Q4 2023 Alexandria Real Estate Equities Inc Earnings Call
And we continue to post strong cash and gap rent increases, which came in at 15.8% and 29.4% respectively for the year.
We believe the beginning of 2023 was the low point for demand and are pleased to see that demand for Greater Boston, San Francisco Bay, and San Diego are all up year over year. A good sign since this does not include a number of projects that are on hold as management teams and boards remain cautious.
However, that should change soon. As you will hear from Hallie, the trajectory of the industry has turned positive.
In the meantime, we continue to win the majority of the current high-quality demand due to tenants prioritizing location, placemaking experience, ability to scale, proven operational excellence, reliability, and trustworthiness.
Our teams continue to closely track supply building by building in our proprietary databases.
As we turn the page on 2023, we expect 2024 to be the peak year for new deliveries, then begin to dissipate in 2025.
In Greater Boston, unleashed competitive supply estimated to be delivered in 2024 is 7% of market inventory.
A 0.9% increase over last quarter, not due to new projects, but because of project deliveries being pushed from 2023 to 2024.
In 2025, the unleashed competitive supply will increase market inventory by another 2.5%, an expected slowdown from 2024 levels.
In San Francisco Bay, unleased competitive supply estimated to be delivered in 2024 is 10.7% of market inventory, which is a 2.7% increase.
Like Greater Boston, this increase is driven by projects that were expected to deliver in 2023, but are taking longer than expected.
In 2025, the unleashed competitive supply will increase market inventory by much less, at 2.2%, a good sign, but still a 1% increase over last quarter due to a new project breaking ground in Menlo Park.
In San Diego, unleased competitive supply estimated to be delivered in 2024 is 6.8% of market inventory, a slight decrease from last quarter due to an increase in supply from projects being pushed from 2023 to 2024 offset by leasing in those projects.
In 2025, the unleashed competitive supply will decelerate to 2.7% of market inventory.
A quick update on direct and sublease vacancy.
Direct vacancy in Greater Boston is up 258 basis points to 7.05%.
still mid-single digits despite a number of deliveries in late 2023.
It has climbed 270 basis points to 12.36% in our San Francisco Bay markets due to unleased new deliveries.
And in San Diego, the increase has been more modest, rising 121 basis points to 7.97%, driven primarily by Serenotherapeutics vacating all of their leases in the region.
They are not an Alexandria tenant.
Sub-lease vacancy has remained stable, ranging from 5.4% in San Diego to 5.9% in Boston.
I'll conclude with an update on our Value Harvesting Asset Recycling Program.
Continued demand for our assets enabled us to self-fund our investments, as we presented at Investor Day.
Page 6 of the supplemental summarizes the material transaction closed during the year.
What can be taken away from the partial interest sales at 15 Necco and 9625 Town Center Drive and the sale of 11119 North Story Pines Road is that well-located and stabilized assets located in Alexandria's primary submarkets continue to command a premium valuation.
Others in solid locations but in need of material capex for repositioning, such as the Second Avenue and Memorial Portfolio in Greater Boston, completed in the second quarter, and the Memorial Drive, Beaver Street, and Roselle Street Portfolio completed in the second quarter.
fourth quarter delivered solid per square foot valuations due to their solid historical performance
Due to the unstabilized nature of these portfolio sales, the cap rates will not provide any meaningful insights to return expectations on stabilized properties. However, I can point you to HealthPeak's 65% sale of 3020 and 3030 Callen Ridge Road in Torrey Pines as a directional comp.
The building is fully leased long-term to a credit tenant, but is not expected to be occupied by said tenant.
The purchase price yielded a 5.3% cap rate despite that change.
or despite that challenge.
As we presented at Investor Day, our strategies continue to widen the moat with competitive advantages our megacampus model provides by recycling our non-campus assets into our current and future megacampuses.
With that, I'll pass the call over to Hallie.
Hallie: Thank you, Peter. And good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets.
Hallie Kuhn: Today, I will provide a recap of the life science industry in 2023 and an overview of the health and demand drivers of each of our life science tenant segments as we kick off 2024.
Hallie Kuhn: John Templeton wisely wrote that bull markets are born on pessimism, grow on skepticism, mature on optimism, and die of euphoria.
Hallie Kuhn: While the reset of the life science industry from euphoric 2021 highs has been rocky, healthy pessimism is seeding renewed momentum.
Hallie Kuhn: underscored by rational valuations and capital flowing to the strongest technologies and experienced management teams.
Hallie Kuhn: Fundamentally, the staggering unmet medical need that drives the $5 trillion secularly growing life science industry has not abated.
Hallie Kuhn: and the opportunity for companies and investors in the life science sector to positively impact human health and disease is massive.
Hallie Kuhn: Through the ups and downs, the trajectory of the industry is positive, translating long-term into a healthy and expanding tenant base.
Hallie Kuhn: This sentiment is reflected in the numbers.
Hallie Kuhn: The XBI, a weighted index of small and mid-cap biotech, ended 2023 up 8%.
Hallie Kuhn: Large biopharma performance, which had an exceptional 2022 while the rest of the market generally languished, ended flat.
Hallie Kuhn: Two notable exceptions were Alexandria tenants Eli Lilly and Novo Nordisk,
Hallie Kuhn: both of which ended the year up over 50% as the market for their novel diabetes and obesity medicines accelerated.
Hallie Kuhn: And as Peter mentioned, in December , we announced a significant lease with Novo Nordisk for their new U.S. R&D headquarters on our Waltham Mega Campus in Greater Boston.
Hallie Kuhn: Another 2023 biopharma trend was M&A.
Hallie Kuhn: Excluding mega mergers over $50 billion, 2023 set a new high watermark with $159 billion in acquisitions.
Hallie Kuhn: These were largely sub-$10 billion deals driven by pharma's need to bolster pipelines as they face steep revenue loss due to patent expirations.
