Good day. Welcome to the Alexandria Real Estate Equities second quarter 2019 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. 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, good afternoon, everyone. This conference call contains forward-looking statements within the meaning of 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. Now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.
Thank you, Paula. Welcome everybody to our second quarter call. With me today are Dean Shigenaga, Steve Richardson, and Peter Moglia. I want to start with focusing on the cover page to our 2Q19 press release and supplemental, which features our recently developed Vertex Pharmaceuticals West Coast research base, designed in the shape of two human lungs, together with a quote from the mother of two children suffering from cystic fibrosis, which I quoted in the first quarter call. This is our solemn mission, to build the future of life-changing innovation as we have each and every day over the past 25 years as the originator and innovator of the life science real estate niche. We thank each and every team member of the Alexandria family for their important contribution each and every day.
As we sit here after the close of the second quarter, we really are very proud on a couple of aspects. I think we've reached a point where we can say we really have built a fortress balance sheet with over $3.4 billion in liquidity and a weighted average remaining debt term of greater than 10 years, and Dean will highlight some of the capital accomplishments this past quarter. We also have a pipeline which could enable us to double rental revenue from January of 2018 to December 2022. The strongest client tenant base with 53% of our annual rental revenue from investment-grade or publicly traded large-cap client tenants with a weighted average lease term of 8.4 years. In addition, a robust 2Q cash same store growth number that Dean will talk about as well, and Steve will highlight our robust cash re-leasing spreads this past quarter.
We're very proud of a very strong value add pipeline leading into 2020, with significant positive activity in each one of our markets, including the 88 Bluxome win, which is a really big win and a very unique one Steve will talk about. Notably, we increased our quarterly dividend 3.1% during the second quarter as well. In July, we were proud to be notified that we were selected by NAIOP as the 2019 NAIOP Developer of the Year for our outstanding design work, sustainable outcomes, scientific prowess, and connected campuses driven by our unique and differentiated mission and deep thoughtfulness toward enhancing the communities in which we work. If we focus for a moment on the next life science frontier, it's pretty clear that the sheer scale of unmet medical need for patients suffering from diseases of the brain is quite staggering. The cost to society, enormous.
Just the nine most common neurological diseases are estimated to cost the United States $800 billion a year. Dementia today affects 50 million people worldwide and 10 million new cases diagnosed every year. Alzheimer's alone affects almost 6 million Americans, and more than 1 million Americans live with Parkinson's, at a total cost of about $50-plus billion a year, nearly double previous estimates. It's estimated by 2050 that more than 12 million Americans will suffer from some form of neurodegenerative disease. In the realm of psychiatric diseases, nearly one in five adults, almost 50 million people, experience some form of mental illness in a given year, costing our economy almost $200 billion in lost earnings alone, while approximately one in 25 people, 11 million daily, suffer from a form of mental illness.
Depression, now the leading cause of disability worldwide, and has become the major contributor to global burden of disease. On the addiction front, we touched upon our efforts in the opioid abuse area last quarter, the abuse of illicit drugs as well as alcohol and tobacco in the U.S. is costing us almost three quarters of a trillion dollars annually in costs related to crime, lost work productivity, and healthcare. The ongoing opioid epidemic is now estimated to cost the U.S. over $500 billion annually, largely driven by the immense scale of preventable fatalities caused by opioid overdoses, where on average 130 Americans die each and every day. Imagine if that was in a war, how that would be covered by the press.
Discovering new treatments and cures for diseases of the brain has become a goal of ever-increasing urgency, and one on which Alexandria is super laser-focused on with our financial capital as well as our human capital. With that, let me turn it over to Steve to give some highlights of the quarter.
Thank you, Joel. Steve here. We're very pleased to report the company's unique cluster campus business model is not only driving superior operating and financial results
It continues to provide tremendous value to our tenants and stakeholders. Alexandria's dominant franchise and brand, its best-in-class team and highly differentiated campuses continue to exceed expectations and drive significant internal and external growth opportunities for the company. I'll provide a granular analysis of the following key clusters and metrics. In the Mission Bay SoMa sub-market, Alexandria's leadership role, dating back from 2004 in establishing Mission Bay as one of the country's most vital life science translational research clusters has, and continues to provide significant value. Our campuses, totaling 2.7 million square feet, have been nearly 100% leased for a number of years. Our lab vacancy is 0%, and the tech vacancy in the market is 1.3%. Lease rates for existing lab and tech space is now in the high $60s-$70s triple net, while we anticipate new deliveries to exceed $80s triple net.
