Q2 2024 Alexandria Real Estate Equities Inc Earnings Call
[music].
Good day and welcome to the Alexandria Real estate equities second quarter 2024 conference call.
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I would now like to turn the conference over to Paula Schwartz. Please go ahead.
Thank you and good afternoon, everyone.
This conference call contains forward looking statements within the meaning of the federal Securities laws.
Actual results might differ materially from those projected in the forward looking statements.
Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in the company's periodic reports filed with Securities and Exchange Commission.
And now I would like to turn the call over to Joel Marcus Executive Chairman and founder.
Please go ahead Joel.
Thank you Paula and welcome everybody with me today are Holly Pieter and Mark and we welcome you to our second quarter earnings call and thank you and congratulations to the Alexandria family team for another very solid second.
Second quarter operating and financial performance, given the continuing uncertainty of the backdrop as soaring U S debt and government spending problems continue pretty much unabated and thinking about our daily efforts. We all think about the Navy seal credo the old easy day was yesterday.
Also huge congrats to our team on the June 2020 for.
Release of our corporate responsibility report, which reinforces our long standing operational excellence across.
What are one of a kind lab space platform and to the team for securing 100%.
The electricity needs with renewable energy for 100% of our Alexandria paid accounts in our greater Boston cluster market.
Phenomenal achievement. Thank you team.
And thinking about long term strategic thinking since the bull market.
The life science industry turned in February of 2021 I would say the market moved from our historical long Bull run to a bear market.
As I said February of 'twenty, one and we've worked every single day to reengineer and fine tune our long term competitive advantages of this one of a kind leading lab space platform. Our goal is much like it was but very different given the facts of course after the 2008 2009 great.
Financial crisis in the bear market after map to position ourselves to come out of the.
Out of this sector bear market with the acumen and business strategy really to enable our life science industry and tenant growth much as we lead the long historical Bull market 2014 to 2021 with record breaking earnings growth for our sector.
So im thinking about our competitive advantages.
And what.
We.
Choose to.
Really emphasize I think most importantly, our first mover advantage in the top life science clusters, we continue to refine and refocus our footprint.
And you see that by our actions you know.
Quarterly are high quality assets aggregated in desirable unwell amenities Mega campuses. We continue this monumental effort really driven to and by our redevelopment and development efforts in each of our massive mega campuses and our attempt to reduce.
And hopefully successful strategy, our non Mega campus pipeline future pipeline and obviously the sale of.
Most of our noncore assets over time, that's going to be critical to our go forward business plan high quality cash flows and substantial embedded future net operating income will be even more secure.
Given that platform.
Focus our long standing tenant relationships that demonstrate stellar Brian loyalty continued Lilly is great example, with multiple strategic relationships. There we continue to be backed by our fortress balance sheet with significant liquidity unique and deep life science expertise, which is a hallmark of this company.
From day, one and our we're very proud of our long tenured and highly experienced management team.
As I moved from kind of our strategic thinking about what we need to do.
To be at the Vanguard of the next bull market for life Science, the life science industry I want to take a reflection on my take of the second quarter and our future planning.
It goes without saying that we had a very solid F O.
Per share growth in this quarter this past quarter second quarter of course, a five 3% and six 3% for the six months. This.
This year, and especially I think positive given the backdrop and astounding, 74% of our <unk> comes from the Mega campuses, and we hope to push that over 90% and a short handful years as our major moat as the major mode of our business.
53% of our air ours from investment grade or big cap companies, the strong quality of cash flows and the 96% of our leases having contractual rental rate increases gives us great future protection.
We've maintained stable occupancy with a very solid leasing quarter with solid economics, and we continue to have very solid.
Cash same store NOI growth, our EBIT margins are best in class and we're also working hard to reduce our go forward Capex and G&A.
We are anchored by our fortress balance sheet as I've said with strong liquidity and almost one third of our debt expires. After 2049 with an average term of 13 years over the next few months. We are laser focused on leasing the remaining 1 million approximately square foot.
Rolling this year and getting a strong jump on the significant 2025 rollovers also over the next few months, we're laser focused on our 'twenty four and 'twenty five deliveries and continue to increase our leasing on those well beyond the current 87% to drive NOI growth.
We're making significant progress on our recycling of capital for 2024 and beyond and finally, the life science industry, which Halley, who will comment on in depth here is the crown jewel in the cherished industry of our country and truly the world's leader in innovation in the discovery of new medicines It has virtually.
The only industry, which fundamentally enables better health, well being and longer and healthier lives.
We've built this one of a kind company to be at the Vanguard of this cherish life science industry as it recovers from the aftermath of the Covid Rocketship and without further Ado, Let me turn it over to Holly.
Thank you Jill and good afternoon, everyone. This is Kelly King SVP of life science in capital markets.
Today I'm going to review Q2, 'twenty four life science industry performance.
And across our strong and diverse tenant base and the incredible innovation that is propelling the growth of the life science sector.
As I walk through the detail there are two main points I want to underscore.
First the five trillion dollar secular Lee growing life science industry continues to command robust levels of capital from diverse funding sources and second the lifetime that life Science innovation is advancing at a historic pace, yielding new medicines that extend and save lives.
Starting at the beginning of the lifecycle of innovation, biomedical and government institutions, which account for 10% of our air our.
Catalyze discoveries that feel a deeper understanding of disease biology, and early development of new medicines and.
In addition to the NIH budget of 49 billion in 2024 50.
<unk> 57 billion, what's contributed to biomedical research last year through philanthropic organizations.
Well institutions, maybe the Amgen for early innovation.
Biotech companies, which represent another 10% of our air or are the fuel advancing research discoveries into potential new medicines.
But life science venture funding was robust this quarter exceeding 12 billion logged.
While down from the peak in 2022. This year is on track to be the third highest year in life science venture dollars ever deployed.
Next our pre commercial public biotech companies, representing 9% a R. R.
Remarkably follow on financings and private placements are at historic highs eclipsing $10 billion in the second quarter with 2024 financing already exceeding full year 2023 levels.
This activity is juxtaposed against the limited IPO volume and the XP II, which is a moderately for the year, but lacks the broader markets.
We caution that the ex the eye is an imperfect barometer for public biotech.
Reality is a picture up have and have nots.
Biotechs that meet clinical milestones, having had ample access to liquidity and see positive stock performance, while those that lack meaningful inflection points are faced with a challenging market reality.
