Alexandria Real Estate Equities Q4 2022 Earnings Report

Alexandria Real Estate Equities EPS Results

• Actual EPS: $0.31
• Consensus EPS: $2.13
• Beat/Miss: Missed by -$1.82
• One Year Ago EPS: $1.97

Alexandria Real Estate Equities Revenue Results

• Actual Revenue: $670.28 million
• Expected Revenue: $674.21 million
• Beat/Miss: Missed by -$3.93 million
• YoY Revenue Growth: +16.20%

Alexandria Real Estate Equities Announcement Details

• Quarter: Q4 2022
• Date: 1/31/2023
• Time: After Market Closes
• Conference Call Date: Tuesday, January 31, 2023
• Conference Call Time: 3:00PM ET

Alexandria Real Estate Equities (NYSE:ARE) (NYSE:ARE) is a real estate investment trust that owns, operates and develops collaborative life science, agtech and advanced technology campuses. The company provides specialized laboratory, research and office space designed to support organizations working in biotechnology, pharmaceuticals, medical devices, diagnostics, agriculture and related technology fields.

Founded in 1994, Alexandria focuses on properties located in established innovation clusters, where its campuses bring together research institutions, universities, hospitals, government agencies, start-ups and established companies. Its properties are primarily located in major U.S. life science and technology markets, including the Greater Boston area, the San Francisco Bay Area, San Diego, Seattle, the Maryland–Washington, D.C., region and the Research Triangle in North Carolina.

In addition to leasing laboratory and office space, Alexandria provides campus amenities and infrastructure intended to support collaboration, scientific research and the growth of innovative companies. The company is led by Peter M. Moglia, chief executive officer, while founder Joel S. Marcus serves as executive chairman.

Alexandria Real Estate Equities Q4 2022 Earnings Call Transcript

Key Takeaways

• Alexandria delivered 8.5% FFO per share growth in 2022 with record leasing of 8.4 million sq ft and same-store net operating income up 6.6% (9.6% cash basis), all despite a very challenging macro environment.
• The company ended the year with its strongest balance sheet ever, including $5.3 billion of liquidity, no debt maturities until 2025, a 13.2-year weighted average debt term and top-10% REIT credit ratings.
• Alexandria’s development pipeline totals 7.6 million sq ft (72% pre-leased), with 1.77 million sq ft delivered in 2022 and another $655 million of annual NOI expected from projects delivering through 2025.
• With an unmatched roster of ~1,000 life-science tenants, VC funding in the sector hit $58 billion (second highest ever) and Alexandria achieved ~22% rent growth on renewals and new deals in 2022.
• Value-recycling remained disciplined, with $2.2 billion of dispositions and joint-venture capital raised at a 4.4% average cap rate, generating $1.2 billion of gains (107% value-creation margin) to fund new growth.

Presentation

[Operator]

Good afternoon, welcome to the Alexandria Real Estate Equities 2022 fourth quarter and year-end conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press * then two. Please note this event is being recorded. I would now like to turn the conference over to Paula Schwartz of Investor Relations. Please go ahead.

[Paula Schwartz, Managing Director of Investor Relations at Rx Communications Group]

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.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Thank you, Paula, welcome everybody. With me today are Hallie Kuhn, Peter M. Moglia, and Dean Shigenaga. Wanna thank you for joining Alexandria's fourth quarter and year-end 2022 earnings call, wishing you a safe and healthy new year. Thank you to our Alexandria family team members for their continued operational excellence across all facets of our unique business platform, a truly mission-driven, one of a kind company. We had truly exceptional fourth quarter and 2022 year-end results, by any and all metrics, we're very proud, thankful, and humbled, while many public reporting companies have really struggled mightily during this past year. Like to take a moment to tick off what I consider to be some of the most notable news for Alexandria.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Truly amazing that Alexandria has delivered approximately 8.5% FFO for share earnings growth while continuing to strengthen our fortress balance sheet, the strongest in our history, and Dean will give you more details on that. Against the backdrop of a very deleterious macro market in this 2022 year, and really again, nothing short of operational excellence to the team. With our highly leased development pipeline and continued strong leasing, and Peter will comment on that, Alexandria is well positioned to deliver strong earnings growth again in 2023.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

We have continued to create long-term shareholder value with a total shareholder return from IPO through the end of the year, December 31, 2022, of 1,673% compared to the MSCI REIT index of 684%, the S&P 500 of 628%, and Nasdaq 838%, so a wide margin of beat. Alexandria continues to produce stable, increasing long duration cash flows and an increasing dividend. We're very proud of our approximately 1,000 client tenant base, a one of a kind treasure that continues to generate remarkable demand for our Alexandria lab space, and Dean will highlight more on this.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Again, 2 million sq ft leased in fourth quarter, over $8 million for the year, and almost $18 million for the last two years, with rental rate increases last year of about 22% on a cash basis. Pretty, pretty amazing stats, and we're very proud of our own tenant base, which has generated by far and away the majority of that lease space. 4Q 2022 and year-end 2022 was another strong quarter by all fundamental financial metrics and a few others, and Dean will highlight some of this. Almost 100% on collections from a very strong and durable tenant base, and very proud of almost 95% occupancy and we put in a, I think, very strong same store performance both for the quarter and the year.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Innovation in medicine is, but must continue to be a national imperative. One in four of us will develop a neurodegenerative disease. Nearly 40% of adult men and women will be diagnosed with cancer during their lifetimes. One in five in the nation's population suffers from mental illness, and we're continuing to see over 100,000 deaths due to overdose last year, despite all of the efforts that certainly this company has made with our Dayton project. Just a literally a war out there which does not seem to be in check, and governments at the federal, state, and local level need to double down with the vast amount of resources that have been appropriated over the last few years and really focus on this mental health issue.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

