Earnings Call: Q4 2019

Feb 4, 2020

Good day, and welcome to the Alexandria Real Estate Equities 4th Quarter and Year End 2019 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 that this event is being recorded. I would now like to turn the conference over to Paula Schwartz of Investor Relations. Please go ahead, ma'am. Thank you, and good afternoon, everyone. This conference call contains forward looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements 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, Paul, and welcome, everybody, to the Q4 year end 2019 conference call. And with me today are Dean Shigenaga, Steve Richardson and Peter Moglia. We'd like to thank, first of all, most importantly, to each and every single member of the Alexandria family from the bottom of our hearts for a stellar execution of our 2019 business plan, a real granular day by day execution with the highest level of operational excellence. We are very, very proud. As we celebrated our 25th anniversary in 2019 from our founding, we also achieved and passed the $25,000,000,000 total market cap level for which we're also very proud. And we're proud to announce, as you see today, the highest leasing activity in the history of the company with so many companies actually seeking Alexandria campuses, not just space anywhere. The highest rental rate increases in 10 years and the best are really driven by the best in locations and our assets, which have really driven that success. And our operating margins have really been outstanding and they're really driven by judicious management of our unique business plan. So thank you everybody for that. When we look at the industry, there's continued bipartisan support for NIH funding, which has remained strong. Congress has provided an additional $2,600,000,000 for fiscal year 2020 budget, totaling almost $42,000,000,000 and this marks the 5th consecutive year Congress has provided the NIH with a multibillion dollar increase. In 2019, there were 48 new therapies approved by the FDA, another historically strong year for bringing new novel therapies to patients. Importantly most importantly, several new therapies approved in 2019 included innovative modalities against novel targets and for diseases which have long needed treatments, such as sickle cell disease and postpartum depression. And we're proud to say that in 2019, ALEXANDER received 52% its tenants of the FDA new approvals. And of all those approvals, about a quarter were cancer related and a quarter were central nervous system related. Total life science venture investment continued strong at about $26,000,000,000 for 2019, the 2nd highest record over the past decade. And despite market volatility in 2019, capital continued to flow to public markets. In 2019, dollars 5,500,000,000 was raised across 48 biopharma IPOs on United States exchanges and 84% of that amount raised was in Alexandria cluster markets. Let me turn for a moment to the coronavirus. On January 30, the WHO declared China's novel coronavirus a global health emergency and some of Alexandria's most important tenants are already working with the NIH on vaccines and hopes are that a vaccine will be ready for human trials by as early as April. In the interim, U. S. Drug makers are donating large amounts of antiviral medicines in the interim that may help in the fighting of the virus. And as many of you know, some experts predict there may be as much as a 2% decrease in China's GDP due to this viral due to this virus. Moving over to briefly to policy, there's been an increased focus on both drug pricing and FTC review of M and A that has caught the attention of both private and public market investors as they work to understand how this may impact valuations and interest in innovation by biopharma and reevaluate which types of companies are primed for success in both the current and or potential future environments. However, these issues have not led to a substantial change in the capital available to fund innovative life science companies and M and A continues to be active with multiple deals announced at the end of 2019 and in the 1st month of 2020. And it's likely that when you look at there are now 4 bills in Congress that are pretty much stuck relating to some focus give or take, the focus on drug pricing, but it's questionable given that we are in a major election year whether these will ever see the light of day. And then finally, the Trump administration in its own policy is interested in potentially tying what Medicare pays for physician administered drugs to a basket of economically similar products in other countries, a basket of countries. And under such a proposal, Medicare would pay 126% of the average price paid in these countries. But I think it's fair to say it's a long way away. The White House is still reviewing a draft of the proposal and once its public supporters and opponents have time to make their case before the administration, long before it will be finalized and even then the idea will only likely be a temporary pilot program. Remember too that Medicare basically covers about a third of the U. S. Population. So with that, let me turn it over to Steve for some granular details on the quarter and the year. Thank you, Joel. Alexandria's continuing clear leadership as a partner to the broad life science industry and a premier developer of world class science and technology campuses is driving exceptional performance as evidenced by the highest annual leasing volume in its history of 1 point of 5,100,000 Square Feet and the highest leasing spreads during the past 10 years of 32.2% on a GAAP basis. It's important to take a step back as we start a new decade and assess what is driving this outperformance. 