Good day, and welcome to Alexandria Real Estate Equities' third quarter 2018 conference call and webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Paula Schwartz with investor relations. Ms. Schwartz, please go ahead.
Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. 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, and welcome everybody to the third quarter call for Alexandria. With me today are Steve Richardson, Peter Moglia, Dean Shigenaga, Dan Ryan. The third quarter was an outstanding quarter by almost every financial and operating metric, particularly core operating metrics that were really stellar. Dean will talk more about that. My congratulations to our entire Alexandria family, for each person's day-to-day, day in and day out operational excellence, which is what really makes it all happen. Also congratulations to the world-class accounting and finance team on their many years of hard work resulting in our recent credit upgrade from Moody's, something very important. Moody's does focus on tenant quality, and at Alexandria, it's one of our strongest characteristics of the company.
As you know from the earnings release, 52% of our annual rental revenue is from investment-grade or large cap public companies. We're very proud that 79%, almost 80% of that revenue is from class A assets and class triple A locations, about 60% of that is focused in Cambridge and San Francisco. Average lease term is about 8.6 years and 12.3 for top 20 tenants. Really a very strong and stellar core to the tenant base. Want to just make a couple of comments on the industry for the quarter.
Venture funding in life science continued at a very strong pace, $7 billion in the third quarter, marking the fourth consecutive quarter of $5 billion invested. This is really a record-breaking trend driven by increase in deal size and well-established venture firms raising larger funds and deploying capital at a faster pace. Something else that I think we're very fortunate, we had our 47th new drug approved on October 24th this year. The FDA has surpassed last year's 46 drug approval count and could be on pace to beat the all-time record of 53 set in 1996. Strong bipartisan support resulted in legislation enacted to increase the National Institutes of Health overall funding, $2 billion to approximately $39.1 billion. We're very fortunate about that. I think that is one of the critical competitive advantages of the U.S. in the world of biomedical research.
We did have very strong legislation, bipartisan legislation passed to address the opioid crisis, signed in the law by the president in the recent past. It's certainly the opioid crisis has been a scourge, resulting in the death of 64,000 people last year, greater than those died in the entire Vietnam War, which is actually hard to fathom. All of us in the industry, and particularly ourselves, are focused on specific things we can do to advance that project forward. We'll give you more details on that in coming quarters. Biotech IPO activity has been the strongest since 2014, approaching 50, certainly over the next couple of weeks and raising almost $5 billion during the first nine months.
The NASDAQ Biotech Index has been down a bit recently due to the volatility this month with the markets, as all of you know. We've seen certainly a flight to value and big cap safety. I think with that, I'm going to turn it over to Steve to comment on a number of operational aspects, then Peter, and then back.
Great. Thank you, Joel. Steve Richardson here. This afternoon I'll highlight the continued strong demand for Alexandria's highly differentiated Class A science and technology campuses in the country's leading innovation clusters. Building on what Joel had mentioned about the life science capital markets, we did have 17 IPOs this quarter. This is just part of an overall strong demand context, really driving stellar leasing and financial results with increases this quarter of 16.9% in cash and 35.4% in GAAP, the highest in 10 years. Drilling down to Alexandria's cluster markets, it's important to note that Alexandria has been a first mover in each of these markets. As such, has a dominant position with the highest quality campuses immediately proximate to the country's leading life science research institutions.
The Cambridge market remains extremely strong with a 0.9% vacancy rate. Demand spiking up from 2.2 million square feet last quarter to 2.8 million square feet this quarter, with five requirements in excess of 200,000 square feet. The San Francisco region has a vacancy rate overall of just 3.0% and no availability in Mission Bay. Demand remains strong in the region at 2.5 million square feet. As the trend has been for a number of years, life science companies are competing with tech companies for space, and increasingly for talent, as there are 17 tech requirements in excess of 100,000 square feet in the city of San Francisco alone, and a total tech demand of 7.2 million square feet from San Francisco down to Palo Alto.