A comment about our successful and continuing value harvesting and recycling of our precious capital. Peter will detail that, amazingly stellar 2022 with $2.2 billion successfully harvested and then reinvested in a highly disciplined manner. Peter and Dean will also comment on the excellent and steady progress we've made year to date, just one month in to our 2023 business plan for value harvesting and capital recycling, we're very optimistic about that. Before I pass it over to Hallie, wanna particularly call out and thank our finance team and all those who had a hand in the impressive balance sheet accomplishments set forth on page XD of our supplement. I'm very proud that we once again have the strongest balance sheet in the company's history. With that, I'm gonna turn it over to Hallie for further comments.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Thank you, Joel. Good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. Today, I'm gonna provide a recap of the life science industry coming out of 2022 and now into 2023, and how our highly unique approximately 1,000 tenants remain resilient through the volatility of the current macroeconomic environment. As Joel mentioned, and as we often talk about, the 90% of 10,000 diseases remains an incredible opportunity and unmet need. The fact is, many of these that do have treatments are far from solved. Take type 1 diabetes. While it was a death sentence before the discovery of insulin over 100 years ago, it still carries an immense burden. A person with type 1 diabetes makes, on average, 180 health-related decisions a day, some of which have life or death consequences.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Looking back at 2022, the stats truly speak for themselves regarding the enduring strength of the life science industry, of which I'll highlight three. First, despite widespread commentary that VC funding hit the pause button in 2022, life science venture deals totaled nearly $58 billion. Other than 2021's record year, it was the second highest amount of capital ever deployed. Of note, over 70% of VC dollars deployed went into an Alexandria cluster, and with VC funds across tech and life science raising nearly $160 billion in 2022, a record eclipsing 2021's $150 billion, significant dry powder is on hand to deploy over a multiyear time horizon. Second, large pharma continues to be one of the best performing sectors in the market.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

In a year where total returns for market indices such as the Nasdaq and Dow ended the year down 10%, the top 20 biopharma ended the year up an average 12%, with eight of the top 20 pharma ending the year with total returns over 20%. With historic levels of cash on hand, over $300 billion to deploy into R&D and M&A, biopharma has the firepower to continue to innovate and grow. Last, the pipeline of early innovation to commercialization continues to deliver to patients. With 37 novel FDA small molecule and biologic approvals, three gene therapy approvals, and a novel cell therapy approval, of which nearly half were developed by Alexandria tenants. Moving to Alexandria's unrivaled life science tenant roster, we wanted to provide additional color on our business segments and some examples of Alexandria's tenants at the forefront of life science innovation.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Starting with large pharma, $260 billion was reinvested into R&D in 2021. Analysts estimate that including leverage, pharma has over $600 billion to deploy into M&A and partnerships. The next several years, indeed decade, are gonna be framed by large pharma's continued pursuit of innovation as product patents expire and new types of medicines such as mRNA and cell therapies transition from large preclinical and clinical pipelines to commercial stage. Alexandria tenant Pfizer is a great example. With over 110 programs spanning early to late clinical development and an estimated 19 products launching in the next 18 months. The company also noted in their 4Q earnings this morning, they are targeting an additional $25 billion in revenue to come from M&A activity by 2030.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Transitioning to public biotech, our tenant base includes a majority commercial stage companies, which brought in nearly $150 billion in revenue in 2021. Tenants such as Amgen and Vertex have large, diversified pipelines driving long-term growth. As a note, Vertex is also leading the next generation of type 1 diabetes treatment with a novel clinical stage cell therapy that addresses the root cause of diabetes. For clinical stage biotechnology companies, data is king, and those that have met and will meet clinical milestones in 2023 continue to see stock recovery and ability to access capital through follow-on financings. While the public markets are still recovering, life science follow-on financings reached nearly $17 billion in 2022, which is right on par with the average life science follow-on financings over the past decade.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

With respect to life science products, service, and devices, this segment largely consists of commercial stage tenants. While not immune to higher interest rates and supply chain challenges, this is a big business segment that both drives and responds to the needs of researchers across academia, biotech, and large pharma, which continue to grow and innovate. A notable development in the space is the rapid drop in the price of genome sequencing, driven by a healthy increase in competition. Costing $100 million to sequence a genome in 2001 and diving to $1,000 per genome in 2020, we are now looking at the $200 genome, enabling access to critical sequencing data that saves lives. Where are we headed in 2023? In the face of persistent economic headwinds, all industries are forced to double down on the areas of greatest value.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

As part of the reset, there are companies that won't make it, and we argue that this, in the long run, is healthy as capital is deployed more efficiently. There will continue to be further separation of haves and have-nots. Companies like those on Alexandria's tenant roster with differentiated technologies, a clear roadmap to key inflection points such as generating clinical data, and tenured management teams will continue to raise capital. As history has shown time and time again, some of the most successful companies are those created in the depths of a financial downturn. Ultimately, the life science industry is not built on technologies looking for a problem, but instead thousands among thousands of devastating problems, i.e., diseases, that this incredibly innovative industry is poised to address over decades to come.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

To end on a note of hope from former FDA Commissioner Scott Gottlieb, "Our ingenuity drives our hopeful innovation, but it's our compassion for each other that inspires us to apply these advances to the purpose of reducing human suffering." With that, I'll pass it off to Peter.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Thank you, Hallie. 2022 was quite a volatile year in the macro markets, a reminder that all businesses are subject to cycles, some more than others. The pruning we see in the tech industry today is not a surprise to anyone who's been around since the turn of the century. However, much like a broken bone, it'll come back stronger after it heals. Unlike tech, developing products and services to address disease is hard and takes a lot of time. Much harder and more time-consuming than creating the next app to book a reservation or share recipes. Because of that, there is more discipline in life science investment, a discipline Alexandria has mirrored in our real estate strategy.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Through the dot-com bust to the financial crisis, to whatever you wanna label today's conditions, our business remains sound, as you can see in our results this quarter and during those historic down cycles. Despite the macro headlines, we remain optimistic and excited for our business as we are in the early innings of the golden age of biology. We have only had the blueprint of the human genome for 20 years, and in that time, we've developed more new modalities to attack disease than in the previous 100. It's gonna be hard, and it's gonna take time, but the industry is going to have options for people with Alzheimer's. It's going to perfect technology to detect pancreatic cancer in time to save lives, and much, much more. Let's all remember, it's hard.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