Significant lease transactions include Pinterest's 488,000 sq ft lease at Alexandria's unique 88 Bluxome project in SoMa, which we'll discuss later, as well as Sony leasing 130,000 sq ft, Autodesk 117,000 sq ft, Glassdoor 116,000 sq ft, Samsara 116,000 sq ft, Workday 74,000 sq ft, and Zoom 64,000 sq ft. Just want to highlight, it's very important to note the overall high regard, respect, and leadership position of Alexandria, as was epitomized by last week's decision by the San Francisco Planning Commission to provide Alexandria with the only full project approval and pro forma allocation for our new Class A plus game-changing 88 Bluxome mixed-use urban campus in SoMa.
I just want to step back and take a moment to say how proud we are of the company and the team for this accomplishment, as we were very thoughtful at the very outset to embrace exceptional design, sustainability, and very importantly, the community and its needs, all resulting in a full project approval and the only central SoMa project to have secured an anchor tenant, Pinterest, and now nearly 60% leased. We are very honored to have received this overwhelmingly positive endorsement from both the city and the community. Moving further south in South San Francisco, we're very well positioned in this sub-market. Our campus is totaling 2.2 million sq ft or 99.3% leased, including the delivery of Merck's Class A 300,000 sq ft Innovation Center at the start of 2019.
We've taken a balanced and prudent approach to expanding our South San Francisco campuses, and are very pleased with the leasing progress at our new ground up 315,000 sq ft two-building campus on Haskins Way, with a signed LOI for nearly 30% of the space. The South San Francisco vacancy rate is just 2.9%, but we are closely watching the supply pipeline with the potential for significant blocks of space coming to market if speculative construction by others were to advance, as this is ultimately a sub-market and not a cluster centered around a world-class institution like UCSF, thus our careful prudence here. Lease rates are now in the mid to high $60 triple net, and new leases in South San Francisco include Atrika for 75,000 sq ft, Cytokinetics for 235,000 sq ft, and Telarian for 25,000 sq ft.
Finally, talking about leasing and same-store performance, which was stellar this past quarter. We leased 819,000 sq ft this quarter for a total now of 2 million square feet in the first half of 2019. Again, a testament to Alexandria's world-class leasing and operations team. 61% of these leases are early renewals, so it's very clear that there's a continued sense of urgency in our campuses. Historical increases in renewals and re-leasing rates for this quarter, 17.8% cash and 32.5% GAAP for the 580,000 sq ft in this pool. When you look at a same-store growth of 9.5% cash basis, split roughly between the burn-off of concessions and step-ups, a very healthy and a very stellar quarter. On that note, I'll hand it off to Peter.
Thank you, Steve. This is Peter Moglia, everybody. I'm going to spend the next few minutes updating you on our near-term pipeline, our acquisition in the Seaport area of Boston, and give you some thoughts on recent capital flows into the life science real estate area. During the second quarter, we placed 218,061 sq ft into service from six different 2019 deliveries that I'll touch on. In South San Francisco, we delivered 24,396 sq ft of our 279 East Grand Project, anchored by Alphabet's life science subsidiary, Verily. We've now delivered 78% of that project at a very strong yield of over 8%.
We delivered another 27,164 sq ft at 188 East Blaine, our new flagship property on Lake Union in Seattle, and are on track to meet or exceed our pro forma cash yield on cost of 6.7%, which is very strong when considering Class A operating assets in this market continue to trade at sub 4.5% yields. 12,822 sq ft was delivered at 266 and 275 Second Avenue in Waltham, and that property is now fully leased with the remaining 19,000 sq ft under construction and expected to be delivered in the fourth quarter. The initial stabilized cash yield on this redevelopment is 7.1% in a market where stabilized lab buildings have historically traded in the low 6% range. A significant portion of phase I of Alexandria's Center for AgTech, located in the Research Triangle market, was delivered in the second quarter, bringing that highly unique 97% leased project to 74% delivered.
We delivered the remaining 76,400 sq ft of 681 Gateway in South San Francisco this quarter. More importantly, increased the pro forma initial cash yield from 7.9% to 8.2%. Completing second quarter deliveries was 3,450 sq ft at our multi-tenant, 80,000 sq ft building at 704 Quince Orchard Road in Gaithersburg, Maryland, where we remain on track to deliver an outsized 8.8% initial stabilized cash yield. Looking further out, our 2020 development/redevelopment pipeline currently consists of about 2.2 million square feet. Dean will provide some high-level information on his commentary. Next, I'd like to talk a little bit about our Seaport acquisition. The acquisition of 5 and 15 Necco, also known as Innovation Point, represents a strategic opportunity to expand Alexandria's unparalleled world-class franchise in the greater Boston area.