1, our talented people across the entire company and a strong culture of meritocracy and 2, the strategy that we emphasized at our recent Investor Day, the ongoing creation and curation of unique mega campuses in the country's strongest innovation clusters. We are very well positioned for robust future growth with compelling mega campuses in each of our clusters. Peter will cover in detail acquisitions that have added to these campuses and the following high level summary provides a clear framework for this high quality growth opportunity. In Greater Boston, Arsenal on the Charles. In New York City, we are advancing the 3rd tower negotiations with the city. In Maryland, the Shady Grove built to suits in a new large land parcel. In Research Triangle Park, the Research Drive and Davis Drive campuses. In Seattle, the Mercer Mega Block anchoring our dominant position along the eastern portion of South Lake Union and in San Diego, the San Diego Tech Center in Sorrento Mesa. And to present a particular highlight today, the very creative and compelling joint venture with Boston Properties in South San Francisco. The campus totals 29.3 acres. Alexandria has contributed 313,000 square feet of operating properties comprised of a Class A lab facility, an office building and a state of the art net 0 mass timber amenity building with conferencing in a cafe anchored with tenancy from the California Life Sciences Association. Boston Properties has contributed 775,000 square feet in 3 office buildings. The existing facilities will eventually be on an approximate fifty-fifty basis and new development on a 5,149 basis. We jointly have the ability to unlock tremendous value on the site with the ability to develop 3 ground up Class A facilities totaling 637,000 square feet and redevelop 1 of the Boston Properties office buildings, so that approximately 50% of the campus offers value creation opportunities over time and a ultimate transformation to a high quality laboratory mega campus. The site is really destined to become the premier life science location in South San Francisco a reimagined master planned and a unique amenity building, a reimagined master planned and a unique amenity building that will be a magnet for the life science industry. Alexandria and Boston Properties share a high regard and mutual respect for one another's teams and accomplishments, and collectively, we are very enthusiastic about the future of the campus as we co develop with Alexandria as the lead developer, a highly amenitide mega campus featuring a total of 1,700,000 square feet at completion. On a separate note, the Proposition E in San Francisco will be we expect to be passed during the upcoming March election. Prop E will essentially provide yet another barrier to entry for development as it ties the allocation of Prop M office entitlements to the city's ability to deliver its State of California mandated requirements for affordable housing. Could thus become further constrained and reduced. We are monitoring this ballot measure closely and anticipate its passage will make existing and entitled campuses even more desirable and valuable. Broad company wide metrics include again 5,100,000 Square Feet Leased During 2019, the highest in the company's history. 2019 rental rate increases of 17 point 6% cash and 32.2 percent GAAP, the highest during the past 10 years. On a mark to market basis across all regions, we're at about 17.1% on a GAAP basis. And finally and importantly, a sense of urgency continues in the marketplace as nearly 3 quarters of our leases in 2019 were early renewals. Alexandria's strategy, the team and strong brand is positioning the company well for sustainable growth in each of our markets. I'll hand it off to Peter. Thank you, Steve. I'm going to spend the next few minutes updating you on our Q4 deliveries, 88 Bluxstone, the Mercer Mega Block and 15 Necko progress, give an update on construction costs and then given recent activity, highlight a couple of major acquisitions that occurred in the Q4 and one that closed in January. So as for developments, 2019 was a very busy year in many respects, but especially on the development and redevelopment front as we delivered over 2,000,000 square feet at an average initial yields of 7.4 percent on a GAAP and 6.9 percent on a cash basis. The 4th quarter deliveries were light relative to the 1st 3 quarters at 130 1,000 square feet, but we closed out 5 projects during the quarter and ended the year with all 11 projects spanning 9 submarkets at 95% occupancy or higher illustrating the strong demand present in all of our markets. Given the significant interest in 88 Bluxom in the Sona submarket of San Francisco, the Mercer Mega Block in Seattle and 15 Echo in the Seaport area of Boston, we wanted to provide a brief update on those 3. As many of you know, the Bay Area's team the Bay Area team's significant community and municipal engagement resulted in our 88 Bluxom project receiving Prop M allocation on the entire project as opposed to approval in phases as other developers received. We are pleased to report that we are now fully entitled as all challenge periods have expired and the Central SoMa Plan litigation has been resolved. We expect to receive a permit for demolition and our site work in May and we expect to commence those activities in the summer once certain required off-site work is completed. As you likely know, the 1,070,000 Square Foot Project is 46% leased to Pinterest and 58% leased overall. The status on the Mercer Mega Block is that we're negotiating a prospective purchaser consent decree with the Department of Ecology that essentially will cap our environmental liability and that should be resolved by year end and we should close shortly thereafter. Concurrently, we're preparing drawings for early design guidance and submittal of a master use permit shortly after closing, which will perfect the entitlement to that project. We're as far as 15 Echo goes, we're redesigning the building to be a lab ready shell and it is currently in for review with the Boston Planning and Development Agency. We expect the entitlements to be complete and have a permit to break ground in the Q1 of next year. The location has been very well received by tenants in the market and we've had preliminary discussions with a few of them. Moving on to construction costs, given our proclivity for value add activities, our underwriting process includes rigorous periodic updates of construction cost trends. The effective tariffs have