It takes time and patience. You will understand why life science research and development continues through the proverbial thick and thin of economic cycles, making our business resilient and essential. With that said, I'll briefly touch on our development pipeline progress, update you on construction trends, discuss our leasing, and update you on investor demand for life science real estate. In 2022, our best-in-class development teams continued to deliver high-quality, purpose-built laboratory space to our tenants on time and on budget in a very challenging construction environment, which I'll touch on in a moment. During the fourth quarter, we de-delivered just shy of 500,000 sq ft with $28 million in annual NOI commencing during the quarter.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

For the year, we delivered 1.77 million sq ft spread over 15 development and redevelopment projects with annual NOI of $119.2 million commencing during the year. Initial stabilized yields for recent deliveries averaged 6.8% and 6.3% on a cash basis, reflecting the healthy contractual annual increases embedded into our leases. As of year-end, projects under construction and near-term projects expected to commence construction over the next four quarters total 7.6 million sq ft and are 72% leased. Approximately 77% of that leasing has come from our approximately 1,000 existing tenant relationships.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

New projects added this quarter include 1450 Owens, which is approximately 213,000 sq ft and will be 100% funded by our joint venture partner, and 10075 Barnes Canyon Road in Sorrento Mesa, which will be 50% funded by our joint venture partner. Both projects are under active leasing negotiations. Deliveries primarily commencing from the first quarter of 2023 through the fourth quarter of 2025 are expected to add $655 million in annual incremental NOI, reflecting a strong pipeline driven by consistent demand even in this volatile time. Transitioning to leasing. The fourth quarter results continue to demonstrate the strength of our unique one-of-a-kind company with leasing volume of 2,322,000 sq ft leased in the quarter. The fourth highest total in company history.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

The 8,405,587 sq ft leased for the year is the second highest annual total in company history. As you can see in the supplemental, our guidance for strong mark-to-market growth remains unchanged from Investor Day, with a range of 27%-32% on a GAAP basis and 11%-16% on cash. These results are certainly reflective of Hallie's commentary on the strength of VC funding and the stellar 2022 performance of large pharma. With $300 billion in cash on hand, we anticipate further investment and growth from this high credit tenant sector in 2023, and the successful conversion of early innovation to commercialization reflected in the 37 FDA approvals in 2022 will incentivize continued investment in new and existing companies that have sound business models and underlying science.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

A cohort of companies Alexandria has a unique ability to identify. The highest quality life science tenants always consider occupancy in the best assets as an imperative. Their facility and campus are not only used for research and development, but is a critical tool for them to recruit and retain the best scientific and management talent in the world, which is by far their greatest asset. Therefore, demand for Alexandria facilities and our unrivaled mega campuses remains healthy as facilities are A plus, and our operational excellence is highly sought after. Moving to construction cost trends. At a high level, it appears the construction industry is on the cusp of slowing down. One of the leading economic indicators of the industry is the AIA Architectural Billings Index that leads non-residential construction activity by nine-12 months.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Design work is at the front end of projects, architecture are the first consultants to slow down. Recent numbers show the 3% moving average heading towards no growth in billings, and commentary from the AIA was that fewer clients are expressing interest in starting new projects. For the first time since the post-pandemic restart of construction projects, which was the genesis of significant cost inflation and supply chain problems, we're starting to see some signs of materials pricing flattening out and general contractors and subcontractors looking for work.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

That said, there are still items such as aluminum, rebar, copper, and glass up 16%-21% over this time last year, and it's still very difficult to obtain electrical switchgear, emergency generators, building controls, and smart air handling units because despite an improvement in availability of chips, there are more products using chips than ever before, so demand for them is still ahead of supply. Laboratory buildings are heavy consumers of these hard to get items, so to keep a laboratory construction project on time and on budget is a difficult task. Alexandria has the intel and experience needed to make quick decisions and relationships with critical vendors to ensure we have access to the materials and labor needed to meet our schedule and budgets.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Despite the continued construction market pressures, as mentioned, we do believe the industry is on the cusp of slowing down, and we do expect cost escalations to reflect that in 2023, reducing from the range of 9%-10% experienced in 2022 to 4%-6% in 2023. However, the $2.3 trillion infrastructure spend over the next eight years will continue to put pressure on costs and labor, so we will continue to conservatively underwrite and manage our value creation projects. As of the end of the year, 81% of our active development and redevelopment projects aggregating 5.6 million sq ft are under GMP or other fixed contracts, which is consistent with the run rate we have maintained during these volatile times.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Anticipating year-end volatility in the real estate investment markets, we completed our 2022 value harvesting and asset recycling efforts in the third quarter with impeccable execution as we laid out at Investor Day. Overall, we completed $2.2 billion of value harvesting with the improved properties achieving a weighted average cap rate of 4.4%, realizing a total gain of $1.2 billion and a value creation margin of 107%. This is a tremendous achievement considering the volatile interest rate environment in 2022 with many real estate investors on the sidelines. It speaks to the desirability of our assets, which are in the best markets with high quality tenants and managed with operational excellence. High quality life science assets are scarce, and that is reflected in the pricing.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

We have started working on and are making good progress on 2023 value harvesting and asset recycling. We'll update you on that next quarter. In the meantime, we'd like to report on three notable non-Alexandria sales that illustrate that there is still strong demand for life science real estate product. The first is the sale of 1828 El Camino Real in Burlingame in the Bay Area. Anchored by three non-credit life science tenants, the property is 98% leased, but is extremely low quality with limited window line, no shipping and receiving, no backup power, and venting through the windows to get adequate HVAC. Despite this, an investor paid $902 per sq ft for this asset at a cap rate of 5.8%.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