Innovation Point, in part, delivers a fully renovated 95,000 sq ft historic building, 5 Necco Street, that will be the global headquarters for GE. GE will occupy approximately 75,000 sq ft, or all of the office space, in the building for a 12-year term. It also provides Alexandria the opportunity to deliver an iconic 330,000 sq ft- 360,000 sq ft, world-class life science building with a robust and vibrant set of retail and ground floor amenities at 15 Necco Street. The existing approvals that reside there will enable us to expedite the entitlements and likely put us in a position to break ground in early 2020. When combined with our adjacent 10 Necco asset, the acquisition provides Alexandria the opportunity to scale this campus to between 600,000 sq ft and 650,000 sq ft over time.
Finally, in light of substantial capital flowing into the life science real estate niche we created and pioneered, we'd like to remind investors and analysts that there have been others in many of our markets for a number of years. It has not affected our ability to grow and thrive in any of them, because Alexandria is much more than a landlord or capital allocator. We are a long-term, highly ethical, and trusted partner to our tenants, who put their mission-critical facilities needs into our hands because they know we have the long-tenured and highly respected experience and expertise to build and operate them to the highest standard. We understand their science, business, and strategic goals. We provide highly curated cluster campus environments that accommodate their growth and allow them to recruit and retain the industry's best talent.
We are solidly positioned to continue to lead this ecosystem in building the future of life-changing innovation. With that, I'll pass it over to Dean.
Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I'll briefly cover five key topics today, including our second quarter results and continued strength from both internal and external growth, our very strong balance sheet today, our recently published corporate responsibility report, venture investments, and then lastly, our updated guidance for 2019. Total revenues for the second quarter were up a significant 15% over the second quarter of 2018, reflecting continued outstanding execution by our best-in-class team. Our adjusted EBITDA margins continue to remain near the top of the REIT industry at approximately 79% for the second quarter. Same property NOI growth for 2Q was up 4.3% and significantly at 9.5% on a cash basis as compared to the second quarter of 2018. Our team executed very well across key drivers of our same property results.
We completed an outstanding volume of leasing activity in the first half of 2019, aggregating 2.1 million square feet, including 1.1 million rentable square feet related to lease renewals and releasing of space, with very strong growth in rental rates of 32.6% and 20.1% on a cash basis over the expiring rental rates. Very strong execution of leasing supports our high and stable occupancy in our same property pool, approximately 96%-96.5% for both the second quarter and the first half of 2019. Our very favorable lease structure with annual contractual rent escalations approximately about 3%, drives growth in same property cash NOI year to year. Continued strong external growth and a few important key highlights for you today.
Now that we're just about mid-year through 2019, it's clear our team has executed extremely well on the delivery of projects in the first half of the year, with a number of highly leased projects aggregating about 1.5 million rentable square feet targeted for the delivery through the remainder of 2019. Our team has also done an outstanding job this year working with key relationships in the life science industry and successfully executed almost 950,000 rentable square feet of leasing related to the development and redevelopment projects. As Peter mentioned, we have grown our pipeline to about 2.2 million square feet of projected deliveries with initial occupancy in 2020, which are weighted to the second half of 2020. We will have more details to share over the next two quarters.
In aggregate, our projects undergoing above-ground vertical construction with initial delivery dates through 2020 are now 74% leased, plus an additional 5% under advanced negotiations. We also have a pipeline of strategic growth opportunities on balance sheet, including certain pending acquisitions, providing important visibility of potential deliveries beyond 2020, aggregating 10 million square feet . Our team has placed our balance sheet in a very strong position today with significant flexibility. Our strategic pursuit of opportunities to refinance outstanding debt and extend our maturity profile with attractive low-cost, long-term fixed-rate debt continued into 2019 for the third year in a row. In March and July of 2019 alone, we raised $2.1 billion with a weighted average coupon of 3.86% and an amazing term of almost 18 years.
The proceeds of our most recent $1.25 billion bond offering in July were used primarily to execute a tender and redemption of our outstanding bonds that were scheduled to mature in 2020 and 2022. Upon completion of the redemption of our remaining outstanding 2020 and 2022 bonds later in August this year, we will be in a really amazing position with no debt maturities until 2023. We have no significant remaining debt capital requirements for 2019. However, we are working with one of our JV partners on a potential early refinancing of a construction loan, which has a maturity today of 2021. Weighted average remaining term of our debt is truly outstanding and has been extended to 10.1 years, and notably is longer than our weighted average remaining lease term of 8.4 years.
During the second quarter, we also completed transactions aggregating 8.7 million shares of common stock at a weighted average price of $144.50 per share for proceeds that ultimately will generate $1.2 billion. $86 million of this closed in the second quarter. 8.1 million shares do remain subject to forward equity sale agreements that we expect to settle in 2019. We've got tremendous liquidity, as Joel highlighted earlier, of $3.4 billion. Our net debt to adjusted EBITDA and fixed charge coverage ratios remain very solid and is on track for our goal of 5.3 x and greater than four times respectively by the fourth quarter. As a mission-driven urban office REIT, really focused on making a positive and lasting impact on the world, we're truly honored to highlight our recently published annual corporate responsibility report and our focus on leadership in environmental, social, and governance matters.