Hallie Kuhn: As M&A dollars are recycled back into the industry, it creates a positive cycle of innovation as scientists and entrepreneurs start their next new venture.
Hallie Kuhn: Altogether, the M&A lifecycle is an important driver of demand across our regions.
Hallie Kuhn: With respect to the FDA, 55 novel medicines were approved in 2023, the second highest year on record and double the average number of annual approvals 20 years ago.
Hallie Kuhn: There were also eight advanced cell and gene therapies approved.
Hallie Kuhn: Tenant Vertex received FDA approval of Caskevi this December , a potentially curative therapy for severe sickle cell disease, and the first approved treatment utilizing a novel genome editing technology known as CRISPR.
Hallie Kuhn: The takeaway is that the industry's model is working. Novel scientific discoveries, such as CRISPR, which was elucidated just over a decade ago, are translating into impactful medicines for patients.
Speaker Change: Thank you.
Speaker Change: Now let's take a closer look at the health and demand across each of our life science tenant segments.
Speaker Change: Thank you.
Speaker Change: First, large pharma, which makes up 19% of our ARR, continues to deploy substantial capital towards internal and external R&D.
Speaker Change: equating to over 270 billion in R&D spend.
Speaker Change: Commitment to R&D is an imperative for pharma.
Speaker Change: Over the next decade, the top 20 pharma are staring down approximately $200 billion of lost revenue as patents expire, new competitors enter the market, and a subset of medicines become subject to potential price setting by Medicare through the recently enacted IRA legislation.
Speaker Change: where does pharma look to offset this gap in revenue to smaller and nimbler biotechs?
Speaker Change: Currently, three out of every five dollars of top 20 farmer revenue stemmed from medicines acquired through M&A and partnerships.
Speaker Change: Fortunately, this segment is well positioned.
Speaker Change: with strong balance sheets and an estimated trillion dollars in available firepower to leverage.
Speaker Change: Thank you.
Speaker Change: All told, we expect healthy levels of internal research in M&A to continue through 24 and beyond.
Speaker Change: We'll be right back.
Speaker Change: Importantly, innovation requires people and a critical component of the pharma equation is stellar talent.
Speaker Change: Recruiting and retaining scientists is more important than ever.
Speaker Change: Cancer can't be cured from the couch, and expectations of a scientific workforce where working from home is not an option are high, requiring amenities and community that the scale of Alexandria's megacampuses are uniquely positioned to provide.
Speaker Change: This need is driving several large farmer requirements across our clusters.
Speaker Change: Transitioning to public biotechnology, our ARR from biotechs with marketed products increased to 17% compared to 14% in 3Q.
Speaker Change: This increase is due to the delivery of Moderna's new headquarters at 325 Binney Street on our one Kendall Square mega campus.
Speaker Change: as well as several clinical stage companies transitioning to commercial stage after receiving marketing approval for new therapies.
Speaker Change: This segment continues to mature, with tenants such as Vertex eclipsing a market cap of $100 billion in 2023.
Speaker Change: Thank you.
Speaker Change: Next up are our pre-commercial public biotech companies.
Speaker Change: which represent 8% of our ARR.
Speaker Change: For this segment, data trumps all. Companies that meet expected milestones have executed significant follow-on financings, and stock prices have responded positively.
Speaker Change: In total, nearly $20 billion in follow-on financing was raised on U.S. stock exchanges in 23, a quarter of which was raised by Alexandria tenants.
Speaker Change: Companies have also tapped alternative financing structures such as pipes and royalty deals providing additional access to liquidity.
Speaker Change: Our San Francisco-based tenant, Bridge Bio, has raised over $900 million in the past 12 months from a combination of these sources.
Speaker Change: driven by clinical data for a novel medicine treating transferretin amyloid cardiomyopathy, a potential fatal disease of the heart muscle.
Speaker Change: As the IPO market cracks open in 2024,
Speaker Change: companies with the right clinical pedigree will be able to access additional liquidity.
Speaker Change: Last week, the first IPO of the year by SF-based CG Oncology priced above their target range and raised $380 million.
Emily Beynon: © transcript Emily Beynon
Emily Beynon: On to private biotechnology, which encompasses 10% of our ARR. While life science venture investments slowed in 23 relative to the highs of 21 and 22, we are still in the early 20s.
Emily Beynon: It still exceeds pre-COVID levels and came in at approximately $40 billion.
Emily Beynon: Series A, B, and C rounds are predominantly being led by outside investors.
Emily Beynon: Speaking to Healthy Levels of New Investments.
Emily Beynon: With the caveat that valuations have come down and deals often take longer to close.
Emily Beynon: Funds have been conservative deploying the capital raised in the past several years and have ample dry powder.
Emily Beynon: As the markets warm, we expect venture activity to remain strong through 24.
Emily Beynon: One counterbalance is that we may see less later stage financings as a subset of companies go public instead of raising another round of private capital.
Emily Beynon: next our life science product service and device tenants
Emily Beynon: which represent 21% of our ARR.
Emily Beynon: This segment includes contract manufacturers, diagnostic firms, and research tool companies.
Emily Beynon: all of which are critical and complementary to companies developing new medicines.
Emily Beynon: For example, research tool companies are creating the next generation of advanced life science technologies such as super-resolution microscopes and DNA sequencers that can process an entire genome in half a day.
Emily Beynon: These technologies often require large, specialized footprints, complex infrastructure, and highly trained scientific talent.
Emily Beynon: As the trusted brand for life science real estate, our tenants look to Alexandria to safeguard the billions of dollars of equipment, intellectual property, and assets housed within their labs.
Emily Beynon: Last are institutional tenants.
Emily Beynon: totaling 11% ARR. As well-funded, often credit tenants, institutions continue to be an engine of innovation within our ecosystems.
