Alexandria Real Estate Equities Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2023

There are 17 speakers on the call.

Operator

Afternoon, and welcome to the Alexandria Real Estate Equities 2022 4th Quarter and Year End Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Paula Schwartz, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. This conference call contains forward looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward looking statements. Additional information concerning factors that could cause actual results And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Speaker 2

Thank you, Paula, and welcome everybody. With me today are Hallie Coon, Peter Moglia and Dean Shigenaga, I want to thank you for joining Alexandria's 4th quarter and year end 2022 earnings call And wishing you a safe and healthy New Year. And thank you to our Alexandria family team members for their continued operational excellence across all facets of Our unique business platform, a truly mission driven, one of a kind company. We have truly exceptional 4th quarter and 2022 year end results and by any and all metrics, we're very proud, thankful and humbled. While many public reporting companies have really struggled mightily during this past year, I'd like to take a moment to tick off what I consider to be some of the most notable news for Alexandria.

Speaker 2

Truly amazing that Alexandria has delivered Approximately 8.5 percent FFO per share earnings growth while continuing to strengthen our fortress balance sheet, the Strongest in our history and Dean will give you more details on that against the backdrop of a very deleterious macro market in this 2022 year and really again nothing short of operational excellence to the team. With our highly leased development pipeline and continued strong leasing, and Peter will comment on that, Alexandria is well positioned to deliver strong earnings growth again We have continued to create long term shareholder value with a total shareholder return from IPO through the End of the year, December 31, 2022, of 1673 percent compared to the MSCI REIT Index of So a wide margin upbeat. Alexandria continues to produce stable, increasing, long duration cash flows And an increasing dividend. We're very proud of our approximately 1,000 client tenant base, a one of a kind treasure That continues to generate remarkable demand for our Alexandria lab space, and Peter will and Dean will highlight more on this. But again, 2,000,000 square feet leased in 4th quarter, over 8,000,000 for the year and almost 18,000,000 for the last 2 years With rental rate increases last year of about 22% on a cash basis, pretty amazing stats And we're very proud of our own tenant base, which is generated by far and away the majority of that lease space.

Speaker 2

4Q 'twenty two and year end 2022 was another strong quarter by all fundamental financial metrics and a few others, and Dean will Highlight some of this, almost 100 percent on collections from a very strong and durable tenant base and very proud of almost 95 occupancy and a we put in a, I think, very strong same store performance both for the quarter and the year. Innovation in medicine is, but must continue to be a national imperative. 1 in 4 of us will develop a neurodegenerative disease, nearly 40% of adult men and women will be Diagnosed with cancer during their lifetimes, 1 in 5 in the nation's population suffers from mental illness, And we're continuing to see over 100,000 deaths due to overdose last year despite All of the efforts that certainly this company has made with our Dayton project, but just a Literally a war out there, which does not seem to be in check and governments at the federal, state and local level need Double down with the vast amount of resources that have been appropriated over the last few years and really focus on This mental health issue. A comment about our successful and continuing value harvesting and recycling of our precious capital, Peter will detail that, but Amazingly stellar 2022 with $2,200,000,000 successfully harvested and then reinvested in a highly disciplined manner.

Speaker 2

And Peter and Dean will also comment on the excellent and steady progress we've made year to date, just 1 month Then to our 2023 business plan for value harvesting and capital recycling, and we're very optimistic about that. And then before I pass it over to Hallie, I want to particularly call out and thank our finance team and all those who had a hand in the impressive Balance sheet accomplishments set forth on page XB of our supplement and very proud that we once again have the So with that, I'm going to turn it over to Hallie for further comments.

Speaker 3

Thank you, Joel, and good afternoon, everyone. This is Hallie Coon, SVP of Science and Technology and Capital Markets. Today, I'm going to provide a recap of the Life Science coming out of 2022 and now into 2023 and how our highly unique approximately 1,000 tenants remain resilient through the volatility of the current macroeconomic environment. As Joel mentioned and as we often talk about, The 90% of 10,000 diseases remains an incredible opportunity and unmet need. And the fact is, Many of these that do have treatments are far from solved.

Speaker 3

Take Type 1 diabetes. While it was a death sentence before the discovery of over 100 years ago. It still carries an immense burden. A person with Type 1 diabetes makes on average 180 health related decisions a day, some of which have life or death consequences. Now looking back at 2022, the stats Truly speak for themselves regarding the enduring strength of the Life Science Industry, of which I'll highlight 3.

Speaker 3

1st, Despite widespread commentary that VC funding hit the pause button in 2022, Life Science Venture deals totaled nearly $58,000,000,000 Other than 20 21's record year, it was the 2nd highest amount of capital ever deployed. Of note, over 70% of VC dollars deployed went into an Alexandria cluster and with VC funds across Tech and Life Science Raising nearly $160,000,000,000 in 2022, a record eclipsing 20 21's $150,000,000,000 Significant dry powder is on hand to deploy over a multiyear time horizon. 2nd, large Pharma continues to be one of the best performing sectors in the market. In a year where total returns for market indices such as The NASDAQ and Dow ended the year down 10%. The top 20 biopharma ended the year up and averaged 12%, With 8 of the top 20 pharma ending the year with total returns over 20%, with historic levels of Cash on hand over $300,000,000,000 to deploy into R and D and M and A, Biopharma has the firepower to continue to innovate and grow.

Speaker 3

And last, the pipeline of early innovation to commercialization continues to deliver to patients. With 37 novel FDA small molecule and biologic approvals, 3 gene therapy approvals and a novel cell therapy approval, of which nearly half were developed by Alexandria tenants. Moving to Alexandria's unrivaled Life Science tenant roster, We wanted to provide additional color on our business segments and some examples of Alexandria's tenants at the forefront of Life Science Innovation. Starting with large pharma, dollars 260,000,000,000 was reinvested into R and D in 2021 and analysts estimate that including leverage, Pharma has over $600,000,000,000 to deploy into M and A and partnerships. The next several years, indeed decade are going to be framed by large pharma's continued pursuit of innovation as product patents expire and new types of medicines such as mRNA and cell therapies transition from large preclinical and clinical pipelines to commercial stage.