San Diego's core UTC and Torrey Pines submarkets are also very healthy, with a direct vacancy of just 5.3% and steady demand of nearly 900,000 square feet. Moving north, Seattle's life science cluster in the South Lake Union market remains very tight with just 1.6% vacancy and lab demand at 400,000 square feet. Research Triangle Park has also been a bright spot with a mix of agtech and life science demand totaling 275,000 square feet. Finally, Maryland's comeback continues with an excess of 500,000 square feet of demand and a 4.6 vacancy rate. Looking at the continued constrained supply and healthy demand here, market rents continue to remain strong. We continue to have pricing pressure in the market. Cambridge is now at $80 plus triple net. New York City is in the mid-80s triple net. San Francisco, the mid to high 60s triple net.
San Diego, in excess of $50 triple net. Seattle, similarly, mid to high 50s triple net. Maryland and RTP, north of $30 triple net. Finally, as a key market takeaway, we'd really like to highlight that 68% of the renewals and re-leasing year to date are from early renewals. There's a sense of urgency in the market, and that's enabling Alexandria and our teams to work collaboratively with its industry-leading tenant roster and continue to drive meaningful rental rate growth. With that, I'll hand it off to Peter.
Thank you, Steve. I'll spend the next few minutes updating you on our near-term pipeline, touch on cap rates, and address construction costs as they remain a major topic of interest. 2018 deliveries have 217,000 square feet in service and another 489,000 square feet with a cost to complete of $76 million will be delivered by the end of the year. The 706,000 square feet total is close to stabilization, with 96% of the space leased or under negotiation and is expected to stabilize at a 7% cash yield. Great leasing progress was made this quarter at our 5 Laboratory Drive project in RTP, which is now 51% leased and has another 47% of the space under negotiation. This is remarkable success considering the project started only 15 months ago and was not expected to stabilize until 2019.
399 Binney in Cambridge will deliver by year-end and has all the space other than the retail under negotiation with a number of high-quality venture capital-backed companies who will likely anchor a number of Alexandria projects in the years to come. This 174,000 sq ft development in the heart of Kendall Square is projected to stabilize at 6.7% cash yield. 9625 Town Center Drive in the University Town Center submarket of San Diego remains on target to be delivered to investment-grade tenant Takeda in the fourth quarter at a 7% stabilized cash yield. The 1.1 million sq ft to be delivered in 2019 with a cost to complete of $319 million is already 85% leased with another 6% under negotiation.
Major leasing progress was made at 1818 Fairview, renamed 188 East Blaine Street as of this quarter, which went from 24% leased or under negotiation in the second quarter to 62%, buoyed by leases from high-quality life science companies and institutions seeking a presence in Alexandria's Eastlake neighborhood corridor of Lake Union. The initial stabilized cash yield is projected to be 6.7% in a market where institutional assets have been trading in the low to mid-fours. Seattle's life science ecosystem is rich with high-quality institutions, such as the Fred Hutchinson Cancer Research Center, the Infectious Disease Research Institute, and the University of Washington. The area is preeminent in the fields of cancer, infectious disease, and immunotherapy. The pace of commercialization from the area's institutions has historically been slow.
Our deep relationships and ecosystem building are beginning to show results, as illustrated by the aforementioned success at 188 East Blaine and at 400 Dexter delivered last year. We are confident that we will continue to capitalize on our long-term investment in the market, which dates back to 1996, which is why we recently added 701 Dexter to our asset base. It will allow us to develop up to 217,000 sq ft of life science or tech space in South Lake Union in close proximity to the University of Washington Medical School and the Gates Foundation. I'll touch on cap rates. As at any time during this cycle where we've seen the 10-year Treasury rise, people's minds start to wander towards cap rates. We saw the 10-year break the 3% barrier for the first time in almost four and a half years in May.
Although it's toggled above and below that mark, it has averaged around 3% since then. As of today, we have not seen any contraction in cap rates for lab product that has traded during this time. In fact, it's been quite the contrary. Alexandria sold our interest in Longwood Center in Boston for a 4.7% cap rate to our partner, Clarion, at the end of the quarter. Though a solid lab market, given the presence of multiple Harvard-affiliated research hospitals, the Longwood Medical Area is inferior to Cambridge, a mid-four cap rate really illustrates the appeal of life science assets to institutional buyers.