been a constant theme in many of our investor meetings And by and large, we've been able to manage through them by engaging our contractors early and leveraging our deep relationships with them to achieve the best pricing for steel and aluminum at buyout and cover any unexpected spikes with contingency. Despite recent positive developments in the trade war, we remain cautious and conservative in our underwriting of costs as manufacturers are quick to point out pricing is subject to change based on trade negotiations. Our latest analysis which we get directly from our contractors indicates that the national average for escalations remains in the 5% range, which is consistent with 2019 and recent years. Most of our major contracting partners across our markets pricing. Most of the pressure on pricing is attributed to skilled labor shortages. Although the construction industry continues to add jobs, most of the additions have been unskilled laborers increasing the productivity gap which has led to above market pay scales for skilled workers and over time to staff projects. The projected slowdown would mitigate this. Moving on to acquisitions, as you know, we executed a secondary offering in January and use of proceeds includes funding a number of strategic acquisitions, approximately 956,000,000 of these were completed in the Q4 of 'nineteen and include the following. Arsenal on the Charles, which was disclosed at Investor Day is located in Watertown, an inner suburb of Cambridge and closed December 17 at a purchase price of $525,500,000 This acquisition is a terrific example of our focus on value add investments. Upon full development, we contemplated 12 building campus containing 1,035,000 square feet that will provide unprecedented scale in Cambridge's inner suburbs. 3825 and 3875 Fabian Way closed in December at a purchase price of $291,000,000 and is located in the Greater Stanford submarket of Palo Alto. This 478,000 square foot campus has been leased back to the seller and provides a similarly unique opportunity for Alexandria to achieve scale on a highly valued cluster location. The 598,000 Square Foot San Diego Tech Center will be rebranded as SD Tech by Alexandria and will ultimately be fully developed in phases into an approximately 1,300,000 square foot life science and technology mega campus, which we own in a fifty-fifty joint venture. Although it's known as the premier technology campus in Cerro Mesa, it has lost its luster in recent years and therefore offers us a great opportunity to leverage our redevelopment skills and long term ownership horizon to create significant value through a thoughtful repositioning. In addition to the 4Q 'nineteen acquisitions, we completed 3 transactions totaling a little over $341,000,000 in January, and I'll briefly touch on one of those as well. 275 Grove Street also known as Riverside Center is a 510,000 square foot office project with terrific access to Cambridge and Boston via its adjacency to the Riverside Green Line Station and location at the nexus of the Route 128 and Mass Pike interchange. It is also located in an area of the western suburbs where a considerable amount of executive talent resides. The project is in Newton, which is within 5 miles of our Waltham cluster and we see this acquisition as an extension of that. In addition to the transit advantages and proximity to decision makers, Riverside Center provides optionality to incrementally convert the building to lab over time. So with that, I'll pass the call over to Dean. Thanks Peter. Dean Shigenaga here. Good afternoon everyone. As a mission driven real estate company, we're very proud of our team's awesome execution of operating and financial results. Our team remains very focused on leadership and ESG making a positive impact on society by executing in a thoughtful manner to minimize the impact that our business has on the environment and advancing human health, well-being and nutrition. During 2019, our team earned a 5 star rating and A disclosure score from GRESB. We issued $550,000,000 in green bonds with proceeds allocated to green eligible projects consisting of gold or platinum LEED certified projects in addition to other bond issuances continued the execution of our 2025 goals focused on how we manage carbon 59 of them finished the 26.2 mile New York City marathon in support of raising important funds for mission critical research at the Mount Sloan Kettering Cancer Center. Now this is pretty amazing since this was the first marathon for most of our runners. Our solid results highlight continued growth in high quality cash flows, operational efficiency and several key REIT industry leading statistics. Total revenues were $1,500,000,000 up 15.4 percent over 2018. Cash NOI was $1,000,000,000 for the Q4 annualized and FFO per share as adjusted was right on track with our expectations at 1.77 dollars $6.96 for the Q4 in 2019 respectively. High quality cash flow growth was generated from one of the best tenant rosters in the REIT industry with 50% of our annual rental revenue from investment grade or large cap tenants. Same property NOI growth was strong for 2019 at 3.1% and 7.1% on a cash basis. And as Peter had highlighted in 2019, we delivered 2,100,000 rentable square feet of development and redevelopment projects contributing significant growth in rental and net operating income. Now occupancy came in very strong this quarter at 97.8 percent before consideration of vacancy in recently acquired properties. Now vacancy from these recently acquired properties reduced occupancy in the 4th quarter by 1% and when combined with acquisitions we completed in January of 2020 will in aggregate reduce occupancy in the Q1 by 2.4%. Now this vacancy is primarily related to San Diego Tech that was acquired in the Q4 and the consolidation of buildings Boston Properties contributed to our joint venture with 27% vacancy. Now the important takeaway is that our occupancy across our core asset base remains very strong and this vacancy represents opportunities to grow rental income and cash flows over the next 6 to 8 quarters. So please refer to the