The second trade was in the Route 128 submarket of Lexington, Mass, where a single non-credit tenant occupied 101,310 sq ft manufacturing building at 20 McGuire Road, sold in October for $878 per sq ft and a 6.2% cap rate. The third comp, which closed last week, is an R&D campus known as The Gauge and CenterPoint in the Route 128 submarket of Waltham. It traded for $983 per sq ft and a 5% cap rate. It was reported that some vacancy existed at that property and that the stabilized return is likely to be in the high fives.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

As the Fed continues to pull levers to battle inflation, we expect we will see cap rates move up, but much less on a relative basis to other product types, and thus, we remain well positioned to fund our value creation pipeline efficiently and at a relatively attractive pricing by harvesting our value creation among other sources. With that, I'll pass it over to Dean.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We'll jump right in here. Our team is very pleased to have the strongest balance sheet in the company's history as of December 31st. This really is a result of disciplined execution of liability management year to year over the past decade. Our key highlights include, you know, we really have earned our corporate credit ratings that rank in the top 10% of the REIT industry today. We ended the year with tremendous liquidity of $5.3 billion that provides us important flexibility in this macro environment. No debt maturities until 2025, a statement only a small handful of REITs can make today, and a weighted average remaining term of debt of 13.2 years.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Net debt to adjusted EBITDA was 5.1x on a quarterly annualized basis, 5.2x on a trailing 12 month basis. The fixed charge coverage ratio is very strong at 5.0x, and 99.4% of outstanding debt is subject to fixed interest rates. Our team had outstanding execution in 2022 on our strategic capital plan. Key highlights include $1.8 billion of 12-year and 30-year bonds with a weighted average rate of 3.28%, a term of 22 years, completed in February of 2022. Outstanding execution by our team, as Peter had highlighted, on outright dispositions, partial interest sales aggregating $2.2 billion with an amazing $1.2 billion in gains or consideration in excess of book value.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

A 4.4% cap rate on cash NOI, all exceptional statistics and significant value creation tapped for reinvestment. We had disciplined issuance of common equity with proceeds aggregating $2.5 billion at an average price of $189 per share, including $105 million sold under forward equity sales agreements in December 2022. On a blended basis for the year, we felt comfortable executing on the modest $105 million under the equity under forward equity sales agreements in December at roughly $150 per share. Briefly on the bond market, the beginning of 2023 has been positive for high-quality issuers like Alexandria. Overall pricing for 10-year bonds for Alexandria has significantly improved, and as of yesterday, was in the upper 4% range or just below 5%.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

For 2023, we will continue to focus on execution of real estate dispositions and partial interest sales or joint ventures for a significant component of our 2023 capital plan. Two transactions are under executed LOI to bring in a partner on a portion of each asset. These transactions will provide approximately $370 million of equity-type capital in 2023. There are other transactions that we expect to complete this year. Turning to operating and financial results, really congratulations to our entire team for outstanding execution this year or in 2022 during a very challenging macro environment.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

We reported total revenues of $2.6 billion, up 22.5% over 2021, with FFO per share as adjusted of $8.42, up 8.5% over 2021, and outperforming our initial outlook for 2022 of $8.36 by $0.06, and ahead of consensus both for the fourth quarter and the full year of 2022. Now, diving into key highlights from our truly amazing operating and financial results for 2022. Strong rental rate growth, leasing volume and occupancy growth drove record same property NOI growth in 2022 of 6.6% and 9.6% on a cash basis, exceeding our 10-year average same property NOI growth prior to 2022 of 6% and 2.9% on a cash basis.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

The last four years of rental rate growth on lease renewals and release into space have been the highest in the company's history, including rental rate growth of 31% in 2022. Over the last two years, cash rental rate growth has been the highest in the company's history, including 22.1% for the full year of 2022. Leasing volume in the fourth quarter was robust relative to the quarterly average volume in recent years in the range of 1.1-1.3 rentable square feet per quarter, highlighting the continued demand from our client tenants. The last two years have generated the two highest annual periods of rentable square feet leased, including 8.4 million rentable square feet in 2022.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Three out of the last four quarters represented the highest quarterly periods of rentable square feet leased, including 2 million sq ft in the fourth quarter. Turning to occupancy. Occupancy was up 80 basis points since the beginning of 2021 to 94.8% as of December 31st. Looking forward into 2023, we expect a slight decline in occupancy in the first half of the year, with recovery expected in the second half of the year. We had a similar dip in occupancy in 2022, specifically overall strong occupancy in the year, but we did have a 40 basis point decline from the first quarter of 2022 to the third quarter of 2022.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

For 2023, we expect temporary vacancy beginning in the first quarter related to spaces that, on average, are expected to generate significant rental rate growth greater than 60% on a cash basis. These spaces are forecasted for occupancy over the next five quarters. This includes a mix of small redevelopment space, i.e., the first time conversion to lab space, normal lease expirations, and a few early tenant departures. Importantly consistent with our general quarter-to-quarter growth in FFO per share for many years, we expect quarter-to-quarter growth in FFO per share in 2023. A few other key highlights. 90% of our annual rental revenue is from investment-grade or large cap publicly traded companies within our top 20 tenants, highlighting the high-quality list of client tenants that our team has curated over the years.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

99.4% of collections of January rent, through January 27th, just highlighting the continued strength of rent collections. We had a very strong adjusted EBITDA margin of 69%, highlighting execution of operational excellence by our team. Cash flows from operating activities after dividends for 2023 is expected to be very strong at $375 million at the midpoint of our guidance, and will continue to support growth in our annual common stock dividends per share. Our FFO payout ratio was very solid at 58% for the fourth quarter. At this pace, cash flows from operating activities after dividends over the next three years should generate over $1 billion. That's an amazing statistic and very efficient capital for reinvestment. Now, turning to a couple important real estate highlights.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Construction in progress, otherwise known as CIP, is forecasted to peak in the first quarter, then decline slightly through 2023 as the dollar amount of deliveries are expected to exceed additions to CIP quarter to quarter, highlighting the significant volume of deliveries over the next couple of years. As Peter had highlighted, we have 7.6 million rentable sq ft of projects that are 72% leased and projected to generate $655 million of incremental net operating income over the next three years. In the fourth quarter, we recognized impairments aggregating $26.2 million on real estate, primarily related to a few assets we plan to sell in 2023. Each asset is small and represents non-core assets no longer strategic for Alexandria to own.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

