Earnings Call: Q2 2021

Jul 27, 2021

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2021 Conference Call. All participants will be in a 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 with Investor Relations. Please go ahead. Thank you, and good afternoon, everyone. This conference call contains forward looking statements within the meaning of the federal securities laws. The company's actual results may differ materially from those projected in the forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in Forward looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel. Thank you, Paula, and welcome everybody to our Q2 call. With me Here today are Jenna Foger, Peter Moglia, Steve Richardson and Dean Shigenaga. I want to welcome all to this Q2 call And also, as I always try to do to recognize and thank the entire Alexandria family team for one of the best quarters in the Entire history of the company with an operational tempo, really like none other, while working virtually for most Many of us for most of the past now into our 2nd year of COVID. As Michael Jordan once said, some people want it to happen, some people wish it to happen, others make it happen. Alexandria makes it happen. We are deeply mission driven and thankful for all that we do and urge you to read about many of our important programs and activities in the corporate social responsibility area in our press release and sup. For a moment, keys to the Q2, historic high demand for Alexandria's lab space and our critical lab operations, which go along with That, Alexandria is at the vanguard of meeting the historic and high unprecedented demand from many of our more than 7.50 tenants For growth needs now and a critical path for future growth, very importantly. Fundamental drivers of demand are the strongest we've ever seen. Rental rate growth continues unabated and no excess supply on the horizon at this time. We're very proud that we've got almost 7% quarter to quarter per share FFO growth, more than 40% rental rate growth, Almost 18% NOI growth, almost 8% same store NOI growth and a 1 point 3 plus 1,000,000,000 annual NOI run rate, not to mention about $545,000,000 in incremental revenue in our development and redevelopment pipeline. Alexandria truly has a demonstrable pricing power advantage in each of our cluster markets. And when life science tenants Shoes, they almost always prefer Alexandria's lab space and our operational excellence based on our critical lab operations. Nature Biotechnology Magazine back in April Wrote the following. 2020 was a year that smashed many records. Biotech's Xavier role in the pandemic attracted a stampede of Private and public investors alike, the pandemic apparently reinforced the requirement for long term Value based investors of any kind have exposure to life sciences. And life science demand has in fact hit an all time high As the world has recognized the importance of next generation therapies to solve current and future really difficult healthcare challenges, And Jen will talk a bit more about it. I'm going to highlight just a couple of things for the moment. The pandemic has underscored the Support for the National Institutes of Health and Investment in Basic Science, which are keys to ensuring that the U. S. Maintain its leadership position In Life Science and Maximizing National Preparedness to Address Current and Future Healthcare Challenges, There is a proposal right now to increase the fiscal year 'twenty two NIH budget Up to $51,000,000,000 nearly a 20% boost over fiscal year 'twenty one. The FDA Center For Drug Evaluation and Research, better known as CDER, has approved 23 new molecular entities in the first half of twenty twenty one, putting it on the pace To exceed 2020's near record approval high of 53. Following a historic year of 2020, Venture Capital and Life Science continues at a very strong pace of almost $36,000,000,000 already raised in the first half of twenty twenty one on pace to eclipse 2020's all time high of $46,000,000,000 This unprecedented level is likely to continue throughout the year Due to substantial dry powder available to life science funds and increased investment from institutional, generalist And traditional life science investors. Following a record 2020 for IPOs and follow on offerings, the first half of this year Continue to reach new highs with over $8,000,000,000 raised in 52 IPOs and over $17,000,000,000 raised in many follow ons, Positioning 2021 for an all time record year of public market investment in life science, R and D continues with amazing productivity and resilience through COVID, enabling the industry to expediently deliver Novel vaccines and therapies to combat the global pandemic. New biology, drug discovery platforms and increasing focus on complex medicines As the future therapeutic innovation have all demonstrated the life science industry's ability to effectively drive solutions to current and future healthcare challenges and yield strong returns to investors. And maybe a final comment would be, As Project Warp Speed did in bringing a historic public private partnership together of the government on the one hand and the Private industry, biotech and pharma companies on the other hand at a warp speed rate to bring Research and development and commercialization of the COVID vaccines in record time as well as ensure a timely manufacturing supply, We really do need a 21st infrastructure package, not a 20th century package like the one Congress is now debating. We need to make the U. S. Self sufficient in semiconductors. We only produce now about 11% to 13% and self sufficient in next gen manufacturing of complex medicines. And so with that, let me turn it over to Jenna. Thank you so much, Joel, and good afternoon, everyone. As Joel highlighted, last quarter and continues to be reaffirmed by the fundamentals you just shared is the tremendous paradox of the Despite the challenges of these past many months, COVID has illuminated the power of science and the industry's ability to transform the future of human health. Not only have so many of our tenants in the industry, as Jill mentioned, risen to the challenge of combating this global pandemic, but R and D and bio innovation broadly have persisted Amazing productivity, resilience and expediency throughout this time. And we cannot stress enough how critical it is for us to halt to preserve and prioritize and continue to catalyze this groundbreaking innovation that has and will continue to save so many lives. So turning to a COVID specific update for a few moments. According to the World Health Organization, as of this morning, on a global scale, there have been over 194,000,000 confirmed cases of COVID-nineteen, including over 4,100,000 deaths. A total of 3,700,000,000 vaccine doses have been administered worldwide with nearly 10% of these doses in the U. S. Alone. Roughly 57.5 percent of the vaccine eligible population in our country, that's 12 and over, have been fully vaccinated by either Tenen Pfizer or Moderna's 2 shot mRNA based vaccine or Tenet's Johnson and Johnson single