tabular disclosures at the bottom of Page 20 of our supplemental package for additional information. Now there has been recent attention on potential changes to property taxes for commercial real estate. Currently under Prop 13, commercial real estate in California is subject to property taxes that are assessed at 1% of the purchase price subject to annual increases in fair market value capped at 2% and subject to assessment for new construction. Now it's really too early to tell if there will be changes in property taxes for commercial real estate in California, but a few key points to keep in mind. Alexandria has a very favorable lease structure with over 97% of our leases providing for the recovery of operating and major capital expenditures. Therefore, there would be a very insignificant amount that we would not recover from our tenants if our properties were assessed at fair value. Additionally, most of our properties are relatively new from ground up development and redevelopment and therefore we believe we are in a better position than the average property in our core markets. Importantly, the life science industry is extremely focused on the benefit of proximity to other scientists and innovative entities in order to develop new and innovative therapies versus the nominal amount of rent they pay relative to their annual R and D budget. Now a couple of points on impairments. During the Q4, we recognized impairments aggregating $10,000,000 primarily to reduce a portion of our cost basis in 2 privately held investments. We still expect to recover a significant portion of our original investment. One company is focused on neurodegenerative diseases and the other is a clinical stage company focused on novel enzyme targets. Importantly, our overall venture investments continue to generate significant value. Our disclosures this quarter highlighted recent value creation aggregating almost $500,000,000 consisting of over $400,000,000 of unrealized gains as of December 31 and over $70,000,000 of net realized gains over the last 2 years. Now on the real estate side in the Q4 we decided to commit to the sale of the only 2 legacy properties that we own in New Jersey and Florida, which resulted in impairment charges aggregating $12,300,000 We hope to sell these properties over the next four quarters. Now we remain on track with our disclosed goal of 5.2x for net debt to adjusted EBITDA by December 31, 2020. And we felt it was prudent to remain patient and execute our follow on equity offering in early 2020 to fund 2 key acquisitions that were awarded and completed in December of 2019. Now as a result, our net debt to adjusted EBITDA for the Q4 of 2019 was 0 point 4 times higher than the 5.3 times that we originally forecasted. It's really important though to highlight that our team deserves recognition for the achievement of our Baa1, BBB plus credit ratings, which ranks our credit profile at approximately the 90th percentile across 160 publicly traded REITs and this excludes mortgage REITs. Now one brief comment regarding our ATM program, we do expect to file a new at the market offering program in the Q1 here. On guidance, we have reaffirmed our 2020 guidance for EPS and FFO per share as adjusted at a midpoint of $2.22 7.38 respectively. And please refer to Page 7 of our supplemental package for detailed underlying assumptions included in our guidance. Let me turn it back over to Joel. Operator, you can open it up for question and answer please. Thank you. We will now begin the question and answer session. And our first question will come from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead. Great. Thank you. I guess I just wanted to start on just thinking about the potential risk of excess supply in both South San Francisco and Boston Seaport. It seems like we've got several projects in the pipeline there. Can you just give us your latest thoughts on both those markets? Jamie, it's Steve. Thank you for the question. We've talked about this for quite a while in South San Francisco, and I think we've been very pleased to see that the supply that's come on has been substantially absorbed. Kilroy with 650,000 square feet of Phase 1 is entirely leased, so that does not present a near term opportunity. Blackstone now has resolved half of their 400,000 square foot building. So they just have 200,000 square feet available there. And then finally, HCP just has 65,000 square feet available in their project a little further north in South San Francisco. So, on an overall basis, that's very limited supply of available inventory. And we in turn feel like we're extremely well positioned with 201 Haskins. We've got 100,000 feet leased there and ongoing discussions for another big block of space. So as it may have been a concern and something we're watching closely a year ago, we're in very good shape. The future pipeline, I think, we'll take a look at that and continue to monitor that, but I think that will be metered over a number of years and not really present a big supply shock. Moving out to Seaport, there are probably 3 other projects that could compete with our Necco site, if you're looking for large blocks of space, a couple of them at about a couple of 100000 square feet and another one at about 500,000 square feet. So, again, you may have a future supply that's a number of years down the road, but nothing in the near or intermediate term that we're overly concerned about, but we're always Okay. Thank you. Can you talk about the demand pipeline for the Seaport? It does seem like there's several projects in the pipeline there beyond farther out as well. Yes. I think as we look at the demand in the Cambridge market, it continues to stay healthy with 2,700,000 square feet of lab demand. And when you start looking at a 2 percent vacancy in that market, we have discussed all along Seaport being a very strong natural outlet for that. So we are in early discussions with a very large tenant base that we have in our 3 mega campuses there in Cambridge. So we're very encouraged at a very early stage with the tenant interest in that site. And this is Peter. Jamie, I