To put this into perspective, the book value of assets held for sale was approximately $120 million as of December 31st. The key takeaway is that from time to time, we review our asset base and proceed with selective sales that continue to enhance the quality of the remaining asset base. Briefly on venture investments, FFO per share as adjusted over the last two years has included an average of $103 million of realized gains each year from venture investments, or approximately $26 million per quarter. Quarterly gains from venture investments in 2023 are expected to be up slightly in comparison to this recent quarterly run rate.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

As of December 31st, 2022, we had gross unrealized gains of $506 million on a cost basis of $1.15 billion, highlighting significant value in our venture investment portfolio. Investments in our venture portfolio have been very modest at less than $70 million in aggregate over the last five years, including $20.5 million that we recognized in the fourth quarter. Turning to guidance, we have reaffirmed guidance for 2023 that was initially provided in connection with our annual Investor Day on November 30th with one minor update. We updated excess cash held from bond proceeds to $300 million, representing a $50 million increase from the midpoint of our prior guidance.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Our 2023 guidance for EPS diluted is a range from $3.41-$3.61, and FFO per share as adjusted, diluted is a range from $8.86-$9.06, with no change in the midpoint of $8.96. Under the current common stock distribution agreement we have in place, otherwise known as our ATM program, we have approximately 142 remaining available. We expect to file a new program in the first quarter of 2023. Please refer to page six of our supplemental package for detailed underlying assumptions included in our strong outlook for the full year of 2023. Let me turn it back to Joel.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Thank you. Operator, you can open it up for questions, please.

[Operator]

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. Our first question will come from Steve Sakwa of Evercore ISI. Please go ahead.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Yeah, thanks. Good afternoon, everybody. I guess I wanted to just circle back to some comments Dean, you made about some of the pending sales and joint venture interests. I'm just wondering if either you or Peter could provide a little bit more color on, you know, what the institutional market is sort of looking for, maybe how pricing has changed over the past six months? Can you give us any sort of flavor on the timing of when some of these transactions may get over the finish line?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah, this is Joel. I think we'll try to be general in that, given that, we have, we're at the letter of intent stage on a number of transactions, but maybe Peter, you could give kind of a top side view.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Sure. Obviously, there's only a few product types out there that people are comfortable in investing in right now, and obviously, life science real estate is one of them. I mean, I've been receiving calls on a fairly regular basis from some existing partners that are excited to see what we have going this year. As I mentioned during my comments, cap rates are expected to rise from the peak. As I've also said in the past, we don't anticipate on a relative basis to be very high. You know, I'm not gonna speculate right now on where they'll be. We'll start reporting once we have more data, but they will be sticky given the scarcity of opportunities for life science real estate.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Okay. Just a second question, Joel. You know, I know acquisitions are not, you know, a huge part of the, of the plan right now, it's mostly development. Maybe could you just comment on the two deals that you did announce in the quarter and kind of the strategic rationale for both of those projects and, you know, how you think about pricing on those versus your development opportunities?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. Each one of those was unique in and of itself. I don't wanna get too granular, but I think the one in the Route 128 corridor really enables us to piece together three different projects into a, you know, more than 1 million square foot mega campus. We have some great activity from our 1,000 tenants to help fill that. We're very optimistic on that and feel like that was very strategic. It's also under a leaseback for a number of years, so it'll be continuing to cash flow. The other acquisition was a unique acquisition in downtown Austin. We felt that it was a superb location. It's also under a leaseback for a period of time, so it'll continue to generate good revenue.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

You know, I won't comment on what our future business plan is for that, but we think there's a really great opportunity to do something unique in that spot, if that's helpful.

[Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI]

Great. Thank you. That's it for me.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. Thank you, Steve.

[Operator]

The next question comes from Georgi Dinkov of Mizuho Securities. Please go ahead.

[Georgi Dinkov, Equity Research Associate at Mizuho Securities]

Hi, thank you for taking my question. I was wondering, what are your thoughts on the sublet market in the sector, and have you seen uptick with more companies subleasing space across the board and specifically in your markets? Could you please remind us what percentage, if any, of your portfolio is currently subleased?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Peter, do you wanna maybe comment generally on that?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Yeah. I've got some sublease statistics. For our larger markets, I will say that the amount of sublease space overall has come down over the last couple of quarters. One of the reasons for that is built out lab space is very attractive, especially for companies today that wanna try to limit their out-of-pocket investment into space. Boston is at about 4.7% right now, sublease. Again, anything of quality and that's built out is moving fairly quickly. San Francisco has been reduced to 2.3%, and San Diego only has 2.1%. These are all very normalized numbers for any cycle.

[Georgi Dinkov, Equity Research Associate at Mizuho Securities]

Great. Thank you. Could you comment on your specific portfolio?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

It's less than that.

[Georgi Dinkov, Equity Research Associate at Mizuho Securities]

Less than that. Okay. Just my second question on Sanofi. We noticed that the square footage they rent dropped by about 30,000 sq ft quarter-over-quarter. I was wondering if you could provide some more color on that.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I don't know, Dean, if you know that, what asset that was or if you.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

No, it's such a small number. I'm sorry, guys. I don't have that at my fingertips.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Yeah. I don't either.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

It's 30,000 sq ft on our 40 million sq ft portfolio. Sorry, Georgi.

[Georgi Dinkov, Equity Research Associate at Mizuho Securities]

Okay. That's all for me. Thank you.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Okay, thank you.

[Operator]

The next question comes from Michael Griffin of Citigroup Global Markets. Please go ahead.