In addition to that trade, the sale of the Linx project at 490 Arsenal in Watertown is also an indicator of status quo, if not cap rate contraction, as initial pricing guidance for this inner suburbs location was for a mid-6% cap rate, and after multiple rounds with multiple bidders, it traded at a 5.4% cap rate in September. I'll conclude my comments with an update on construction costs. In the first quarter, we noted that our 2018 and 2019 deliveries were insulated from the effects of tariffs because we have GMP contracts in place. Only a change in scope involving steel or aluminum could expose us. Although we don't anticipate any scope changes, we have adequate contingency to cover any impacts of the tariffs if we incur any.
In the first quarter, we reported that if we had repriced those projects, including the impacts of the tariffs, we would have had an increase in total project costs of approximately 1%. We have updated that estimate and have moved it from 1% to 1.3% of total project costs and are including this impact in all of our escalation assumptions for new projects. Likely a bigger threat to our development cost structure is labor shortages caused by the last recession that removed a number of skilled workers from the market. The shortages can impact our cost and schedule if we don't proactively manage them.
We've been doing just that by leveraging our deep relationships in all of our markets to ensure we always have the contractor's A team and employ a number of processes, such as bringing contractors into the planning process early, ensuring we have the labor lined up and all costs included in our underwriting. With that, I'll pass it to Dean.
Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I'll briefly cover six topics: our solid third quarter results, continued strong internal growth, our balance sheet and improving credit metrics, non-real estate investments, sustainability, and our updated guidance for 2018. Kicking off with the results. As we enter the fourth quarter of 2018, it's useful to look back over the past year and reflect on the strength and consistency of our execution by our entire team, really quarter to quarter. The third quarter of 2018 also reflects continued strong execution. Total revenues for the nine months of 2018 annualized were $1.3 billion, up 19% over the nine months of 2017 annualized. Cash NOI for the third quarter annualized was $867 million, up $162 million, or 23%, over cash NOI for the third quarter of 2017 annualized.
We reported FFO per share diluted as adjusted at $1.66, up 9.9% over the third quarter of 2017. We also reported continued and strong internal growth that reflects the strength of our real estate and life science industry fundamentals and our unique and differentiated business strategy. Occupancy remains very strong, up 20 basis points to 97.3% as of three Q, and up 50 basis points since the end of 2017. San Diego occupancy of 94.2% reflects the anticipated lease expiration of 44,000 rentable square feet related to 4110 Campus Point Court that was acquired in the fourth quarter of 2017 with an in-place lease. We are currently reviewing various renovation options for this space. In New York City, our occupancy was 97.2% and reflects the temporary vacancy as we transition 29,000 square feet to multiple tenants, with 77% of this leased or under negotiation today.
Our rental rate growth continues to remain very strong. Over the past four years, our rental rate growth on annual leasing activity has ranged from 20%-28% on a GAAP basis and 10%-15% on a cash basis. Rental rate growth for the third quarter was 35.4%, as Steve had mentioned, and represented the highest rental rate growth in the past decade, and it was 16.9% on a cash basis, and overall reflected of the unique and strong real estate and life science industry fundamentals in our sub-markets today. Early lease renewals represented almost 70% of lease renewals and re-leasing of space for the first three months of 2018 and continue to drive growth in rental rates and cash flows. We're in excellent shape with 2019 contractual lease expirations representing only 5.4% of annual rental revenue, 25% of which is already leased.
Our same property NOI growth for the third quarter was very strong, up 3.4% and 8.9% on a cash basis and overall in line with our guidance for the full year of 2018. Our team has successfully completed several strategic goals this quarter and continue to strengthen our balance sheet and our credit profile. Due to the ongoing strength of the private real estate market, we remain focused on strategic and disciplined execution of important real estate dispositions, including, as Peter had mentioned, the sale of Longwood, generating about $70 million of proceeds net of debt repayment and about a 4.7 cap rate. We also are advancing a partial sale of a JV interest in a high-value core property located in Cambridge. Importantly, we are expecting a lower cap rate than our prior sale in Cambridge, which was done at a 4.5 cap rate.