can just give you some color that obviously the Seaport is a major tech destination, is a number of big tenants going in there. Amazon is making a huge move and will likely gobble up a lot more space when you talk about the concern over supply. But also it's starting to gain a lot of traction with life science companies. Birdtex which is already there is looking to expand in a fairly big way and there's a couple foundation medicine has moved over there and there's a couple of other tenants that we'll keep to ourselves that are interested in as well as Cambridge has very limited availability and people see Seaport as a great place to go in lieu of that. Okay. And then last for me. I mean if you think about your acquisitions done to date and the pending, I think it looks like you're pretty close to your full year target. So how do we think about how should we think about the potential that you go well above that target? And if so, how do you finance it? Well, Jamie, it's Dean here. I think what we found really interesting about the market today versus looking back several years ago is, there's obviously a volume in the market, many deals of which we pass on. The other thing that's really interesting about the dynamics today is I would say that we're required to do diligence before we're even aware of being awarded as the winning bidder on a transaction. So I think what I'm trying to highlight is there is deal flow in the marketplace. We're very disciplined in what we choose to pursue. And there's a short fuse when it does come up as a winning opportunity. So we'll keep the market informed as we go through the year. As far as funding goes, whether it's construction, value creation projects or future acquisitions, I think we'll remain as disciplined as we have been historically, Jamie. Today, we've got a bucket of equity to solve for. We solved the big chunk of it and we have an amount to resolve for the rest of the year, but I think you'll find us disciplined in preserving our optionality as we look forward to solving the rest of our capital needs for this year. Okay. How large is your non core pipeline or non core portfolio right now that you'd sell? Sell? I think the way to simply describe it, Jamie, is we always prune the bottom of the portfolio. There's always a couple of assets we're selling every year that don't even resonate to any meaningful capital. We did most of our heavy lifting back in 20122013 on the non core site. Okay. All right. Thank you. Thanks, Jamie. And our next question will come from Tom Catherwood of BTIG. Please go ahead. Excellent. Thank you. Steve, at the opening, you mentioned kind of the role of Alexandria as a partner to the life science industry. And then later you mentioned the sense of urgency for your tenants across your markets, hence the high leasing spreads in the early renewals. How do you balance this kind of almost dual mandate of the ability to push rents because vacancies are so low and tenant demand is so high with the fact that you have these long term relationships with tenants? What's the kind of equation that goes into that? How do you make sure you're giving them the space that they need while also pushing rents as far as you can? Tom, it's Steve. Thank you for the question. I think it's been and it has been for the time since the company was started. It's a balance of respect for the clients that we're working with and the work that they're doing. These are multi market relationships. They're multi company relationships. So they are critically important. And I think we balance that respect with the reality of the marketplace and share that in an open and pretty transparent way, so that ultimately the companies and the decision makers feel like they're gaining tremendous value in the facilities, tremendous value in the operations of the facilities and really are working with somebody who is a partner for the long term. So I think it's a balance between those 2. Got it. That makes sense. And I assume that there is kind of also helping them find space in other areas, which leads to my next question. Peter, it was really helpful when you provided more insight to the Riverside Center purchase in the Boston suburbs. Obviously, the Boston suburbs has been an area where you've been more active with acquisitions and redevelopments over the past few quarters. What are you seeing as far as demand dynamics beyond just executives living in the area? What are you seeing as far as tenant demand there? And how does this differ from previous cycles the suburbs experienced much more volatility than your urban markets? Yes. So, Tom, this is Joel. Let me start off before Peter jumps in. I think one of the things you have think about is there are a host of companies broadly in the life science area that actually don't want to be in the Cambridge location for a variety of reasons beyond where executives may live. And so we've seen certainly being the number one Life Science market in the United States, there are a continual flow of companies that either started in Cambridge and choose to move out or have never moved there and are expanding. And I think those are ones we see pretty regularly, a number of which are pretty great credit and a number of which are not. But I think there is a pretty good core of tenants and then those tenants are pretty mindful of what Peter says is transit has become king And I think working with a owner operator that both understands their needs and is pretty sophisticated about what they do and how they do things. But Peter can give you any further. Yes. I mean, I think Joe answered it well. I guess one thing I would remind everyone about is we've had over a 1000000 square feet in the suburbs for a number of years with high 90s occupancy. Never really run-in any problems there. As Joel said, there's a number of companies that just would prefer to be there. But we feel confident in acquisitions like Arsenal and Charles and the Riverside Center because they do connect well to transportation. They have very close proximity to Cambridge and Boston. And given just what is going on in Boston in general such