[Michael Griffin, Senior Equity Research Analyst at Citigroup Global Markets]

Great. Thanks. Maybe going back to the Route 128 acquisition. You know, Peter, you touched on some pretty favorable pricing, it seemed like, with some transaction comps. I feel like that's probably one sub-market that maybe there's been more worries around supply with. Maybe you can expand on sort of what you're seeing out there. Has sentiment changed, you know, for that suburban market? I mean, obviously, when we think Boston, we think Cambridge being the highest quality market there. Maybe has sentiment shifted in more of the suburban products?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. This is Joel. Let me make a top side comment. Then I'll turn it over to Peter. If you're asking about general sentiment, you know, Peter will comment if you're asking about our sentiment. It's different because we generally have a certain targeted demand from our existing, you know, client base, and therefore, by making, say, the acquisition we did or doing things that we do to create an environment where companies wanna go, it really is, you know, focused on our, you know, our kind of game plan. If you're looking at a top side view, I don't know, Peter, you could share, you know, top side view on Waltham generally.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Waltham, Lexington, the other surrounding areas, I think the sentiment is, you know, still positive. That last comp I talked about, the campus that sold for a 5 cap, it was reported, I think it was CoStar that had the article, that the group that sold it made $200 million on it, and they only owned it for two years. Pretty good outcome. Obviously, if somebody's paying $200 million more than someone bought it for two years ago, maybe it was three years ago now.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

You know, that, they're a believer in the rent growth in the market. The other, you know, the other reason that the comps are weighted towards the suburbs is very likely because there's just not a lot of available product to buy in Cambridge or the Seaport or Watertown. The opportunities were just there. I don't know if it says anything about the sentiment, and probably just more about the availability.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Keep in mind, there will always be demand among more R&D light companies for Route 128 in Waltham than in the heart of Cambridge. That's just how it's been for, you know, decades now.

[Michael Griffin, Senior Equity Research Analyst at Citigroup Global Markets]

Great. That's helpful. Then on the $1.4 billion of commitment costs from joint venture partners, I'm curious, are there any kind of restrictions around how that can be drawn down, how much these partners can fund? I think you've got some portion of that in your capital plan for this year, but, you know, anything you can expand on that would be helpful as well.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. I'll ask Dean to do that, but obviously each and every situation is different. Dean, top side view.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Yeah. I think the high level concept on the $1.4 billion of commitments for funding from our JV partners, that generally speaking, these are funding requirements related to our value creation pipeline, so construction funding commitments. These commitments do extend out over multiple years, out, you know, two-three years, depending on the joint venture. Given the recent increase in projects with joint ventures over the last, call it, fourtsix quarters, we just wanted to be sure that the investment community understood the significance of the commitments coming from our partners on just a handful of construction projects. We'll continue that disclosure going forward.

[Michael Griffin, Senior Equity Research Analyst at Citigroup Global Markets]

Great. That's it for me. Thanks for the time.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Yep. Thank you.

[Operator]

The next question comes from Joshua Dennerlein of Bank of America Merrill Lynch. Please go ahead.

[Joshua Dennerlein, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Yeah. Hey, everyone. I saw on your top 20 tenants page in the sup, it looks like there's a footnote on 2seventy bio. saying the in-place cash rents are 20%-25% below current market. Looks like that last quarter was 5%-10% below current market. Just curious on what's driving that update?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. Dean, do you have any comment on that?

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

It's Dean here, guys. What we did was we looked more carefully at the actual space. I believe the prior quarter was slightly lower or showing a modest mark-to-market opportunity. It was reflective of looking at that specific property overall. We realized we had to dive into the details a little bit further 'cause it didn't make sense as we were looking at it for the current quarter. As we looked at the space specifically, so a portion of the building and the specific space that they're occupying, there's a bigger mark-to-market opportunity, so we wanted to be sure we updated that number in the current quarter.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Nothing changed from a real mark to market, but previously it was the overall building, and today it's just specifically, or this quarter, it's specific to that space that they occupy.

[Joshua Dennerlein, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Okay. Just since I'm newer to the story, just kinda curious why the disclosure on that company. It looks like it has a small market cap.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

It's really due to that. Some occasionally there's a tenant in the top 20, list of tenants that we did not curate ourselves or has a modest, market cap, and we just wanna provide some incremental color to. Investors don't need to research the details on their own.

[Joshua Dennerlein, Senior Equity Research Analyst at Bank of America Merrill Lynch]

Okay. Yeah, I appreciate that, Dean. Thanks, guys.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Thank you.

[Operator]

The next question comes from Richard Anderson of SMBC Nikko Securities. Please go ahead.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Oh, you may be on mute, Rich.

[Richard Anderson, Managing Director at SMBC Nikko Securities]

I totally was. Sorry about that, Joel. Peter, we talked about cap rates in your opening comments, and I think, Dean, you mentioned some partial interests that are far along and may be announced shortly. How would you characterize the quality spectrum of what you're looking at for partial interests? Are we talking very high-quality assets like, you know, the Binney Street transaction a little while back or more middle of the road, you know, and as a mechanism to, you know, minimize the cap rate, but also, you know, keep hold of your, you know, your best assets and not relinquish too much of that opportunity going forward?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I'll start, Rich. The profile of what is going on is good quality. We don't have much of anything outside, I think of high quality. I mean, certainly are some workhorse assets that we still hold. We've sold a lot of those

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Partial interest sales, just because of the profile of our portfolio, are typically gonna be higher quality assets, and that's what we're working on now.

[Richard Anderson, Managing Director at SMBC Nikko Securities]

I mean, are we sub five on or you're not talking about pricing just yet, or can you give?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I mean, I don't think it does us any good really to talk about pricing because we're still negotiating with people and so, better for better strategy to keep that to ourselves at this point.