Emily Beynon: One pioneering institutional tenant that came out of stealth this month is Cambridge-based Arena Bioworks.
Emily Beynon: With $500 million in funding, ARENA hired scientific luminaries from around the country with the goal to combine and accelerate academic research and venture-backed drug development under one roof.
Emily Beynon: Returning to where we started, the life science industry is squarely in the realm of healthy skepticism.
Emily Beynon: seeding the very early innings of the next bull run.
Emily Beynon: We are not completely out of the woods yet with question marks around interest rates and 2024 elections looming
Emily Beynon: However, accelerating pace of scientific innovation, access to significant capital from multiple sources, and enormous unmet need for life-saving therapies will propel the industry forward and translate into healthy demand and increasing long-term revenue.
Emily Beynon: With that, I will pass it over to Mark.
Emily Beynon: Thank you, Hallie. This is Mark Binda here. Hello and good afternoon, everyone. Congratulations to our entire team for outstanding execution this past year in a very challenging macroeconomic environment.
Mark Binda: I'll start with our solid financial results.
Mark Binda: Total revenues in NOI for 2023 were up 11.5% and 12.2% respectively over 2022, primarily driven by solid same-property performance.
Mark Binda: record-high development redevelopment projects placed into service in 23 with an incremental annual NOI of 265 million
Mark Binda: FFO per share diluted as adjusted was 897, up a solid 6.5% over 2022.
Mark Binda: We're very proud to report solid operating results for the year, driven by disciplined execution of our megacampus strategy. Our tenants continue to appreciate our brand, collaborative megacampuses, and our operational excellence by our team.
Mark Binda: We have high quality cash flows with 52% of our annual rental revenue as of 4Q23 from investment grade and publicly traded large cap tenants, up 3% from the prior quarter, and we have one of the highest quality client rosters in the REIT industry.
Mark Binda: Seventy-five percent of our annual rental revenue comes from our collaborative megacampuses. Collections remain very high at 99.9 percent. Adjusted EBITDA margins remain strong at 69 percent, and 96 percent of our leases contain annual rent escalations approximating 3 percent.
Mark Binda: Now, solid rental rate growth and leasing volume drove same property NOI growth in 2023 of 3.4% and 4.6% on a cash basis.
Mark Binda: These results were in line with our previous guidance and very solid results, especially considering the macro environment.
Mark Binda: As expected, our fourth quarter same property results took some pressure due to some temporary vacancy at four properties spread across Boston, San Francisco, and San Diego, comprising about 330,000 square feet that is 64% leased or negotiating.
Mark Binda: We expect same property results to accelerate in the second half of 2024, driven by anticipated solid rental rate growth.
Mark Binda: occupancy growth in the second half of the year, coupled with the four properties I just mentioned,
Mark Binda: as well as contractual rent increases and the burn-off of contractual free rent from executed leases.
Mark Binda: We expect solid same property growth for 2024 consistent with what we provided at our investor day in December of 1.5% and 4% on a cash basis at the midpoint of our guidance range.
Mark Binda: Leasing volume in the fourth quarter was solid at 890,000 square feet for the quarter and 4.3 million for the year, which is in line with our general historical average from 2013 to 2020.
Mark Binda: We continue to benefit from our long-standing tenant relationships and brand loyalty, with 76% of our leasing completed in 2023 coming from existing tenant relationships.
Mark Binda: rental rate growth for lease renewals and releasing space in 23 was very strong at twenty nine point four percent and fifteen point eight percent on a cash basis
Mark Binda: These are very solid results and are the third highest annual amounts compared to the ten years preceding the rocket ship years of 21 and 22.
Mark Binda: For Q23, rental rate growth for lease renewals and releasing of space was 9.2% and 5.5% on a cash basis.
Mark Binda: Due to the incredible execution by our team, we were able to backfill the roughly 100,000 square foot Forma Atreca space in San Carlos with a very exciting clinical stage biotech company called Cargo Therapeutics during the quarter at solid economics, including no TIs and limited downtime.
Mark Binda: The starting cash rent on that deal was slightly negative, at about negative 4%, compared to the most recent in-place rents from Atreca that was three years into a 10-year lease.
Mark Binda: Given the quarterly results are driven by a relatively small amount of square feet, the relatively flat results from this transaction had a meaningful impact on the quarterly rental rate increases.
Mark Binda: Excluding this transaction, rental rate increases for the quarter would have been 21.4% and 9.7% on a cash basis.
Mark Binda: We expect solid rental rate growth on lease renewals and releasing of space for 2024 at a midpoint of 15% and 9% on a cash basis with some variation from quarter to quarter.
Mark Binda: The overall mark-to-market for cash rental rates related to our in-place leases for the entire asset base remains solid at 14%.
Mark Binda: Our non-revenue enhancing expenditures, including TIs and leasing commissions on second generation space, have averaged 15% of NOI over the last five years and remained low during 2023 in the 12% to 13% range.
Speaker Change: Thank you.
Speaker Change: Year-end occupancy was solid at 94.6%, up 90 basis points from the prior quarter, and the primary driver of the increase from the third quarter was space that was delivered in San Diego.
Speaker Change: The midpoint of our guidance range for occupancy for year end 2024 is 95.1%, so we do expect some modest growth in occupancy through the year, as well as growth in same property occupancy in the second half of the year.
Speaker Change: Transitioning to the balance sheet, we have one of the strongest balance sheets in the company's history as of 4Q23.
Speaker Change: Our corporate credit rankings rank in the top 10% of all publicly traded U.S. public REITs.
Speaker Change: We met our goal for a year-end leverage of 5.1 times for net debt to adjusted EBITDA on a quarterly annualized basis, and we ended the year with tremendous liquidity of $5.8 billion, fixed rate debt comprising 98.1% of our total debt, a weighted average remaining term of debt of 12.8 years.
