Alexandria Real Estate Equities Q1 2022 Earnings Call Transcript

Key Takeaways

  • Alexandria delivered a 24.4% year-over-year revenue increase to $576.9 million and a 22.7% rise in NOI for Q1 2022, while raising its full-year FFO growth outlook to 8%+ and boosting guidance by $0.02 at the midpoint.
  • Lease activity reached the second-highest quarterly volume in company history with 2.5 million sq ft signed, highlighted by a 427,000 sq ft flagship lab lease with Bristol Myers Squibb and a 334,000 sq ft institute facility for Eli Lilly.
  • The value-creation pipeline expanded to 8 million sq ft expected to generate $665 million of annual rental revenue, of which 77% is already leased or under LOI and 94% stems from existing tenant relationships.
  • In a strategic capital-recycling move, Alexandria sold a 70% stake in 100 Binney Street at a sub-4% cash cap rate for a $1.02 billion valuation, unlocking $410 million of profit, and plans up to $2.35 billion more in dispositions this year.
  • With half its rental revenue from investment-grade tenants and minimal new supply coming online, Alexandria says it retains strong pricing power, 30% mark-to-market upside, and sees no speculative lab deliveries in key markets through 2024.
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Earnings Conference Call
Alexandria Real Estate Equities Q1 2022
00:00 / 00:00

There are 14 speakers on the call.

Operator

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

Operator

Please go ahead.

Speaker 1

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

Speaker 1

Please go ahead, Joel.

Speaker 2

Thank you, Paula, and welcome everybody to today's call, April 26, 2022, Previewing or highlighting our Q1. And I want to also let everybody know with me today are Dean Shigenaga, Peter Moglia and Steve Richardson, and I want to make a shout out happy birthday to someone very special listening here today. I want to welcome and thank you for joining our first Quarter earnings call and want to wish everyone God's blessings and just watching the war in Ukraine gives us pause to appreciate everything we have. The good to great author, Jim Collins, has spoken about Alexandria. We have achieved 3 outputs that define a great company: Superior results, distinctive impact and lasting endurance.

Speaker 2

And I want to congratulate the entire Alexandria family team On a Q1 earnings performance really by all metrics exemplifying Alexandria exceptionalism at its finest Our, in fact, as Jim Collins said, our superior performance. I want to thank the entire family team as well for What they do each and every day for this mission driven company profoundly committed to driving forward our distinctive impact approach to address some of society's Most pressing challenges through our long standing Bedrock Social Responsibility Pillars, As Jim said, our distinctive impact and we have worked in these pillars, accelerating groundbreaking research medical research, Harnessing the agri food ecosystem to combat hunger, empowering underserved students to achieve long term success, Bolstering the resilience of our military, conquering the opioid epidemic, building a model for With a focus on helping children cope with suicide loss, another new focus and supporting museums to preserve our history and honor our greatest heroes, also A new focus pillar. I want to also share that next month, May 2022, we'll Celebrate our 25th anniversary of Alexandria's initial public offering since our IPO in 1997. We maintained the highest standards of excellence and continue to drive long term value for our stockholders, significantly outperforming major indices and companies.

Speaker 2

With the total shareholder return through the end of the year from 97% of 2,532%, Which has beat the NASDAQ average for that time of 12 91%. We beat Warren Buffett at Berkshire during that time at 9.50 3% the MSCI REIT Index, all REIT Index at 939 percent the S and P 500 for that timeframe 790 percent The Russell 2,721 percent and the FTSE NAREIT Office Index at 552%. As Jim Collins said, Alexandria's lasting endurance. I want to move to the Q1 characterized by Alexandria's Preserving its very strong core while stimulating strong and continuing future growth. Alexandria continues to have Pricing power in each of our core markets.

Speaker 2

As Dean will talk about, our very strong NOI growth in the Q1 and out of a sense of Conservatism, we raised our midpoint of our guidance $0.02 given the macro environment. But on the other hand, we have very strong conviction for the coming three quarters of 2022 and the delivery of strong NOI growth, both internally and especially from our stellar external value creation pipeline. Steve will highlight our 2nd highest leasing quarter in the company's history and Alexandria continues to experience the Strengths across each and every one of our markets here in our overall portfolio. Dean will highlight our very strong same store performance and increased guidance as we continue to see positive occupancy gains And strong rental rate growth. With our extreme tension to each and every detail of our unique and special life science real estate business, We're seeing modest increases in our development yields as well as we're highly focused on tightly managing all aspects of our business With a tough macro environment and with rising recession risks, today reminds me of 1979 with Government Policies Failing the American People.

Speaker 2

Alexandria has been very focused on tenant quality and 50% of our annual rental revenue is from investment grade or publicly traded large cap tenants. I think it's pretty amazing that Alexandria's tenants Have made astounding progress in developing groundbreaking medicines. 48% of FDA novel therapy approvals Have been granted to Alexandria tenants since 2017, almost half of all approvals. The life science industry has seen the explosion of biotech over the last Over the past decade from 2013 to 2021 with funds flows up generally 5 times historical averages advancing broadly innovative pipelines for large unmet medical needs Every one of us knows either a family member or friend who suffers from some form of disease still not treatable effectively with today's medicines. The move in inflation starting in the Q1 of 'twenty one, now we're 5 quarters into it, Coupled with the myriad of problematic U.

Speaker 2

S. Policies and macro threats have ended that boom and over the last five quarters, What has emerged are the haves and have nots. The have nots are a range of small and mid cap biotech companies with programs that are preclinical As well as many are in the clinic have seen their values drop and the open markets over the last 9 years by and large are closed. The halves are large biotech as well as biotechs that have reached commercial stage together with big pharma And are as flush with cash as ever being estimated to be over $500,000,000,000 of available Immediate cash. Alexandria's tenant selection has been a cornerstone of our unique business model and has enabled us to select and grow with the best And highest quality and most innovative tenants, one of the absolute bedrocks of our Really our business model.