It's important to also recognize that our strategic business initiatives are well-aligned with those of our highly innovative client tenants, really highlighting the importance of our initiatives. Key highlights from our corporate responsibility report include 58 LEED certified or in-process certifications that, upon completion, represent over 50% of our annual rental revenue. Recognition as a leader in workplace health and wellness and key philanthropy initiatives with over 2,600 volunteer hours by our team and key social initiatives like our partnership with Verily, an Alphabet company, really to design and develop a fully integrated campus ecosystem in Dayton, Ohio, for the full and sustained recovery of people living with opioid addiction. Lastly, continued progress on our 2025 goals to reduce energy consumption, carbon pollution, potable water consumption, and increase our waste diversion rate.
We also want to congratulate our awesome team on their fourth Nareit Gold Award for communication and reporting excellence in the large cap category. Our team is really proud to be recognized for their efforts to create clear, concise, and efficient disclosures for the investment community. Thanks to our entire team, and truly great work, guys. During the second quarter, we recognized $21.5 million of investment income, including $11.1 million of unrealized gains. In the second quarter, importantly, we also recognized $10.4 million of realized gains. As you look back over the last several quarters, realized gains from venture investments have averaged about $10.7 million per quarter. Closing here on guidance. Since our first quarter earnings call, we updated guidance on June 20th through an 8-K filing and further updated our guidance yesterday, primarily for the improvement in our outlook for 2019 rental rate growth.
When you compare that to expiring rates on lease renewals and re-leasing of space, our range increased by 1% at the midpoint to 28.5% and 17.5% on a cash basis. This represents our second increase in our outlook for rental rates for the year. Our EPS guidance was updated to range from $2.39-$2.47. We increased the midpoint of our guidance for FFO per share diluted as adjusted by $0.01 to $6.96, with an increase of the lower end of our range of guidance by $0.02. Guidance was also updated for the outstanding execution by our team on the opportunistic bond offering and refinancing of our 2020 and 2022 bonds, as I highlighted earlier.
Please note, as we have disclosed for a number of quarters now, Cray Court, 117,000 rentable square foot property located in San Diego, is now vacant, resulting in a temporary 49-basis point decline in overall occupancy by September 30th, while we renovate and retenant this property. Additionally, as disclosed on page four and page six of our supplemental package, an acquisition of an operating property in San Diego with several buildings aggregating 560,000 rentable square feet with in-place leases has an occupancy of 76%. This will reduce our overall occupancy by another 57 basis points and represents an opportunity for our team to grow cash flows from this property post-acquisition. Please refer to page six of our supplemental package for further details on our guidance assumptions for the year. I'll turn it back to Joel.
Operator, if we could go to question and answer, please.
Sure. Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We will pause momentarily to assemble our roster. The first question will be from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you. I guess starting with Dean, you've raised a lot of capital in the quarter and slightly after. Can you just give us your thoughts as you look out through 2020 and the development spending, what you think, next year's capital plan might look like compared to this one, this year's?
Jamie, thank you. It's Dean here. It's a good reminder that we do plan to hold our annual investor day event on Tuesday, December 3rd, later this year at our New York center, in New York City. We think about this time every year, we do get questions about the next year, our preference is to respond to those questions about our outlook, once we publish that on the morning of our annual investor day event. Jamie, broadly, I think if you look back over the last several years, our objective with capital and our capital-raising needs each year will remain to be very disciplined, and prudent with funding our needs from various sources as we have historically.
Okay. We've seen a pickup in kind of value add or development or kind of development-related acquisitions over the last couple of quarters. Can you just talk about maybe the returns you're getting or what is it lately that's made those types of opportunities come to the surface for you guys? Looks like you've even got more to close going forward.
Hey, Jamie, it's Peter. The volatility in interest rates, latter part of last year, I think woke up a lot of people that were holding real estate and decided, "If I'm going to sell, I'm going to sell soon." That has tempered, and we're looking at continuing to look at a low rate environment. A lot of opportunities have come into the market and in great locations where we wanted to expand. We've been able to capitalize on that, especially considering our stock has performed well and our cost of debt has gone down due to Dean and his team's great work. With all those things aligning, we've gone ahead and purchased some things, and we certainly strive for a good spread over exit cap rates of at least 150 basis points for something ground up, and we'll continue to maintain that.
Okay. You're saying the acquisitions, you're underwriting 150 basis points better than ground up?
That's typically the target. We sometimes do better. It's gonna depend on the risk, obviously. We're certainly aware of risk-adjusted return concepts, and I think we do a good job of allocating capital that way.