shot. This is just over 49% of the total U. S. Population, And we hope this number of fully vaccinated individuals will continue to steadily rise. These numbers are astounding. And before we get into the where are we now, I want to Despite the COVID fatigue, we all continue to feel even despite some relief from the easing of restrictions over the past few months, albeit with the likely return of some new ones, None of where we are in the recovery process can be taken for granted. The fact that the biopharma industry spearheaded by many of our tenants Was equipped with the know how, resources and technology to create safe and effective vaccines to combat a novel viral pathogen would have been unimaginable just a few decades ago. The fact that our tenants, Pfizer, Moderna and Johnson and Johnson were able to develop, run robust clinical trials, manufacture and distribute billions of vaccines at scale in less than 12 months is absolutely unprecedented. These vaccines achieve such astounding safety and efficacy All of the above transpired at a pace and level sufficient to provide adequate vaccine supply to inoculate the entire U. S. And the fact that we have a regulatory agency in the FDA that has worked around the clock To review thousands of COVID-nineteen related applications, to maximize the availability of high quality testing and safe and effective vaccines and therapies Against COVID-nineteen cannot go unrecognized. So where are we now? It's been just over 18 months since the first U. S. COVID case was reported on January 21, 2020. Yet despite all of the progress with vaccines, etcetera, Countries around the world are still very much combating new COVID-nineteen surges, driven most recently in part to the increasing prevalence of the so called Delta variant. In the U. S, this highly contagious Delta variant, approximately 50% more transmissible with 1,000 times higher viral load, Account for at least 83% of COVID cases. Average daily confirmed COVID case counts now exceed 50,000, which is 5x that of the mid June lows with hospitalizations and deaths rising as well. And as such, it Tren18 breakthrough infections, those are infections that occur in vaccinated people, are still relatively uncommon, and the vast majority of these breakthrough cases have not caused serious illness, hospitalization or death. More than 95% of people hospitalized for COVID-nineteen are unvaccinated And the vaccines still remain effective even against the Delta variant. So while they may not entirely prevent transmission, they do seem almost entirely able to prevent With regards to vaccine safety, there have been very few adverse events, less than 7 per 1000000 Reported overall with nearly all cases resolving and without long term side effects reported. As such, the strong safety and efficacy With regards to pregnancy and women of childbearing age, Though data is more limited, based on the safety data generated to date and how we know vaccines work in the body, the CDC does encourage pregnant women to get vaccinated, especially given that pregnant and recently pregnant women are at increased risk for severe illness from COVID-nineteen. With regards to children, Pfizer has an emergency use authorization for And the FDA is urging Pfizer and Moderna to expand their studies in children ages 5 to 11. So what's next and where are we headed? The evolving data on the duration of immunity and COVID-nineteen variants of concern suggest that COVID-nineteen and the need for vaccines and boosters will likely persist long term. However, the faster we can vaccinate the population in this country and increase access to vaccines in the rest of the world, the more effectively we can Slow the emergence of new variants and the sooner we can turn this virus into a less deadly pathogen even if still contagious. And given that COVID will likely remain on the planet for the foreseeable future, therapies are going to continue to be important in mitigating the severity of COVID-nineteen, as recently authorized to our tenant, Vir and GSK for their new antibody. Equally as important is Continued COVID testing, of course, for active virus and symptomatic individuals as well as surveillance testing across the population to detect new outbreaks, The last point I want to make is regarding the FDA, which has received somewhat unyielding slack over the past several months despite the herculean COVID efforts while maintaining a near all time record high pace of new drug approval, as Joel highlighted. This criticism is announcing on account of several factors, including the lack of a fully appointed FDA Commissioner, the growing backlog of review Despite their being authorized under the emergency use authorization pathway and most recently the historic yet highly controversial approval of Biogen's Aduhelm to treat Alzheimer's disease. This was the first approval in nearly 2 decades for this chronic neurodegenerative disease affecting over 6,000,000 people in the U. S. Alone. I will save commentary on all of this for another time, but it needs to be said that without the FDA's steadfast and tireless work throughout COVID to maximize the review of The immense COVID relating testing, therapeutic and vaccine applications, while trying to keep a pace with the record numbers of submissions from the industry, We as a nation would fall way behind. It is nothing short of astounding and worthy of the utmost recognition. The FDA is critical for ensuring the will be announced by November of this year is of the utmost importance to all of us, as the FDA is instrumental in ensuring the continued pace and vitality of biomedical innovation in our country. So in summary, thanks to the heroic work and collective investment of so many of our tenants in the industry, we have the tools and the roadmap at our disposal to end this pandemic. Biopharma is emerging from COVID at the dawn of a historic new era for biotech and scientific innovation. The world recognizes the value of this And the potential for next generation medicines as evidenced by Moderna and Pfizer's next generation vaccines to address current and future health care challenges. And clearly, the paradox of this pandemic moment has only reaffirmed why Alexandria has dedicated our business, our passion and our purpose to help drive this mission critical industry forward. And with that, I'll turn it over to Steve. Thank you, Jenna. I'd like to take a step back at the start of my comments and provide some historical context for the accelerating demand, Which really translates into leasing at warp speed for Alexandria's mega campuses. At Alexandria's Annual Investor Day during December 2017, we presented a bold framework to nearly double the company's annual rental revenues from a little more than $800,000,000 to 1 point $5,000,000,000 by the end of 2022. We are pleased to share those annualized revenues for Q2 2021 are in fact in excess of $1,500,000,000 and so the Alexandria team has accomplished this lofty The goal in an accelerated timeframe more than 1 year sooner than anticipated. The company has also grown from a