Speaker 2

And with that, let me turn it over to Steve for some details on the quarter on the growth side.

Speaker 3

Thank you, Joel, and good afternoon, everybody. Steve Richardson here. As we bring Q1 2022 to a close, I'd like to highlight 2 Factors driving the continued momentum and success of Alexandria. 1 is the demand for Alexandria's unique and highly differentiated operational excellence services and mega campus offerings continues at a very COVID and post COVID level With leasing during Q1 totaling 2,500,000 square feet and within that total 1,400,000 square feet in our development redevelopment pipeline, This activity is the 2nd highest quarterly leasing volume in company history in each of these two categories, Following historically high leasing during 2021 and particularly Q4 2021. And 2, importantly, the exceptional quality and long term nature of Alexandria's leasing results overall And especially this quarter is truly noteworthy and one to double underline.

Speaker 3

We signed a long term lease for a ground up Class A laboratory office flagship facility comprising 427,000 rentable square feet with Bristol Myers Squibb, A company with a market cap of $164,000,000,000 as they chose Alexandria to design, build and operate their mission critical Innovative Research Hub at our Campus Point Mega Campus. Let me just say that this type of outcome is the result of Alexandria's pioneering efforts in establishing the life science asset class. We started working with BMS during 1998, so 24 years ago and began building trust and confidence at every level of the organization. Bristol Myers Squibb is now our top tenant and present in five Alexandria's core clusters, a truly unique partnership and a distinct and compelling competitive advantage. The entirety of Alexandria's brand value and BMS' decision to select Alexandria was crystallized with this inspiring achievement.

Speaker 3

1st, A deep and meaningful, trusted and mutually respectful historical relationship was further cemented. 2nd, The unique ability to scale in a single mission critical facility featuring cutting edge design and infrastructure was realized And 3rd, a marquee destination at Campus Point with a highly curated and first class suite of amenities to meet BMS' imperative to retain and recruit the absolute best talent sets a new mega campus gold standard. We also signed this quarter another Class A plus laboratory office facility comprising 334,000 rentable square feet At our Seaport Campus with Eli Lilly, a company with a market cap of $280,000,000,000 for their state of the art Institute For Genetic Medicine. Eli Lilly is a similarly exceptional story. Our teams first worked with Lilly during 2000 and embarked upon a journey together to create world class Laboratory office facilities in 5 of our core clusters as well as the Lilly's team pursues its cutting edge research.

Speaker 3

The foundational work during these past 22 years provided a bedrock of trust and enabled our teams to And entrepreneurial talent in the Greater Boston cluster with a premier high visibility waterfront site offering expansion optionality, adjacency to transit and unparalleled amenities in an iconic design, certain to be a landmark for generations. These are showcased examples of Alexandria's formidable and irreplaceable position deeply embedded within the life science ecosystem. The strength of our internal growth engine is unassailable. We have now more than 1,000 tenants To deliver sophisticated operational expertise for these mission critical facilities and curate the precise amenity mix to drive the holistic Recruiting and retention of talent platform essential to these innovative companies' success. These leasing accomplishments are a testament to the entirety of the Alexandria team's passion, commitment and unwavering work ethic towards our shared mission.

Speaker 3

The continued demand for our facilities is also borne out by the following stellar results. Growth within the core provides critical and immediate value to the company with impressive renewal and releasing spreads of 23.2% cash and 39.8 percent GAAP when excluding the block of short term swing space for BMS as we begin construction on their flagship facility noted earlier. The portfolio mark to market remains strong at approximately 30% And as we noted on the last quarterly call, this is significantly greater than the mark to market of 17% at the end of Q4 2020. Accounts receivable for Q1 was 99.9% and again huge kudos to our best in class operations team. Early renewals for this quarter were 51%, somewhat below our historic rate, but a clear sign that our tenant base continues actively seek to lock down their valuable laboratory office facilities.

Speaker 3

Healthy demand is also evidenced By the exceptional health of Alexandria's value creation pipeline, as mentioned earlier, the 1,400,000 square feet in the pipeline is highest total in the company's history and further contributed to the highly derisked nature of the pipeline As 77% of this 8,000,000 square feet, which is projected to generate $665,000,000 of incremental revenue is Leased or negotiating. Peter will provide additional detail and color on the pipeline during his comments as well. Moving on to supply and demand. Demand overall, as we highlighted during Investor Day back in December And again on the Q4 'twenty one earnings call and now on this call for Alexandria's mega campus continues And our irreplaceable set of relationships and central role in the life science ecosystem positions us very well to engage and secure The very best innovative companies in the country. Market supply, we continue to sources behind potential projects.

Speaker 3

When we look at 2022, important to note that Rates are very low in each of our 3 largest clusters and the overall new supply is either leased We're adding very incrementally say 1% or so in our key markets. In 2023, projects that are And I want to emphasize actually under construction are much more modest, 25% of what various broker reports might indicate as those reports include planned or proposed projects. The 2023 deliveries are again either leased or contributing just 3% to 4% of availability to the total market size, Which will likely be further reduced during the coming quarters. And in 2024 and beyond, in these three markets, There are no projects actually under construction with delivery dates in this timeframe. Yes, There are a number of planned or proposed projects or dirt being moved around, but we'll have to see if the operators and more importantly, the capital Partners behind these projects actually commit significant capital to the projects on a purely speculative basis to their oftentimes inexperienced development operators.

Speaker 3

And let me finish the supply summary with a reminder of the significant difference And highly valued difference by quality life science tenants between Alexandria's Class A plus facilities as part of our fully amenitized mega campuses and one off buildings and commodity locations. So in conclusion, the Q1 of 2022 was a very strong quarter and positions the company very well to drive immediate And long term value through our core operating base as well as our substantially lease negotiating 8,000,000 square foot REIT Leading Development Redevelopment Pipeline. With that, I'll hand it off to Peter.