Next our commercial stage, biopharma and large multinational pharmaceutical companies, representing 17% and 20% of air are respectively.
Biopharma continues to commit historic levels of capital to internal R&D and external innovation.
2023, R&D spend near 300 billion and the industry set records for M&A driven by an estimated 200 to 300 billion of revenue at risk in the next five years due to patent expirations.
In 2022 this pace has continued.
With over 60 billion M&A announced.
On the ground leasing from this cohort is driven by the need to recruit and retain scientific talent critical to developing new medicines are central to meeting near and long term growth targets.
This is illustrated by the 127000 square foot lease we announced this quarter with a large multinational pharmaceutical company on our SD Tech by Alexandria, and Mega campus in San Diego.
Spanning the entire lifecycle of innovation is our life science product service and device tenant segment, which represents 21% E. R. R.
Relevant to this segment is the bias to Cure Act, which if passed will limit utilization of select Chinese contract manufacturing and research organizations.
We view this legislation is largely positive it includes grandfathering provisions to minimize near term impact to biotech companies, while creating an incentive for U S based contract manufacturing and research organizations to onshore capabilities.
The output of the entire innovation cycle, our novel medicines that make it into the hands of patients.
Through June the FDA approved 21 novel small molecule and biologic therapies and separately approved five novel gene and cell therapies.
Proximately 500 novel FDA therapies approved since 2013, 50% were developed by Alexandria tenants.
Highlighting one recent approval this month, the FDA approved Alexandria tenants, Eli Lilly novel antibody for treatment of early Alzheimers disease.
As many listening today have experienced firsthand alzheimers is devastating affecting one out of every nine individuals' over 65 in the U S well.
While recently approved Alzheimers medicines can slow disease. They are still not a cure and there remains much work to be done.
The same way that 10 years ago obesity was considered too complex to treat with medicines and now has been transformed by G. L. P. One therapy is developed by Alexandria tenants, Eli Lilly and Novo Nordisk.
10 years in the future we may have medicines that completely alter the paradigm of diseases, such as Alzheimer's rendering them treatable or even preventable conditions.
Coming full circle the life science industry continues to demonstrate sustained strength.
Energized by this incredible pace of innovation and reinforced by diverse sources of funding.
As the trusted partner to the world's leading life science companies that span the entire lifecycle of innovation. Our mission remains steadfast to create and grow life science ecosystem and clusters that ignite and accelerate the world's leading innovators and their noble pursuit to advance human health and cure disease with.
That I will pass it over to Peter.
Thank you Holly.
Respected economist recently made the case that.
That pent up demand from the pandemic is continues to be a key source of inflation, which is one of the reasons. The raising of short term rates has been an effective and that sectors of the economy with pent up demand will continue powering the economy going forward in 2024, regardless of rates or who wins the election health.
Carol was one of the sectors mentioned patients returning to doctors' offices and hospitals are releasing pent up demand for therapies, and medicines, which should send a strong signal to the industry to grow we look forward to enabling that growth.
I'm going to discuss our development pipeline leasing supply and asset sales and then hand it over to Mark.
In the second quarter, we delivered 284982 square feet, 100% leased with 92% of the space contained in Mega campuses located in a high barrier to entry sub markets. The annual incremental NOI delivered during the quarter equaled $16 million, bringing the year to date total to 42.
Yeah.
Development and redevelopment leasing of approximately 341000 square feet was more than three times the volume of last quarter led by strong credit tenant leasing the.
The ability to execute on our development and redevelopment pipeline when others are clearly struggling is mainly attributed to our strong brand built on operational excellence and the attractiveness of our Mega campus platform, which houses 69% of our current pipeline.
Projects to be delivered in 2024, and 2025 or 87% leased and projects expected to stabilize in 2026 and beyond our 40% leased or under negotiation because of our continuing strong execution during the quarter.
Our development and redevelopment pipeline is expected to deliver very significant incremental NOI of approximately $480 million in the near to medium term $187 million of this NOI is expected to be delivered through the fourth quarter of 'twenty five and the remaining 293.
<unk> will be delivered from the first quarter of 2006 through the first quarter of 'twenty eight.
To execute on this we will only need to average approximately 61% of the leasing.
Per quarter through <unk>, one through the first quarter of 'twenty. Eight then we executed this quarter.
Transitioning to leasing and supply the leasing market is in a flight to quality field projects are often in tertiary markets and operated by inexperienced entities with little to no knowhow or capital to fund tenant improvements.
The majority of fully vacant buildings in our markets. Our recently delivered buildings from these entities, who majorly on estimated the skill sets needed to be successful in life science real estate and pick sites as if they were investing in office hi.
High quality locations in the core areas of innovation and high quality sponsorship matters. Many of these new entrants are learning that the hard way.
Alexandria sets the standard for sponsorship and life science real estate, and our consistent occupancy tenant retention and strong tenant relationships, which accounted for 83% of our leasing during the quarter.
Are reflections of that moat, we have created with our high quality Mega campus model residing in AAA locations, our operational excellence and our fortress balance sheet.
Although the search rings of the tenant basis have expanded with the delivery of new supply the strike rings have tightened as quality tenants leery of inexperienced and under capitalized developers choose the trusted brand.
We leased 1 million 114001 square feet during the second quarter highlighted by the strong leasing in the development and redevelopment pipeline I noted earlier <unk>.
GAAP and cash rental rate increases or seven 4% and 3.7% respectively over 90% of our renewals were either neutral or had a positive mark to market.
On competitive supply 2024 is going to be the peak year for new deliveries and then it will begin to dissipate in 2025 to about half of what we will deliver in 2024.
We're likely to see little to no new deliveries from her tenders after 2025 unless projects currently under construction are delayed.
I'll conclude with an update on our value harvesting asset recycling program is.
As mentioned on the last call our value harvesting transactions will be heavily weighted towards the third and fourth quarters, but significant progress continues to be made during the quarter. We closed on the $60 million non income producing asset in New York and increased our pending transactions subject to letters of intent or purchase sale agreement.
Hey, Matt negotiations by approximately $549 million to a total of $806 $7 million. This combined with our $77 $2 million in closed sales and $27 million of forward equity sales agreements expected to be settled in 2024 brings our pen.
<unk> and closed transactions to $884 million approximately 59% at the midpoint of guidance for dispositions partial interest sales and equity.