Speaker 3

Alexandria Tenet Pfizer is a great example With preclinical and clinical sorry, with over 110 programs spanning early to late clinical development and an estimated 19 products launching in the next 18 months. The company also noted in their 4Q earnings this morning, they are targeting an additional $25,000,000,000 in revenue to come from M and A activity by 2,030. Transitioning to Public Biotech, Our tenant base includes the majority commercial stage companies, which brought in nearly $150,000,000,000 in revenue in 2021. Tenants such as Amgen and Vertex have large diversified pipelines driving long term growth. As a note, Vertex is also leading the next generation of

Speaker 4

Type 1 diabetes treatment with a

Speaker 3

novel clinical stage cell therapy that addresses the For clinical stage biotechnology companies, Data is king. And those that have met and will meet clinical milestones in 2023 continue to see stock recovery and ability to access capital through While the public markets are still recovering, Life Science follow on financings reached nearly $17,000,000,000 in 20 22, which is right on par with the average Life Science follow on financings over the past decade. With respect to Life Science products, service and devices, This segment largely consists of commercial stage tenants. While not immune to higher interest rates and supply chain challenges, This is a big business segment that both drives and responds to the needs of researchers across academia, biotech and large pharma, which continue to grow and innovate. A notable development in the space is the rapid drop in the price of genome Sequencing driven by a healthy increase in competition.

Speaker 3

Costing $100,000,000 to sequence a genome in 2,001 and diving to $1,000 per genome in 20 We are now looking at the $200 genome, enabling access to critical sequencing data that saves lives. So where are we headed in 2023? In the face of persistent economic headwinds, all industries are forced to double down on the areas of greatest value. As part of the reset, there are companies that won't make it and we'd argue that this in the long run is healthy as capital is deployed more efficiently. There will continue to be further separation of haves and have nots, but companies like those on Alexandria's tenant roster with differentiated technologies, A clear roadmap to key inflection points such as generating clinical data and tenured management teams will continue to raise capital.

Speaker 3

As history has shown time and time again, some of the most successful companies are those created in the depths of a financial downturn. Ultimately, the life science industry is not built on technologies looking for a problem, but instead thousands among thousands of devastating problems, I. E. Diseases That this incredibly innovative industry is poised to address over decades to come. To end on a note of hope from former FDA Commissioner, Scott Gottlieb, Our ingenuity drives our hopeful innovation, but it's our compassion for each other that inspires us to apply these advances to the purpose of reducing human suffering.

Speaker 3

With that, I'll pass it off to Peter.

Speaker 5

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

Speaker 5

Unlike tech, developing products and services to address disease is hard and takes a lot of time, much harder and more Time consuming than creating the next app to book a reservation or share recipes. Because of that, There is more discipline in life science investment, a discipline Alexandria has mirrored in our real estate strategy, which is why Through the dotcom bus to the financial crisis to whatever you want to label today's conditions, our business remains sound, as you can see in our results this quarter and during those historic down cycles. Despite the macro headlines, we remain optimistic and excited for our business As we are in the early innings of the golden age of biology, we have only had the blueprint of the human genome for 20 years. And in that time, We've developed more new modalities to attack disease than in the previous 100. It's going to be hard And it's going to take time, but the industry is going to have options for people with Alzheimer's.

Speaker 5

It's going to perfect technology to detect Pancreatic cancer in time to save lives and much, much more. Let's all remember, It's hard. It takes time and patience. And then you will understand why life science research and development continues Through the proverbial thick and thin of economic cycles, making our business resilient and essential. With that said, I'll briefly touch on our development pipeline progress, update you on construction trends, discuss our leasing and update you on investor demand for life science real estate.

Speaker 5

In 2022, our best in class development Teams continued to deliver high quality purpose built laboratory space to our tenants on time and on budget in a very challenging construction environment, which I'll touch on in a moment. During the Q4, we delivered just shy of 500,000 square feet With $28,000,000 in annual NOI commencing during the quarter. For the year, we delivered 1,770,000 square feet spread over 15 development and redevelopment projects with annual NOI of $119,200,000 commencing during the year. Initial stabilized yields for recent deliveries averaged 6.8% 6.3% on a cash basis, reflecting the healthy contractual annual increases embedded into our leases. As of year end, projects construction and near term projects expected to commence construction over the next four quarters total 7,600,000 square feet And are 72% leased.

Speaker 5

Approximately 77% of that leasing has come from our approximately 1,000 existing tenant relationships. New projects added this quarter include 1450 Owens, which is approximately 213,000 Square Feet and will be 100% funded by our joint venture partner and 10075 Barnes Canyon Road in Toronto Mesa, which will be 50% funded by our joint venture partner. Both projects are under active leasing negotiations. Deliveries primarily commencing from the Q1 of 'twenty three through the Q4 of 'twenty five are Expected to add $655,000,000 in annual incremental NOI, reflecting a strong pipeline driven by consistent demand Even in this volatile time. Transitioning to leasing, the 4th quarter results continue to demonstrate the strength of our unique one of a kind company with leasing volume of 2,322 Square Feet Leased in the Quarter, the 4th highest total in company history.

Speaker 5

The 8,405,587 Square Feet Leased for the year is the 2nd Highest annual total in company history. And as you can see in the supplemental, our guidance for strong mark to 16% on cash. These results are certainly reflective of Hallie's commentary on the strength of VC funding and the stellar 2022 performance of large pharma. With $300,000,000,000 in cash on hand, we anticipate further investment in growth from this high credit tenant We'll incentivize continued investment in new and existing companies that have sound business models and underlying science. A cohort of companies Alexandria has a unique ability to identify.

Speaker 5

The highest quality life science tenants always consider occupancy in the best assets as an imperative. Their facility and campus are not only used for research and development, but is a critical tool for them to recruit and retain the best scientific and management talent in the world, which is by far their greatest asset. Therefore, demand for Alexandria facilities in our unrivaled mega campuses remains healthy as the facilities are A plus and our operational excellence is highly sought after. Moving to construction cost trends. At a high level, it appears the construction industry is on the cusp of slowing down.