mission critical operating asset base and development pipeline of 29,000,000 square feet at the end of 2017 to a total of 62,000,000 square feet at the end of Q2 2020 21, truly exceptional growth, more than doubling the footprint of the company and importantly, concentrated in our core clusters With disciplined execution enabling the continuation of high quality cash flows. And as we fielded questions during the 2020 as to whether the healthy leasing activity for Alexandria's mega campus platform was perhaps a short term blip Driven by COVID-nineteen, the Q2 of this year's leasing volume of more than 1,900,000 Square Feet, The highest quarterly leasing volume in the history of the company is again evidence of the company's unique position as a trusted partner to the growing life science industry, providing a durable and sustainable competitive advantage in the market. I'll go ahead and review a few of the exceptional highlights, including the following. Leasing outperformance. As we just stated, the 1,900,000 Square Feet Lease represents the highest quarterly leasing activity during the 27 year history of the 3,400,000 Square Feet Under Construction IS 80 Percent Leased and the Additional 3.6 1,000,000 square feet anticipated to commence construction during 2021, 2022 is 89% leased So robust leasing in our growth pipeline provides exceptional clarity and these projects in total will drive incremental revenues In excess of $545,000,000 We also have exceptional core results, cash increases this quarter of 25 point 4 percent and GAAP increases of 42.4%. Occupancy remained very solid At 94.3 percent in the operating portfolio, which would have been 98.1% if it were not for the 1,400,000 square feet of vacancy in In market health, demand as we've outlined continues to accelerate in Alexandria's branded and highly desirable mega campuses Large scale projects delivering 2022, 2023, we're closely evaluating Greater Boston's ground up pipeline, which is 56% Leased. And in the San Francisco Bay Area, we are monitoring leasing activity at 2 or 3 ground up lab projects. And as we've stated before, there have been no significant lab sublease spaces put in the market for several quarters now. So in conclusion, The first half of twenty twenty one continues the very strong outperformance by Alexandria and our intent focus on operational Thanks, Steve. I'm going to update you all on our development pipeline and construction cost trends, comment on our recent asset sales, As Steve and Joel both noted, we're experiencing historic demand and have responded by executing our differentiated life science strategy At an accelerated pace through expanding our collaborative campuses and asset base in each of our cluster markets, a significant sign of the health The underlying life science industry is that we're expanding significantly in almost all of our markets. In many of our submarkets, the supply and demand imbalance Has been exacerbated by a lack of near term opportunities to expand, leading Alexandria to push the boundaries of those markets. Examples of this are successful forays into Watertown and Seaport in Greater Boston, new mega campuses and expansion of San Diego Science Sector to the North and East and a highly successful mega campus underway in San Carlos. This high demand paired with our highly experienced development teams resulted in another very productive quarter for Alexandria. In the Q2, we delivered 755,565 Square Feet, spread over 5 assets located in South San Francisco, San Carlos, Long Island City, San Diego and the Research Triangle. This is double what we delivered in the Q1 These deliveries will provide more than $31,000,000 in annual rental revenue over the next year. In addition, this historic demand has led to improved Quarter over quarter leasing and leases under negotiation numbers despite adding 2 new assets that have had little marketing time. Assets contributing notably to this outcome include 840 Winter Street in Waltham, Mass, which is a testament to our ability to capture from companies needing facilities for next gen manufacturing 3,160 Porter Drive in Palo Alto, a joint effort with Stanford to commercialize Most Innovative Science and 5,505 Morehouse in Serrano Mesa, which is benefiting from Alexander's Placemaking expertise and strong demand drivers in San Diego. As illustrated on Page 2 of the press release, this historic demand And our corresponding strategic response has led to our current pipeline growing to 3,400,000 Square Feet and 33 Properties Better, as Steve mentioned, 80% leased or under negotiation. In addition, we expect to have another 3.6 1,000,000 square feet and 19 properties commenced construction this year and next that are already 89% leased or under negotiation. As Steve also mentioned, these properties will cumulatively add approximately $545,000,000 Construction costs remain elevated from trade from some trades and commodities holding steady and others continuing to be Lumber is a positive story and could be a microcosm for what will happen with other commodities. A year ago, lumber was $500 per 1,000 board feet, which was about $100 above its historical norm. It climbed to $1700 per 1,000 board feet in early May, but has since dropped back down to $600 per 1,000 board feet and is still dropping. The reason for the drop was a large number of residential projects were put on hold due to the price of lumber. With this pullback in demand, the mills I've been able to catch up, leading to stabilization in pricing. A correction due to a decrease in demand is essentially what's going to eventually normalize All construction commodities. Copper has shown signs of dropping, but it's still 2 times above historical norms. Alternatives such as aluminum are being considered to alleviate the pricing pressures, and if there is enough adoption, it could lead to a stabilization in pricing. Despite the promising news with lumber and copper, rolled steel remains very volatile and is not showing any signs of stabilizing. Rolled steel is used for things such as metal decks, metal studs and ductwork. So it's very impactful on multilevel buildings with large HVAC needs such as lab buildings. So we have to keep our cost escalation assumptions on the high end despite the noted drop in some commodities. The reason being reported is both a commodity and labor issue at the shops that create the products from raw materials. COVID caused many to shut down. And then when demand exploded, the shops had a hard time getting the labor to come back. The shops tried to solve this by scheduling longer shifts, but the amount of rolled steel showing It was not enough to support those shifts. Thus, prices remain very high with metal studs up 75% since January. We want to assure you that we're keeping a very close eye on commodities and have been developing strategies to counter these increases. And together with our prudent underwriting, we will continue to deliver our projects I'll conclude by commenting on our recent sales and provide a couple of comps that were announced recently. I discussed our record 