[Richard Anderson, Managing Director at SMBC Nikko Securities]

Fair enough. Second question from me is for Dean. you know, you have a average debt expiration, I think, of 13 years, you said. I think your average lease term expires in seven or eight years. I'm wondering if that provides you any opportunity in the future, you know, in the interest of matching liabilities with assets. you know, you're way conservative in that comparison as it stands today. Do you ever see that gap shrinking, whereas maybe, you know, the opportunity to raise shorter term debt or lengthen lease term, you know, would make sense for the company? I'm just curious if that spread that you have in place now is something that could wiggle around a little bit in the future.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Rich, I guess the way to answer the question is I think we find significant value in the longer maturity profile, given the size of our company. you know, we have a meaningful maturity profile for a big company, right? That matches a big company is maybe a better way of describing it. The longer average debt term gives us a lot more flexibility to manage the overall maturity profile, right? 'Cause if that was more like five years, with that much debt outstanding, it'd be a lot to manage year to year on top of any growth capital. I think strategically, the longer term of remaining maturity is a real positive for us.

[Richard Anderson, Managing Director at SMBC Nikko Securities]

Okay. Fair enough. That's all I have. Thanks.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Thanks, Rich.

[Operator]

The next question comes from Thomas Catherwood of BTIG. Please go ahead.

[Thomas Catherwood, Managing Director and Real Estate Investment Trust Analyst at BTIG]

Thanks. Good afternoon, everyone. Appreciated Hallie's comments at the outset about tenant health and funding, and commentary around Pfizer M&A really jumped out. Maybe Peter or Joel, during prior M&A cycles in the biopharma industry, what was the read-through for real estate usage? Did acquirers tend to consolidate the footprint of their portfolio companies, or were there further expansions?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. I can give you my thoughts, and Peter can share his. I think it's hard to compare, you know, past cycles because the level of technological development in biotech was so different. Today it's much more sophisticated, new modalities. When you have M&A today, it used to be oftentimes you're buying a company for maybe a pipeline and, you know, you like to hold on to the people, but maybe space is less valuable going back maybe a decade or two. Today, that space is pretty critical, especially if it's located in a top-tier cluster market like Cambridge.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Not only do you want the people for, you know, recruitment, retention, and just working on the projects, but you've also got probably built into the space some pretty sophisticated new modality technologies, you know, both at the lab side and in the R&D manufacturing, which is kind of integrated so closely. I think it's harder to tell. I think, again, there's gonna be a whole series of different types of uses of capital. A lot of it'll be partnering, which has historically been, you know, probably the favorite approach of pharma. There will be some acquisitions. You know, you've got a Federal Trade Commission that's pretty hostile to any acquisition in any industry these days.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

You'll probably see bolt-on acquisitions where people will want to keep that group and that technology in tow. I don't think it's as easy to look at, say, big mega mergers in the past and think that that has any relevance to today. I think the key byline for life science in 2023, in addition to what, you know, Hallie kinda framed out, is what will be the velocity, the depth and the focus of this large cash hoard, $300 billion, and if you leverage it, you could be as much as, you know, $500 billion-$600 billion. You know, Peter, you could comment just historically on what you've seen.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

It used to be if you were like a one-trick pony, it was an acquisition and then you shut it down. I mean, a good example was a company called ICOS in the Seattle area was bought by. They, they developed Cialis, they were bought by Lilly and they completely shut down. With the rise of platform technologies, a lot of the M&A were super beneficial to the growth of our clusters. Companies realized that these teams that they were buying were, or these companies were much more valuable than just the pipeline, but the teams were extremely important. There were a number of companies. I mean, I remember when I was in Seattle, a company got bought by Gilead. It was called Corus Pharma.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

They were a 5,000 square foot tenant. He, right after that, Gilead approached us, and we ended up doing a huge over 100,000 square foot deal with them so that they could expand the capabilities of the team. As Joel said, you know, it ebbs and flows. I think if you look at the fact that I think about 75% or in certain years, about 75% of products that have hit the market have started from external innovation that, you know, that end up in pharma's hands, it's pretty telling that that is a long-lasting strategy to comb the biotech world, to buy the companies and to keep the teams in place because they generally have platforms and other products behind their initial ones.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I think the general trend in recent years has been to keep them in place and to expand. you know.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Hallie, any final comments on that question?

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Yeah, just to say that every acquisition is gonna be very unique in terms of the types of products being acquired, the talent base that comes along with it, the market that it's in. You know, we very much are acutely aware of kind of the one-off nature of every acquisition. You know, for acquisitions where, you know, they may tuck it into the company, we see a net positive in the ecosystems. You know, if it's a small company that does get folded in, those executives go on to create one more or multiple, you know, companies after that. We've had some great examples in the past of, you know, a company gets acquired, and then that CEO goes on to build a, you know, a bigger and even larger company.

[Hallie Kuhn, SVP of Science and Technology and Capital Markets at Alexandria Real Estate Equities]

Altogether, you know, it's a net positive for the ecosystem, I would say, no matter what the outcome is.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. A great example in Seattle, as Peter mentioned, another great one is Celgene's acquisition of Juno and then the acquisition by Bristol Myers. That's really one of their, you know, most critical advanced, you know, cell therapy outposts. Again, it's almost case by case, Rich.

[Thomas Catherwood, Managing Director and Real Estate Investment Trust Analyst at BTIG]

Great. No, I really appreciate the thoughts there. Maybe sticking with Pfizer.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Sorry.

[Thomas Catherwood, Managing Director and Real Estate Investment Trust Analyst at BTIG]

We did notice that, in New York, 219 East 42nd Street moved from future developments to intermediate developments. If memory serves me, I think there was a six-year sale lease back on that asset. What are your current plans, if any, on that building and a potential project?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. That building, which we acquired, had a lease back to Pfizer. Remember, it's a office building for Pfizer, but Unique in New York, very few buildings have the bones to be converted to lab. They are moving to Hudson Yards, as you know, and their lease is up, I think, out about two years or so. We do have some internally generated demand for that from our current client base, and so we're moving that along.

[Thomas Catherwood, Managing Director and Real Estate Investment Trust Analyst at BTIG]

Understood. Thanks, everyone.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. Thanks, Tom.