Okay. Just as you think about the legislative environment or regulatory environment, especially related to drug pricing, have you seen any change in tenant behavior or any thoughts that you can pass along on just either how your tenants are acting or how you think they might act going forward?
Hey, Jamie, this is Joel. We haven't seen any real impact at the moment. I think it is pretty clear, though, that from the executive branch to the legislative branch, in light of the impending 2020 election, each party wants to have some talking points about what they've accomplished on drug pricing. Unfortunately, they've focused on the 10%-12% of the healthcare pie and haven't appropriately focused on the big numbers. I think it's fair to say, given some of the movement in the Senate Finance Committee, that we'll see something done over the next few months. My sense is that it may reside in some adjustment to Part D of Medicare. Remember, outside of the 8%-10% of Americans who are not insured, two-thirds of people are covered by private pay or self-insured plans, and one-third is Medicare.
The one-third is gonna be focused on the Part D. It's also important to remember there's this notion of trying to index somehow Medicare pricing to international standards, but that president can't enact that by executive order individually. That's something to think about.
If you were to boil it all down, what's your view on how this plays out in terms of your business?
I think that if there is a fix to Part D, that would impact what we call the oral oncology drug sector. The two biggest players in oncology are Bristol-Myers Squibb, Celgene, and Roche have pretty dominant positions there. They'll have to think about how that impacts them. A company like Lilly wouldn't be impacted in any way, shape, or form. I think it's selective. Remember, Medicare is about a third of overall Medicare covers a third of U.S. people, so it's not 100% by any means.
Okay. All right. Thank you.
You're welcome. Thank you.
The next question comes from Manny Korchman with Citi. Please go ahead.
Hey, good afternoon, everyone. Maybe this is a question for Dean. Dean, the accelerated acquisition pace in 2019, does that at all impact your goal of doubling revenues and does it sort of speed that up, or was this all sort of contemplated and this is just going to be land bank essentially through those years?
Manny, it's Dean here. The acquisition pipeline, as you can imagine, is very unpredictable. It does add to our five-year growth plan in that sense. It does move along to that target nicely for us, but that was not critical in our initial outlook that we had contemplated in our five-year plan.
Remember, that's a framework. We haven't given definitive guidance on that since we only give one-year guidance.
Okay. You talked about competition specifically, I guess, in South San Francisco. Have you seen anyone coming into more of your cluster markets that's a more of a developer or a merchant developer that's just trying to put up and get out, or is that limited to that one market?
Well, I think historically, certainly over the last five, 10, 15 years, there have been both national players and regional players in every single one of our markets. I think that just is the way it is, and that hasn't really changed. There is a lot of capital moving into the sector, that's why Peter made the mention that he did. To some people, this almost becomes a valuable core asset, whereas when we started out for many, many years, this was looked at as kind of a funky, oddball niche that you wouldn't group with retail, housing, office, industrial, et cetera. That's changed around, and that's why the cap rates have gone where they are. That's a net plus for us, anyways.
Thanks, everyone.
Thank you.
The next question is from Rich Anderson with SMBC. Please go ahead.
Hey, thanks. Good afternoon. Dean, first to you. Why do a forward deal if you plan to settle it as soon as this year? I can understand having a longer tail to the plan. I'm just curious what your line of thinking was there.
Sure, Rich. It is Dean here. Forward equity sale agreements, generally, most of them are set for about a 12-month term contractually. Very few of them extend meaningfully beyond that. You might go to 15 months, but not much beyond that. I think conceptually, Rich, forward transactions are short-term settlements. I would say that most useful transactions on a forward is really focused on settling somewhere in the near term over several quarters to match your funding requirements, and that is the reason why we use it.
Okay
Rich. It's really to align with our timing of funding.
Fair enough. Just curious. Usually, it's a next year sort of event. I understand the answer. The second question is somewhat conceptual. You guys are doing a lot in the way of early renewal activity, 61% again this quarter. I'm curious if there's any impact on your ability to negotiate those rents. In other words, if someone's coming to you early, do you think about the current market rent, or do you think about what the future market rent would be for them had they waited until they were contractually expiring and hence you kind of get a bigger number out of that in negotiation? Is that something that makes any sense at all, or is the market just the market?
Rich, it's Steve Richardson. No, as you might imagine, it is all a balance, and we are certainly looking at, in an increasing rental rate environment, how to tackle that.
Right.
I think, with that balance, we get the benefit of locking the tenant down. I think we are getting upside beyond what the rent is today. Really importantly, this is a metric that we've noted for a long time now, the reusability of these improvements, the lower CapEx requirement, is really enhanced when we can renew somebody in their existing space that they've already invested in. I really do think we end up with an optimal balance where we get the best of all worlds there.