4% cap rate at 213 East Grand last quarter, but want to add that in addition to Achieving that cap rate, we also achieved an unlevered IRR of 9.6% and a value creation margin, which is calculated by dividing our Gain by gross book value of 56%. This quarter, as disclosed on Page 3 of the press release, We once again demonstrated our ability to create tremendous value for our shareholders by selling a 70% interest in 400 Dexter, Located in the Lake Union submarket of Seattle for a 4.2% cash cap rate with a gross value Equalling $12.55 per square foot. We achieved a 12% unlevered IRR on It's very reflective of the high quality assets we've developed and continue to develop in the Seattle region and elsewhere. Outside of those Alexandria transactions, there are a couple of transactions of note in our submarkets that reflect the high value that private Investors are putting on life science assets today. In Sorrento Mesa, an asset known as The Canyons, which contains a little over a third of lab and Factoring space with the balance being office sold at a 4.48 percent cap rate and a value of $5.75 per square foot. The cash flow is from a credit tenant and there is no near term upside, so the cap rate really reflects The yield a private investor was willing to pay in a submarket that a couple of years ago would have commanded a cap rate with a 6 handle. In a similar vein, the other comp we're reporting comes from Rockville, Maryland, which was perceived to be a 7% cap rate submarket by some analysts not too long ago. 9,615 Medical Center Drive, located in the Shady Grove submarket and adjacent to a number of Alexandria properties Was sold to a U. S. Insurance company for a 5.18 percent cap rate and a valuation of $6.10 per square foot. The asset is a leasehold interest subject to a long term ground lease that Thank you. And with that, I'll pass it over to Dean. Thanks, Peter. Dean Chicanaga here. Good afternoon, everyone. We reported exceptional operating and financial results for the first 21 and provided a very strong outlook for the remainder of the year. Revenue and net operating income for the 2nd quarter 16.6% 16.8% over the Q2 of 2020 respectively and NOI for the Q2 was up 6.9% over the Q1 of 'twenty one. Now venture investment gains included in per share were $25,500,000 for the Q2 and was consistent with the Q1 of 'twenty one. Now looking back over the last two quarters, we raised our outlook for FFO per share $0.03 when we reported the first quarter results. And during the Q2, we raised our outlook for FFO per share again by another $0.02 Now this $0.02 increase was announced in connection with Form 8 ks filing dated June 14 when we were substantially through the Q2 and had solid visibility into the Strength of core results for the quarter. Same property NOI growth for the first half of twenty twenty one continued to benefit from our high quality tenant roster with 53% of our Annual rental revenue from investment grade rated or large cap publicly traded companies. Same property NOI growth for the first half of twenty twenty one was very strong at 4 0.4% and 7.4% on a cash basis. High rental rate growth on lease renewals and releasing the space Was the key driver for the improvement in our outlook for 2021 same property net operating growth to 2% to 4% and 4.7 6.7%, an increase of 30 basis points and 40 basis points, respectively. Now while the primary focus of our acquisitions for 2021 has been driven by strong demand from our tenant relationships for both current and future development and redevelopment projects, Certain acquisitions have also included operating properties with opportunities to drive growth and cash flows through lease up a vacancy. Now these operating properties have also contributed to NOI growth in the first half of twenty twenty one. It's important to highlight that The lease up of 1,400,000 Brentwood Square Feet of Vacancy at these properties will provide further growth in Annual rental revenue in excess of $55,000,000 Now, occupancy that we reported for June 30 was 94.3% And 98.1 percent on a pro form a basis, excluding vacancy from recently acquired properties. And it's also important to highlight that if we set aside recently acquired properties, our occupancy is on track to improve by 100 basis points in 2021. Now we believe it's important to highlight the strategic benefits of having a team with tremendous experience and expertise with designing, Building and operating sophisticated laboratory office buildings and a team with decades of trusted partnerships with As mentioned earlier, we have one of the highest credit tenant rosters in the REIT industry. We have one of the highest adjusted EBITDA margins in the REIT industry at 69%. We reported our lowest AR balance since 2012 at $6,700,000 Truly amazing when you Our total market capitalization was over $26,000,000,000 as of June 30, and we continue to consistently Report high collections at 99.4 percent for July. We reported record leasing velocity at over 3,600,000 rentable square feet in the first half of this year and this run rate significantly exceeding the strong leasing volume for 2020 and on track for exceptional rental rate growth In the range of 31% to 34% and 18% to 21% on lease renewals and release in the space, the last figures on a cash basis, by the way. Now as a trusted partner with access to over 7 50 tenants in our portfolio, we are well positioned to capture the tremendous demand from our tenant roster and life science relationships. We have a super exciting pipeline of projects under construction aggregating 3,400,000 rentable square feet, 80 percent lease negotiating, Near term projects starts 89% leased or under negotiations aggregating 3,700,000 square feet. Now this aggregates about 6,900,000 square feet, 90% of which is related to space requirements from our existing relationships. These projects will generate an amazing amount of incremental annual rental revenue exceeding $545,000,000 Or a 34% increase above the 2nd quarter rental revenues annualized of $1,600,000,000 Now importantly, we also expect to start additional projects between now December of 2022. Our venture investments portfolio continue to highlight the Exceptional talent of our science and technology team for underwriting high quality innovative entities. As of June 30, unrealized gains were 962,000,000 On an adjusted cost basis of $990,000,000 realized gains on our venture investments for the Q2 were $60,200,000 including $34,800,000 of realized gains excluded from FFO per share. Now for the first half of twenty twenty one, we realized gains aggregated about $57,700,000 that related to significant gains in 3 investments that were excluded from FFO per share as adjusted. Now we're pleased that the venture investment program is generating capital exceeding our initial forecast for 2021, and We hope this will be in the range of about $100 plus 1,000,000 for the entire year. Now continuing on to our very strong and flexible balance sheet to support our strategic Growth initiatives, we continue to be very pleased to have one of the best