as the tech Cadre going to downtown, connecting to all the different teams such as the Green Line as well as Red Line is important. And so the demand is really coming from a lot of folks that want to be in the suburbs, as Joel said, but there's also a tremendous amount of company growth in Cambridge that can't find growth space. So we're figuring out where to go next and I think we've made some pretty good decisions. Got you. So it sounds like it is a little bit different in the suburbs than it used to be. So one last one for me. And not all suburbs are created equal, so remember that. Very fair. Last one for me, probably for either Dean or maybe Steve. A lot of redevelopments as part of the acquisitions that you guys did in 2019, whether it's stuff in Campus Pointe or SD Tech or The Arsenal. Is it possible that earnings could kind of take some chunky hits as leases expire and you go into redo some of these either outbuildings or parts of these buildings? Or are you planning to pull the projects out of service, so end up capitalizing interest and FFO remains stable? How should we think about how those kind of roll on over the next 12 to 18 months? Hey, Tom, it's Dean here. I'm trying think about the redevelopment projects that we have on the horizon. At least if you look at our 2020 lease expirations as an example, in fact, '21 as well. We highlight that there's some redevelopment opportunities as an example. So I think over the next 2 years, what we do have going into redevelopment is very, very modest. There's 75,000, 76,000 targeted for 'twenty and then another 79,000 targeted for 'twenty one. And that is related to the arsenal and the Charles. So I think that gives you some visibility over the next 24 months that it's not really going to have any impact. And this is Peter. I think I'll chime in to remind everybody that some of these redevelopments are considered covered land plays. If you look at the 1260 Campus Pointe Drive, 4161 Campus Pointe Court, we have Leidos occupying those properties as we do a build to suit for them just next door. So we're able to kind of get the earnings while we build and then once we deliver, one of those buildings will be converted to lab, the other will be demolished in favor of a new building part of the overall 1,900,000 square foot campus point mega campus development. 10 Necko Street in Seaport is very similar to parking garage with good income coming off of it as we position it for redevelopment. So we have a number of things like that and we're very aware when we buy something that could be redeveloped that to the extent it has cash flow, it makes it more attractive. Understood. Thanks everyone. Thanks Tom. And our next question will come from Rich Anderson of SMBC. Please go ahead. Hey, thanks and good afternoon. On the Boston Properties joint venture, I'm curious if you can speak about that in dollar terms a little bit in terms of building get mark to market when they contributed into the JV? What's the leverage on the JV? What's your equity investment and what kind of capital are you kind of taking out of pocket and putting into this JV? I guess mainly I want to know 1,700,000 square feet means in dollar terms? So, Rich, it's Dean here. I think you asked a couple of points. First off, I think it's important to recognize this is a tremendous joint venture opportunity for Alexandria. The mark to market is actually fairly modest on the operating assets. So that really doesn't come into play here. As far as dollars going in, I'd say stay tuned for the Q1 disclosures. We'll get into a little more information that's required to be disclosed. But it was just a very recent transaction, so it was premature for us to get into the details right now. Okay, fair enough. Now the dissatisfies your 2 sort of objectives, which is mega campuses and buying vacancy. And so I agree, it seems like a really great setup for 2 really high quality companies. So like all that, wondering if there's a pipeline here, Boston Properties operates in a lot of your markets. Is there a chance that you the 2 companies could work more together in other areas around the country and do something similar or is this sort of a one shot deal do you think? Rich, hi, it's Steve. This was a very unique opportunity. We were literally adjacent neighbors to one another for a couple of decades. There is actually one parcel in the heart of the campus that Boston Properties owns and we had a long term perpetual easement across it. There is additional parking with a parking facility that ends up unlocking another chunk of square footage. So you had presented to both of us a very unusual and unique opportunity. So we're very focused on this and don't necessarily see this being a pipeline, as you mentioned. But again, just a very unique and exceptional opportunity to create something that really will be transformational for nearly 30 acres in South San Francisco. So quite the scale when you think about it. Okay, great. And then on your buying vacancy initiatives, what is like the path, the cadence to cap rates if you're buying at X and how does that ramp, if you could speak in general terms, when you look at these sort of half vacant type of opportunities for the company? Yes, I wouldn't say that we have a strategy to buy vacancy, Rich. I think it is unique to each transaction. So the San Diego Tech Center, as we said, presented itself in a unique way, very under managed and really was not meeting up to what we think its aspirational capabilities could be. I don't think we went in there specifically because it had significant vacancy. Same thing with Boston Properties issues. I mean, I think they were motivated by vacancy. I'm not sure we were, but we were motivated for the things that Steve pointed out is the ability to over time create a very unique mega campus right on right at the gateway entry to South City. So I don't think I would intuit that as a like deliberative strategy. Okay. I didn't mean to put words in your mouth there. So sorry about that, but nonetheless, good deals. And then finally for me, what is the timing of that $55,000,000 burn off of