We're also mindful of relationships, and we're not pushing the last.
Dollar and the last cent, because you can be penny-wise and pound-foolish in a sense, because these relationships are long-term and we want to be a partner, not a financial landlord who's pressing every last cent out of the property.
Perfect answer. Thank you. Last, I think perhaps one of the jewels of the story is your pre-leasing of your development pipeline, upwards to 80%. Curious how much of that is, you start a deal and you are almost amazed by the level that you're able to get to in a relatively short period of time or do you manage it? I guess the short question is, where are you on what type of pre-leasing you need to just get the engine rolling on a development, and how does that vary from one market to the next? I imagine you'd be more willing to go spec in a Cambridge and less so in maybe San Diego or something.
Yeah. I think since the financial crisis, we've tried to match going vertical with commitments in hand. I think fortunately, we've been fortunate and also, with relationships, we've been able to match those over the last many years with a very comfortable kind of dovetail. There's no magical number. Obviously, as you could imagine, there would be more momentum in Cambridge than there would be, say, in a New York City. It's one that just, you have to have kind of the touch and feel of that particular sub-market. It's pretty differentiated.
Thanks.
Hey, this is Peter Moglia. The other thing I think I would add is that it's a testament to how ingrained we are in the fabric of the industry in each market, that we are well aware of the demand well before the market is. That allows us to plan for these things, and if you plan well, you can deliver quickly, and that's what our tenants need. Really, our long-term presence in these markets and our teams that are highly experienced and with long tenure, pays off in the ability to forecast when we should be delivering product.
Okay. Lastly, can you mention who the San Diego seller was?
No. We need to keep that confidential.
Oh, okay. Fair enough. Thank you.
Thanks, Rich.
The next question will be from Sheila McGrath with Evercore ISI. Please go ahead.
Yes, good afternoon. On 88 Bluxome, you have the approvals. That's great news. Just wondering the status of any lawsuits there and what you expect the timing to be, and is this going to be in two phases, or is it all one phase?
Yeah. Sheila, I'm going to kick it over to Steve in a moment. I think, remember what Steve said, we're the only project to get full one-time approval for the entire project, and we don't have to go back for any prior approval and a full Prop M allocation. No other developer in Central SoMa has that. They must come back. Steve can speak to the lawsuits that I think we're pretty optimistic on.
Yeah. Hi, Sheila, it's Steve. That's exactly right. There are ongoing discussions. Everybody is reasonably encouraged, and we would hope through the balance of the year, that we would be able to resolve those, enabling us to be in a position to go ahead and kick off construction. Again, we're very hopeful. Again, that would be for the entire project, as Joel just emphasized there. We do not need to go back to the city. We could in fact kick off the entire 1 million-square-foot project.
Okay, great. Just a question on Alexandria District for Science in the Greater Stanford area. That's a big project. It's already 37% leased. Just wondered if you could give us an update on that, and is that a ground-up development, or was that redevelopment?
That is a ground-up development. Yes, we're very pleased, and I think this really speaks to what Peter had discussed with our long-term presence there and the insight that we have with the teams on the ground, that we've been able to have this type of success this early in a ground-up project. Very pleased with the progress there.
Okay. Two questions for Dean. On the forward equity, in terms of timing, should we assume that is back-end weighted to fourth quarter?
Yeah. That's fair to assume, Sheila.
Okay. On the other investment gains, just wondering, is the active IPO market in biotech, is that driving these realized gains a little bit higher this year? Given current equity market conditions, should we assume a similar level as the first half of the year?
Sheila, it's Dean here again. I'd say, when I think back several years now, or maybe even longer than that, because we've been investing in early-stage companies for quite a number of years. The liquidity events that derive realized gains have always been a combination of IPOs and M&A activity. That seems to be pretty true for the last number of quarters. The IPO market has been fairly active since 2013, but you still see quite a bit of M&A driving liquidity events and gains for this business.
Okay. Thank you.
The next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.
Yeah, thanks. I wanted to see if you guys can touch on your investment activity. I know Peter kind of discussed this a little bit earlier. I know you've been acquiring a lot of future development sites. How do you underwrite that, and when do you break ground on those projects? When could they potentially be stabilized down the road, and how willing are you to increase your land bank today?
Michael, it's Dean here. I think broadly what we'd like to comment on is that what we've done here is, I think, given really nice visibility for our investors to think about how we can manage growth into the future, because now we have a pipeline that goes beyond 20 of about 10 million square feet . We just want to be able to provide strategic visibility for everybody, and I think we've accomplished that in recent quarters with adding to the pipeline.
Is there a limit to how much land you want to add to your land bank, or is it just the market fundamentals are so strong you're willing to grab high-quality sites when you can find them?