Interest in our noncore asset sales remains consistent and we believe the anticipated rate cuts and buying of the financial markets will bring more buyers and have a positive effect on values. The lack of financing available to investors has been the driver of the widely reported lack of capital markets activity in the broad market cap.
Capital flows have a major impact on valuations and commercial real estate debt has trended downward as a percentage of GDP for the last two years prior to the first quarter of 'twenty. Four. However, this appears to be reversing as new C. M. B S issuance for the first half of 'twenty 'twenty four is up nearly threefold from the same period.
Last year, which should provide positive momentum for our current and future efforts.
With that I'll pass it over to Mark.
Thank you Peter this is mark <unk>, CFO, Hello, and good afternoon, everyone.
We reported solid operating and financial results for the second quarter total revenues and NOI for <unk> 24 were up seven 4% and nine 4% respectively. Over <unk> 23, primarily driven by solid same property performance and continued execution of our development and redevelopment strategy.
<unk> per share diluted as adjusted for the quarter was $2 36 up five 4% over <unk> 23 and was ahead of consensus.
We reiterated the midpoint of our full year 2024 guidance for <unk> per share diluted as adjusted of $9 47, which.
Which is up five 6% over the prior year.
The key assumptions to <unk> as adjusted generally remain within our prior guidance ranges and so they remain unchanged with the one exception being the change to our sources and uses for the Tech square ground lease amendment, which I'll get to later.
Speaker Change: I'll start with internal growth.
Our solid operating results for the quarter were driven by our disciplined execution of our Mega campus strategy tremendous scale longstanding tenant relationships and operational excellence by our teams 74% of our annual rental revenue coming from smart collaborative Mega campuses, we have high quality cash flows with 53% of our annual rental.
Revenue from investment grade and publicly traded large cap tenants collections remain very high at 99, 9% and adjusted EBITDA margins continue to be strong at 72% for the quarter.
Turning to leasing leasing volume was strong for the quarter and the first half of 2024, and $1 1 million and $2 3 million square feet, respectively. The second quarter was up 27% over the average in the back half of 2023 and is consistent with our historical quarterly average for the period from 2013 to 2000.
'twenty.
We continue to benefit from our tremendous scale high quality tenant roster and brand loyalty was 79% of our leasing activity over the last 12 months coming from our existing deep well of approximately 800 tenant relationships, including the 127000 square foot development lease that was executed this quarter.
There was a multinational pharma company at our Mega campus development in Sorrento Mesa.
The rental rate increases for the first half of 'twenty four were strong at 26, 2% and 15% on a cash basis and our outlook for rental rate growth for the full year 'twenty four remains solid at 11% to 19% and 5%, 13% on a cash basis.
Rental rate growth for lease renewals and releasing of space for the quarter was seven 4% and three 7% on a cash basis as we've noted in the past the rental rate increases can vary from quarter to quarter based upon a particular mix at lease explorations.
Lease terms on new leases completed in the first half of 2024 were seven seven years, which is consistent with five out of the last 10 years, which had lease terms in the seven to eight year range.
The overall mark to market for cash rental rates related to in place leases for our entire asset base remains solid at 12%.
T is on renewals and releasing of space for the quarter of $31 83 were consistent with our historical per square foot average since 2020 of $31 seven.
In the year to year to date amount is significantly below our historical average at $25 32.
Our total non revenue enhancing expenditures, including <unk> on renewals and releasing of space.
Are expected to be in the 12%, 13% range as a percentage of net operating income in 2024, which is below our five year average of about 15% and highlights the durable nature of our laboratory infrastructure.
Same property NOI growth for <unk> 24 was solid at one 5% and three 9% on a cash basis, driven by solid rental rate growth and leasing volumes.
Full year same property growth is consistent with our last update at 154% on a cash basis at the midpoint.
Occupancy for the quarter was solid at 94, 6%, which is consistent with the prior two quarters.
Speaker Change: Turning to lease explorations or our team has done a great job of addressing 2020 for leasing explorations unresolved lease explorations remaining for the balance of 2024 are pretty modest up 637192 square feet. Two result, excluding the 350000 square foot lease.
Exploration related to the New York asset we disposed of in July.
Looking ahead to the first quarter of 2025, we highlighted a few key lease explorations aggregating 600000 square feet with $37 million annual rental revenue that are expected to have 12 to 24 months of downtime on a weighted average basis with more than half of that coming from a lease expiration with darrin.
Speaker Change: At Tech square, which as a reminder, recently expanded into 462000 square feet at the recently completed 325 Binney project.
These spaces may require some time to release <unk> repositioning the assets and are likely to remain as operating assets. Please refer to footnote number five in page 23 of our supplemental package for additional details there.
Next to external growth during the quarter, we continued to execute on our development and redevelopment strategy by delivering 284982 square feet in the pipeline, which will generate $60 million of incremental annual net operating income. We also expect to see.
Your growth in incremental annual net operating income on a cash basis.
Of the $80 million from executed leases.
Initial free rent from recent deliveries burns off over the next seven months on a weighted average basis. As a reminder, this 80 million is for previously delivered projects and is not part of the projected go forward $480 million and net operating income associated with current projects.
We have $5 4 million rentable square feet of development and redevelopment projects, there are 61% leased or negotiating and those projects are expected to generate $480 million of incremental annual net operating income over the next four years, including $187 million in the next six quarters.
In July we completed an extension of our ground lease at Alexandria Technology Square.
This will require a pre payment of rent up to $135 million amounts to <unk> 24, and <unk> 25.
<unk> in the non recoverable ground rent expense starting in <unk> 24 through 2088 on a straight line basis.
We increased our guidance range for dispositions sales of partial interest in common equity to reflect the funding for the first ground lease payment due in <unk> 24.
A few key items to note.
First we view this asset Tech square is a generational asset located adjacent to <unk>.
In Cambridge at the center of Maine, and Maine with several important relationships located on the campus.
Since we acquired this Mega campus in 2006, NOI has nearly quadrupled over our ownership period and third even with the expected prepayment of Brent. We believe this adjusts to a very attractive annual ground rent cost relative to market over the next 65 years and.
We believe that this extension enhances the long term value of the campus for all these reasons, we are very pleased with the outcome.
I'll turn next to cap interest.