Speaker 5

One of the leading economic indicators of the industry is the AIA Architectural Billings Index that leads non residential construction activity by 9 to 12 months. Design work is at the front end of projects, so architects are at the are the first consultants to slow down. Recent numbers show the 3% moving average heading towards no growth in billings and commentary from the AIA was that fewer clients are expressing interest in starting new projects. For the first time since the post pandemic restart of construction projects, which was the genesis of significant cost inflation and supply chain problems, we're starting to see some signs of materials pricing flattening out And general contractors and subcontractors looking for work. That said, there are still items such as aluminum, rebar, copper and glass Up 16% to 21% over this time last year and it's still very difficult to obtain electrical switchgear, emergency generators, Building controls and smart air handling units, because despite an improvement in availability of chips, there are more products using chips than ever before, so So to keep a laboratory construction project on time and on budget is a difficult task.

Speaker 5

Alexandria has the intel and experience needed to make quick decisions and relationships with critical vendors to ensure we have access to the materials and labor needed to meet our schedule and budgets. Despite the continued construction market pressures, as mentioned, we do believe the industry is on the cusp of slowing down And we do expect cost escalations to reflect that in 2023, reducing from 9% to 10% from the range of 9% to 10% experienced in 2022 to 4% to 6% in 2023. However, the $2,300,000,000,000 infrastructure spend over the next 8 years will continue to put pressure on costs and labor, So we will continue to conservatively underwrite and manage our value creation projects. As of the end of the year, 81% of our active Development and redevelopment projects aggregating 5,600,000 square feet are under GMP or other fixed contracts, which is consistent with the run rate we have maintained during these volatile times. Anticipating year end volatility in the real estate We completed our 2022 value harvesting and asset recycling efforts in the Q3 with impeccable execution as we laid out at Investor Day.

Speaker 5

Overall, we completed $2,200,000,000 of value harvesting with the improved properties achieving a weighted average cap rate of 4 point 4%, realizing a total gain of $1,200,000,000 and a value creation margin of 107%. This is a tremendous achievement considering the volatile interest rate environment in 2022 with many real estate investors on the sidelines. It speaks to the desirability of our assets, which are in the best markets with high quality tenants and managed with operational excellence. High quality life science assets are scarce and that is reflected in the pricing. We have started working on and are making good progress On 2023 value harvesting and asset recycling and we'll update you on that next quarter.

Speaker 5

But in the meantime, We'd like to report on 3 notable non Alexandria sales that illustrate that there is still strong demand for life science real estate product. The first is the sale of 1828 El Camino Real in Burlingame in the Bay Area. Anchored by 3 non credit life science tenants, the Property is 98% leased, but is extremely low quality with limited window line, no shipping and receiving, no backup power And venting through the windows to get adequate HVAC. Despite this, an investor paid $902 per square foot for this asset at a cap rate of 5.8%. The second trade was in the Route 128 submarket of Lexington, Mass, We're a single non credit tenant occupied 101,310 Square Foot Manufacturing Building at 20 Maguire Road sold in October for $8.78 per square foot and a 6.2% cap rate.

Speaker 5

The 3rd comp, which closed last week is an R and D campus known as the Gage and Center Point in the Route 128 submarket of Waltham. It traded for $9.83 per square foot and a 5% cap rate. It was reported that some of that some vacancy existed at that property And that the stabilized return is likely to be in the high fives. As the Fed continues to pull levers to battle inflation, we expect We will see cap rates move up, but much less on a relative basis to other product types and thus we remain well positioned to fund our value creation pipeline And at a relatively attractive pricing by harvesting our value creation among other sources. With that, I'll pass it over to Dean.

Speaker 6

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We'll jump right in here. Our team is very pleased to have the strongest balance sheet in the History as of December 31, and this really is a result of disciplined execution of liability management year to year over the past decade.

Speaker 6

Key highlights include, we really have earned our corporate credit ratings that rank in the top 10% of the REIT industry today. We ended the year with tremendous liquidity of $5,300,000,000 that provides us important flexibility in this macro environment. No debt maturities until 2025, a statement only a small handful of REITs can make today and a weighted average remaining term of debt of 13.2 years. Net debt to adjusted EBITDA was 5.1 times on a quarter annualized basis, 5.2 times on a trailing 12 month basis. The Fixed charge coverage ratio was very strong at 5.0 times and 99.4 percent of outstanding debt is subject to fixed interest rates.

Speaker 6

Our team had outstanding execution in 2022 on our strategic capital plan. Key highlights include $1,800,000,000 of 12 year 30 year bonds with a weighted average rate of 3.28 percent, a term of 22 years Completed in February of 2022. Outstanding execution by our team, as Peter had highlighted, on outright dispositions, partial interest sales, Aggregating $2,200,000,000 with an amazing $1,200,000,000 in gains or consideration in excess of book value, A 4.4% cap rate on cash NOI, all exceptional statistics and significant value creation tap for reinvestment. We had disciplined issuance of common equity with proceeds aggregating $2,500,000,000 at an average price of $189 per share, including $105,000,000 sold under forward equity sales agreements in December of 2022. On a blended basis for the year, we felt Comfortable executing on the modest $105,000,000 under this equity under forward equity sales agreements in December at roughly $150 per share.

Speaker 6

Now briefly on the bond market, the beginning of 2023 has been Positive for high quality issuers like Alexandria, overall pricing for 10 year bonds for Alexandria significantly improved And as of yesterday was in the upper 4% range or just below 5%. For 2023, we will continue to focus on execution of Real estate dispositions and partial interest sales or joint ventures for a significant component of our 2023 capital plan. Two transactions are under executed LOI to bring in a partner on a portion of each asset. These transactions will provide approximately $370,000,000 of equity type capital in 2023 and there are other transactions that we expect to complete this year. Turning to operating and financial results, really congratulations to our entire team for outstanding execution this year or in 2020 2 during a very challenging macro environment, we reported total revenues of $2,600,000,000 up 22.5 percent over 2021 With FFO per share as adjusted of $8.42 up 8.5% over 2021 and outperforming our initial outlook for 2022 of $8.36 by $0.06 and ahead of consensus both for the Q4 and the full year of 2022.