Speaker 4

Thank you, Steve. I'm going to update you all on the value creation pipeline, discuss the continuation of construction costs to meet the needs of our world class tenant roster, reflecting the continuing strong demand referenced in Steve's comments And our ability to capture it due to our trusted brand, AAA locations, inspiring aesthetics, operational excellence, Curated amenities and capability to elevate the tenant experience, our value creation pipeline of projects that are either under construction Or expected to commence construction in the next 6 quarters has increased to 8,000,000 square feet that is projected to add more than $665,000,000 in annual rental revenue, primarily commencing from the Q2 of this year through the Q1 of 'twenty five, a $55,000,000 increase over what was discussed last quarter. As of quarter end, 77% of this remarkable pipeline was either leased or under negotiation, which means we have an executed LOI. With an Astounding 94% of the activity coming from existing relationships, highlighting the incredible loyalty to our Stellar brand. Our tenant base is in a war for talent and recognize that space at an Alexandria campus is mission critical in that fight.

Speaker 4

Without question, our ability to offer our Tenet based scalability and comprehensive amenity offerings Through our mega campuses is a truly unique differentiator and why Alexandria is the clear choice to provide mission critical facilities to the life science industry's most innovative and successful companies. During the Q1, we delivered 566,655 Square Feet from 10 projects located in 8 different submarkets, reflecting the diversity of our pipeline made possible by strong demand across all regions. The deliveries provide Strong GAAP yields at approximately 6.7%, translating to approximately $36,100,000 of annual NOI. Alexandria's tremendous execution on our value creation pipeline represents a key component of our compelling growth engine, And an example of this is the extraordinary job our highly seasoned development teams are doing in managing cost escalations and supply chain disruptions that continued to proliferate throughout the construction industry. Approximately a year ago, in our Q1 call for 2021, We included commentary on construction cost trends because construction cost inflation was anticipated to be outsized Due to double demand for materials and labor caused by the simultaneous restart of paused and new projects, Combined with shortages in materials and labor due to closing of mills and fabrication shops, weather events and the loss of workers who migrated to different careers.

Speaker 4

It was all expected to be transitory and even last quarter, we noted expectations for things to start normalizing in 2023. However, war, COVID in China And transportation issues have become the latest antagonist in the story and reversed any thoughts of the near term stabilization. The war in Ukraine's biggest impact on construction costs is an astronomical increase in fuel costs. Sustainability experts will tell you that the embedded carbon of constructing a building is equal to the carbons used to operate the building for 30 years, much of it coming from fuel burned by the trucks delivering materials to the site and the machinery that produces the earthwork on the build. In addition to fuel, the war has reduced the supply of critical semiconductor materials such as palladium and nickel, exacerbating the ship shortage, which affects such things as building control systems and emergency generators, the latter of which can now take up to a year to deliver.

Speaker 4

Other raw materials that come from the area are used to make certain metals like aluminum and contributing to their inflation. Transportation issues proliferate throughout the economy and construction is no exception. If you spend any time on a construction job site, You will marvel at the amount of coordination that needs to take place as trucks come in and out of the job, delivering materials or hauling things away. In addition to the cost of fuel, inflationary pressures coming from an estimated 50,000 to 80,000 trucker shortage emanating from outdated compensation models and the allure of last mile delivery companies reducing the pool of candidates. In addition to trucking, we're keeping our eye on labor negotiations for over 22,000 dock workers on the West Coast.

Speaker 4

The deadline to reach an agreement is July 30, and if they strike, it could place pressure on alternative ports and further delay delivery of materials. Specific material problems today include steel, copper and aluminum, roofing materials, Elevators, HVAC equipment, switchgear, transformers and emergency generators. Price by double digits. Rest assured, we are tightly managing these conditions. As mentioned last quarter, The biggest asset we have to leverage is our decades of experience in developing purpose built laboratory buildings, enabling us to mitigate delays.

Speaker 4

Currently, approximately 82% of our costs or development and redevelopment projects aggregating to 5,400,000 square feet are subject to guaranteed maximum or other contracts that enable us to mitigate the risk of inflation. We have contingencies behind those contracts to account for scope creep and unknowns. The other 18% is from projects that are currently pending guaranteed maximum contracts that are in process and those disclosures include larger contingency allowances. The voracious demand for high quality life science assets in key cluster markets led to a highly competitive bid for our 100 Binney asset. Our excellent execution led to our 3rd asset sold with a valuation exceeding $1,000,000,000 and the 4th to achieve a sub-four percent cap rate.

Speaker 4

We sold a 70% interest in the 432,932 Square Foot Lab Office Building, anchored with long term credit tenants for a purchase price based on a total valuation of $1,020,000,000 through which we received proceeds exceeding $700,000,000 The cash cap rate was a record for our capital recycling program at 3.5% and enabled us to harvest a profit of approximately $410,000,000 The price per square foot of $2,356 exceeds the record price we set last quarter in the sale of 50 to 60 Binney by 3.7%, which is meaningful Considering the uncertain interest rate environment we were and continue to be in during the quarter and the disruption caused by Russia's invasion of the Ukraine that happened on February 24. With that, I will pass it over to Dean.

Speaker 5

Thanks, Peter. Dean Chignaga here. Good afternoon, everyone. We reported very strong operating and financial results for the Q1 of 2022, highlighting that we are off to a great start and on track for 8% plus growth in FFO per share. Now this is impressive considering the consistency of bottom line growth Year after year and following a historic year in 2021 of operating and financial performance and significant achievement of historic milestones, We reported Q1 2022 revenues of $576,900,000 or $2,300,000,000 annualized, Up 24.4 percent over the Q1 of 'twenty one and NOI was up 22.7% over the Q1 of 'twenty one, Highlighting very strong growth and outstanding execution by our team.