Speaker Change: and no debt maturities until 2025.
Speaker Change: Only 20% of our debt matures in the next five years, and 29% of our debt matures in 2049 and beyond with an attractive rate of 3.91%.
Speaker Change: We continue to focus on the enhancement of our overall asset base and the recycling of capital through outright dispositions of assets that are not integral to our megacampus strategy.
Speaker Change: We recognize that these types of assets will likely have a higher cost of capital than our core assets located in our mega campuses, but this will allow us to recycle these proceeds into our highly leased development and redevelopment pipeline and to continue to enhance our mega campus strategy.
Speaker Change: For 2023, we completed dispositions in partial interest sales of $1.3 billion, including $439 million of dispositions completed in the fourth quarter.
Speaker Change: Importantly, during 23, we did not issue any new common equity other than the settlement of our outstanding forward equity contracts from 2022, which raised $104 million. And we're very proud of our strong execution capability.
Speaker Change: The team is laser-focused on the execution of our capital plan headed into 2024, and we have pending dispositions subject to letters of intent or sales agreements for another $142 million that we expect to close in 2024.
Speaker Change: Based upon our current outlook, we expect our asset recycling program to be more heavily weighted towards outright dispositions of non-core assets rather than partial interest sales in 2024.
Speaker Change: In the fourth quarter, we recognized impairments aggregating $271.9 million, which included two significant items.
Speaker Change: First was the $94.8 million charge related to the sale of 380 and 420 E Street, located in the Seaport, which had been announced last quarter and subsequently closed during the fourth quarter.
Speaker Change: And then second, as Joel mentioned, $93.5 million of a charge related to an office property located in Manhattan, which was classified as held for sale this quarter.
Speaker Change: The New York project Joel mentioned was acquired in 2018 as a covered land project with a leaseback and in-place cash flows, but in the fourth quarter we elected not to proceed with the conversion project, and this is now under contract and expected to be sold next year.
Speaker Change: Thank you.
Speaker Change: Cash flows from operating activities after dividends for 2024 is expected to be very strong at $450 million at the midpoint of our guidance and will continue to support growth in our annual common stock dividends per share.
Speaker Change: We had a low and conservative FFO payout ratio of 56% for the quarter, with a 6% average per share dividend increase over the last five years.
Speaker Change: At this pace of retained cash flows over the next three years,
Speaker Change: Cash flows from operating activities after dividends should generate close to $1.4 billion of efficient capital for reinvestment.
Speaker Change: Now, I'll turn to a couple of important highlights on the external growth side.
Speaker Change: 2023 and 4Q23 were both record years in terms of the amount of incremental annual NOI onboarded with $265 million and $145 million, respectively.
Speaker Change: Importantly, about 80% of the annual rental revenue delivered in the fourth quarter was to investment grade or publicly traded large cap tenants, including Moderna and Eli Lilly.
Speaker Change: With a very large amount of deliveries around mid-quarter, on average in the fourth quarter, we expect a significant earnings benefit headed into 1Q24.
Speaker Change: We expect tremendous growth in incremental annual net operating income on a cash basis of $114 million upon the burn-off of initial free rent related to recently delivered projects with a weighted average burn-off period of about 10 months.
Speaker Change: As Peter highlighted, we have 5.7 million rentable square feet of projects that are 60% leased or negotiating and projects that will generate $495 million of incremental annual net operating income over the next four years.
Speaker Change: A key item to highlight here is that we had strong leasing activity in the pipeline, with over 500,000 square feet either leased
Speaker Change: or added to the negotiating bucket through signed LOIs during the quarter, which was the most we've had since 2Q22.
Speaker Change: Next, on capitalized interest, our outlook for capitalized interest for 2024 is consistent with our previous guidance. As a reminder, we expect capitalized interest for 2024 to be impacted by the following.
Speaker Change: First, an overall decline in average real estate basis subject to capitalization compared to 23, which was driven in part by the large basis placed into service in the fourth quarter of 2023.
Speaker Change: And second, we expect an offsetting increase caused by an uptick in our weighted average interest rate on borrowings used in the calculation of capitalization of interest in 2024 compared to 2023.
Speaker Change: Thank you.
Speaker Change: We'll turn next to venture investments. Realized gains from venture investments included in FFO per share as adjusted for the quarter was $12.3 million, which was below our recent run rate in part due to a large realized loss on one of our investments that occurred late in the quarter.
Speaker Change: FFO per share, as adjusted over the last three years, has included, on average, 96 million of realized gains in each year from venture investments, or approximately 24 million per quarter.
Speaker Change: Our outlook for quarterly realized gains from venture investments in 2024 is $95 to $125 million, which is modestly above our three-year annual average of $96 million.
Speaker Change: Gross unrealized gains in our venture investments as of the end of the quarter were $320 million on a cost basis of just under $1.2 billion.
Speaker Change: Thank you.
Speaker Change: Turning to guidance, we have reaffirmed our solid guidance for 2024 that was initially provided in connection with our annual Investor Day on November 29th, with a few minor changes as outlined in our supplemental package on page 4.
Speaker Change: Our range for guidance for EPS is $3.49 to $3.69, and our range for FFO per share diluted as adjusted is $9.37 to $9.57, with no change in the midpoint of $9.47, which represents a solid 5.6% growth in FFO per share, following excellent growth last year of 6.5%.
Speaker Change: Lastly, our ATM program expired in early January of this year upon the expiration of our shelf registration, so we do expect to file a new program here in the near future. With that, let me turn it over to Jill.
Jill: So please open it up for questions operator
Speaker Change: We'll be right back.
Jill: We will now begin the question and answer session.
Jill: To ask a question, you may press star then 1 on your telephone keypad.
Jill: If you are using a speakerphone, please pick up your handset before pressing the key.
Jill: To withdraw your question, please press star then 2.