We are still working through this transaction, and we will provide our usual details once we complete the partial sale. Keep in mind that over the past four years, including the partial interest sale that's in process, we anticipate completing $1.5 billion in dispositions, averaging a highly attractive cost of capital in the 4% cap rate range. We also raised about $196 million under our ATM program during the quarter at a sale price of $127.66 per share. As Joel had mentioned, we're very proud that we received our upgrade in our corporate credit rating from Moody's to Baa1 stable, which really highlighted our diversified portfolio of properties with consistently high occupancy and high-quality tenants, many of which are less sensitive to economic cyclicality.
It's important to note that S&P has a positive outlook on our BBB flat rating, moving us along to our goal of continued improvement in our credit profile. We also extended a key source of liquidity for our balance sheet with important relationship lenders through the extension of the maturity date under our line of credit to 2024, increased available commitments by $550 million to $2.2 billion, and improved pricing by 17.5 basis points to LIBOR plus 82.5 basis points. We also extended the maturity date under our $350 million unsecured term loan to 2024 and reduced pricing by 20 basis points to LIBOR plus 90. We repaid two LIBOR-based loans aggregating $350 million, reducing unhedged variable rate debt to 6% of total assets.
We remain committed to continued improvement in our credit metrics each year, including our fourth quarter annualized net debt to adjusted EBITDA, as our goal for 2019 and 2020 is to move closer to five times. As Warren Buffett recently stated in his most recent annual shareholder letter, new accounting rules required us to recognize significant unrealized gains resulting in unusually high net income in the third quarter, which, by the way, we exclude from FFO per share diluted as adjusted. It's important to recognize that our cost basis in these investments were approximately 4.4% of total assets as of September 30. It's also key to recognize that realized gains of about $25.8 million for the nine months ended September 30th really have been driven primarily by liquidity or M&A-related events versus management deciding to sell securities.
We are on track for about $35 million in realized gains based upon the run rate for the first nine months. This is higher than prior years, but really reflective of the quality of innovation in the life science industry today. We would like to thank Ari Frankel, our AVP of Sustainability and High Performance Buildings, and our entire team for our GRESB Green Star designation and the number one ranking in GRESB's Health and Well-being Module . We also want to thank our team for hosting GRESB's North America Real Estate Results event at the Alexandria Center for Life Science in New York City. We continue to execute on our goals, making a positive and meaningful impact on the health, safety, and wellbeing of our tenants, stockholders, employees, and communities in which we live and work.
Our team also remains focused on our environmental impact reduction goals for 2025, as recently highlighted in our inaugural corporate responsibility report. We updated our 2018 guidance for net income attributable to common stockholders on a diluted basis to a range from $4.34 to $4.36, primarily reflecting unrealized gains on non-real estate investments of $117.2 million and a realized gain on the sale of Longwood of about $35.7 million. We also reaffirmed the midpoint of our range for 2018 guidance for FFO per share, diluted as adjusted of $6.60 at the midpoint and narrowed the range from $0.06 to $0.02. The midpoint of $6.60 puts us on track for another strong year of execution by our best-in-class team, with 9.6% growth over 2017.
As a reminder, we will hold our annual Investor Day event on Wednesday, November 28th, at the Alexandria Center for Life Science in New York City, where among other key items, we will provide an overview of our detailed guidance and assumptions for 2019. We appreciate your continued interest in Alexandria, and thank you in advance for waiting until Investor Day regarding detailed guidance assumptions for 2019. Let me turn it back to Joel.
If we could go to Q&A, operator.
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question today comes from Manny Korchman with Citi. Please go ahead.
Hey, everyone. I don't remember if this was Dean or Joel that mentioned this, but the JV in Cambridge, can you give us some details as to what that building is or more specific geography, and also just your thoughts behind doing a JV at this point?
Yeah, I think the answer to that is no. We'll do it when we complete the transaction. I think Dean can talk about the capital raising. We've always tried to think about multiple sources, this is one key source that we're drawing upon at this point.