balance sheets in the REIT industry, providing us access to attractive long term cost of capital. We remain on track for a net debt to adjusted EBITDA of 5.2x by year end. Our fixed charge coverage ratio The Q4 has increased to greater than 5 times. We continue to maintain significant liquidity of $4,500,000,000 as of June 30. We're in a solid position with debt maturities with our next maturity representing only $184,000,000 comes due in 2024. And while it's challenging to predict when owners of real estate will decide to sell, 2 to 3 transactions drove most of the amount of acquisitions And accounted for about half of our target for 2021. For the remainder of the year, our goal is to remain very selective with acquisitions. Our team is advancing a number of important dispositions, primarily focused on partial interest sales in high value, low cap rate properties for reinvestment into Our strategic value creation development and redevelopment projects. Now to date in 2021, we have completed $580,000,000 at cap rates In the $4,000,000,000 to $4,200,000,000 range, and we have about $1,400,000,000 in process at various stages and expect to move along other dispositions That will push us well above the top end of our range for dispositions, which are currently at 2,200,000,000 Now we are targeting about $1,000,000,000 in dispositions to close in the 3rd quarter and the remainder in the 4th quarter. Importantly, each of these Pending transactions will continue to highlight the tremendous value we have and continue to create for our stakeholders. Now as a reminder, please refer to Page 6 Our supplemental package for a detailed and updated guidance assumptions for 2021. This guidance is an update to our guidance for the year that was disclosed on our Form 8 ks dated June 14, we narrowed the range of guidance from $0.10 to $0.08 for both EPS and FFO per share. EPS was updated to a range from $3.46 to $3.54 and FFO per share as adjusted was updated to a range From $7.71 to $7.79 with no change in the midpoint of FFO per share Diluted as adjusted of $7.75 Now as a reminder, since our initial FFO per share guidance for 20 We have increased the midpoint of our guidance by $0.05 for growth in 2021, representing an increase of 6.1% over 2020. Now, before Before I turn it back over to Joel Marcus, I just wanted to highlight that we recently published our annual EST report highlighting continued leadership and sustainability, social and governance matters. I also wanted to express our team's appreciation for continued recognition by an independent panel of judges for our 6 NAREIT Gold Award for Communication and Reporting Excellence to the investment community. So congratulations to our team for outstanding execution, and I'll turn it back to Joel. Thanks very much, Dean. Operator, we can go to questions, please. We will now begin the question and answer session. Our first question will come from Manny Korchman with Citi. Please go ahead. Sorry about that. This is Manny Portnier. Now I'm here. It's Manny and Michael. I have to Michael, I was on mute. So Dean, in your last comment, you talked about going forward being more selective on acquisitions. I was wondering if you can or maybe Peter sort of talk about what's going to change in your approach or your underwriting or the yields you're targeting Relative to the voracious appetite that you've had in putting capital out, how will deals going forward be scrutinized versus the deals that you've done? Yes. So maybe, Michael, this is Joel. Let me maybe it's best to amend that word, selective, And think about it as being a bit more patient. We've had If you just look at the quality of deals we've done, we don't change our underwriting, we don't change our focus. It hasn't changed for a very long time. We look at if you look at the 2 big deals we did this year, Both were aimed at, 1 creating a new submarket in Boston, the other was extending the Alexandria Center For Life Science at Kendall Square. Both of those to meet kind of historic high demand, but we're mindful of the overall capital markets. So I think we're being just A bit of a slower pace, but I wouldn't say the selectivity or the change in the underwriting or how we do things or what we do is any way, Shaper form changed. And from a capital markets, you've shown a lot of discipline in prefunding a lot of these deals Through forward, through debt or through straight equity offerings, is it more of a concern about where the markets are going, Joel, in your mind about funding future deals? Well, I think one has to just be mindful that if you look at, We're probably at a historic high with GDP right now. We're probably peaking and It's just hard to know where the market might go. So we're just going to be careful about stepwise about how we do things. We also have no anticipation of when I think Dean said this pretty clearly, we don't know when an owner is going to bring an Asset to market. And so that oftentimes drives decisions as to The 750 tenants, many of whom have active current requirements and many of whom want a path to future growth. So we just have to be maybe the best word to use is judicious rather than selective. Okay. And that's not necessarily parsing words. So I think we're just going to be judicious about how we go forward. There's only so many big acquisitions one can continue to do and that So I think the market will determine that. That's helpful. And judicious, it definitely sounds like more of the word rather than selective in the comments. Yes, I agree. And then just secondly, Yes, I agree. And then just secondly on supply. Joel, in your opening comments, You basically said that it's not a concern of yours. Now you're obviously as an entity building a ton, others are building a lot. Is it just the level of pre leasing and tenant demand that causes you not to worry about the levels of Development going on in life sciences and just the overall excitement, that there is on behalf of a lot of corporate landlords to do it. Yes. I'm going to ask Steve to comment, but I would say we're always worried about everything. I think when you look at And we're fans of Jim Collins. We always have productive paranoia. And so we're always Every day we wake up, we assume nothing and we have to prove everything. And so I don't think it has to do with Or are not worrying or so forth, but I think if you look in each of the key markets, you look in the Bay Area, you look at the Greater Boston area, The supply chart really is focused out several years. It's not focused on 2021, 2022 or even 2023. You start to see bigger blips, for example, Kilroy's capability to do large scale projects in the Oyster Point area In South San Francisco, pretty large numbers, but those are out quite a number of years. They're also at a disadvantage because they have A substandard location that kind of the gateway location. But Steve, do you want to comment on kind of on the supply Overall, Ishu, I think you have a good perspective on that. Sure. Yes. Hey, Michael, it's Steve. Look, we I have been in these markets for more than 2 decades. We