Speaker 6

Now diving into key highlights from our truly amazing operating and financial results for 2022, strong rental rate growth, leasing Volume and occupancy growth drove record same property NOI growth in 2022 of 6.6% 9.6% on a cash basis, Exceeding our 10 year average same property NOI growth prior to 2022 of 6% and 2.9% on a cash basis. The last 4 years of rental rate growth on lease renewals and release in the space have been the highest in the company's history, including rental rate growth 31% in 2022. Over the last 2 years, cash run rate growth has been the highest in the company's history, including 22.1% For the full year of 2022, leasing volume in the 4th quarter was robust relative to the quarterly average volume in recent years in the range of 1.1 to 1.3 rentable square feet per quarter highlighting the continued demand from our client tenants. Now the last 2 years have generated the 2 highest Annual periods of rentable square feet leased, including 8,400,000 rentable square feet in 2022, 3 out of the last four quarters represented the highest quarterly periods of rentable square feet leased, including 2,000,000 square feet in the 4th quarter.

Speaker 6

Now turning to occupancy. Occupancy was up 80 basis points since the beginning of 2021 to 94.8% as of December 31. Now looking forward into 2023, we expect a slight decline in occupancy in the first half of the year with recovery expected in the second half of the year. We had a similar dip in occupancy in 2022, specifically overall strong occupancy in the year, but we did have a 40 basis point decline from the first For 2023, we expect temporary vacancy beginning in the Q1 related to Spaces that on average are expected to generate significant rental rate growth greater than 60% on a cash basis. Now these spaces are forecasted for occupancy over the next 5 quarters.

Speaker 6

This includes a mix of small redevelopment space, I. E. The first time conversion to lab space, Normal lease expirations and a few early tenant departures. Importantly, consistent with our general quarter to quarter growth in FFO per share for many years, we expect quarter to quarter growth in FFO per share in 2023. Now a Few other key highlights, 90% of our annual rental revenue is from investment grade or large cap publicly traded companies within our top 20 tenants, Highlighting the high quality list of client tenants that our team has curated over the years.

Speaker 6

99.4 percent of collections of January rent through January 20 7th, just highlighting the continued strength of rent collections and we had a very strong adjusted EBITDA margin 69% highlighting execution of operational excellence by our team. Cash flows from operating activities after dividends for 2023 is expected to be very strong at $375,000,000 at the midpoint of our guidance and will continue to support growth in our annual common stock dividends per share. Our FFO payout ratio was very solid at 58% for the 4th quarter. And at this pace, cash flows from operating activities after dividends over the next 3 years generate over $1,000,000,000 and that's an amazing statistic and very efficient capital for reinvestment. Turning to a couple important real estate highlights.

Speaker 6

Construction in progress otherwise known as CIP is forecasted to peak in the Q1 Then declined slightly through 2023 as the dollar amount of deliveries are expected to exceed additions to CIP quarter to quarter, Highlighting the significant volume of deliveries over the next couple of years, as Peter had highlighted, we have 7,600,000 rentable square feet of projects That are 72% leased and projected to generate $655,000,000 of incremental net operating income over the next 3 years. In the Q4, we recognized impairments aggregating $26,200,000 on real estate primarily related to a few assets we plan to sell in 2020 3, each asset is small and represents non core assets no longer strategic for Alexandria to own. And to put this into perspective, the book value of assets held for sale was approximately $120,000,000 as of December 31. The key takeaway is that from time to time we review our asset base and proceed with selective sales that continue to enhance the quality of the remaining asset base. Briefly on Venture Investments, FFO per share as adjusted over the last 2 years has included an average of $103,000,000 of realized gains each year from venture investments or approximately $26,000,000 per quarter.

Speaker 6

Now quarterly gains from venture investments 2, we had gross unrealized gains of $506,000,000 on a cost basis of $1,150,000,000 highlighting Significant value in our venture investment portfolio. Now investments in our venture portfolio have been very modest at less $70,000,000 in aggregate over the last 5 years, including $20,500,000 that we recognized in the 4th quarter. Turning to guidance, we reaffirmed guidance for 2023 that was initially provided in connection with our Annual Investor Day on November 30 with one minor update. We updated excess cash held from bond proceeds to $300,000,000 representing a $50,000,000 increase from the midpoint of our prior guidance. Our 2023 guidance for EPS diluted is a range from $3.41 to $3.61 and FFO per share as adjusted diluted It's a range from $8.86 to $9.06 with no change in the midpoint of $8.96 Now under the current common stock distribution agreement we have in place, otherwise known as our ATM program, We have approximately 142 remaining available.

Speaker 6

We expect to file a new program in the Q1 of 'twenty three. Please refer to Page 6 of our supplemental package for detailed underlying assumptions included in our strong outlook for the full year of 2023. With that, let me turn it back to Joel.

Speaker 2

Thank you. Operator, you can open it up for questions, please.

Operator

We will now begin the question and answer And our first question will come from Steve Sakwa of Evercore ISI. Please go ahead.

Speaker 7

Yes, thanks. Good afternoon, everybody. I guess I wanted to just circle back to some comments You made about some of the pending sales and joint venture interest. I'm just wondering if either you or Peter Could provide a little bit more color on what the institutional market is sort of looking for, maybe how pricing has changed over the past 6 months? And Can you give us any sort of flavor on the timing of when some of these transactions may get over the finish line?

Speaker 2

Yes, this is Joel. I think we'll try to be general in that given that we have we're The letter of intent stage on a number of transactions, but maybe Peter you could give kind of a top side view?

Speaker 5

Sure. Obviously, there's only a few product types out there that People are comfortable in investing in right now. And obviously, life science real estate is one of them. So we are I mean, I've Been receiving calls on a fairly regular basis from some existing partners that We are excited to see what we have going this year. As I mentioned during my comments, Cap rates are expected to rise from the peak.

Speaker 5

But as I've also said in the past, We don't anticipate on a relative basis to be very high And I'm not going to speculate right now on where they'll be. We'll start reporting once we have more data, but They will be sticky given the scarcity of opportunities for life science real estate.

Speaker 7

Okay. And just a second question, Joel. I know acquisitions are not a huge part of the plan right now. It's Mostly development, but maybe could you just comment on the 2 deals that you did announce in the quarter and kind of the strategic rationale For both of those projects and how you think about pricing on those versus your development opportunities?