Jill: At this time, we will pause momentarily to assemble the roster.
Joshua Dennerlein: And our first question will come from Josh Dennerlein of Bank of America, Merrill Lynch. Please go ahead.
Joshua Dennerlein: Hey, guys. Thanks for the time. I just wanted to explore the occupancy uplift that you're assuming in Guide. How much of that occupancy uplift is just driven by leases you've already signed versus leasing that you're assuming that still has to get done?
Joshua Dennerlein: Yep, so Mark commented.
Mark Binda: Yeah, sure. Hi, Josh. So we do have about 300,000 square feet of leases that we've already signed that have not commenced.
Mark Binda: that will commence next year so we have a good head start headed into 24 I think you know to put things into perspective you know we've got about 3.4 million of lease rolls next year but after you back out the space that we've anticipated will go dark that go into redevelopment or development that only leaves you with about you know one
Mark Binda: 1.8 million square feet that's not resolved. So I think that number feels pretty manageable relative to our historical run rate on leasing.
Speaker Change: Yeah, so when Mark says next year, we're in 2024, but, you know, the next year from 23, which we're reporting, just so we're clear.
Speaker Change: appreciate that and then it looks like supply is going to peak this year just kind of what's your latest thoughts on timing for net effective rents bottoming any kind of variation across your three core markets
Speaker Change: Yep, so Mark, Peter, you guys want to comment?
Mark Binda: Yeah, I'll take it. Hey, Josh.
Joshua Dennerlein: Thank you.
Peter: hard to predict
Peter: But certainly, you know,
Speaker Change: The effects of 2023's supply has...
Speaker Change: We've seen TI's increase remarkably, we've talked about that before.
Speaker Change: TIs aren't going to go any further up because they're already pretty high.
Speaker Change: I'd say there's some.
Speaker Change: pricing power to the tenant if they've got a very large requirement.
Speaker Change: But outside of that, I think things have been holding relatively well.
Speaker Change: Okay, I appreciate that. Thank you. Yep, thank you.
Speaker Change: The next question comes from Anthony Paolone of J.P. Morgan. Please go ahead.
Anthony Paolone: Yeah, thanks. First question is, it's early in the year and it seems like you're approaching the midpoint of your acquisition guide. So just curious if these were transactions that were in process when you were setting up the guidance or if you just are seeing a lot of stuff that's attractive or you feel like it's a time to play more offense.
Speaker Change: Yeah, the former, Tony.
Tony: Okay. So there's no, like, anticipation that you want to pick up? Yeah. Okay. And then just on the disposition side,
Tony: You talked about some of the non-core stuff like having New York under contract, but when you look at the rest of the dispositions that you're thinking about for the rest of this year, do you think you'll have better execution on non-core sales or do you think selling stakes and more core, higher quality stuff is where you might get either more capital or better execution at this point?
Tony: Yeah, I think as Mark and Peter have indicated, we're focused on really non-core, non-campus assets, so we feel pretty good about that.
Speaker Change: okay sorry thanks yep thank you
Speaker Change: The next question comes from Vikram Malhotra of Mizuho. Please go ahead.
Vikram Malhotra: Good afternoon. Thanks for taking the questions. Just wanted to get some maybe more color on the pipeline that you're kind of looking at today.
Vikram Malhotra: to, you know, deal with sort of expirations over the next 12 to 18 months, but also the developments, particularly what's delivering in sort of 25, 26, where maybe more leads up is, you know, expected. So I don't know if you could give us some sort of wide range of, like, what is the pipeline square footage-wise of...
Vikram Malhotra: tenants you are, you know, at some stage of discussion with, or if not that, at least give us a sense of the composition of these large, small, you know, by market, and any color that would be helpful, just to sort of bridge the leaves up that you have to do in terms of expirations and developments.
Tenens: Yeah, so I don't think we would want to talk about pipeline. That I think is –
Speaker Change: pretty confidential stuff, Vikram, but I think you can assume, you know, every lease is somewhat different and every market is somewhat different. I mean, if you go back and look at
Speaker Change: you know the cargo therapeutics that was a very unique
Speaker Change: lease in a very unique set of circumstances. So it isn't like, you know, this is not a commodity product. This is a generally a premium price non-commodity product. So it's not like, you know, you have the same
Speaker Change: A bunch of folks waiting for the same amount of space in the same, you know, kind of market type place. It's just not that kind of a business.
Speaker Change: Okay. And then just maybe one other topic, you know, Biogen announced sort of rationalization of its...
Speaker Change: office space. And I'm wondering if in your conversations with tenants across the portfolio, can you give us a sense of the latest thoughts on how they're thinking about office versus lab or office needs?
Speaker Change: whether it's remote work or just they took on too much space. Just, you know, how are the tenants thinking about office space they may have in their lab portfolios? That's always asked. Hallie, do you want to kind of comment on that?
Speaker Change: Sure. And hi, Vikram. This is Hallie. You know, I think we need to separate out the component of, you know, non-technical space adjacent to the labs. You know, these are, you know, desks.
Hallie Kuhn: It's largely for the researchers that are moving in and out of the labs through the day, and there's no rationalization of that space. That space is needed. It's part of the workflow.
Hallie Kuhn: that scientists, you know, day in and day out are utilizing.
Hallie Kuhn: surely there are you know larger office requirements that as companies grow you know that they will lease up if it's further clinical or sales and marketing and you know that's a different set of questions you know that is you know not who we are catering by and large and so when it comes to
Hallie Kuhn: the lab space infrastructure,
Hallie Kuhn: THAT
Hallie Kuhn: space is is not going to go away and you know we even have examples right now where that you know lab to non-technical space ratio is shifting you know we need we need more desking right like we have more scientists going in and out right people don't like to share the same space they like their own their own desks so just just to make that clear you really have to distinguish the two
Speaker Change: Thank you.