track this on a building by building, parcel by parcel basis, So we have absolute granular information and insight on these projects. And just to add to what Joel said, when you look at Greater Boston and that pipeline of projects that actually have gone vertical that are under construction, More than half of that is already leased, and those will extend into 20222023. So when you look at that, you really don't see very significant pieces being added to the overall inventory from that basis. Other people may be talking about supply, but again, 4 or 5 years out, Inevitably, the markets will change. Office will always be an alternative for all of these new entrants as Well, and then in the Bay Area, as Joel said, there's 2 or 3 projects we're monitoring. There is leasing activity there. So there is additional supply, but we don't see large disruptive, very large projects That are well under construction that have no leasing activity. So again, we do monitor it on a very granular basis and that's what we're seeing over the next Year or 2 or even 2.5 years. Great. Thank you both for Manny and me on the responses. Take care. Yes. Thank you, guys. Our next question will come from Sheila McGrath with Evercore ISI. Please go ahead. Yes. Good afternoon. Acquisition cap rates have compressed for life sciences, we can see at 400 Dexter. How should we think about the development yields for your current pipeline? Should we expect some of the newer projects to have A little bit or some compression in the development yields versus historic yields? Yes. So Peter? Yes. Hey, Sheila. I think it's fair to say that there's been a tremendous amount of growth in rent. So that will help keep the returns buoyant. But with that has come Growth in the cost of land, there's been some obviously some cost increases that I just went over in my comments. But I think it's fair to say that our goal of development and redevelopment, having a minimum Spread of 150 bps over exit cap rates will continue. And That's a very important number for us. We often exceed that, well over 200 bps in many cases. But, yes, just the cost of capital is advantageous, so you can Develop something to a 6 and it would be very accretive, especially if you can sell it for a 4. Okay, great. And then I was wondering if you could provide a little more detail on the Sorrento Mesa acquisition of existing buildings. Will you redevelop those buildings and add density or knock them down? What are the plans there? I think we've got a number of scenarios that Dan and team have explored. But you're right, I mean the advantage Or one of the great things about that acquisition is the ability to combine it with an existing property and create a 2,000,000 square foot mega campus. Will that it will certainly contain new buildings, whether they're all new and some are redeveloped It's still to be undertaken or to be decided, but We're very comfortable with our basis there and we've got a lot of optionality with the existing buildings, but also Our basis is good enough that if we take a couple down, we can build bigger ones at good yields. Okay. And last question. Leasing spreads were almost a record quarter. Was that driven by any one particular transaction or market? And where do you think in place rents for your portfolio compared to market right now? Yes. So pretty broad, Sheila, not based on any single one, but Steve, you could or Peter, you can give some view on that on the uptick. Yes. The mark to market, Sheila, it's Steve here, has actually increased over the past several quarters. We're roughly 23.5 percent on a mark to market basis across the entire portfolio. So I think that's clear evidence The continued healthy demand in rent growth. We were in the mid teens not that long ago. So That's a pretty significant increase. Okay, thanks. Thanks, Sheila. Our next question will come from Anthony Paolone With JPMorgan, please go ahead. Thank you and good afternoon. Joel, you mentioned some of the record Capital formation in the form of venture capital, IPOs, and I think the NIH as well. In the past, those numbers have ebbed and flowed. I'm just wondering what you think happens to space demand, if there's any sort of pullback in that capital formation this time? Yes. So that's a really good question and welcome to the call, Tony. This is a kind of a historic biotech bull market. It's Really going into its 7th year, which is pretty historic. I think what gives us good comfort is On the private side, a number of the venture firms, quite a number of the venture firms have raised record amounts of money and those Funds usually take multiple years to invest, 2, 3, sometimes 4. And so that's going to give runway to private companies. Let's say there was a black One event or something, God forbid, happens that just causes the market Sell off pretty drastically. I think we're very fortunate. As Dean said, we have a historically high credit Profile in our asset base, so that's good. I think the companies that would be most at risk would be Newly public companies now that are outside of the private venture or private equity financing, They're public now and if the market shutdown, they have capital, they'll have to adjust their burn rate And be careful because they won't be able to go back to the capital markets. So I think that we saw that in 'eight and 'nine. It was the newly public companies, companies that were preclinical particularly or in the clinic and needed a number of years of runway. So that would be a downside scenario. But as I said, I think for at least for the coming couple of coming quarters, we see a pretty Steady flow of capital, we don't see any interruption, but you never know if China decides to Make Taiwan like Hong Kong or something like that and decide to reunify, that Could cause the markets to certainly freeze up. I mean, they're already attacking a lot of the tech companies and so forth. So I think China remains a huge A huge question as to the impact on the market and what their intention is. Okay. Got it. Thank you. And then, just the other question I have is you mentioned your pricing power advantage And tenants wanting to be in your portfolio, are you being asked to go to either new markets, new submarkets To satisfy some of the demands of your tenants and just updated thoughts on potentially going to those places, if so? Well, I think what is true of this industry for a long time and I've said this for a long time, The life science clusters generally take a generation to grow 25 years or more and we See, for instance, New York is now just into the 12th year of that gestation period. And because of the Density of players, the ecosystem being collaborative and cooperative as opposed to tech, which is more a little bit, those guys like to be more Delated. There's an employee base there. Most companies looking to expand or opting to stay in the existing markets. I do not see And have not seen and Steve or Peter can certainly comment any big move toward new markets Or other locations. Obviously, if somebody wants to go somewhere, I mean, we'll look at