Speaker 2

Yes. So each one of those was unique in and of itself. I don't want to get too granular, but I think The one in the Route 128 corridor really enables us to piece together 3 different projects Into a more than 1,000,000 square foot mega campus, and we have some great activity from our 1,000 tenants to help fill that. So we're very optimistic on that and feel like that was very strategic. It's also under I'll lease back for a number of years, so it'll be continuing to cash flow.

Speaker 2

The other acquisition was a unique acquisition In Downtown Austin, we felt that it was a superb location. It's also under a leaseback for a period of time, so we'll continue to generate good revenue. And I won't Comment on what our future business plan is for that, but we think there's a really great opportunity to do something unique in that spot. That's helpful.

Speaker 7

Great. Thank you. That's it for me.

Speaker 2

Yes. Thank you, Steve.

Operator

The next question comes from Georgi Denkos of Mizuho Securities. Please go ahead.

Speaker 8

Hi. Thank you for taking my question. So I was wondering what are your thoughts on the sublet market in the sector? And have you seen uptick with more companies subleasing space Across the board and specifically in your markets. And could you please remind us what percentage, if any, of your portfolio is currently subleased?

Speaker 2

So Peter, do you want to maybe comment generally on that?

Speaker 5

Yes. I've got some sublease statistics for our larger markets. I will say that The amount of sublease space overall has come down in the over the last couple of quarters. One of the reasons for that is Built out lab space is very attractive, especially for companies today that want to try to limit their out of pocket investment in the space. So Boston is at about 4.7% right now sublease and again anything of quality and that's built out It is moving fairly quickly.

Speaker 5

San Francisco has been reduced 2.3% and San Diego only has 2 point 1%. So, these are all very normalized numbers for any cycle.

Speaker 8

Great. Thank you. And could you comment on your specific portfolio?

Speaker 5

It's less than that. Okay.

Speaker 8

And just my second question on Sanofi. We noticed that the square footage The rents dropped by about 30,000 square feet quarter over quarter. I was wondering if you could provide some more color on that.

Speaker 5

I don't know, Dean, if you know that what asset that was or

Speaker 6

No, it's such a small number. I'm sorry guys, we don't I don't have that in my fingertips. Yes, I don't either. It's 30,000 square feet on our 40,000,000

Operator

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

Speaker 9

Great, thanks. Maybe going back to the RUBI-one hundred and twenty eight acquisition, Peter, you touched on some pretty favorable pricing it seemed like with key transaction comps. I feel like that's probably one submarket that maybe there has been more worries around supply with. So maybe you can expand on sort of What you're seeing out there, has sentiment changed for that suburban market? I mean, obviously, when we think Boston, we think Cambridge Being the highest quality market there, but maybe has sentiment shifted in more of the suburban product?

Speaker 2

Yes. This is Joel. Let me make a top side Comment and then I'll turn it over to Peter. I think you have to if you're asking about General sentiment, Peter will comment if you're asking about our sentiment. It's different because we generally have A certain targeted demand from our existing client base and therefore by Making, say, the acquisition we did or doing things that we do to create an environment where companies want to go, it really is focused On our kind of game plan, but if you're looking at a topside view, I don't know, Peter, you could share topside view on Waltham generally.

Speaker 5

Waltham, Lexington, the other surrounding areas, I think the sentiment is still positive. The Group, that last comp I talked about the campus that sold for a 5 cap, it was reported, I think it was Poststar that had the article that the group that sold it made $200,000,000 on it and they only owned it for 2 years. So pretty good outcome and obviously if somebody is paying $200,000,000 more than someone bought it for 2 years ago, maybe it was 3 years ago now. They're a believer in the rent growth in the market. So the other reason that the comps are weighted towards the suburbs is very likely because There's just not a lot of available product to buy in Cambridge or the Seaport or Watertown.

Speaker 5

So The opportunities were just there and I don't know if it says anything about the sentiment and probably just more about the availability.

Speaker 2

And keep in mind, there will always be demand among more R and D light Companies for Route 128 in Waltham have been in the heart of Cambridge. That's just how it's been for decades now.

Speaker 9

Great. That's helpful. And then on the $1,400,000,000 of commitment costs From joint venture partners, I'm curious, are there any kind of restrictions around how that can be drawn down, how much these partners can fund? I think you've got some portion of that in your capital plan for this year, but anything you can expand on that would be helpful as well.

Speaker 2

Yes. I'll ask Dean to do that, but obviously each and every situation is different. But Dean, upside view?

Speaker 6

Yes. I think the high level concept on the $1,400,000,000 of commitments for funding from our JV partners, Generally speaking, these are funding requirements related to our value creation pipeline, so Construction funding commitments. And these commitments do extend out over multiple of years out 2 to 3 years depending on the joint venture. But given the recent Increase in projects with joint ventures over the last, call it, 4 to 6 quarters, we just wanted to be sure that The investment community understood the significance of the commitments coming from our partners on just a handful of construction projects. So we'll continue that disclosure going forward.

Speaker 9

Great. Well, that's it for me. Thanks for the time.

Speaker 2

Yes. Thank you.

Operator

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

Speaker 10

Hey, everyone. I saw on your top 20 tenants page on the SOP, it looks like there's Footnote on 270 Bio saying the in place cash rents are 20% to 25% below current market. Looks like that Last quarter was 5% to 10% below current market. Just curious on what's driving that update?

Speaker 2

Yes. Dean, do you have any comment on that?

Speaker 6

Yes. So it's Dean here, guys. So what we did was we looked more carefully at The actual space, I believe the prior quarter was slightly lower or showing a modest Mark to market opportunity and it was reflective of looking at that specific property Overall, but we realized we had to dive into the details a little bit further because it didn't make sense as we were looking at it for the current quarter. And as we looked at the space specifically, so a portion of the building and the specific space that they're occupying, there's a bigger mark to market So we wanted to be sure we updated that number in the current quarter. So nothing changed From a real mark to market, but previously it was the overall building.

Speaker 6

And today it's just specifically or this quarter it's specific to that space that they occupy.

Speaker 10

Okay. And then just since I'm newer to the story, just kind of curious why the disclosure on that Company looks like it

Speaker 2

has a small market cap.