Speaker 5

Bottom line, we beat consensus this quarter and raised our outlook for FFO per share growth to 8%. More on this in a moment. Alexandria has tremendous scale in key innovation We have a very high quality and diverse tenant roster consisting of over 1,000 tenants that provides AREA a unique and strong position to address current and expansion We continue to reap the benefits from these attributes as shown in our continued strong operating and financial results. We generated a REIT industry leading adjusted EBITDA margin of 71%, highlighting highly efficient execution by our team. Occupancy was up 70 basis points to 94.7 percent since December 31, and our team is on track achieve our exceptional growth in occupancy by the end of 2022 of 150 basis points in comparison to Twelvethirty Onetwenty 1.

Speaker 5

Now the key takeaway from our leasing activity in the Q1 beyond achieving the 2nd highest leasing volume in the company's history Is that the strong rental rate growth in the Q1 of 39.8% 23.2% was higher than the annual rental rate growth reported for the full year of 2021 2020. We are also on track to hit our very strong rental rate growth projections For 2022 ranging from 30% to 35% and 18% to 23% on a cash basis. Same property NOI growth continues to benefit from strong demand from our tenants as they look to renew and expand with Alexandria. We reported same property NOI growth of 7.6% 7.3% on a cash basis. The primary driver of this Exceptional performance with strong rental rate growth on renewals and releasing the space in recent quarters, a larger impact this quarter from a number of leases And same property NOI in the Q1 also benefited from 110 basis points in growth in occupancy.

Speaker 5

And for the full year of 2022, we expect a total of 150 basis point increase in same property occupancy. During the Q1, $36,000,000 of annual net operating income commenced on average on February 14 related to the 567,000 rentable of development and redevelopment projects that were completed and placed into service, including a couple of projects that were completed earlier than projected. We completed acquisitions in the Q1 aggregating 7,300,000 square feet of development and redevelopment opportunities. Acquisitions in the Q1 also included some operating rentable square feet that added $75,000,000 in annual net income that commenced on average on January 23. Now looking forward, our team is uniquely positioned to Alexandria with excellent visibility growth within the REIT industry with $665,000,000 of incremental annual rental revenue to commence from the Q2 of 'twenty two Through the Q1 of 'twenty five, now this represents significant year over year growth in net operating income for 2022, 2023 2024 from deliveries of development and redevelopment projects over the next 12 quarters.

Speaker 5

This represents 8,000,000 rentable square feet that is 77% leased under advanced lease negotiation or subject to an executed LOI. We are pleased to have a super strong and flexible balance sheet with credit ratings that rank in the top 10% of the REIT industry. As of March 31, we had 5 $700,000,000 of liquidity, our net debt to adjusted EBITDA is forecasted to be 5.1x by the end of the year, representing a slight improvement from 5.2x as of the beginning of 2022. And our fixed charge coverage ratio is We remain disciplined with our strategy for long term funding our business with Focus on maximizing bottom line growth, maintaining a strong and flexible balance sheet and reinvesting capital from real estate dispositions and partial interest sales intend to minimize the issuance of common stock, a typical operating property at stabilization of NOI For Alexandria, we generally require long term funding with 35% to 40% debt and 60% to 65% equity capital. Now the 60% to 65% amount of equity capital is much higher than Alexandria's average common equity issuances over the past 5 years, which has ranged roughly between 40% 45% of our capital plan.

Speaker 5

The key reason for a lower amount of common Stock issuances is due to the significant amount of value we monetized through real estate sales and partial interest sales for reinvestment into our business. Importantly, common stock issuances for 2022 is projected to be lower than the 5 year average of 40% to 45% of our capital plan due to the continued execution of real estate sales, both 100 percent outright sales and partial interest sales. As Peter Mogalea highlighted, 100 Binney Street achieved a record $1,000,000,000 valuation based upon the partial interest sale of 70% of the property. We generated almost 140% profit on this development project that we built a handful of years ago, truly spectacular value creation And opportunity to reinvest capital back into our business. We also have another advanced negotiation for a sale in the approximately $350,000,000 range, plus up to an additional $1,500,000,000 plus in real estate sales and partial interest sales targeted for the remainder of the year.

Speaker 5

We are very pleased with our very proactive and opportunistic bond offering consisting of $1,800,000,000 in 30 year 12 year unsecured notes With a weighted average rate of 3.28 percent and a term of 22 years. Now to put this into perspective, if we had to issue 10 year 30 year unsecured notes today, The rate would be in the low 4% and mid-four percent range, respectively. Importantly, we remain on track Continued improvement in our balance sheet and credit profile. Now realized gains included in FFO from venture investments were 23,100,000 the Q1 and over the last four quarters were $104,400,000 or $26,100,000 per quarter. Unrealized losses this quarter were $264,400,000 reflecting a decline in fair value of venture investments.

Speaker 5

Importantly, unrealized gains in our venture investments were $533,000,000 as of March 31. Our team continues with their journey and leadership in ESG. Our next annual ESG report will be released in a couple of months

Speaker 6

in June.

Speaker 5

Key ESG leadership highlights since year end include Alexandria is ranked the number 5 Alexandria earned the 1st ever Fitwell Life Science Certification at 300 Technology Square, located at the Alexandria Technology platform purpose built to accelerate the growth of promising life science companies. And our team is executing on the construction of Net strong operating and financial results for the Q1 supports our improved outlook for 2022 with EPS diluted ranging from $1.08 to 1 point $18 and FFO per share as adjusted diluted from a range from $8.33 to $8.43 up 8 plus percent Over 2021 at the midpoint of guidance. Now we increased GAAP same property NOI growth by 40 basis points to a range of 5.9 percent to 7.9%. Straight line rent is up $4,000,000 to a range from $154,000,000 to $164,000,000 and we increased the upper range of guidance by Please refer to Page 6 of our supplemental package for detailed underlying assumptions included in our outlook for the full year of 2022. Thank you, and I'll turn it back to Joel.