We continue to focus on the completion of committed <unk> under construction projects, which are expected to generate $480 million of incremental NOI through <unk> 28, as well as important preconstruction activities, adding some value and focused on reducing the time from lease execution to delivery capitalized interest since declined three quarters in it.
Primarily due to the delivery of projects in the pipeline, which generated 187 million of incremental <unk>.
Net operating income over that time, and a decline in average real estate basis subject to capitalization up $1 9 billion from a peak and <unk> 23 to <unk> 24, our outlook for capitalized interest for 24 is consistent with our previous guidance continues to assume around a 10% decline in average basis.
Subject to capitalization for the full year 24 compared to 23.
Transitioning next to the balance sheet, we continue to have one of the strongest balance sheets amongst all publicly traded U S. Reits and we look for opportunities to continue enhancing our fortress balance sheet or corporate credit ratings are in the top 10% of all publicly traded U S. Reits our leverage continues to remain low at five four times net debt to adjusted.
EBITDA in our quarterly annual annualized basis, and we have an attractive debt profile with fixed rate debt comprising 97, 3% of our total debt.
Speaker Change: The average remaining term of debt of 13 years. We also have tremendous liquidity of $5 6 billion supported by our 5 billion revolving credit facility and we're very pleased with the recent agreement to extend our credit facility through January 2030, and we think are fantastic banking relationships for the tremendous support to help us.
Our mission.
We remain disciplined with our strategy for long term funding of our business and recycling capital from dispositions and partial interest sales to minimize the issuance of common stock.
Disposition strategy is heavily weighted towards outright dispositions of assets not integral to our Mega campus strategy, allowing us to enhance the quality of our asset base.
We may also consider reducing the size of our future pipeline through asset recycling into current the current pipeline and into our mega campuses.
July 24, we completed the sale of the vacant non laboratory building located in Manhattan for $60 million.
These buildings designated as held for sale and for Q2, three and was sold following the lease exploration for the full building in July 24.
The aggregate total completed and pending disposition dispositions under negotiation plus a small amount of equity we raised on the ATM aggravates $912 million or 59% at the midpoint of our guidance.
155 billion.
While the macro environment remains challenging we are reasonably optimistic that we can execute on our disposition plan in 2024 values, representing a reasonable cost of capital.
Based upon our outlook as of today, we plan to pause on future issuances under the ATM program at least for the next quarter.
We also expect to fund a meaningful amount of our equities with retained cash flows from operating activities after dividends of $450 million at the midpoint of our guidance for 'twenty four are.
Our high quality cash flows continue to support the growth of our annual net our annual common stock dividend with an average annual increase in dividends per share of 5% since 2020, and we continue to have a conservative <unk> payout ratio of 55% for Q4.
Realized gains from venture investments included <unk> <unk> per share as adjusted were $33 for the quarter.
$62 2 million for the six months ended June.
On an annualized basis based upon the first six months of 24 that would take realized gains towards the high end of our guidance range for the full year of <unk> $95 million to $125 million.
Gross unrealized gains in our venture investments as of <unk>, 24, or $284 million on a cost basis of $1 2 billion.
We've updated our guidance for 2024 for EPS of $2 98 to $3 10.
And we maintained our guidance range for <unk> per share diluted as adjusted with no change to the midpoint of $9 47.
Which represents a solid five 6% growth in <unk> per share for 2024.
With that let me turn it back to Joel.
Thank you Mark and operator, we will go to questions. Please.
Yes, Sir and as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
To remove yourself from the queue. Please press Star then two.
Today's first question comes from Joshua <unk> with Bank of America. Please go ahead.
Hi, This is for all granite on behalf of Josh.
I quickly wanted to ask about is you were mentioning.
The Alexandria technology square Mega campus that repositioning going from multi tenant or going to multi tenancy from single tenancy I was wondering if you could discuss the driver of this change and if you're seeing any shift in demand of the market for single tenants.
Well I think there is.
No fundamental change as I think.
Mark mentioned Madonna is.
Essentially or is moving out of that space.
Tech Square 200.
Moving to their new R&D in HQ headquarters at three to five bimini.
They leave behind laboratory.
<unk>.
Assets in.
In that space or spaces, and our plan is to release those.
Generally yes.
As a multi tenant situations. So it's not really any change we clearly knew prolonged period of time that <unk> was leaving and this is just part of their growth something we've done time and time again just remember.
Alexandria Technology square sits right across the street.
From Mit's main science campus and.
You've got the best location in the World when it comes to laboratory space.
Great. Thank you Ann.
So I noticed in between the one Q to Q.
Letters of intent and pending along with closed acquisitions that there was a slight.
Kind of I don't know dropping off of the LOI is I was wondering if you could comment on that either.
If things are are coming out of the pipeline do different circumstances I'm pricing negotiations.
Peter do you want to comment on that.
Hi, Jackie.
Yes.
Go ahead Mark.
Mark: Oh, Yes, I was just going to say yes.
I think I think what you're referring to is.
Is that the lease percentage on the development pipeline.
It wasn't that leases are leased and then werent piece.
What happened there was we actually added a little bit more square feet into into one of the assets at 311 Arsenal that was.
Project that has been coming back to us in phases and so the project has got larger this quarter and as a result, the lease percentage went down so.
Mark: I don't know that there was any type of surprise there.
I think what I was referring to is the and the acquisition page in the supplemental.
Pending acquisition signed letters of intent I guess, just when when adding them together.
I'm taking out what was completed in Q2 24, I think there was a slight.
Difference this.
Quarter over quarter is that what you're referring to for the purchase price for.
Page five of the supplemental.
Yes, yes.
Don't think there is.
Yes look if you look at last quarter that depending items that we were looking at I think that numbers come down a little bit.
But I think that number came down by a pretty small amount if I recall correctly. So I don't know that theres anything.
Shocking or surprising from our end I think we're focused on.
Conserving capital and putting our capital into the active pipeline focused on dispositions at the moment.
Okay. Thank you I appreciate it.
Thank you and our next question comes from Anthony Pallone at J P. Morgan. Please go ahead.
Yeah. Thank you.
Can you talk a bit about cap rates on the pending $806 million of <unk>.
Sales or stick sales and just maybe even more broadly any updates across your markets.
It relates to property values or cap rates.
Yes, John Peter Peter.
Yes.
The things that that will have cap rates published I think you'll find to be in line with our commentary.
Of.
Good quality assets are still in demand.
Yes.
Okay.