it and we'll think about it, but it's got to be a pretty Convincing and persuasive situation. Great. Okay. That's all I got. Thank you. Thank you. Our next question will come from Jamie Feldman with Bank of America. Please go ahead. Thanks. If I could just add on to Tony's question. I mean, what about on international? I mean, clearly, your platform has absolutely proven itself. You have any thoughts about trying to do it again in other markets around the world? Well, I think if you look at this quarter's results, you would ask You'd asked the question, why would you ever want to or need to? We spent time in India and exited India, Realize that the Indian Supreme Court invalidated the Gleevec patent and so novel research just isn't going on there. We have one remaining project in China, which is partially leased up. We compete against government Properties that get free rent for 3 years for Chinese tenants, so that's not a really great market to grow in. I mean, Europe is fine, but it still is, by and large, their socialized medicine system. So Not a place you would think about booming R and D. So we're very happy with the markets we're in and with our current You know, operational view of things, Jamie. Okay. And then that's helpful. And then thinking about New York, Can you give us an update on when you think you might start the new project there? And with Long Island City, it looks like 100% leased In the supplemental, just how are you thinking about other opportunities there away from the center? Yes. I'll have Peter comment on Long Island City, we're not 100% leased there. That's been a slower lease up than we would have wanted partially and due to what happened Amazon and so forth kind of put a chill on that submarket overall. We're working with the city right now going through a process And I would just say stay tuned there. I think New York is the one market that brokers tout Like this big demand, but the reality is the demand is much less and the demand is primarily organic companies that are Starting up, being formed, spinning out, you don't see any big companies moving to New York for obvious reasons, high taxes, governance issues To some extent, and just it's an expensive place to be. So we're doing great at our center. And but it's a tough market. It's a heavy lift market. You really have to create the entities that Stay there and we've helped do that over the last decade, but it's different than Boston, which is experiencing record high boom, So just fundamentally different. Okay. So you said that Long Island is not 100% leased? The supplemental is just Yes. So Peter, do you want to talk about Long Island? Yes. Long Island, according to the supplemental, is 41% leased and under negotiation on Page 38%. So the that's actually the least percentage went up 10%. So we have started to make some progress. We meet weekly about demand there and different companies we're talking to. Essentially, there's a lot of slow decision making going on there. I don't know if it has to do with just the state of New York City and if people are wondering when COVID is going to not be as impactful to life there, Could be one reason. But as Joel mentioned, it's definitely a market where we've had to almost create demand. It's very organic. The tenant prospects we're talking to are almost exclusively New York created companies. We're not getting a lot of help from In migration, but we are seeing everything and capitalizing on some. And Admittedly, it's been a slow process, but we do think we'll get that stabilized in the near term. Okay. Thanks. By the way, I was looking at Page 34, which I think shows that it is, but I hear what you're talking about. Thank you. All right. 34, Jamie, is what we delivered to date. Yes. Partial parts of the building already delivered, not the full building. Got it. Okay. Thank you. Yes. Thanks, Jamie. Our next question will come from Rich Anderson with SMBC. Please go ahead. Thanks. Good afternoon, everyone. So on the dispositions, you're looking at $2,000,000,000 for this year. And I look back at what you've done in Previous years and this will be the most by a fair margin in other years. And I'm curious, obviously, you described capital Flowing into the business like I think you used the word stampede, and we're all seeing that for all the good reasons. But are you getting any Reverse inquiry, where you would have maybe not sold partial interests or whatnot, but you were just given an offer that's too good to be to refuse. Is that happening To you or is this stuff you would have sold one way or another eventually? I don't know. So Peter, you could comment on that. Yes, regimen, very confident saying that if I made a few calls and said, hey, Anything you like, want to make an offer and the other party thought we'd sell anything that they wanted, there'd be a lot of them. So we have been the ones that have selected what to sell. And obviously, We've done quite well. The typical profile is something that we have already really maxed the value out On at least in the near to medium to long term. So it's a good time to monetize. But It's fair to say that our whole portfolio is very attractive to many investors today given the Sean, on the Life Science Industry. Okay, great. And then on the development side, Peter, you mentioned you're underwriting Cost inflation, despite the comments on lumber, can you say what type of inflation you're assuming when you underwrite a development and on the other on the numerator side, what your assumption is for market rent growth? Are you taking a discount to what you're seeing? I'm just curious if you could get a little bit more in the weeds of how you're underwriting a deal that so it pencils and it makes sense to go forward with it. Yes. I'm not getting not to give away too much secret sauce, but I last quarter, I mentioned when I addressed the Costs that we look at escalations in the 5% to 6% range right now. And That may not seem like a lot, but labor is fairly stable. So these large Commodity increases and with materials being about 30% of the project, you can get to a weighted average of about 5% to 6%. Now that's could be double what a normal year of escalations could be In certain times, things obviously fluctuate. But we, along with our real estate development The underwriting team communicates constantly about these things, so we make sure we get them right. And the proof is in the pudding. The yields that we We hit like pretty much 100%. So other than that, we don't underwrite spikes In rents, I've talked about that before. We have a very good idea of what long term growth looks like. We're probably more conservative than what actuals end up being, but that's great. Surprise to the upside is always good. But yes, we're very comfortable with our current pipeline and the way we've underwritten it. And I think I've been here for 23 years, been an underwriter for all that time and feel very comfortable with our process and that we'll continue Meet the numbers that we're publishing. Okay. Thanks very much. Appreciate it. Great