Yeah, Manny, I would reiterate what Joel said. As I mentioned in my commentary, over the last 4 years, about $1.5 billion in real estate dispositions, heavily weighted to high value, low cap rate assets, very attractive cost of capital. When you blend that in with the disciplined issuance of common equity, as well as tapping long-term debt from the bond market, I think we're actually hitting an attractive cost to fund projects that are yielding about 7% on a cash basis. Pretty consistent execution there.
Maybe if you could give us updated thoughts on the New York market, specifically in Long Island City, with your entrance into that market, and whether you see yourselves building a larger cluster there, if this was a one-off opportunity.
Well, I think if you look at our press release of October 18th, we really tried to give a picture of our strategy in New York City, which is continuing to expand the current campus at the Alexandria Center by the North Tower, looking at upsizing that a bit. Our acquisition of one of the Pfizer buildings on East 42nd and the acquisition in Long Island City really fits well with that. There is a ferry from Long Island City right to the East Side Medical Corridor. I would view these as almost all of the same overall East Side Medical Corridor effort. I think, as I said many quarters ago, we do view New York in a positive fashion, although it's fundamentally different than other markets. There are no waiting line of tenants. It isn't an established market where large companies are likely to move.
You have to recruit individual units of larger companies, and it's a much earlier stage effort. I think our footprint and our pipeline that we've announced really recognize those underlying factors. Each market is truly vastly different than the other, and you can't treat them at all alike.
One quick one for Dean. I appreciate that you'll be giving full 2019 guidance at the Investor Day, just in terms of the impact from lease accounting that'll impact your numbers, do you have early estimates on that that you could share?
Manny, I would say there's two things that I think probably have come up for most REITs. One is what you're referring to is the initial indirect leasing cost that under the new rules, would be required to be expensed. It looks like it's fairly insignificant to Alexandria, right about in that 1% of FFO per share. I think the other thing to consider is that we do have certain ground leases, which, as you probably know, under the rules, would be put on balance sheet. We have roughly a $200 million gross up on our balance sheet for that. I would say, from a P&L perspective on net income or FFO per share, there's really no impact from changes under the new lease rules for ground leases.
Thanks, everyone.
The next question comes from Sheila McGrath with Evercore ISI. Please go ahead.
Yes. The gap in cash leasing spreads were significant this quarter. I was just wondering if that was across the board or if there was one lease in a particular market that was driving that.
Yeah. Sheila, I'd say, we had good strength across our markets. It's pretty consistent with what we've observed over the year, the full nine months, as well as prior years. We've always had really good strength on contractual expirations. I think the early renewals have always been a pleasant surprise to cash flow growth.
Yeah, I think Peter mentioned that much of the leasing this year was early renewals. Can you give us a little bit more details there? Do you expect this trend to continue?
Fortunately, real estate fundamentals and the life science industry fundamentals are strong. We're operating in a very solid environment. Our expirations are fairly modest, going out year to year, but I would say what is happening, which is a real positive, tenants are very nervous about space. They continue to come forward to early renew, sometimes 3+ years prior to their expiration. We are reaching far out. I think from our perspective, Sheila, we're just trying to be balanced, because there is some upside in rental rate growth. Being patient while taking some off the table is kind of the approach we've been taking.
Last question on investment gains. Unrealized investment gains for the quarter were significant, I know those don't impact FFO or anything, I was just curious, was that driven by an IPO or just appreciation of existing holdings?
That was really across a broad set of investments, Sheila. It's a good reflection of the appreciation of the quality of that portfolio.
Certainly, hey, Sheila, Joel, there has been a strong IPO market this year, some of that's reflected in there. I think Dean mentioned in his prepared remarks the 2019 lease expirations of about 1.3 million sq ft. Our annual rental revenue on that is about $41. We've got, as Dean said, 25% pre-leased and another 12% in negotiation. That gives you some idea of how people are thinking about. Here we are in third quarter of 2018 thinking about 2019 already. I think that bodes well, generally well.
Yeah. Sheila, to expand on the question on investments, I'd say roughly spread across private and public. You actually had a good appreciation in the quarter across that portfolio.
Okay, great. Thank you.
Thanks, Sheila.