Yes, I don't want to I don't want to spoil any.
Thunder for next quarter, but we do have a couple of things that are going that are that are pretty good.
Noncore assets, though can certainly.
Not necessarily be representative of our prime assets that we plan on holding.
<unk>, but.
No.
Cap rates are a tough thing to figure out these days, what People's returns, where they are looking for.
Largely depends on their cost of capital which has been.
Varied.
Throughout the last few quarters, but.
I'm going to go ahead and wait till I think next quarter, we will have something to publish and Neil you'll.
You'll see the numbers.
Okay and then just you mentioned a couple of times in the prepared remarks about just the increased leaning into the Mega campus strategy and and even shedding more non core is there like a percentage of the portfolio you would characterize as kind of not fit.
Adding the long term strategy at this point that you can provide.
Well I think if you look at the percentage of <unk> coming from the Mega campuses.
And that that's not you have a series of assets remember this company was built over a.
Over decades on individual acquisitions, and then individual redevelopments and developments and then.
The first Mega campus that we bought was tech square in fact in 2006 and that really kind of launch that strategy followed by campus point in 2010.
And then the New York campus, which was our first Mega development campus.
So I think you just have to think of it in terms.
These are still really good very very good assets and we've moved in many cases and shed many of our.
Workhorse assets in the suburbs and we still have.
Quite a number of.
Standalone assets not really in the outer suburbs that we've.
Transacted over the last handful of years and I think we're looking at that so I'm not sure. It's easy to give you exact percentages, but as I said our main goal is to move our Mega campus annual rental revenue.
Into the high <unk> or low ninety's over the next short handful of years, Tony If that's helpful.
Okay.
Okay, great. Thank you.
Thank you and our next question comes from Michael Griffin.
Please go ahead.
Great. Thanks. My first question was just on the leasing environment I noticed for the renewals there was a decline in weighted average lease term relative to last quarter can you maybe give some insights was it specific to the renewals that were coming up is it more indicative of tenants, maybe being unsure of their footprint.
Realize that one quarter doesn't make a trend, but you know any commentary around that would be helpful.
Yeah, So I'll ask Peter to comment from his perspective, but I think if you think about again you said it.
Individual leases.
Come up quarter to quarter, certainly drive those stats I think it's fair to say and <unk> commented on this on a number of occasions, we're seeing more demand from the.
Mark: The earlier stage companies and the.
Revenue generating companies, it's the <unk> between the biotechs that are in the <unk>.
Our clinic waiting for clinical.
Mark: Milestone achievement that I think has caused.
Some of the disruption in the normal.
Leasing.
Leasing transactions that have gone on and I think this quarter. There was just more at the earlier stage.
Those people can't commit to 10 or 15 year leases because they are likely to grow and that's the reason to have them on the Mega campus. Because we can provide them 5010 2030, whatever they want and we can double and triple their footprint on a mega campus, whereas on the individual building oftentimes you can't really do that.
Yeah, Hey, Mike.
Peter.
Yeah, Michael it's Peter.
Speaker Change: Observation we.
It's one of the first things that.
But I noticed when I started looking at the numbers and Joe's absolutely spot on.
It's serendipitous.
<unk> had to say.
A large portion of the leasing was for early stage companies and as Joel mentioned those companies tend to sign shorter term leases.
Because they expect to be much bigger in the future.
Joe is exactly right. It's one of the reasons that we adopted a mega campus strategy. Because we have these types of tenants that will grow within the Mega campus, so, but yet no trend other than.
Just serendipity.
And Peter do those smaller tenants I guess require larger ti packages I noticed the free rent was stable quarter over quarter, but it seemed like Ti and Lcs went up so what is that just a one off maybe driven by one lease or what was driving that.
Yeah, well Mark mentioned in his comments that although it was higher than maybe the last.
Couple of handful of quarters.
Speaker Change: That TLC number was.
Our average since 2020.
These are renewals so.
Yes.
It's kind of the numbers will vary from quarter to quarter based on the.
The work that needs to be done on the sweep.
Mark mentioned in his comments the recycling the durability of our of our spaces. We don't have to put a lot of capex to continue the lease.
And to continue to do.
Speaker Change: Leverage off previous investment but.
In certain cases, you have a tenant that might be to do some reconfiguration or you might have.
Thats.
In our space.
15 years old or so so you got to put more money into it so it's.
Again, it's not a trend.
It's not a market trend like it would be we've talked about things from shell.
<unk> have gone up considerably.
Because tenants don't want to invest in this space like they used to have two but in the case of renewals. It's it's.
Just.
Lease by lease what is the space look like what is the tenant need.
But it is still if you consider the inflation that is happening.
Structuring costs $30 is still not a lot of money.
To be averaging on renewals.
And then maybe just one more if I could follow up on the development pipeline I noticed that the 651 Gateway project was pushed.
<unk> six is this just a function of maybe more tepid demand in south San Francisco and one at what point would you have to stop capitalizing costs on this project and start.
Having it flow into the income statement, yes, thats exactly correct.
Markets or Submarkets, South San Francisco, certainly as we've highlighted and Peter has talked about that for quite a number of quarters has.
One of the most outsized supply issues remember too this is an old building.
That we inherited in a joint venture so the time and effort to get this redeveloped is just what it is the good news is we have.
Several transactions going on that weren't alive last quarter. So I think that's good news mark can comment on.
The termination of capitalization.
Yes, Michael Yes, there is.
Magic number there in terms of when it when it would turn off.
There's continuing activities today.
Doing work on those floors that remain to be leased and delivered.
But yes.
If there was a situation where.
Speaker Change: Those activities ceased.
Where the demand just couldn't catch up.
With the supply there than we would.
We would have to shut down those portions of the project no longer have activity.
We'll continue to watch that very carefully.
Okay.
Great. That's it for me thanks for the time thank you.
Thank you and our next question today comes from Rich Anderson at Wedbush. Please go ahead. Thanks, good morning out there or good afternoon excuse me.
So on the leasing front you know you had the mix issue this past quarter, but if you sort of look at what you did in the first half and compare that to what youre guiding to which didn't change that would imply like a GAAP number of eight average 8% up in the second half and our cash average of about five.
<unk>.
Is that about is that right am I thinking about that correctly. If I just do some product of the of the mass or am I missing something.
Yes, I can take that one.
Rich yes. It is.
It's not a perfect analysis right because volume.