Speaker 6

It's really due to that. Some occasions there's a tenant in the top 20 list of tenants that we did not curate ourselves or Has a modest market cap and we just want to provide some incremental color to so investors Don't need to research the details on their own. Okay.

Speaker 10

No, I appreciate that, Dean. Thanks, guys.

Speaker 2

Thank you.

Operator

The next question comes from Richard Anderson of SMBC Nikko Securities. Please go ahead.

Speaker 2

You may be on mute, Rich.

Speaker 11

I totally was. Sorry about that, Joel. So, Peter, we talked about cap rates in your opening comments. And I think, Dean, you mentioned some partial interests that Or far along and maybe announced shortly. How would you characterize the quality spectrum of what you're looking at for partial interest?

Speaker 11

Are we talking very high quality assets like the Binney Street transaction a little while back or more middle of the road and It is a mechanism to minimize the cap rate, but also keep hold of your best assets and Not relinquish too much of that opportunity going forward.

Speaker 5

I will start, Rich. The Profile of what is going on is good quality. We don't have much of anything outside, I think, of high quality. I mean, Certainly are some more course assets that we still hold. We've sold a lot of those.

Speaker 5

So the partial interest sales just Because of the profile of our portfolio are typically going to be higher quality assets and that's what we are Working on now.

Speaker 11

And I mean, are we sub-five on you are not talking about pricing just yet? Or can I mean,

Speaker 5

I don't think it does us any good really to talk about pricing, because we are still negotiating with people and so Better for better strategy to keep that to ourselves at this point?

Speaker 11

Fair enough. And then second question for me is for Dean. You have Average debt expiration, I think of 13 years, you said. I think your average lease term Expires in 7 or 8 years. I'm wondering if that provides you any opportunity in the future, in the interest Matching liabilities with assets, if you're way conservative in that comparison as it stands today, do you ever see that that gap shrinking, whereas maybe the opportunity to raise shorter term debt or lengthen lease term would make sense For the company, I'm just curious if that's if that spread that you have in place now is something that could wiggle around a little bit in the future?

Speaker 6

Rich, I guess the way to answer the question is I think we find significant value In the longer maturity profile, given the size of our company and We have a meaningful maturity profile for a big company, right, or that matches a big company is maybe a better way of So the longer average debt term gives us a lot more flexibility to manage the overall Maturity profile, right? Because if that was more like 5 years with that much debt outstanding, it'd be a lot to manage year to year on top of any growth So I think strategically the longer term of remaining maturity is a real positive for us.

Operator

The next question comes from Tom Catherwood of BTIG. Please go ahead.

Speaker 12

Thanks and good afternoon everyone. Appreciated Hadley's comments at the outset About Tenant Health and Funding and commentary around Pfizer M and A really jumped out. Maybe Peter or Joel, during prior M and A cycles in the biopharma industry, What was the read through for real estate usage? Did acquirers tend to consolidate the footprint of their portfolio companies or were there further expansions?

Speaker 2

Yes. I can give you my thoughts and Peter can share his. I think it's hard to compare You know, past cycles because the level of technological development in biotech was so different. Today, it's Much more sophisticated new modalities. So when you have M and A today, It used to be oftentimes you're buying a company for maybe a pipeline and You like to hold on to the people, but maybe space is less valuable going back maybe a decade Or 2, today that space is pretty critical, especially if it's located in a top tier cluster market like Cambridge.

Speaker 2

Not only do you want the people for recruitment, retention and just working on the projects, but you've also got probably built into the space some pretty Sophisticated new modality technologies, both at the lab side and And in the R and D manufacturing, which is kind of integrated so closely. So I think it's harder to tell. I think, again, there's going to be a whole series Of different types of uses of capital, a lot of it will be partnering, which has historically been Probably the favorite approach of pharma, there will be some acquisitions. You've got Where people will want to keep that group and that technology in tow, but I don't think it's It's easy to look at, say, big mega mergers in the past and think that that has any relevance to today. And I think the key byline for life science in 2020 3, in addition to what Halicana framed out is, what will be the velocity, the depth and the Focus of this large cash hoard $300,000,000,000 and if you leverage it, you could be as much as $500,000,000,000 to 600,000,000,000 But Peter, you could comment just historically on what you've seen.

Speaker 5

I mean, it used to be if you were like a one trick pony, it was an acquisition and then you shut it down. I mean, a good example was a company called IQOS in the Seattle area was bought by They developed Cialis. They were bought by Lilly and they completely shut down. But with the rise of Platform Technologies, a lot of the M and A and were super beneficial To the growth of our clusters, companies realize that these teams that they were buying or these companies were much more valuable than just The pipeline, but the teams were extremely important. So there were a number of companies.

Speaker 5

I mean, I remember when I was in Seattle, A company got bought by Gilead. It was called Chorus Pharma. They were a 5,000 square foot tenant. And Right after that, they Gilead approached us and we ended up doing a huge over 100,000 square foot Deal with them so that they could expand the capabilities of the team. So as Joel said, it ebbs and flows.

Speaker 5

But I think If you look at the fact that I think about 75% or in certain years about 75 Percent of products that have hit the market have started from external innovation that end up on in pharma's hands. It's pretty telling that that is a long lasting strategy to comb the biotech world, To buy the companies and to keep the teams in place because they generally have platforms and other products behind their initial ones. So I think the general trend in recent years has been to keep them in place and to expand. That would be my

Speaker 2

Yes. Hallie, any final comments on that question?

Speaker 3

Yes. Just to say that every acquisition is going to be very unique In terms of the types of products being acquired, the talent base that comes along with it, the market that it's in. And so we very much are acutely aware of kind of the one off nature of every acquisition. And ultimately, for Acquisitions where they may tuck it into the company, we see a net positive in the ecosystems. If it's a small company that does get folded in, those executives go on to create one more or go on to create 1 more or multiple companies after that.

Speaker 3

So we've had some great examples in the past of A company gets acquired and then that CEO goes on to build a bigger and even larger company. So Altogether, it's a net positive for the ecosystem, I would say, no matter what the outcome is.

Speaker 2

Yes. And a great example in Seattle, As Peter mentioned, another great one is Celgene's acquisition of Juno and then the acquisition by Bristol Myers, that's really one of their most critical advanced cell therapy Outposts. So again, it's almost case by case, Rich.