This question comes from Thomas Catherwood with BTIG. Please go ahead.
Thank you, and good afternoon. Just wanted to kind of follow up on Manny's question about New York City. There's a number of groups that are involved in trying to kind of push the New York City life science cluster, including the city and state, with a variety of incentives and proposals. I guess, Joel, how do you view Alexandria's role in shaping the ecosystem in New York? And do the incentives that are being provided play any part in your capital allocation decisions?
Yeah, that's a really good question. Maybe let me take them in somewhat reverse order. There are a number of people in New York, some of whom are credible and some of whom are totally incredible, and lacking in credibility as well as being incredible, that are trying to push the life science industry as if it was Cambridge, and it is not. It doesn't bear any resemblance to Cambridge. New York grew up as a strong clinical market. It's very hospital based. It's got very good basic research. Commercial activity, before we started back, and when we won the RFP from Mayor Bloomberg was back in 2005, there was a single incubator up at Columbia that did a bunch of companies doing research. Other than that, it was all office. You're starting from ground zero. It takes 25 years to build a legitimate cluster.
This cluster will be different than San Francisco, different than Cambridge. It's an early-stage cluster. There will be some large companies who put units in. It's stepwise growth. It's not a hockey puck growth like some people are touting. How we've worked with the city and the state and the components of the ecosystem is there are four elements to build a cluster. You got to have a location. The Alexandria Center was chosen as really the key location. When we complete the north tower, we'll have 1.3 million sq ft. You've got to have great science. They do have excellent science. You got to have great management teams for companies. That's a challenge. You have to import a lot of management. Certainly at the management level and at the development level, there are good researchers there.
That's an area that has to work on. Venture capital. It's taken eight years to date to try to build a decent venture capital base, which is now coming to fruition. It's a big effort, and we've been clearly at the vanguard of that in all ways. When it comes to incentives, we have not relied on city and state incentives in the future. The city does own the land we're on, and that was their contribution to the joint venture, but we put up all the capital. I think the city and state incentives are helpful, but really they're not going to make the difference of bringing and growing the industry, frankly. Sorry for the long-winded answer.
Just to loop back. The LIC investment, there was no incentives tied, or you don't need any incentives to make that work?
None whatsoever.
Got it. Kind of, I guess for Steve and Peter, you mentioned some strength down in North Carolina, obviously some pickup in development leasing. Last quarter, you also picked up roughly 100,000 sq ft of development rights. This quarter, you moved maybe 130,000 sq ft into intermediate-term developments. What are you seeing in terms of demand that's making you kind of more comfortable doing developments down there?
Yeah. Let me take that for a moment. North Carolina has seen a downturn substantially in the life science industry over the last decade, with Glaxo really kind of, I wouldn't say closing, but substantially reducing its footprint. The market there is kind of spread out. There's a little bit in Durham, a little bit in other places. We've chosen to focus on the Research Triangle region, and we've also chosen to focus on what we call agricultural technology because we think that's going to be the next big wave. Human health is really two components. One is fighting disease, and the other is good nutrition. At the next call, year-end and fourth quarter call, I'll get into more detail on our strategy there, but it's been primarily the result of our ag tech strategy down in North Carolina.
All right. I'll hold tight. Thanks, guys.
Thank you.
The next question comes from Richard Anderson with Mizuho Securities. Please go ahead.
Thanks. Good afternoon. When you talk about early lease renewal activity, how would you compare the roll-up that you get in the current year negotiations versus what you're doing for those tenants that are approaching you early? Is it a similar kind of roll-up versus where you were at, or is it something less or more?
Rich, it's Dean here. It's actually a little mix of everything, as you would expect. I would say that early renewals that have a large benefit to cash flows is very specific to the lease. We have a handful of those that have been occurring every year for the last four or five years now. We're still getting really nice mark-to-markets on average across the markets. There's a blend of what I call normal, healthy mark-to-markets occurring today, then some half a dozen or more larger, really large steps in early renewals.
What do you define as?
I think.
I was going to say, what do you define as normal?
Oh, normal, I'd say call it right down the fairway of our guidance. 10% on a cash basis.