Very from quarter to quarter, particularly.
In that release and renewal bucket right. That's only a fraction of the total leasing so it's not a perfect analysis.
I think youre right that the first half of the year was was very strong. It's the numbers are actually above the high end of our mid point.
But we feel comfortable with our guidance, we've got out there, which we still think is very strong in this environment.
And then it does it doesn't play.
On average slightly.
Slightly lower numbers in the first half, but I think we're still very pleased with.
Speaker Change: Where we expect to come out for the year.
Okay, and Peter I'm going to see if I can ask a cap rate question a different angle.
So if you shut me down as well, but.
Do you have a differential between core and non core assets in terms of cap rates.
Is there a spread that you guys think about in terms of what you think is.
A long term hold and what's not.
Yes, I mean, I would think about it in a way of long term holds we're gonna be mega campuses in the prime corner locations and you've seen us put up really strong numbers. There and then we've got some good assets.
We own them, because they're good assets, but.
They're not mega campuses that are typically not.
Within the core Mark core centers of innovation.
Speaker Change: But they were areas that supported research for different reasons.
Yeah it might be.
Hundred to <unk>.
The 200 basis point spread between something prime and something not so prime.
Okay. Great last question, you're funding a lot of your development or most of it with dispositions.
And I'm curious if you think.
By doing so you're you guessed expose yourself to impairments in this market.
Do you kind of view this in <unk>.
Some ways as a cleansing event.
I suppose you do like you wouldn't necessarily be using dispositions. If your stock was at $200 a share but you are.
Is there is that the silver lining to this long term in your opinion in your opinion or is that not the way to look at it.
Yes, well I'll comment and then Peter can I think the answer is yes.
Yes in the sense that we feel that the.
The industry has.
Been on a tear for as I said, the 2014 to 2021 and then the rocket ship and then kind of the.
Drop off from that and it's pretty clear that in todays fairly.
Way more disciplined allocation of capital from the life science industry.
More and more clear to us it's been clear for a long time, but even more so today that the best prospects for leasing and either keeping a tenant or attracting a new tenant is to give them great optionality on our Mega campus, great amenities and.
That's where we want to refocus our double down our efforts and we've gone a long way too.
Bring that to reality, but we think that's where we want to be out a period of time, where we have fewer and fewer noncore assets because I think they don't give us the optionality to attract or grow with tenants. The way we want to grow not that the buildings are leasable because some of them are absolutely great great build.
<unk> and have great tenants.
Yes.
Good.
I think it is a bit of a silver lining, but I would say that it would have happened anyway because of our observation that the Mega campus model was where we needed to be headed so ultimately those assets. Maybe it was it would have been at a slower pace, but we would have.
<unk> been selling those noncore non mega campus assets overtime anyway, yes.
We really have done that if you look at greater Boston, meaning we didn't have the money to get into Cambridge or even <unk> in the early days. So we started out in Worcester.
And so are the.
<unk> of how we've looked at each of the Submarkets as we've gone from kind of outer burbs to kind of the inner core just as the company has grown and now we just want to refine and.
Speaker Change: <unk> strategy and.
We feel like we.
We started that back as early as 2006 and now we're doubling down on it.
Okay, great color. Thanks, Thanks folks.
Thank you and our next question today comes from Wes Golladay with Baird. Please go ahead.
Hi, everyone just looking at the dispositions it looks like you have about 10 million square feet of non non.
Non Mega campus development potential how much of that would you like to be part of your disposition program.
Yes sure.
Yes go ahead Peter.
Yes look.
I think Joel mentioned that.
Earlier that.
R R.
Our development pipeline.
Sure ink in the future.
And but something Thats non income producing.
Land is very accretive.
Two to sell and to use to fund.
Our current pipeline are in our future.
In place pipeline so of course, we would like to.
If we.
For certain.
In certain areas, if we have land that.
We can market and so we will.
So it will certainly be part of our strategy.
And then looking at the ground lease purchase you did mentioned it was a generational asset did have a lot of term on it already before you extended it is there any other ground leases youre looking to extend actively at the moment.
Well one thing on it.
One thing I'd point out I think Mark you absolutely can answer this but one thing I want to point out is.
I think it was a really astute move for us to do that today because this was.
So it is a situation where we had more leverage today than we would have in better times.
So sometimes you have to make.
Make moves even if it's a tough environment because long term it is going to really set you up well.
Mark do you want to answer the other part of the question.
Yes, sure Hi, Wes I was just going to say Tech square. If you look at the IRR subject to ground lease was far and away the largest ground lease that we have it was about a third of the IRR subject to ground leases the balance of that is spread across 29 different properties.
And then if you think about where the lease terms are.
On a pro forma basis once that the amendment now that the amendments done.
A little bit north of 60 plus years. So I think we've got pretty good term in terms of that for the remainder of our ground leases.
Great. Thanks for the time everyone.
Okay.
Thank you and our next question today comes from Michael Carroll RBC capital markets. Please go ahead.
Yeah. Thanks, Peter I wanted to follow up on Mike's question earlier on the call. I mean is there a reason why most of the leasing activity is coming from early stage biotech companies.
A trend we should expect to continue over the next few quarters is that just kind of unique towards the activity this specific quarter.
Well look it is consistent with the way we've characterized demand.
By and large across our regions. There has been a barbell of early stage companies.
Being very active in large pharma being very active in.
Not as much in the middle.
Due to.
A.
Lack or not necessarily a lack of wanting to grow but lack of confidence to grow. So we do expect that the middle fill in over time, especially considering the metrics of how they started to.
Or had presented but.
It's not a trend it just happened to be.
A number of earlier stage company.
Leases rolling in.
It just was a coincidence.
Hi. This is Kelly I was just going to reiterate that certainly we see funding being strong across multiple.
Multiple data points venture certainly looks great. This year follow on financings have been very strong and we continue to see demand across the diversity of our tenant portfolio. If you look at our tenant Pie chart broken out by <unk> fell.
Well certainly.
Demand may look different from quarter to quarter from any given segment.
I don't think there is one.
Vic trends that is driving demand from only one of these tenants segments. We.
Yes, that's the beauty of the life science industry is the diversity of the types of companies we have in our portfolio.
Okay and then.
And then can you guys provide an update on your supply outlook I know on prior calls you provided some stats given the scheduled deliveries in 'twenty four and in 2025 as a percentage of inventory in the top three cluster markets. I mean have those stats changed at all or can you provide us an update on how youre viewing that.