Speaker Change: Yeah, this is Peter. Just to be clear, Biogen's rationalizing their pure office space, nothing to do with their lab space.
Peter: Yeah, and remember, they're a big cap company, so like Big Pharma, they have kind of dedicated legions of people doing things in traditional office, if you will, so it's not a typical case.
Speaker Change: Okay, thank you. Yep, next question operator.
Speaker Change: The next question comes from Rich Anderson of Wedbush. Please go ahead. Hey, thanks. Good afternoon. I just wanted to ask about the the impairment and specifically, you know,
Richard Anderson: you know it's it's behind you now but you know the function of taking on what may be called you know kind of a creative approach to development in a different macro environment and I'm curious if you
Richard Anderson: can we can expect to see more in the way of an impairment type of model in 2024 as you you know part ways with non core assets is this something that we might we might see repeat itself as the year progresses
Richard Anderson: Yeah, Mark, do you want to comment on that?
Mark Binda: Yeah, sure. Hi, Rich. Yeah, so, you know, under the accounting rules, these, you know, you can
Mark Binda: The common way where you could have an impairment is at the point where you designate an asset as health or sales. So as we get closer to potentially committing to certain sales.
Mark Binda: it's definitely possible that we could have additional impairments, but it's really hard to say at this point as we're
Mark Binda: we're still refining our approach in which assets to sell. So hard to say at this point.
Mark Binda: Okay.
Speaker Change: And then, second question, on the $114 million of free rent burn, that's good in the sense that, you know, you've got new cash flow coming in, but it's also, you know, free rent is what it is. It's not necessarily a good thing. Where does that compare, if you can quantify it, to the past and how much of it is a reflection of the current difficult, you know, headwinds that are facing you? And how do you expect that free rent sort of...
Speaker Change: exposure to trend on a go-forward basis.
Speaker Change: Yeah, yeah. Hi, Rich. Yeah, so...
Speaker Change: We did – yeah, we had $114 million of free rent that will be burning off. I guess just to put that into perspective –
Speaker Change: We delivered 265 million of NOI this year, that's annual NOI, and a lot of those leases are very long in term in nature. So it's not a direct correlation one for one, but if you just do the simple math there, it's less than...
Speaker Change: less than half a year on what is generally on average, those types of leases are 10 years and longer. So I don't think it's something that we're super concerned with. But to be fair, free rent has trickled up a little bit, as we've seen.
Speaker Change: But it's not glaringly higher or anything like that over the past few years. Is that correct?
Speaker Change: I mean, we published our free rent statistics, Rich, and I think, you know, I think it was.
Speaker Change: about 3.3 months per year of rent at the end of last year, and I think we're at 0.6.
Speaker Change: So, it's ticked up a little bit this year, but still relatively modest compared to the length of leases.
Speaker Change: Fair enough. Thank you.
Speaker Change: Yeah. Hey, Rich, it's Peter. In the great financial crisis, it was more like one.
Peter: So we're still pretty healthy considering the market dynamics.
Speaker Change: Great. Thanks, Peter. Thanks, everyone. Thank you, Rich.
Speaker Change: The next question comes from Michael Griffin of Citi. Please go ahead.
Michael Griffin: Great, thanks. I want to go back to the cargo therapeutics lease at 835 Industrial. Joel, I know you mentioned that it was something specific driving that, but I was wondering if you can give any more color on what drove the decline in rents. Was it a function of cargo willing to take occupancy pretty quickly, or are there more worries about supply and where rental rates are going?
Joel: I think the key is, it's a good question, is it's one of those situations where you're trying to find the right key to fit the right lock.
Joel: you know, an exact amount of space that comes, you know, vacant that one would not have wanted to be vacant due to a TRICA and finding the exact, you know,
Joel: user of that space with literally very little downtime, and as I think Mark said, we had no TIs.
Joel: You don't want to just let that kind of a tenant go into the market and choose from some assorted number of spaces that might be available now or in the future. And so you try to make the deal because it's the perfect lock fitting, the perfect key fitting the right lock. And so that's kind of the story.
Speaker Change: Gotcha. That's helpful. And then I was wondering if you could provide any additional color on the recent asset sales, the ones in Greater Boston and San Diego. It seems like they're aggregated in the supplemental in that.
Speaker Change: Given it seems like they're kind of lowly occupied, I'd be curious if you can kind of give us pricing, particularly on the asset in Cambridge.
Speaker Change: you know, maybe what a yield would be on a stabilized basis.
Speaker Change: Yeah, so Peter, do you want to give some commentary?
Peter: Yeah, I mean, that's...
Peter: Speculating on what the Cambridge asset would be on a stabilized basis, I just kind of point to
Peter: You know, where where we've seen stabilized things in Boston trade ourselves, you know, in the low.
Peter: to mid fives.
Peter: With the NECO,
Peter: transaction we had a couple quarters ago on Boston Properties last quarter did something in the high fives but it's about two or three years from the
Speaker Change: So, that's a great question.
Peter: cash flowing. So, you know, I pointed to in my commentary a 5.3% cap rate in Torrey Pines for a building that's fully leased long-term to a credit tenant, but that tenant's decided not to move in.
Peter: So, I've said it before, we speculate that good, well-located assets with good credit and good lease term are going to be in the low fives. The sub-five cap rates are no longer with us.
Peter: due to rates and,
Speaker Change: You know, hopefully that's helpful.
Speaker Change: Yep, that's it for me. Appreciate the time. Yep, thank you.
Speaker Change: The next question comes from Jim Kamert of Evercore ISI. Please go ahead.
Jim Kamert: Thank you. Good afternoon. Thematically, in Alexandra's experience, Hallie mentioned a lot of this positive M&A activity. Has that historically, in your experience, translated to a net increment in space demand across your portfolio?