Speaker 2

So with that, operator, if we could open it up to questions.

Operator

We will now begin the question and answer session. And our first question will come from Jamie Feldman of Bank of America. Please go ahead.

Speaker 7

Thank you for taking my question. So I guess just the big picture here, there's been a lot of concern on the biotech funding outlook in light of capital markets volatility. It's sort of the Sierra stocks, it's sort of the life science stocks. Can you just give us your latest thoughts And how this might be impacting demand, the funding backdrop, any signs of weakness in areas? And then also Just thinking about leasing timing, are you seeing any delay in lease decision making?

Speaker 7

Just how should we be thinking about reading the T lease here? Thank you.

Speaker 2

Yes, Jamie, thanks for the question. I think what I said in the prepared remarks As I think, how you should frame the cornerstone And kind of bedrock demand situation, I think you've got haves and have nots. So the have nots, as I said, are companies, Public companies by and large, because most private companies are generally well financed and the venture firms have raised mountains of capital. So they've got Pretty long runways, but I think people who've gone public and some who went public too soon are caught in a bit of a squeeze With cash burn either if they're preclinical or somewhat into the clinic at various stages and maybe don't have early readouts And so for those, I think you can expect they will not be on track to expand and in fact some Will contract and reduce their workforce and maybe their space. We've seen some of that in different markets.

Speaker 2

But I think it's fair to say that the haves are those companies that are The big cap companies, big pharma plus the companies that have reached commercial stage are really very flush with cash And we see no real change in growth trajectories of those companies, plus Many in the private side who've raised massive amounts of cash. So I think you're going to find that operators who have leased to And I can think of 1 group in Boston who leased to a variety, thank goodness not us, of course, lease In new construction leased to a variety of companies that are in the clinical stage, they're seeing I can think of this one building. I won't say who the operator is. So I won't it's not in Cambridge. It's out in the burbs.

Speaker 2

But they're going to see many of their tenants Either sublease or try to give space back. So I think it's a tale of 2 worlds and luckily we're I think extremely well positioned in that. Hello, operator?

Operator

The next question comes from Sheila McGrath of Evercore. Please go ahead.

Speaker 8

Yes, good afternoon. I was wondering if you could provide a little bit more detail on the partial sale where In place rents might have compared to market and the weighted average lease term in that building and was the pricing set Before the shift in interest rates or just on the timing there?

Speaker 2

Yes. So Peter, you want to handle that?

Speaker 4

Yes, sure. No, the pricing was set during the heat of everything, the war, interest rate Volatility, so it is reflective of today's market conditions. The I don't know what the wall I don't know how the wall Memorize, but just looking at the top two leases, it was very likely close to 10 years, Probably maybe 9%. So definitely a long time before you realize, any upside. And there is upside there, probably somewhere in the neighborhood of about 27%, 28%.

Speaker 4

The rents were overall below market. But again, I think the price is reflective The fact that someone's going to have to live with that return for a while. The credit there was really good, So there's nothing to worry about, but it was a very fair price considering the amount of demand Is looking for high quality projects and that was probably the most high quality projects anyone could have found this year.

Speaker 2

Yes, I mean perfect, great Tremendous location in the heart of Cambridge, brand new construction more or less, and as Peter said, Pretty good lease duration with very strong credit, so a real iconic, I think, investment.

Speaker 8

Okay, that's great. And then just curious, inflation, everybody's talking about it. Wondering like when you look at New projects, would you consider most of your leases are with 3% escalators. Would you consider having A minimum with tied to inflation or that's just not the market?

Speaker 2

Yes. So I'll comment and maybe ask Stephen, Peter to comment. So over the history of Alexandria, we've kept kind of 2 approaches. 1 has And annual rental escalations, generally 3%, sometimes a little less, sometimes it's more, but average about 3. And during different time periods, we have gone to a minimum, maximum of minimum 3 and max 6 based on the CPI.

Speaker 2

We are involved in a number of negotiations where those both of those are being discussed and you will likely see some of those over Time, but I don't know Peter or Steve, if you guys have any other color on that.

Speaker 3

Yes, Joel, just to echo that, it's Steve, Sheila. That's exactly what we're doing and we're being very targeted and thoughtful with the particular Segments of the portfolio that we might do that for. So, we think it's going to be very fair and reasonable And so far it's been understood and well received. So just at the beginning of the process here.

Speaker 8

Okay. Thank you.

Operator

The next question comes from Manny Korchman of Citi. Please go ahead.

Speaker 6

Hey, everyone. Peter, maybe one for you, just as you think about which assets you want to keep, you guys have used The term iconic when referring to 100 Binney, how do you think about keeping iconic assets versus selling iconic assets and Especially in a market like that, that is so supply constrained, part of me wants to say why not keep the longer term upside there and part of it is you're getting a 3.5% So how do you weigh all that?

Speaker 4

Yes. I mean, as you said On the latter part of your comments, I mean, being able to take advantage of market conditions where you can get a sub four cap rate and then plug that back into your next Iconic asset, at a 6 plus, it's just it's hard not to do that. And remember, we are Keeping a pretty material part of each of these assets that we're selling. We are also going You'll accrue fees, and so there's some operating leverage that we can achieve there. So it is You look at the market, you see what you can monetize at the best price And you only make that decision though if you have opportunities to reinvest that And something that's special.

Speaker 4

And if you look at our development pipeline today, we think it is full of the next Wave of iconic assets. So we don't want to get too in love with things that are legacy. We appreciate them. We again don't But there are other frontiers for us to conquer and Such as the Fenway, where we believe there's going to be an incredible rent growth and appreciation as well. So we need to Get the cash to make those accretive investments and we pick carefully, but Strategically.

Speaker 6

And then maybe on that deal specifically, how much of it was about managing tenant risk, if at all, with Selling BSM and then having the new project with BSM coming in at the same time?