We're always being very thoughtful in that regard, Michael, as it relates to the amount of product we have. What we did on page two of our supplemental disclosure was add some visibility into that pipeline. About half of it is currently vertical, highly leased, 74% leased, and included in this bucket is the 88 Bluxome project, which is also about 60% pre-leased today. What I think that most of our investors should focus in on is what's behind that, and it's a fairly modest number. This is land that's Nothing vertical is going on with these land sites, but it's really strategic sites for future growth. That number is only 6% of our gross investment in real estate, so it's pretty modest today.
Okay, great. Steve, can you talk a little bit about your comments on the South San Francisco market? I know demand has been pretty strong. I know one of your competitors had some good leasing activity on one of their development projects. Does supply worry you in that market? Maybe you can touch on about the, if you can, the acquisitions you put in the sup regarding the three sites in the San Francisco Bay Area that's pending acquisition right now.
Michael. Hi, it's Steve. We'll provide further color when we're able on the pending acquisition, certainly in the Bay Area. On South San Francisco, I think as we've said for a while, we've just been very thoughtful and prudent in the approach there. We've got a tremendous set of campuses. They are essentially fully leased. Adding product like we're doing at Haskins, is the right thing to do at the right time. We are watching the supply very closely there with a number of different projects that if people choose to build on a speculative basis, could add more supply than we've seen there for a while. We monitor this extremely closely. Right now we're taking a very balanced approach.
Okay, great. Thank you.
The next question is from Daniel Ismail with Green Street Advisors. Please go ahead.
Great. Thank you. Peter, you mentioned the amount of new capital flowing into the space and with potentially lower rates. I'm curious to get your thoughts on where you see cap rates across your markets, and have you noticed any accelerating cap rate compression in any specific markets?
Yeah, thanks, Daniel. It's Peter. I wouldn't say that we've seen accelerated cap rate compression, but it has ticked down. I don't think anybody would've forecasted that at the end of last year. I think, I may have had this conversation with you in the past, but right now, a well-located lab building in a core market is probably more valuable on a cap rate basis than an office building, which is unique, considering what Joel said about how people looked at our assets back when we started. Obviously, that had terrific impact on our NAV. We expect that it'll continue. We do get contacted quite a bit from people interested in our assets when we do put things out for sale. We do have some pending transactions that had very high-quality investors interested.
Next quarter, we'll be giving some news on that, and I think everyone will be pleasantly, not surprised, but satisfied with the cap rates that we'll show. It's a good time to be a laboratory owner for us. That's another reason we continue to create value through some acquisitions, because we wanted to create even more.
Just a quick one for Dean. Noticed expenses ticked up a little bit this quarter again. Anything we should know driving that, and maybe the outlook for the rest of the year?
Daniel, I think I missed the key part of your question.
Oh, just the expense growth this quarter looked like it ticked up again about 8%. Anything driving that we should know?
Nothing unusual in our operating expense growth. I think you probably had a little bit of repairs and maintenance. Property taxes is a driver lately over the last few years. I think what you find as we build out and renovate product through redevelopment or development, the different regions are sometimes slow to assess the values, and that creeps in over time and doesn't necessarily all commence in the year that we actually deliver product in. Importantly though, Daniel, as you know, our leases are triple net. We're able to pass through almost all of our operating costs to our tenants. I think that's really important because that mitigates volatility to earnings or net operating income.
Great. Thanks guys .
The next question comes from Tom Catherwood with BTIG. Please go ahead.
Thank you. Question on San Diego. This cluster has always been somewhat unique for you guys in that it's been more spread out than some of your other markets. In this quarter, you've taken down more land adjacent to your Campus Point projects, and you're looking at kind of a pretty substantially sized, dense cluster there. Is this a case of just taking advantage of adjacent assets that came up for sale, or do you think that a denser cluster in San Diego could help drive demand and rent growth?
This is Joel. Remember San Diego was our first market. I think Campus Point is pretty unique because it sits essentially as part of a university town center, which is a more urban-like market than you would normally find in, say, other parts of San Diego, per se, say, as compared to Torrey Pines, which is one of the most beautiful, but it's not so urban. I think that is an important factor. Obviously, we have the preeminent campus and a world-class set of client tenants there, both life science and tech. The opportunity to expand that campus by adjacencies is, I think, super prudent. Those things play into our mindset.
It would be fair to say that you're starting to see some interest by tenants in getting those adjacencies to similar companies that you've seen, obviously not the same level, but that you've seen in a Cambridge or in a Mission Bay.
I think, yes, and also, we've been fortunate that existing tenants have wanted to expand. Having the ability to both build or provide product that there may be some near-term vacancy ability is a real plus.
Got it. I know it was a small deal, but you announced the Alexandria LaunchLabs partnership with Columbia University this quarter. I assume that that's the West Harlem Campus. Is that correct?