Jim Kamert: meaning, or is it more of a credit upgrade? I'm just trying to understand if the acquirers really tend to, over time, expand their lab footprint, or they already have kind of underutilized space.
Speaker Change: Yeah. Hey, Jim, the way to think about that is every case is different. If it's a smaller company with a specific product, it's sometimes just bolted on and the space isn't necessarily, you know, utilized.
Speaker Change: and maybe subleased or terminated, but oftentimes you find a strategic acquisition and they could be on the larger, medium, or even smaller side,
Speaker Change: where companies I can think of, you know, the Bristol Myers-Juno in Seattle back a number of years ago, where BMS wanted really to get into the self-therapy issue. And that led not only to the acquisition, but a fairly big expansion. So if they're buying, if it's a strategic technology platform with multiple product shots on goal, usually those end up with very, very good expansion results. If it's a smaller bolt-on, sometimes those don't. But every one is honestly different.
Speaker Change: Fair enough. And then a technical question. I'm sorry. You note that the fourth quarter or sort of same store progression in the first half of this year will be a little repressed by the vacancy associated with four properties.
Speaker Change: What would have to happen at those properties from a leasing perspective from where they are today to get the 3% same story guide at the bottom end of your range? Does anything have to happen? I'm just trying to understand the order of magnitude in terms of incremental leasing for that portfolio to get you in your range.
Speaker Change: Yeah, so we gave the least negotiating stats. I think it was about half of that, 64% was least, and the other half was negotiation.
Speaker Change: and that stuff's expected to benefit that last half of the year. We do need to continue to make progress on that.
Speaker Change: But then, you know, we do have a significant amount of free rent that's contractual that is already been leased that will also.
Speaker Change: you know, contribute to the numbers in the back half of the year.
Speaker Change: Thank you.
Speaker Change: Fair enough. Thank you.
Speaker Change: The next question comes from Tom Catherwood of BTIG. Please go ahead.
Tom Catherwood: Thanks and good afternoon everyone. Peter, you commented in past quarters on tenant space planning trending towards more just-in-time leasing. Is that still a fair characterization across your portfolio or are you seeing some markets where tenants are getting ahead of their expirations to lock in space?
Tom Catherwood: Thank you.
Tom Catherwood: Yeah,
Tom Catherwood: Decision-making has been slow.
Peter: And, I mean, I guess what I've talked about is that and tenants not wanting to invest in space, so the preference has been to go into available built space, you know, things that are...
Peter: vacant or rolling or subleased, rather than
Peter: Plan ahead and move in 12 months later into a development project. A lot of that has to do with a lot of the requirements over the past.
Peter: year and a half have been small.
Peter: versus a larger requirement that you might not might not be easy to find and you need to put into a newer building
Peter: but
Speaker Change: You bet.
Speaker Change: I don't think anybody is waiting to the last minute. It's really a function of the size of the company. If you're under 15,000 square feet or even under 20,000 square feet, you probably have options.
Speaker Change: If you're above that, you definitely need to plan ahead because there's a lot less inventory in those sizes.
Speaker Change: Yeah, I think the other way to think about that is,
Speaker Change: The just-in-time inventory issue is really focused on primarily biotech companies' clinical stage that hit a milestone, and they need to move pretty rapidly to scale because of that milestone, which also yields funding, and that's where you get probably the most kick on the just-in-time space.
Speaker Change: Thank you.
Speaker Change: I appreciate that. And that actually kind of leads into the second question, which is, you know, Peter, you'd mentioned elevated concessions. And we hear about that kind of across the market. Yet, you know, if we look at your second generation leasing costs in 23, they were a good bit lower than in 22, especially if we do it on a kind of, you know, per year average basis.
Speaker Change: So, you know,
Speaker Change: Can you speak maybe about how concessions are trending for new and renewed leases at existing properties as compared to leases at new developments and maybe where the economics are different on that side?
Peter: Yeah, I mean, the increase in...
Peter: the large increase in tenant improvement concessions You
Peter: has really been almost exclusively in new development space where you would traditionally give somebody $200 a foot, plus or minus, depending on the market.
Peter: Um.
Peter: you know, with their rental rate and then expect them to invest into the rest of the space. That, as we've talked about, has gone to $300 a square foot.
Peter: If you look at the operating portfolio, and you pointed out that the numbers prove this,
Peter: that concession isn't needed because that's...
Peter: is already built out. And one of the beautiful things about our business is how the tenants or how the TIs are recyclable.
Peter: So we build something out first generation, it's very rare that we have to put a material amount of money into it the next time around.
Peter: And, you know, given that it's...
Peter: probably got a large investment from
Peter: a tenant, the first-generation tenant.
Peter: We don't have to bump the rents.
Peter: you know, much to
Peter: you know make up for that additional investment right because we didn't make it so it becomes a you know a very valuable thing to a tenant to be able to move into something that's already built out and so they aren't seeking the type of concessions
Peter: that they are for a new space. Now, it ties to what I said before.
Peter: If you're in the, you know, a smaller set of, you know,
Peter: of space needs, you know.
Peter: 25,000 square feet or less
Peter: You might have some options to find, but once you get above that, it becomes tougher to find existing space.
Peter: You might end up going more towards new development, where you would seek the concessions of higher TIs, but you're also paying higher rents.
Speaker Change: Appreciate the color. Thanks, everyone. Yep. Thank you, Tom.
Speaker Change: The next question comes from Jamie Feldman of Wells Fargo. Please go ahead.
Jamie Feldman: Great. Thanks for taking my question. So, if you look at your 24 expiration schedule, the amount of expirations moving into redevelopment declined 30% in this supplemental from 41% when you initially gave guidance.
Jamie Feldman: Do you think that's a number that's going to continue to trend lower as the year moves on, or is that more driven by dispositions?
Jamie Feldman: Maybe just talk about what changed.
Speaker Change: you know, what may change going forward. Yeah, Mark, you want to comment on that?