Speaker 4

I'm sorry, the tenant risk with D

Speaker 6

and A. Was any of it about managing your Bristol Myers exposure or did that not really

Speaker 2

capture? No, not at all. Not at all.

Speaker 6

Thanks, both.

Speaker 2

Yes.

Operator

The next question comes from Rich Anderson of SMBC. Please go ahead.

Speaker 9

Thank you. So on the topic of dispositions, As much as $2,600,000,000 potentially this year. Last year, you had a whole lot of activity at the end of the year. Year before, I think you did about $1,000,000,000 So you're clearly identifying with some opportunities to raise capital in that format. But with rising interest rates and all that talk, do you think 2022 will be more of And a ratable sort of level of dispositions across the year or do you think it could still be lumped towards the back half of Maybe in the sense of urgency to get some things done before interest rates perhaps do play a role on cap rates?

Speaker 5

Yes. Dean, do you

Speaker 10

want to maybe

Speaker 5

Yes. Rich, maybe it's helpful to look back to last year just to give some context to The late year transactions and you might recall our commentary over the last few quarters. The reason why we had a number of transactions really weighted to December last year had everything to do with Specific leases that were significant to the transactions Being extended, and it was super important to complete that before we went out and Got deep in the marketing of the underlying asset for sale. And so a number of those transactions had that aspect, which delayed The transaction for execution until later in the year, but it was an important component to the valuation as well. So as you can imagine, important to This year, we don't have that same issue across the transactions we're looking at today.

Speaker 5

So I think you'll see it be a little bit more spread out through the year than you did it last year by far. We don't have those same challenges this year, Rich.

Speaker 2

Okay, great.

Speaker 9

And Joel, you mentioned your haves and have nots comment. But one name that jumped out to me when Speaking internally with my our biotech team was a name like Novartis, which is kind of registers As one larger cap name in your top ten that is seeing some significant layoffs. I'm curious if you guys have any comment about their situation specifically as it relates to demand and any examples of larger cap names that Despite your comments might also be considering some significant levels of employee reduction? Thanks.

Speaker 2

Yes. Well, I mean, Novartis is one of the strongest certainly pharma companies in the world and certainly one of the Strongest companies in the world. All companies of large size, as you know, from your long history in this industry, go through Rationalizations of different groups. I mean, Galaxo is an example, sold their oncology group at one point, which was Core seemed to me to be kind of an odd thing to do and then later on essentially kind of restarted it. Different people are Shuffling around different lines of businesses, whether they be high value ethical pharmaceuticals or more Commodity type products.

Speaker 2

So I think I would view that as having nothing to do with The industry itself, the state of the industry at this point, but rather a rationalization of that And whenever you get a new CEO or a change, a number of these companies kind of And so that's something else that you're seeing from time to time, but I wouldn't read anything into that in particular.

Speaker 9

Okay. And then real quick, Peter, I think it was you that said or maybe it was even Joel that said development yields are modestly up for you. I assume that's not a comment generally about the industry. So do you have a sense based on all the things you talked about, about delays, about how Far down development yields have come for your competition, not so much you.

Speaker 4

Hey, Joel, do you want me to take that?

Speaker 2

Yes, please.

Speaker 4

Yes, Rich, the I think we Just getting back to my comments, our team has done an incredible job in helping to mitigate costs Escalations and locking things in early, and so because of that and because of the rent growth that we've experienced In all of our markets, we've been able to marginally increase our yields, as Joel mentioned. What other people are doing, I'm not sure. They don't certainly don't have the scale Advantage that we have the relationships that we have probably not even close to the personnel we have. So I'd imagine that they wouldn't be able to do the same thing.

Speaker 9

Fair enough. Thanks very much.

Speaker 2

Thanks, Rich.

Operator

The next question comes from Dave Rodgers of Baird. Please go ahead.

Speaker 11

Yes, good afternoon. Just again with your comments About maybe recession as well as the have nots. Maybe this question is for Peter. Is there anywhere on the life science investment sales spectrum That's being impacted by those types of comments or by interest rates and spreads. And I guess I'm just trying to get a better understanding if there's other competitive That's where maybe we're just not seeing enough of a spread between what's trading and any examples you might have off the top of your head.

Speaker 4

I can tell you, I mean, I was looking at our comp database yesterday, just You've seen what changed from quarter to quarter. There's a lot of things are still trading with the quality of tenancy is completely All over the place and things are getting for cap rates Or more, just certain portfolio that Biomed sold in San Diego With a lot of cats and dogs, it was a sub-five cap rate. So All right. There is a lot of demand for exposure to life science assets. And so unfortunately for a number of investors, tenant quality Probably hasn't been the focus, but we rest Sure.

Speaker 4

To anyone who is looking at our portfolio, we our tenants are highly vetted and that doesn't become A question that's more about the location and lease duration. Tenant quality is usually assumed to be great because it is.

Speaker 11

Thanks for that. And then maybe just one follow-up question. I don't know if this is for Dean or maybe Steve, but it looks like Apple and Alphabet joined the top tenant list. I I don't know if that was a function of acquisitions or perhaps sales or just new leases there, but they had some shorter duration. So I was curious if those were added and if those were kind of Intermediate term redevelopment opportunities or just kind of good standalone investments?

Speaker 2

Yes, this is Joel. Yes, the answer is yes and yes.

Operator

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

Speaker 12

Yes, thanks. Just real quick back on to the have nots. And I think, Joel, you were mentioning that there might be some have nots that have to give back space in the suburban Markets of Boston. I mean, how much of that could come back to the market? Is it big enough to alter any of these markets where you could see vacancy rates kind of Uptake or is it just more of a one off type thing?

Speaker 2

Yes. I don't think it's we haven't seen any sign that it's a material impact. And we'll monitor that quarter to quarter. So I think right now, it's pretty building and location specific And obviously tenant specific, but we haven't seen anything that I would say material as an overall trend at this Time.