That's correct. The motivation for that is a little different than you might imagine broadly speaking. New York really is an early-stage company. Clusters take about a generation, 25 years to really evolve and develop. Boston, Cambridge is in their second generation. So is San Francisco. New York is really in the first decade. There's not a long waiting line of tenants like there is in Cambridge. It really is an early-stage market and one that you really have to create. We've tried to meet that reality with a product that makes sense, and we've partnered with by far the largest, most dominant institution in that market.
I think along those lines, we've seen new lab space development both happen and it's also ongoing in West Harlem. There's an incubator up there right now, and there's been a number of companies that have formed of tech transfers out of Columbia up there. Is this kind of a test the waters kind of move where you get to feel out a potential growing cluster in New York? Was this just the connection to Columbia that was really the benefit?
Well, you have to take demand kind of with a grain of salt in New York. There is some institutional demand, and I think that's been the focus of some of the developers there, because there's not a line of companies waiting like there is, as I say, in San Francisco or Cambridge as pretty prototypical examples. Columbia is the biggest and most dominant institution. They have a huge amount of NIH funding, so it's really part of a strategic ability to take advantage of that opportunity. I'm not sure whether there will be a sub-cluster of any effort up there. There is, you mentioned one incubator, that's the Harlem Biospace, but that's 3,000 sq ft . I think you can't assume that's some massive amount of incubation space.
Very fair. Thanks, Joel.
The next question comes from Dave Rodgers with Robert W. Baird. Please go ahead.
Yeah, good afternoon. Steve, I wanted to start with you on the 88 Bluxome property. I think you've quoted now a couple times, 60% leased or committed. Pinterest only gets you a portion of the way there. If you had said it earlier, I missed it. You mentioned a lot of leases at the beginning of the call. Have you announced a second lease there, or can you give a little more color on that?
Dave, hi, it's Steve. Yeah, this is the historical kind of relationship we had with the Bay Club. That's the other lease that's counting towards that occupancy percentage of the overall mixed-use complex.
Gotcha. That's helpful. Thank you.
Sure.
Dean, the increase in capitalized interest, I think, for this year, was that just purely a function of more land kind of acquired in the most recent quarter? Were there any other changes as you looked at that bucket of capitalized properties?
No. What has increased is the dollar basis on average, Dave, under qualifying activities, which could be construction, vertical construction or pre-construction, which is entitlements. We have more activity today than we did last year, as an example. That's, I think, apparent as you look at our disclosures for product beyond 2019, as an example.
Right, it is. I guess I was just thinking it was in the guidance that went up, not necessarily versus last year, but in your own guidance. I guess I was just trying to reconcile the changes.
Oh, yeah. I'm sorry. Dave, you're right. On June 20th, we filed an 8-K, which highlighted an increase in our acquisition guidance and a significant portion of that is future redevelopment and development opportunities. That results in almost all those projects have qualifying activities that require capitalization of interest. Our guidance for cap interest went up at that point, and net interest went down because there weren't any increases in interest costs anticipated. Just to round that out a little bit, Dave, we fund that with common equity because that's non-income producing. There's no cash flows on the future development product. That kind of helps you understand why there's no increase in interest cost. It's equity-funded projects.
You're capitalizing the average cost of debt, I assume, so that's the change.
I'm sorry?
Yeah, I get you. That's helpful. I appreciate that. Maybe last question for Joel. Joel, I think in the last cycle, you go back to kind of early 2000s, you guys were very aggressive buying buildings, land, redevelopment, et cetera. I guess I was wondering, aside from the balance sheet, which has been much improved from that point in time, have you guys done anything different, or is it really just the market that's cooperating this time versus last time, kind of the market fell out, if you will, for a couple of years?
Well, I think if you listen to the story, you would realize that Mission Bay took place in 2004, 2005, and beyond, where we shifted from single asset to a campus cluster strategy. In 2006, we moved big time into Cambridge with Tech Square and the entire Binney Street development of over 2 million square feet, and we won the RFP in New York. The pivot in the days of 2004, 2005, and 2006 have vastly impacted our growth over the last number of years. I think the deleveraging and the investment grade that we achieved in 2011 have significantly enhanced our balance sheet to where we are today. We believe we've got what people sometimes refer to as a fortress balance sheet, and that has enabled us to continue to grow. I think there's nobody who has this kind of a unique business.
I think nothing is ever the same. If you look at some of the things that we've done and some of the approaches we've taken in each of the markets, I think they're pretty highly differentiated than where we were, say, even five years ago or 10 years ago.
Great. Thank you.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks.
Exactly at 60 minutes, 1:00 P.M., and 4:00 P.M. on the East Coast. Thank you very much, and we look forward to talking to you on the third quarter call. Be safe.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.