quarter. Thanks, Rich. Our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead. Yes, thanks. Joel, in your comments, you discussed the need for the U. S. To be the leader in next gen drug manufacturing. And I'm not sure if I heard you correctly or not, but did you say the U. S. Only produces 11% to 13% today? I'm not sure if you're referring to semiconductor production or next Manufacturing? Yes, that was semiconductors. Okay. Where is the next gen manufacturing being done right now? I think Given the advancement we're seeing in technology, is it safe to assume that's going to be a bigger life science demand driver in general and for your industry Are you safe? Yes. The answer is yes. 1, it's still in the early days. Number 2, because It's more integrated with the research and development side. They will tend to be either at the same or nearby as opposed to a random manufacturing if this was just Normal synthetic chemistry pills and so forth, you could put it anywhere, you could put it in overseas or in any state. But I think you'll see these will be much more integrated with the R and D function. And so my guess is the clusters as they are today will be mostly As opposed to other regions. Okay. And when you're looking at this, I guess, this demand driver, I guess how close do they need to be to, I guess, the headquarters? I mean, are they going to be in Cambridge? Or is it going to be in like suburban Boston? Or how close does the manufacturing need to be to get that synergy with the mines within the headquarters? Yes. Well, I think it depends on the stage of scale up, but in the early clinical, preclinical and clinical, You could see that being a part of the R and D effort, but then when it goes to full scale, you could see that being in adjacent locations. I mean, Moderna's example is a great example. They did a lot of work inside Tech Square, but then they we built their plant in Norwood, etcetera. So I think that that's not a although that's vaccine, but That's somewhat emblematic of what you could see happen. Okay. And then I just want to I think I heard you correctly, but this is going to be a driver For every cluster, I mean, is there some clusters that could benefit more than others? Well, I think the clusters that would benefit more are the established clusters, obviously, the Boston market, San Francisco, Seattle, San Diego, Maryland, RTP, I mean the ones that we're focused in, I think secondary markets probably wouldn't do as well, because you also need Skilled workforce and you just don't find them, you're not going to find them in Charleston, South Carolina per se, although that's a great place to be. All right, great. Thanks, Joe. You bet. Our next question will come from Tom Catherwood with BTIG. Please go ahead. Excellent. Thank you and good afternoon everyone. Peter, maybe turning to the dispositions. Obviously, partial interest sales have been an important part of your capital sources over the past few years. When you're evaluating Assets for disposition, how do you decide between an outright sale and a partial interest sale? And are you able to maintain enough Troll over the joint venture to make decisions kind of holistically across your cluster instead of prioritizing certain assets kind of to the detriment of others. Yes. So maybe, Peter, let Dean take it first and then maybe you can kind of add the color around that. Sure. Yes. So, Tom, one part of your question really touches on the complexity of managing Good governance around your joint venture relationships and I think that's what our team has tried to do It's to be very respectful of these important relationships that are being established in markets and sometimes across markets. We want to be long term partners and be mindful as much as we've got Joint venture assets and wholly owned assets in a particular market. And so that's important. From a technical A control perspective, I think we're working with partners that understand that we have the expertise to make these In that fashion, and so that's been important, I think as an attribute from a partner perspective for us. So hopefully that helps a little bit there, Tom. Yes, that's really helpful. Thank you. Thank you, Dean. And then maybe just focusing on a specific market. Down in North Carolina, so back in August of 2020, you acquired The Alexandria Center For Life Science in Durham and expectations at the time were that tenants would both expand within the research And then some would relocate to RTP from other areas to kind of looking for more talent. In the Q2, occupancy in that Durham campus picked up, I think, almost 400 basis points alone. And then you've Added another 885,000 square feet of development rights kind of in and around that campus. So as you're now almost a year out From that large acquisition, how has the market performed there compared to underwriting? And then what are your expectations for that going forward? Yes, it's done pretty spectacular. Peter, do you want to maybe give color on that? Yes, I can tell you that we're certainly Above our rental assumptions, probably close to 10%. And then we have definitely absorbed The vacancy faster than we had underwritten it. Yes, I give Joel a lot of credit. He definitely saw this trend coming towards RT when we made this deal. And we've knocked it out of the park. It's really been great. And is the idea with the expansion adding the additional almost 900,000 square feet, is that Demand. There's this great demand there and that campus itself has built in amenities. It has existing Space that some tenants have gone into and we know that those tenants will need to expand. Yes. Tom, I think what has distinguished Research Triangle, for many years, it was kind of a 50 year old backwater place that Few companies went to and had a was a nice place to be. And then over the last number of years, it's emerged as a really powerhouse You know, cluster, I mean, Apple has just now taken a gigantic stake down there. And I think what people see is What they're looking at other places in the United States, people see a great quality of life, A modest cost environment, beautiful place anchored by 3 world class institutions And a really, really great workforce. So we're seeing the incoming I mean, we kicked off The Beam Next Gen Manufacturing project, that's a company that's in Cambridge, But they came to us for their next gen manufacturing gene therapy aimed at cancers and sickle etcetera. And that was the best place because of the workforce. So I think that to me has been the hallmark of that market. Great place to be, live, work, play and really talented people, Which you just can't find everywhere. No, that's really helpful and it does sound like very different than what it was historically. So that's it for me. Thanks everyone. Yes, thanks. This concludes our question and answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks. Just to say thank you everybody and we look forward to talking to you on the Q3 earnings call. Take care. Be safe. God bless. The conference has now concluded. Thank you for attending today's presentation.