Speaker Change: Yeah look we didn't want to bore you all with the same numbers over and over and over again I'd say the only real material change was there was.
A lot of deliveries in San Francisco this past quarter.
But it's progressing like like we thought.
We're in the under five 5% of total.
Inventory left to deliver in this year and then next year about half of that amount will will deliver.
Next year so.
The amount that is left to deliver in 'twenty four is roughly half of what it was.
Beginning of the year.
So it's progressing like we thought.
It's the same amount of space, we don't see.
Material amount of.
Supply.
Dissipating, we also don't see a material amount of supply being added.
Okay and then just last one for me I know you already talked about the Gateway project, but I know you had two developments that we're 100% leased at winter Street in her time in way that got pushed out it looks like roughly a quarter or so is that just delays in the construction or is there any reasons why those stabilization were put out pushed out a few quarters.
Yes, I can take that one Michael yes, I mean youre right.
The project at 230, <unk> was was pushed out I think a quarter that projects are 100% leased.
With 840 winter actually it's a similar story on both of them.
There are 100% leased and the tenant programming.
Yes.
Ends up making the construction a little bit longer so.
That just happens sometimes.
Okay, great. Thank you.
Thank you and our next question comes from Vikram Malhotra with Mizuho. Please go ahead.
Afternoon, Thanks for taking the questions.
Yes.
Maybe a bigger picture.
You laid out a pretty compelling longer term scenario for life sciences in the portfolio.
No. One wants you to if you could help us marry that with the near term sounded like there's still some challenges.
But also we're in.
<unk> from a delivery supply delivery standpoint, so just help us like what should we be watching for.
Inflection sounded like a little more.
That said near term than the long term.
Yes. Thank you for the question and I think it's a it's a good one.
I think you have to remember that we've seen.
Internet bubble crash in 2000, and the GMC in 2008, 2009, and then kind of the.
Blow up of the rocket ship of Covid as it kind of came down to Earth and each one is kind of different.
This time, we don't have financial institution problems, we don't have lots of companies that had kind of big business plans failing like back in 2000 and not so much biotech, but certainly in the.
Speaker Change: The dot com bubble era I think this time, we've never seen supply.
In our particular niche.
Supply has always been there, but it's never been oversupplied in a sense and so when you combine that oversupply.
With more muted demand coming off just a rocket ship.
Demand of 2021, I mean, our leasing quadrupled during some of those quarters and years, which you just know can't can't be sustained.
That's the overarching issue and the industry in the early did a great job of articulating the segments.
Mission critical.
The crown jewel of this country.
Critical to the health of our citizenry and beyond.
And I think that.
And the funding factors and diversity is very very strong.
That translates into is the big question, everybody wants answered, but there is no algorithm to do it how that translates into a more consistent and robust demand and I think thats what were all <unk>.
End of <unk>.
Working through and every every cycle is just different and so we're very optimistic about the future. Obviously, we wouldn't be in this business if we werent.
But we know that we have to make adjustments to.
Speaker Change: Our our assets our capital plan and make sure that we have we're best positioning the company to help our 800 tenants grow and attract a whole lot more and we think by selling.
More of the.
Noncore assets slimming down the future pipeline a bit.
And doubling down on the Mega campus is the right strategy till the market really turns and I think whether the election, whether it's.
The executive branch or each of the houses.
Helps reinforce a more robust economic environment, it's hard to say as I've said in my prepared remarks.
That debt service and the overall health of that.
Of the economy given.
Debt to GDP, and so forth a lot of really smart people have.
Opined on that issue.
We want to make sure that if there is a bigger shock out there to the system, we are extremely well protected.
Speaker Change: So sorry for the long answer.
No that's helpful and just maybe one more I guess.
Mark you can or Peter.
Uh huh.
<unk>.
You've done a bunch of repositioning is working to put properties into repositioning and I'm just trying to understand like bigger picture of what the opportunity set is our hardest submitted between like this was the office, we always intended to reposition the lab versus when we got it just we develop so like for example, the Apple.
Positioning where Apple was I correct me, if I'm wrong I thought that was going to be a renewal originally.
But now you're repositioning it so I'm just trying to think about the opportunity set down the road and like what the impact the numbers.
Yes, I can take that one yes, so on the on the Apple.
The Apple one that you mentioned are really in Austin, we're renewing some of that space. If you look at the lease exploration some of Thats.
B b negotiated the balance of that to the spaces, we're getting back.
Our warehouse and R&D spaces.
So those are that space for marketing, we've got we've got folks looking at that.
It's possible that some of those one or two of those buildings gets converted.
But we'll have to stay tuned.
When you talk about repositioning.
That's more in the lines of what I think Joel or Peter talked about earlier.
The Tech square 200, where it's an existing laboratory building.
But it's it's been single tenant.
For a while and it's an opportunity to be able to.
To market that space to multi tenants.
In terms of when we talk about repositioning that we're thinking of that is.
In the quote unquote bad Capex bucket.
But again, if you look back over a long period of time that the amount of Capex has been relatively relatively small.
Yes, just maybe a footnote on that so apple is in the process of negotiating a renewal on the.
The majority of the buildings, but they're giving back two of the buildings, which.
Mark highlighted I think the good news is one is.
I think eminently re leasable as RMB.
And the other is warehouse, which we do have a client who is actually very interested in that and.
Based on what we've seen in the market. There also could be some demand for data center activity. There. So we're not necessarily we had in our forward model. We had assumed this scenario that we would get back.
Two buildings that werent adjacent to their campus, where there other buildings are and that they would take those forward and that's exactly how it played out so.
Thanks, so much.
Thank you and our next question comes from Jim Clemmer with Evercore. Please go ahead.
Thank you apologies for a bit of a pedestrian math question, but you speak to 341000 square feet or so of leasing activity in the development and redevelopment pipeline.
Help me, where am I missing if I go to page 37 of supplemental and I can kind of reconcile the net change in lease square footage percentages from the prior quarter to the second quarter coming up a little shy of 340000. So I'm just trying to we don't where am I missing a real should I look thank you.
Hey, Jim This is mark.
Yes, Youre right. There was there was actually one.
Project that was already leased whereas the tenant actually came back to us.
To actually add on additional term.
That project has not been finished yet hasnt been completed.