Mark Binda: Thank you.
Mark Binda: Yeah, sure.
Mark Binda: I think last quarter,
Mark Binda: Last quarter, or at least as of Investor Day, we did have the 219 East 42nd Street asset in there as, you know, something that we thought that we would redevelop or develop.
Mark Binda: turned out that we've decided to sell that asset. Aside from that, it's been pretty consistent from the last quarter. I think, you know, a lot of those redevelopment assets are in great locations in, you know, places that we'd like to be. But certainly, as we go through our process to look at, you know, non-core assets, it's always possible that we find things in there that could potentially be sold.
Speaker Change: Okay, thanks for that. And then the $95 to $125 million of investment gains that you plan to include in earnings?
Speaker Change: You said you took an impairment recently. I mean, what gives you conviction that you can hit those numbers?
Speaker Change: And do you think you'll see more impairments netting that out?
Speaker Change: Yeah, we did have some impairments during the quarter here, Jamie, but I think when we look back over three years,
Speaker Change: We've averaged, like, you know, 96 million over the last three years per year. And so over a longer period, when we look back, you know, the impairments have been
Speaker Change: Pretty pretty modest relative to the size of those gains So I think you know we're thinking about the things that that Hallie mentioned up front just with some renewed excitement around M&A You know that we we feel pretty comfortable with that number headed into next year
Speaker Change: Do you mean that you think you'll see some increase in values and take gains on that or based on where values are today, you still can deliver that 95 to 125?
Speaker Change: Yeah, hard to say where values go. Yeah, no, I think we're talking about the, you know, the values today. I think if you look on balance sheet, we've got something like north of 300 million of, you know, unrealized gains that we could tap. And part of it, to be fair, Jamie, a lot of it is outside of our control, you know, whether it's an M&A event or an acquisition by a big pharma or so forth. So some of it's hard to predict because, you know, these things kind of happen when they happen.
Speaker Change: But the fact that we've reiterated guidance here, I think, Jamie, should give you comfort that we think we can hit those numbers pretty comfortably. Otherwise, we wouldn't stick with it.
Speaker Change: Thank you.
Speaker Change: Okay, that makes sense. Thank you.
Speaker Change: The next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.
Michael Carroll: Yeah, thanks. I believe you touched on this earlier, but I wanted to see if I can ask it a different way just regarding overall leasing activity.
Michael Carroll: I know that some tenants have been delaying decisions just given the uncertain environment. I mean, are there any examples of this starting to loosen up just given the prospect of interest rates that could continue to drop? I mean, is that –
Michael Carroll: activity or urgency for attendance? Is that starting to pick up here? Well, I think, again, if you go back to Hallie's comments and think about the –
Michael Carroll: sectors. Each sector is kind of driven by different issues when it comes to, say, Big Pharma or Big Cap Bio.
Michael Carroll: Those, you know, those are dependent upon their needs and not on the vicissitudes of, you know, the capital markets today or whatever. But then you contrast those to clinical stage biotech who are waiting.
Michael Carroll: you know, to hit a clinical milestone or not, then those, that's where, you know, and Peter's reemphasized this a number of times.
Michael Carroll: boards want to be really careful not to get ahead of their skis so it really depends on you know the sector that you know you're looking at it's not a one-size-fits-all
Michael Carroll: shoe fits all, if you will.
Michael Carroll: Okay.
Michael Carroll: And then on the five projects that are scheduled to be stabilized in 2025, I mean, how are the leasing prospects on those specific buildings? And I know that we're still a year out from the expected stabilization, but when should we start to see leases getting signed in those projects? What are going to be done here in the next few quarters? Is that a good way to think about it? Yep. So maybe let's do this since we're doing fourth quarter and year end 2023. Let us, and Peter, make a note of this. We'll specifically address that on our first quarter call if you don't mind.
Speaker Change: Great. Thanks, Joel. Okay. Thank you.
Speaker Change: Our last question comes from Dylan Berzinski of Green Street. Please go ahead.
Dylan Berzinski: Hi, guys. Thanks for taking the question. Peter, just wanted to go back to one of the comments you made regarding one of the questions asked a little bit earlier on $200 a square foot for new development leases for TIs being the norm.
Dylan Berzinski: last year versus $300 a square foot today, would you attribute that to solely the imbalance between supply and demand today, or do you expect that to sort of be the new normal moving forward?
Speaker Change: Thank you.
Peter: I think it's the new normal.
Peter: Going forward, I mean, it's driven certainly by.
Peter: more competition in the market.
Peter: But it's also driven by the higher cost.
Peter: to build out space.
Peter: been a considerable increase in construction costs, as you guys all know, and I used to comment on. So that alone, I mean, you know,
Peter: The availability numbers will eventually resolve themselves, but the costs are what they are, and the tenants are willing to invest in the space, but only to a certain degree. So I think that that number is here to stay.
Peter: Again, I think you have to distinguish different sectors have different tolerances for investing in space.
Peter: and they can be pretty dramatically different. And as Peter said,
Peter: The structural inflation that we have brought on ourselves over the last number of years as a country and really as a world is pretty much here to stay, and that's true across all real estate classes.
Speaker Change: Okay, appreciate the details on that, and then one more on sort of the dispositions.
Speaker Change: You know, you mentioned focusing on non-core, non-campus-like assets. Could you just talk about sort of the typical buyer profile on who's in bidding tents when you go to market with those types of assets? Yeah, I think we'd rather not get into that issue and just let it be at this moment. I don't think we want to discuss that on an earnings call.
Speaker Change: Sorry.
Speaker Change: Okay. Oh, that's all I had. Thanks, guys.
Speaker Change: Yep.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks.
Joel S. Marcus: Thank you, everybody, and look forward to our call for first quarter, and again, safe and healthy New Year.
Joel S. Marcus: Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.