Speaker 12

Great. I really appreciate the thoughts there. Maybe sticking with Pfizer, We did notice that in New York, 219 East 42nd Street moved from Future developments to intermediate developments. If memory serves me, I think there was a 6 year sale leaseback on that asset. What are your current plans, if any, on that building and a potential project?

Speaker 2

Yes. So that building, which we acquired, had a leaseback to Pfizer. Remember, It's a office building for Pfizer, but it has unique in New York, very few Buildings have the bones to be converted to lab. They are moving to Hudson Yards, as you And their lease is up, I think, out about 2 years or so, but we do have some internally generated demand for that from our current Client base and so we're moving that along.

Speaker 12

Understood. Thanks everyone.

Speaker 6

Yes. Thanks Tom.

Operator

The next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Speaker 13

Yes, thanks. I know demand for fully built out lab product is pretty high, but have you noticed any Friends in the level of demand you're tracking in your development pipeline where tenants do need to invest a significant amount of cash outlays to build out that space. I mean, Has that dropped off noticeably over the past 6 to 12 months given the disruption in the capital markets?

Speaker 2

Yes. Peter, you could comment generally topside.

Speaker 5

Yes. I mean, one of the reasons the sublease market has stayed in check even When there's been some disruptions to companies is the fact that and as we've talked about for now almost 2 years, the high cost of construction has just created A much more expensive proposition when you have to build out lab space. The news though is that there's just not a lot of sublease space to satisfy all the demand. Deals where the tenants have to invest space such as our development and redevelopment deals do continue To go, but I mean there if you're a Board and your company wants to expand and they can go into 25,000 to 35,000 square feet of existing space even though it might be in a different building and even a different neighborhood, they're going to Consider that today just given the cost. We're still doing fine in our leasing of our development and redevelopment portfolio, but Yes, there is a sentiment that if there is existing available space, just try to grab it.

Speaker 13

Okay. Do you know if your competitors on the development pipeline? I mean, That where the drop off in demand is coming from is that 1st generation type space?

Speaker 5

Well, I mean, I think that the reason that others aren't as successful is just because they don't have our brand. I mean, it's we've talked about it For years years and there is a lot to be said about the operational excellence we bring The management of the facilities to the design of the facilities, I think, to the extent that there's projects out there that are pausing Even after they've gone vertical or remain vacant, it's a number of things. One is that the location isn't comparable to ours. 2, they've underwritten very high rents because they need to, their basis isn't very good and 3, they don't have a reputation to manage these Critical infrastructure buildings. So, I would say that that's really the reason behind a lot of the Competitive buildings not

Speaker 2

And major overruns on budgets. I can think of one project in Boston where a client Went there because we didn't have exactly the space that they needed and then they came back to us when the developer Had a huge overrun on costs, so that goes on all the time. Okay.

Speaker 13

And then just last one for me. I was looking at your current tenant roster versus the prior And it looks like Maxar Technologies dropped off the list. I mean, is that a fair read? Am I looking at that correctly? And can you give us a sense of what happened there?

Speaker 2

Yes. That is a project that we own where they're rotating out of that and that will be a future development project, Redevelopment and Development.

Speaker 14

Okay, great. Thanks.

Speaker 2

Yes.

Operator

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

Speaker 15

Yes, good afternoon. Maybe this is for Dean, but wanted to talk about the leasing spread. When you excluded the 2 leases in the quarter, obviously very strong performance for the company overall. Curious about the guide for this year, which you gave in December reaffirmed last night that at the 11% to 16%, I think you had said that there was some incremental component That was non Life Science maybe, but can you give us a sense of kind of that 11% to 16% is that more a function of kind of market rents maybe slowing down or is that just a function of kind of more Different leases that have been added to that pool.

Speaker 6

Hey, Dave. It's Dean here. Lab rents remain healthy as you can tell from leasing statistics in the 4th quarter. Hard to really look out well as you go out into the future and lab rents are trending well as we noted from our results. There is a slight mix at play in 2023 with certain expirations coming up and certain leasing activity we expect to accomplish Call it non lab product, but that product is a small percentage of the portfolio.

Speaker 6

Rental rates Overall, even when you blend it all together, remain very strong.

Speaker 15

That's fair. And then maybe to follow-up, Peter, In your last question in terms of kind of market rent growth, it sounds like it's bifurcating even further probably between kind of the higher quality and lower quality assets. What's that Spread look like today maybe across the portfolio or maybe pick the top three clusters in terms of kind of where replacement rents might be going versus where maybe a more

Speaker 5

I mean, I can really only Speak to our rents, I just don't have a lot of visibility to Outside of the asking rents that we are hearing from competitive buildings,

Speaker 14

our

Speaker 5

Newer product and our older product, there's not much of a spread between it. Typically, you might see even a 10% to 15% premium for new buildings over older buildings. I think probably the availability of existing space makes the existing space more valuable today. But it also I think speaks to just the quality of our overall portfolio. We don't have a lot of B You could say that out in the suburbs, The single story stuff that's not amenitized, still the rents I can Greater Boston, I mean, the rents out there For that type of product are in the $60 to $70 range.

Speaker 5

Compare that to The 100 to 120 in Cambridge and maybe the 85 to 100 in Seaport, it's still Fairly close, but that you do the math and that will give you the premium. I think overall though, I would say that rents for lab space Have not regressed at all and are still fairly strong and there has not had been a big movement in concessions like you might be seeing in the office market. I know I read a lot about the office market and I know that rents for high quality buildings Have held there, but concessions have gotten really, really high and that's not the case with us. Our rents have held well and concessions have

Operator

The next question comes from Dylan Brzezinski of Green Street Advisors. Please go ahead.

Speaker 16

Thanks for taking the question. And appreciate the color on some of the transactions that have happened lately. But just curious, When we look at cap rates for purpose built lab product versus converted product, have you guys seen any cap rate differential between the

Speaker 5

I don't have any specific examples Other than maybe what I just talked about, the comp in Burlingame is a really just terrible conversion. Burlingame's on the Peninsula, it is very close to South San Francisco. So to get a fully leased comp at an almost 6% cap rate, I think, probably illustrates That conversions aren't that appealing. I would expect good quality purpose So lab in Burlingame to be at least 100 to 150 basis points lower than that.