So a bit of a conundrum.
But given that that project hasn't delivered.
It's in the development pipeline that is that's a project in San Diego.
We were happy to see that happen because we got a.
Extra term out of it so.
That's the reason for that that doesn't happen very often.
Speaker Change: So it was basically almost to give back but then they came back with a longer requirement. So we just can't see that must be in the order of Harvard square feet, plus does that sound right.
That's right.
Okay. Thank you.
Thank you and our next question comes from Peter Abramowitz with Jefferies. Please go ahead.
Thank you, yes, most of my questions have been answered, but just one other on the mix in leasing this quarter.
Could you just comment on the leasing spreads if was there anything kind of.
Notable that stood out.
Down a little bit this quarter I know you talked about how it can be lumpy, but just wondering if there's anything to call out there yes.
Yes, the answer is no and.
The mix of the different segments, whether it be product and device multinational pharma.
Speaker Change: Private biotech.
All were actually pretty strong and.
A mixture of those public biotech was probably among the lowest.
That's just how it works given what we've said about the barbell, but nothing don't read anything into.
If you look at first quarter was extremely strong this quarter's more muted, but still pretty solid and I think.
It kind of just deals.
Kind of down the middle of the fairway as we see it at this at this juncture.
Got it thanks, Joel and then one other for me.
You've talked about there's been a fair amount of activity and an increase in activity. This year sort of in that small to mid sized tenant group I guess.
As you look out into the market and the funding environment and the macro backdrop.
Any any idea or a sense of what you think it would take for kind of larger those 100000 square footer in up tenants to to start to get more active.
Yeah, I'll ask Kelly to answer by my kind of the one thing that would make a huge difference would be the true opening of the IPO market.
Which signals a.
That you've got long term investors crossover investors and even earlier stage investors participating the ipos that have happened to date are kind of few and far between and they've traded down on an average pretty substantially. So that's one thing that would be very recognizable and has been.
Something that has led some of the other bull markets, but how long you could combat more more in depth.
Yes, I would say, taking a step back and generally those requirements, particularly from the public biotechnology tenants are very milestone based and that is irrespective of the macro environment, whether or not in a clinical trial has positive or negative data it doesn't matter what the interest rates are.
So I would say historically as we look at those types of requirements. It's just really dependent on companies hitting those inflection points.
And we certainly have.
Some.
Of those types of requirements in that in the pipeline as data comes to fruition.
And theres been some other examples of <unk>. It's a good example in our San Carlos campus, they've continued to expand our positive data.
So I would kind of shift our focus more towards you know as these companies continue to.
And so that they have value in their pipelines and that is really where the demand is driven from.
That's helpful. Thank you.
Thank you and our next question comes from John Burzynski with Green Street. Please go ahead.
Good afternoon, guys. Thanks for taking the question just sort of wanted to touch on retention here I know historically you guys is retention has typically been in call it 75% to 80% range, but over the last six quarters that started to trend down I guess, just curious as we sort of look out over the next year or so.
The supply pipeline continues to deliver should we expect that to continue to have an impact on you guys is retention.
And then I guess just looking at the last six quarters. I mean is there something else. Besides supply that is sort of driving that lower attention right.
Yes, so mark do you have.
The steps on that.
Yes, yes.
I think if youre just looking at.
Renewals as a percentage of explorations.
Speaker Change: Really hard to get the full picture.
And point you have got as an example, you've got Mcdonough and Tech square that we talked about right, where a large space.
They will not be renewing right, but what's missing is right the signed up 462000 square foot lease.
At our new developments so it's.
It's difficult just to take the retention rates right off the face of the leasing page I mean, the way we look at it when we normalize for those sorts of things.
We really haven't seen a drop off in retention.
Got it and so I guess.
Given the mission critical nature of life Science facility it seems like.
For those tenants new supply like simply upgrading your facility may not be worth it given the downtime and the risks associated with moving landlords is that fair to say.
Well I think it's way more complicated than that people in this industry don't move for a Buck a foot difference that's just not relevant and also the sponsorship of who they lease from us critical because there've been a number over the last year of significant failures.
<unk> of others in this industry, where labs have been shut down and major damage has happened to the science or the people in the laboratories, so operating with the.
The best of breed in the industry makes a big difference.
We don't see anybody that's just going to move to a place for some small difference that just doesn't happen and.
If the tenants are decent are Mega campus strategy is aimed at always having inventory to to allow these companies to grow into and to retain them. So.
The big issue.
Supply isn't really the big issue now supply does impact you.
Leasing in the sense that when somebody is looking at space. They could cite other other locations, but if the locations aren't really.
Dead Center comparable than those comps don't really make a big difference and people arent going to pick up and leave for let's say.
A few bucks cheaper rent it just doesn't happen in this industry.
That's helpful detail thanks, guys.
Thank you and our last question today comes from <unk> Okusanya with Deutsche Bank. Please go ahead.
Hi, yes, good afternoon, everyone.
Just wanted to focus on Boston, a little bit you do have a fair amount of leases that will be expiring in that market in the back half of this year and also in 2025 trying to understand what's happening with market rents in those markets relative to your in place rents as we kind of try to estimate.
Estimate what mark to market could look like on a going forward basis.
Yes, so mark you could comment on overall mark to market and Peter you could give some observations if you want.
Sure Yes.
We talk about the in place Mark to market.
Our entire portfolio being about 12%.
We typically don't break that down.
Speaker Change: Kind of market by market.
But youre right. We do we do have a fair amount of space.
It's rolling the good news is a lot of Thats in Cambridge.
Speaker Change: Which.
What are you getting space back.
Yes. It is.
Still.
The place where market rents have done pretty well, but Peter maybe I'll, let you comment specifically if you want an on market rents there.
Yes.
We've been looking at a lot of data around where phase III, it's our.
Boston is.
And the rest of our large.
Markets are pretty consistent where rents have come off the peaks of 2021, 2022, but they're still well above the pre pandemic rates of course, you still have more concessions today in the form of <unk>.
For the newly built space, but.
Speaker Change: And we're pretty happy considering the supply dynamic that rents are still above the pre pandemic levels.
Speaker Change: Thank you.
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.
Just want to wish everybody, a safe and healthy.
Summer and we'll look forward to talking on our third quarter call. Thank you everybody.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation.
May now disconnect your lines and have a wonderful day.
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