Okay.
Yeah.
What did you say, Joel?
Oh, no, go ahead.
Okay. Following on to the mark-to-market sort of question, you had a nice lift versus where your guidance was last quarter, yet no change to the same store. Is it just that it is just not big enough part of the same-store pool, or are you running at the high end of the range now, or how would you describe that issue?
It's a little bit of both, Rich. Just to put it into perspective, it takes quite a bit.
Yeah
in steps to actually move or in a GAAP pickup, because those are GAAP numbers, or the cash numbers, for that matter, on the cash side, to really drive same property results because 80%-85% of our cash flows or operations actually go through the same property pool.
Right.
We are getting an overall benefit. It's just not reflected in the strong results.
Yeah. Okay. Then last.
Rich, I was going to say, just a footnote to what Dean Shigenaga said. In a place like Cambridge, again, the reason there's so much demand like that and companies are not looking to go out to Route 128 or to the burbs for much cheaper space is, the cost of rent as a percentage of their overall operation is not significant, and the need to keep these companies in the mainstream, on transit, in good recruiting locations, et cetera, really outweighs cheaper rent in a more remote location. I think that's the other reason you're seeing this kind of confluence of early renewal activity and some, Cambridge being maybe the best example.
Okay. When you look ahead, I know you're not going to give guidance right now, and I'm not asking for that, unless, of course, you want to acquiesce. The mark-to-market number has been a pretty brilliant part of the story for quite a while now. As you look ahead and you see which markets are expected to show some of the disproportionate amount of the expiration activity, do you see sort of this type of growth continuing, perhaps not at this level? I mean, is there some sort of shelf life to this that we should be aware of?
Well, just looking, if you go to page 24 of the sup, the 2019 lease expirations, they're really well-distributed in Greater Boston, San Francisco, San Diego, Seattle, a little bit in Maryland. There's no overly burdensome concentration in one location. If you look at the annual rental revenues of those leases in place, relatively speaking, they're pretty low.
Yeah. Okay. That's good. Thanks for pointing that out. Lastly, just a modeling question for you, Dean Shigenaga. With the moving parts in the unconsolidated JV line, do you have an idea of where that should shake out on a sort of an annualized run rate basis, putting aside anything that might happen in Cambridge in the near term?
You know what, Rich? I don't have that in front of me right now, why don't we think about giving the market an update at Investor Day on that?
Okay. No problem. Thank you very much.
Thanks, Rich.
Thanks.
Next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great. Thank you. I know at the outset of the call, you talked about a very strong VC funding market, a very strong tech IPO or biotech IPO market. We've seen some volatility in the capital markets recently. I mean, how do we think about your business in a market where those two factors are not quite so strong? How do you make decisions for the future based on that?
Well, I think if you go to my opening comment, Jamie, 52% of our annual rental revenue is investment-grade or large-cap public. That's actually where the money has flowed these days. I think we feel pretty good. It would be, I think, not a good thing if venture dried up and not a good thing if the IPO market shut down. If you think about venture capital, you go behind the numbers, there are a handful of funds that have and are raising large amounts of money that some have closed and some will close over the next couple of quarters that will probably restock, and this is on the life science side, not the tech side, that will probably fund those entities to the tune of north of $2 billion.
Even if things became rougher in 2019, the amount of venture that will be available for investment over the coming years will be strong. I think actually, if valuations fall, that'll even be better, in a sense, for investors in the private markets because it'll be more attractive. I don't think we're going to see any wholesale radical change over the next year or so.
I would add, if you think back to pre-2013, the biotech IPO window was pretty much shut for about a decade, they were doing fine with liquidity events. Today, biopharma's got a tremendous, with 75% or something of the top-line revenue actually coming from products that have been sourced outside of pharma, which means biopharma is going to feel capital into the biotech industry to continue to grow their platform.
Yeah, I think that's right. If valuations fall, pharma's going to get very acquisitive.
Okay. All right. That's helpful. Thank you.
Yep.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Joel Marcus for any closing remarks.
Thank you very much, everybody, and we'll look forward to talking to you on fourth quarter and year-end call. Take care.
This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.