Speaker 2

Yes. And most conversions, not all, but almost all, don't work.

Speaker 16

Okay, that's helpful. And then I guess just looking at the supply picture, are there certain markets or submarkets where you're starting to see Supply pickup and maybe become more of a risk here?

Speaker 5

From a supply standpoint?

Speaker 4

Yes.

Speaker 5

I mean, the numbers for availability are still kind of Where they've been over the last few quarters, I mean that the biggest Supply overhang in any of our markets is in South San Francisco and it remains that way. That has not really changed. We there's a lot of talk about supply in Greater Boston. Majority of what's talked about hasn't broken ground. Some assets have.

Speaker 5

A lot of them are in the Summerville area, which is not competitive to where our product is. So We are not too concerned about it. But yes, I think the supply story is always one that we have to Talk about people are trying to get involved in the business, but the best locations are very Difficult to get and so people have tried to fan out in other areas such as Summerville and with limited to no

Operator

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

Speaker 14

Great. Thanks for taking my question. So I know you spoke a lot about how differentiated Ally's interest portfolio is and leasing demand is. But if you look at the market stats, it does kind of show in some of these markets you're seeing flattish rent and concessions rising and net effective rents being Declining month over month or maybe quarter over quarter. Are you seeing that at all in your portfolio?

Speaker 14

I mean, are you still pushing rents? And I know you said the concessions Haven't grown a lot, but can you just provide some more color on how that really looks for your business versus maybe what we're seeing overall in the market?

Speaker 6

Jamie, it's Dean here. Net effective rents have been positive over time for our business. So It's not declining, it's increasing.

Speaker 14

Can you say maybe by how much Like quarter over quarter, if you were to do it on like a same store basis, how much you're pushing net effective rent?

Speaker 6

I don't have it right in front of me, Jamie, but I don't have the exact statistic. But You recall reviewing it over the last month and it was very solid positive trend. I mean, look, our rents cash and GAAP rents are up. Those are significant increases period over period. Net effective is just trailing out a little bit, but still directionally very substantial, Right.

Speaker 6

Because they're based net effective is based off your GAAP rents rate. Very strong.

Speaker 5

Yeah. I wouldn't doubt, Jamie, that other developers are offering concessions to try to Bridge the gap between the quality and reputation that we have and what they offer. Our numbers are still stable at this point.

Speaker 14

Okay. That's great news. And then I thought I noticed you did the $105,000,000 forward equity agreement in the 4th quarter. Typically this time of year, Sometimes you'll do a much larger one. Can you just decide can you just discuss the decision to do equity at all this quarter and just how you think about Why you didn't do something bigger?

Speaker 6

Jamie, it was Dean. As we looked at our wrapping up The year there was an opportunity to raise a very modest amount as you mentioned, dollars 105,000,000 and so we looked at Our overall capital that we raised in the year, which I commented on, it blended in very attractively. While it was done at $150 I think the overall blended common equity proceeds We're about $189 per share. So just keeping things in perspective, there's a modest amount that we raised. And Jamie, going back to your Other question, I just needed a second to pull it, but one second, I just lost the page.

Speaker 6

But on rental rate growth, we were at so 31 Percent GAAP, dollars 0.22 cash for the year. Net effective for the year was Something around 37%.

Speaker 14

Yeah. I guess I was thinking more in terms of just in the market today. I mean you have a nice baked in mark to market that's going to show up in leasing spreads, But are you able to still versus last month keep pushing rents? Sounds like you think you are on a net effective basis, but I just don't think you

Speaker 4

have any color on that.

Speaker 6

It sounds like you are asking what the Q1 is going to look like. Look, Jamie, in the Q4 and the year for 2022 were very strong. I don't have an outlook going into the Q1 for net effective, but again 2022 Up 37% on a net effective basis.

Speaker 2

And directionally, just look at our guidance for GAAP and cash too.

Speaker 14

Okay. That's great. And I guess just going back to the equity raise. So it sounds like you kind of think about it as on a 12 month view like That kind of clean things up for 2022 and then 2023 kind of as a fresh start in terms of how you would raise equity?

Speaker 6

Well, maybe I think probably what's more important Jamie on the broad bucket of solving for equity type capital as I Mentioned, we remain focused on dispositions and partial interest sales, JV type capital, first significant component of our capital plan for 2023. And we've got a couple of transactions that are fairly advanced right now, executed LOI and moving through. So It's only January 31 and we feel like we're in a good spot moving on our capital plan there. And so we got to keep in mind that That's an important component as well, Jamie, as it has been for many years now.

Operator

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

Speaker 4

Yes. Good afternoon, everyone. Just a quick question on capitalized interest. I think there was a comment made earlier on that CIP would peak in Q1 and then slowly start to decline as you have deliveries. But I believe the CIP guidance is meaningfully above last year.

Speaker 4

Can you just help us kind of reconcile the difference? It's just higher cost of capital Being used to capitalize the CIP or how do we think about that? Thank you.

Speaker 6

Is your question just the growth year over year?

Speaker 4

Yes.

Speaker 6

The year over year growth is more of just a function of the size of Activities undergoing construction today. As you know from our disclosures, we have $7,600,000 either under construction or near term starts, On average 72% leased. If you look at the 4th quarter capped interest, which is reflective of the average basis under construction. It was $79,500,000 Of capped interest for the quarter, it was $73,000,000 in the 3rd quarter, so I'll call it up about $6,000,000 It was $68,000,000 in the prior quarter, so up about $5,000,000 quarter over quarter. If you were just to continue to project out That $4,000,000 or $5,000,000 increase quarter to quarter.

Speaker 6

You can kind of project out what half of the year would look like And just double that from that point forward, you're now at the bottom end of the range of our guidance. So directionally, it Should make sense if you look at it from a run rate perspective. Again, year over year, it's up significantly because the amount of construction activities are

Operator

This concludes our question and answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks.

Speaker 2

Thank you, everybody, and we look forward to talking to you on the Q1 call. Be safe. Feel well.

Operator

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

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Earnings Conference Call
Alexandria Real Estate Equities Q4 2022
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