Speaker 12

Okay. And then related to the have nots, I mean, I think in your prepared remarks, you said it's basically companies that went public too quickly. I mean, what about the small to mid cap private companies that you kind of indicated? Did they raise enough equity or capital So they're really not an issue or is it more muddled than that? It's kind of depending on the company that we're talking about.

Speaker 2

Yes. So certainly not all companies I would put in they went public too early. I would probably put those on preclinical. So if you've not even entered the clinic and you're going public, probably that's too early. I mean, it's obviously case specific, Depends on what the technology is, what the opportunity is, what your shareholder base is from the private side and so forth.

Speaker 2

But by and large, There is a host of those that were preclinical that just went too early, maybe grew too fast and realized that they still got the clinical ahead of them. And then those that went public in the clinic, I think that's generally been a good game plan, but then didn't realize that After 9 years, I mean, I've been saying that for a while, a 9 year bull market in the sector just doesn't continue unabated. So it tends to rationalize itself. And as I said, 5 times the capital volume was being And kind of went into the industry, which is a lot. On the private side, as I say, many I mean, again, it's very case specific, but Many of the companies who have blue chip founder groups or investor groups who've raised large pools of money Have good runways.

Speaker 2

So generally, a lot of those are not going to suffer maybe some of the challenges that may face a host of the public companies In the have not sector, if you will.

Speaker 12

Okay, great. And just last one for me. Steve, you kind of highlighted in your prepared remarks That there is no project under construction that will be delivered in 2024, at least as of now. I mean, when would a developer We need to break ground or go vertical to achieve the 2024 delivery date. Do they have another, what, 6 plus months or so?

Speaker 12

Is that kind

Speaker 7

of fair to say?

Speaker 3

Yes. Hey, Michael, it's Steve. Yes, I think it's within that window. And the Key is whether someone is going to actually start doing that and going vertical to deliver in that timeframe. And what we've really done is drill down to the Capital behind these operators, obviously, the operators are going to be positive and bullish, but we just Haven't seen that from the capital sources actually committing capital as of today.

Speaker 2

Great. Thank you.

Operator

The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.

Speaker 10

Great. Thank you. Maybe going back to 100 Binney Streets and the cap rate compression in Cambridge. I'm curious if you're seeing a similar level of price appreciation across markets or are any markets accelerating or maybe moving slower than that clip you guys are seeing in Cambridge.

Speaker 2

Well, yes, I'll ask maybe Peter and Steve. I would say on your end, I think you guys need to revisit our NAV. I think you guys are off. But in any case, I think it's When you look at Binney, Binney is in the heart of the Kendall Square and Cambridge Epicenter. So The cap rate there is not real surprising for relatively new construction, high credit quality And just an iconic location and building.

Speaker 2

And I think you can see across most of our markets, Cap rates have held, I think, very strong and continue to be very positive in our favor. But I'd ask Steve and Peter to comment more detailed.

Speaker 4

Yes. This is Peter. All the markets that were there, I guess said another way, none of the markets we are in would have a cap rate that would Anything greater than a 5 handle on it, which is, as you know, remarkably different from a couple of years ago when People were thinking certain markets had 6% or 7%. Some of those markets now are in the 4s or 5s. So, I would generally just say, as Joel mentioned, Cambridge is a special place.

Speaker 4

There are going to be few submarkets where you probably go below 4 See the mid-3s like we just did, but who knows. I mean, there's certainly a lot of money chasing these assets And the competition for high quality assets when the investors are thinking, hey, there's great rent growth here, I'll Pay the price for it today. You who knows, we could certainly see breaking through 4 in other markets. But in general, cap rates for lab are Like industrial, like logistics, storage or Apartments, I mean, it's just a hot industry. There's a lot of money out there to be invested, and they want to bet on winners and winners are expensive.

Speaker 10

And maybe to that last point, I'm curious across those property sectors you mentioned, we've been noticing cap rates go either at or below Borrowing costs and I'm curious if that's a similar dynamic you're noticing across life science as well. I assume 100 bps, I believe it's unencumbered, but I would assume that the debt would be close to that cash cap rate or it's not a smidge below?

Speaker 4

Well, you bring up a good point that actually we don't really talk about too much, but I mean, yeah, our large partial interest sales are done With partners that are not buying leverage. So they're putting this money to work And not looking to lever it up. They're accepting these Frankly, we don't go into the secured market and buy anything on a levered basis, so Hard for me to comment, but I would imagine just seeing where rates are today that negative leverage is probably the only leverage available if you want to buy a Really high quality asset.

Speaker 10

Great. And then maybe just last one for me. On the Mercer Mega Block, Can you remind us if the plan was always to bring in a partner? And if so, why not retain the entirety of that development for ARE?

Speaker 2

Yes. Peter, you could comment.

Speaker 4

Sure. We have a strategic Partner in a couple of nearby assets that made a lot of sense for them to participate with us. I can't really go into the details. They'll become apparent later on. But this is a partner that is We're in multiple markets with they have a lot of trust in us.

Speaker 4

They're a great source of capital that's Very attractive compared to common and they were highly interested in getting involved and we're keeping the majority share there, But it's also a good opportunity for us to finance something upfront rather than after the fact to keep the capital flowing to other projects as well.

Speaker 2

Yes. I would also say we've seen great activity with credit tenants in that for that location.

Speaker 10

Got it. Appreciate the color. Thanks, everyone.

Speaker 2

Yes.

Operator

The next question is a follow-up from Jamie Feldman of Bank of America. Please go ahead.

Speaker 7

Thank you. I appreciate your color on the Construction pipeline breaking out 'twenty three, 'twenty four and beyond, would you say that your appetite for speculative has changed at all in the last 6 months or so or even the last 3 months, just given it seems to be a growing pipeline and maybe more questions on the demand side?