free rent on the delivered developments? Hey, Rich, it's Dean here. The majority of that $55,000,000 of free rent that is now related to properties that are in service generating revenue. So the free rent period will burn off substantially over the next 4 quarters. And our next question will come from Sheila McGrath of Evercore ISI. Please go ahead. Hi, yes. Good afternoon. I wanted to first clarify on the Mercer Mega Block. Peter, did you say you don't expect that to close until the end of this year? And if so, when do you expect to have buildings open at that project? Okay. Well, I will confirm that closing will be at the end of the year. We are concurrently, as I said, processing drawings for our early design guidance and MOP. So that is a fairly long process, but I'd imagine our entitlements will be perfect sometime in 2021 and then decisions will be made then based on market conditions, really hard to forecast where we'll go. Okay. And then just following up on your comments on the mega campus strategy, obviously, the flexibility for growing tenants is a key part of it. Just wondering if part of the economic benefit is spreading the cost of the amenity building across a larger campus, if that's part of your strategy. And on those dedicated amenity buildings, are you getting reimbursed for the amenity package from tenants? Yes, Sheila, it's Peter. You're exactly right. The mega campus does allow the spreading of the cost, not only the cost of the amenities, but it actually gives us a lot of economies of scale and the operations of the buildings. So that's how we're able to get to that NOI premium. In addition to higher rental rates, we have lower reimbursement. So the tenants feel that they can go ahead and cover those things. The amenities themselves are almost always included in a load factor. So we do get full rent on them as well as some the collection of operating expenses. So the larger the campus, the easier it is to do because obviously you want to manage your load factor. Okay, great. And one last question. You mentioned the leasing spreads continue to be significant with 2019 at, I think, a record in the past 10 years. Just wondering if you have a rough estimate for us where in place rents for the portfolio might compare to current market rents? Sheila, it's Steve. Yes, we had talked about a mark to market of 17.1% on a GAAP basis and nearly that on a cash basis. And that's across all markets. And it is particularly strong as you might expect in Boston, Cambridge. Our next question will come from Manny Korchman of Citi. Please go ahead. Hey, it's Michael Bilerman here with Manny. So I just want to come back to potential other opportunities around the assets that you own. And it definitely sounded like from the BXP call that BXP approached you guys with this unique opportunity. And certainly there's a lot of unique circumstances from that ownership of assets beside each other. But I'm just wondering after you've now identified and been able to go through this process for what will be 1 plus 1 greater than 2. Have you sort of done a deep dive into every single one of your other assets and campuses to see whether there's other landlords that may be beside your assets who you could work with to create similar value either by buying them out or entering into similar types of joint ventures like that? Yes. Hey, Michael, this is Joel. We've actually been doing that for quite a while, thinking about our locations, the assemblages, Campus Point is maybe the best example of that where we grew a campus we acquired back in 2010. I can't remember exactly how big it was then, but in the hundreds of thousands of feet today, it's over almost 2,000,000 square feet And that's probably the best example where we have very deliberately gone after adjacent parcels or buildings or things like that, other owners and so forth. And I think that's something we always think about. It's not so much easy to do, oftentimes, especially if they are owner users that are adjacent, but that clearly is part of our long term strategy. I guess is there anything else sort of underway that got uncovered where arguably this thing would be XB once you got into the negotiation and understanding what was that what was there, obviously, on a lot of value to both parties, Is there nothing that sparked something of similar scope within the portfolio today? Probably enough breaking news today, stay tuned. But the answer is Well, I guess, right, it's a question whether you've gone through a more deep dive into these opportunities and Yes. The answer is very much so, yes. Manny has a question too. Hey, Dean, just thinking about the capital plan, I understand you want to keep your options open. But just you help us dial in how much of that is equity and maybe as part of that what the cadence is of taking down the forward that you just did? Manny, sure. It's Dean here. So, two questions. Maybe I'll start with the latter as far as the timing on the forward. Because a big component of the capital raise was related to 2 key acquisitions that not only closed in December, but also were awarded around that timeframe. So we had a short fuse to work with. We do need to bring down a big chunk of the capital in Q1. So you'll see some of the equity settle in the Q1 and then you'll see the rest kind of spread through the remaining three quarters. As far as our broad needs, Manny, our guidance on Page 7 touched on the broad equity component number that we need to solve for 2020, which was $1,950,000,000 at the midpoint and the follow on offering in January solved for little over $1,000,000,000 of that. And so we'll work through options to close out the remainder through the next several quarters. And our next question will come from Dave Rodgers with Baird. Please go ahead. Yes, good afternoon. Maybe for Joel or Steve, wanted to ask about just kind of the mega campuses versus historical kind of clustering of slightly smaller building. I mean as you move to these mega campuses, is it your expectation you would kind of move back toward maybe a smaller base of lab tenants? Would you prefer that versus maybe