in net effective rent.

Declining.

You know a month over month or maybe quarter over quarter are you seeing that at all in your portfolio. I mean are you still pushing rents and I know you said the concessions haven't grown a lot but can you just provide some more color on how that really looks for your business versus maybe what we're seeing overall in the market.

Jamie its dean here net effective rents have been.

Positive.

Over time for our business so it's not.

It's not.

It's not declining it's <unk>.

Creasing.

Can you say, maybe by how much like quarter over quarter.

You have to do that in like a same store basis, how much youre pushing net effective rents.

I don't have it right in front of me Jamie but.

Yeah.

Well I don't have the exact statistics, but.

If you recall.

Reviewing it over the last month and it was.

Very solid positive trend.

I mean, it look or a wrench cash and GAAP rents are up.

Those are significant increases period over period.

The net effect of this just trailing a little bit.

But still directionally very substantial alright, because they're they're based net effective is based off of your GAAP rents right.

Very strong.

Yeah, I mean, I wouldn't doubt Jamie that that other.

Other developers are offering concessions to try to bridge the gap between the quality and reputation that we have and what they offer.

Our numbers are still are still stable at this point.

Okay, that's great news.

And then I thought you know I know that you did the $105 million forward equity agreement in the fourth quarter.

You know typically this time of year, it's sometimes you'll do a much larger one can you just decide can you just discuss the decision to do equity at all.

Router and and just how you think about.

You know why you didn't do something bigger.

Jamie we're seeing as we looked at our wrapping up.

The year, there was an opportunity to.

To raise them, but very modest amount as you'd mentioned $105 million and so we looked at.

Our overall capital that we raised during the year, which I commented on.

It blended in very attractively well.

Well it was done at ordered $50 I think the overall blended common equity proceeds.

We're about $189 per share so just keeping things in perspective, there was it was a modest amount that we raised and Jamie going back to your other question I just needed a second to pull it but.

One second I, just lost the page but on rent.

Rental rate growth.

We were at.

So it's 31.

Percent, yeah, 20 to cash for the year.

Net effective for the year was.

Something around 37%.

Yeah, I guess I was thinking more in terms of cars in the market today I mean, you have a nice baked in mark to market, that's going to show up in leasing spread.

But are you able to still.

Last month, he pushing rents it sounds like you think you are in a net effective basis.

I was just hoping to get color on that.

It sounds like you're asking what the first quarter is going to look like.

Jamie in the fourth quarter and.

In the year for 2022 were very strong so.

I don't I don't have an outlook going into the first quarter for net effective but.

Again 2022.

37% on a net effective and Directionally just look at our guidance for GAAP and cash too so.

Okay.

Great and I guess, just going back to the.

The equity raised so it sounds like you kind of think about it.

On a 12 month view like that kind of clean things up for for 'twenty.

22, and then 'twenty three kind of as a fresh start.

Hum you or how you would raise equity.

Well, maybe I think probably what's more important Jamie on on the broad bucket of solving for equity type capital as I mentioned.

We remain focused on.

Dispositions in portion Entre sales.

But JV type capital.

A significant component of our capital plan for 2023.

And we've got.

A couple of transactions that are fairly advanced right now executed LOI and moving through so you know, it's only January 31st and we feel like we're in a good spot moving on our capital plan there.

And so we got to keep in mind that that's that's an important component as well Jamie is as it has been for many years now.

Okay, great. Thanks for the thoughts.

Yep Thanks, Jamie.

The next question comes from Tayo Okusanya of Credit Suisse. Please go ahead.

Hi, yes, good afternoon, everyone.

Just a quick question on on capitalized interest I think there was a comment made earlier on that.

CIP would peak in first quarter, and then slowly start to decline as you have deliveries, but I believe the CIP guidance is meaningfully above last year. So can you just help us kind of reconcile the difference to just higher cost of capital being used to capitalize the CIP or how do we think about that thank you.

Is your question just the growth year over here.

Yeah.

Because.

The year over year growth is more just a function of the size of.

Activities undergoing construction today as you know from our disclosures.

We have $7 6 million either under construction or near term starts.

On average 72% leased.

If you look at the fourth quarter capped interest, which is reflective of the average <unk>.

<unk> under construction.

It was $79 5 million of capped interest for the quarter.

It was $73 million in the third quarter, So I'll call. It up about $6 million. It was 68 million in the prior quarter, so up about 5 million quarter over quarter.

If you were just to continue to project out that four 5 million increase quarter to quarter.

You can kind of project out what half of the year would look like.

Double that from that point forward, you're now at the bottom end of the range of our guidance.

So directionally.

It should make sense, if you look at it from a run rate perspective.

Again year over year, it's up significantly because of the amount of construction activities are actually up year over year.

Great.

But that's helpful. Thank you 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.

Thank you everybody and we look forward to talking to you on the first quarter call be safe feel well.

Yeah.

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

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