Speaker 2

Well, I think, Jamie, somebody mentioned, I don't know or if not, we haven't really done speculative development Since before the 'eight, 'nine crisis, when we were forced under contract in New York, We're building 2 towers. We stopped 1 after Lehman collapsed, but we built the East Tower and then luckily we is our anchor tenant there. But we haven't generally built specs since then. And When we tend to put up, if we go vertical, we generally always have either assigned lease, signed LOI, LOI or we have, as a case of one project I can think of a series of companies who have told us they need growth at this point, and We've decided to go forward and working through the mechanics of documenting that, but we wouldn't just Put up steel on the hope that they will come, not because of the current market, but we just haven't done that As a matter of policy in the company for literally more than a decade.

Speaker 7

Okay. That's helpful. And then if you think about your investment activity in the quarter, the projects you bought or even some of the more covered land plays, Is it safe to assume there is also tenant interest in those projects or the stuff you've been buying really is kind of a future land bank without a tenant in mind?

Speaker 2

Generally, we like to I can think of a number of situations, say, in San Diego or other markets where Absolutely, specifically or the Bay Area, the Peninsula, where we have specific tenant interest. Remember, Peter, Steve and Dean have all mentioned, we have got now more than 1,000 innovative tenants. So the amount of information and the amount Of requirements really come to us in a way that there's nobody else that could marshal that kind of a resource and that gives us the confidence to make some moves where we know that we We'll be successful. There have been a recent we're not going to confirm or deny anything, but a recent San Francisco Peninsula report on something on a project we are doing there and that we have signed an LOI. I mean, that's a good example.

Speaker 2

And again, I won't Confirm or deny, but that's an example of if that was true, where it makes sense to do what we did and that's kind of how we operate. Okay.

Speaker 7

And then I was going to ask a follow-up to my original question on this call, which was you started talking about the has and have not. Is there a way to handicap The rate like the percentage of the portfolio NOI that even is what you would consider more at risk type tenants?

Speaker 2

When you say more at risk, what do you mean?

Speaker 7

Well, you had talked about tenants that either Maybe they're running they may run out of capital to fund their pipeline, just not as Well capitalized and so may end up needing some sort of recapitalization or running out of capital.

Speaker 2

We diligence tenants before we sign leases or even letters of intent And we monitor them oftentimes usually quarterly, but sometimes monthly. And if you look at on page 17 of the We give you a breakdown of our tenants. Half of our tenants are investment grade or large cap. We have got about 7% of the portfolio, which is Private. We feel very good about the majority of the the vast majority of those companies, because they are generally Well funded and they've got a pathway for additional funding.

Speaker 2

We've got In our public biotech, the vast majority of those again are well funded with Cash runways that go out oftentimes beyond leases and if not certainly multiple years or are waiting for readouts Oftentimes for Phase 3. So we feel pretty good about where we are. And if there's anybody that runs into a problem, we I mean a good example might be Nektar which had a clinical failures in our Mission Bay portfolio. We have watched them for quite a while. We are very close to them.

Speaker 2

They are going to, I think, sublease Their office space which is with Kilroy, they've got a chunk of space with us. That project is partnered, But we already have demand for backfilling that space should they decide to give it up, but they said they were going to Keep a big chunk of their lab space. I wouldn't expect them to give the majority of that up. So we've already I mean that that might be an example of something you're referring to. We are already well ahead of the curve there and could backfill that space probably at much higher rates.

Speaker 10

Okay.

Speaker 7

And they are on that lease till what, 2030, I believe?

Speaker 2

Yes. I don't have it in front of me, but it's a long term lease. And The truth of the matter is, in some cases and I would never say that with specifics to Nektar, but sometimes You might hope a company would decide to give up a lease because you could backfill it at a much higher rate. So some of that you will see Happened, I'm sure in I mean Mission Bay still the vacancy rate there is literally 0 at this point for Built out lab space and so the demand is significant and there's a high credit quality in that submarket that has a huge pent up demand for space. I'll tell you that.

Operator

Our last question comes from Anthony Paolone of JPMorgan. Please go ahead.

Speaker 13

Yes, thanks. So I just want to make sure I understand with the again this have, have not discussion. And then looking at Your mark to market of the overall portfolio, I think it was pretty flat from what you mentioned last quarter, I think 31% and now about 30%. So Are market rents still going up or have market rents kind of just holding steady at this point? And what is the outlook for the rest of the year?

Speaker 2

Yes. So Steve, you could comment on that.

Speaker 3

Yes. Hey, Tony. Steve here. Yes, I don't know that Drilling down on one specific quarter really tells a trend there. You are right, it's generally flat, but it's flat From an exceptional perspective, I mean maintaining a 30% mark to market I think is extremely healthy.

Speaker 3

Look again, as I said before, we are still in very low single digit vacancies in these core markets, Particularly for Alexandria's portfolio, as you see with our occupancy, we continue to see healthy demand. So our expectation is No, we will continue to see pricing power in the market.

Speaker 13

Okay, great. And then just last One for me. You closed on your Texas investment in the foray there. Can you tell us where you went?

Speaker 2

Yes. So let me comment maybe on your first question first and then your second question next. So I think if somebody owns I think the assets and we've seen this in other cycles that are going to be the most at risk will be Buildings in non cluster environments, 1 off buildings in suburbs And so forth that are not really high quality buildings or in the best of locations. And so I think those are the ones that You know, may end up they're getting the probably the poorest quality tenants and the ones that may have a struggle there. And luckily, we don't have Much of that at all in our entire portfolio.

Speaker 2

With respect to Texas, we're still under a series of transactions, so I'm unable legally to I'm in on that, but do hope that at the next call, I said that last call, but we're still In pending transaction, but hopefully we'll be able to give you color on the next call, Tony.

Speaker 4

Okay, got it. Thank you.

Speaker 2

You're welcome. Thank you.

Operator

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

Speaker 2

Simply to say thank you, everybody. Be safe and God bless.

Operator

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