leasing a mega campus to a tech tenant? It just seems like maybe the tech tenants will be less likely to want to rent next door to competitive tenant versus the lab tenants. So just some thoughts maybe around how that what direction that takes you? Dave, it's Steve. Thanks for the question. Again, by and large, 90% or thereabouts of the NOI is from life science companies. And the industry as it's growing and maturing and I think one of the most important slides we put out in Investor Day was the new modalities that the life science companies are pursuing to really get at intractable diseases. So what we see is these companies continuing to grow. They demand to be in these clusters and the footprints that they're looking to occupy and their colleagues are looking to occupy continue to grow. So we see the mega campuses as a natural response to the way the industry is growing and evolving in a very healthy, productive and sustainable way. Thanks for that. And then maybe just a second question. You have a little over 2,000,000 square feet of remaining expirations between 2020 2021. As you talk to those tenants, what are their maybe hesitation to have renewed already? I mean, does it have to do with rent? Are you getting pushback on rent? It doesn't sound like maybe you're getting a lot of that. These new modalities, are they thinking of, hey, I have to move to another cluster? I mean, how much of that is kind of weighing into these decisions in these smaller tenants in particular? Very much case by case, I think. I think it's very hard to make a general observation there. Some are quite small and some are somewhat larger, but I think it's super case by case. So I wouldn't read anything into it particularly. And David, Steve, I would just emphasize Joel's point. We really don't have a number of large blocks rolling. It really is consisting of smaller tenants and they would typically be looking at a different timeframe than larger tenants. Got you. Thank you. Thanks. Our next question is a follow-up from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead. Great, thanks. I was just hoping you could talk more about the impairment. I think you had a $10,000,000 impairment in the 4th quarter and I think it was like $17,000,000 for the year. Just what caused you to take the write down? And then also just going forward, is that kind of a reasonable run rate based on obviously, not every investment is going to play out the way you think it will? Jamie, so the $10,000,000 impairments on the venture side was really related to 2 privately held investments. The impairment as well, let me just touch on the accounting rules because it will give you a sense for how the impairments do come up. On the public side, publicly traded securities, they're mark to market through earnings now based on the closing stock price for each security. So it's pretty straightforward. There's no impairments on the public portfolio. To the extent a privately held company provides net asset value, the FASB said net asset value is really effectively a practical expedient for fair value. And as a result, there's no impairments because you're just going to record those investments at net asset value. So it's the other privately held investments where there's no NAV and you do have to mark to market from time to time for up rounds and down rounds in those companies. But to the extent there's some hiccup in their business plan that impacts the value the valuation for the company. The accounting rules will require you to take a look at indicators of impairment and recognize a write down. I think, Jamie, when you have a portfolio of any assets, real estate or these venture investments, you will have an impairment from time to time. I don't think the historical run rate gives any perspective for the perspective charges that could occur because they're very specific to the companies. And most importantly, Jamie, we've got tremendous value that we've generated from this portfolio. As I mentioned, over $400,000,000 of unrealized gains on the books as of December 31, and that's in addition to roughly $70,000,000 of realized gains that were recognized over the last 2 years. So I'd probably focus on the upside here than the occasional write down, which is inherent in a portfolio of assets. Yes, the one I'll add a footnote, Jamie. The one similarity between the two companies is there was management changes in each of the companies that played into that impairment. Okay. But both of these are investments you're still holding on to that you think still have upside? Well, we wrote down only a portion of it, Jamie, which means we still have a significant amount of our original investment we expect to recover. As far as the future goes, it's too difficult to speculate whether we'll make more money downstream in the future on it than our current adjusted cost base. So stay tuned on that. Okay. And then as I looked at the development pipeline, it looks like there are several projects where your lease percentage declined, but the square footage increased. Was there anything specific that you did this quarter in terms of changing building sizes or at some of these projects? I'm just trying to make sure I understand what's new. There's only one that I could think of, Jamie, that might have been a little more noticeable than anything else. I think in our project, the Alexandria District, 56% leased, 65% lease negotiating. I think it's pretty close to where it was. It might have moved a little bit. I know there's one lease we had that we're not as confident in completing, but it's still in the works. I think that was the only meaningful change that may have been reflected, Jason. Okay. I'll follow-up offline. I think there was 1 or 2 that adds like they're now larger projects, so it's pulled back the occupancy percent, but I don't have it in front of me. So I'll follow-up with you guys. Thank you. Thanks, Jamie. This concludes our question and answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks. Please go ahead, sir. Yes. Thank you, everybody, and we look forward to chatting with you on the Q1 call. Take care.