[Operator]

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

[Michael Carroll, Managing Director at RBC Capital Markets]

Yeah, thanks. I know demand for fully built out lab product is pretty high, but have you noticed any difference in the level of demand you're tracking in your development pipeline, where tenants do need to invest a significant amount of cash outlays to build out that space? I mean, has that dropped off noticeably over the past six-12 months, given the disruption in the capital markets?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. Peter, you could comment generally to that side.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Yeah. I mean, one of the reasons the sublease market has stayed in check, even when there's been some disruptions to companies is the fact that as we've talked about for now almost two years, the high cost of construction has just created a much more expensive proposition when you have to build out lab space. You know, the news, though, is that there's just not a lot of sublease space to satisfy all the demand. You know, deals where the tenants have to invest space, such as our development and redevelopment deals, do continue to go. I mean, they're...

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

If you're a board and your company wants to expand and they can go into 25,000-35,000 sq ft of existing space, even though it might be in a different building and even a different neighborhood, they're gonna consider that today just given the cost. We're still doing fine in our leasing of our development and redevelopment portfolio, but, you know, there is a sentiment that if there's existing available space, just try to grab it.

[Michael Carroll, Managing Director at RBC Capital Markets]

Okay. Do you mean, do you know if your, like, competitor is on the development pipeline? I mean, is that where the drop-off in demand's coming from, is that first generation type space?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Well, I mean, I think that the reason that others aren't as successful is just because they don't have our brand. I mean, it's, you know, we've talked about it for years and years. There's a lot to be said about the operational excellence we bring to management of the facilities, to the design of the facilities. I think, to the extent that there's projects out there that are pausing, even after they've gone vertical, or remain vacant, it's a number of things. One is that the location isn't comparable to ours. Two, they've underwritten very high rents because they need to, their basis isn't very good. Three, they don't have a reputation to manage these critical infrastructure buildings.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I would say that that's really the reason behind a lot of the competitive buildings not-

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Major overruns on budgets. I can think of one project in Boston where a client went there, because we didn't have exactly the space that they needed, and then they came back to us when the developer had a huge overrun on cost. That goes on all the time.

[Michael Carroll, Managing Director at RBC Capital Markets]

Okay.

[Michael Carroll, Managing Director at RBC Capital Markets]

Just last one for me. I was looking at your current tenant roster versus the prior quarter, and it looks like Maxar Technologies dropped off the list. I mean, is that a fair read? Am I looking at that correctly? Can you give us a sense of what happened there?

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah, that is a project that, you know, we own, where they're rotating out of that. That will be a future development project, redevelopment and development.

[Michael Carroll, Managing Director at RBC Capital Markets]

Okay, great. Thanks.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yep.

[Operator]

The next question comes from David Rodgers of Robert W. Baird. Please go ahead.

[David Rodgers, Senior Real Estate Research Analyst at Robert W. Baird]

Yeah, good afternoon. Maybe this is for Dean, wanted to talk about the leasing spread. When you excluded the two leases in the quarter, obviously very strong performance for the company overall. Curious about the guide for this year, which you gave in December, reaffirmed last night, at the 11%-16%, I think you had said that there was some incremental component of that that was non-life science, maybe. Can you give us a sense of kind of that 11%-16%? Is that more a function of kind of market rents maybe slowing down, or is that just a function of kind of more different leases that have been added to that pool?

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Hey, David. Dean here. Lab rents remain healthy, as you can tell from leasing statistics in the fourth quarter. hard to really look out well as you go out into the future. Lab rents are trending well, as we noted from our results. There is a slight mix at play in 23 with certain expirations coming up and certain leasing activity we expect to accomplish, call it non-lab product. That product's a small percentage of the portfolio. Rental rates overall, even when you blend it all together, remain very strong.

[David Rodgers, Senior Real Estate Research Analyst at Robert W. Baird]

That's fair. Then maybe to follow up, Peter, in your last question, in terms of kind of market rent growth, it sounds like it's bifurcating even further, probably between kind of the higher quality and lower quality assets. What's that spread look like today, maybe across the portfolio or maybe pick the top three clusters in terms of kind of where replacement rents might be going versus where maybe a more traditional kind of A-minus asset might be performing today at a market rent level?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I mean, I can really only speak to our rents. I just don't have a lot of visibility to outside of the asking rents that we're hearing from competitive buildings. You know, our newer product and our older product, there's not much of a spread between it. You know, typically you might see even a 10%-15% premium for new buildings over older buildings. I think probably the, you know, the availability of existing space makes the existing space more valuable today. It also, I think, speaks to just the quality of our overall portfolio. We don't have a lot of B assets.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

You know, that you could say that, you know, out in the suburbs, the single story, stuff that's not, you know, amenitized. Still, the rents, you know, Greater Boston, I mean, the rents out there, for that type of product are in the, are in the $60-$70 range. You know, compare that to the $100-$120 in Cambridge and maybe the $85-$100 in Seaport. It's still fairly close, but that, you know, you do the math and that'll give you the premium.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I think overall, though, I would say that rents for lab space have not regressed at all and are still fairly strong, and there has not had, you know, been a big movement in concessions like you might be seeing in the office market. I know I read a lot about the office market, and I know that rents for high-quality buildings have held there, but concessions have gotten really, really high, and that's not the case with us. Our rents have held well, and concessions have remained constant.

[David Rodgers, Senior Real Estate Research Analyst at Robert W. Baird]

All right. Great. Thank you.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Thank you.

[Operator]

The next question comes from Dylan Burzinski of Green Street Advisors. Please go ahead.

[Dylan Burzinski, Senior Analyst at Green Street Advisors]

Thanks for taking the question. Appreciate the color on some of the transactions that have happened lately. Just curious, when we look at cap rates for purpose-built lab product versus converted product, have you guys seen any cap rate differential between the two?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

You know, I don't have any specific examples, other than maybe what I just talked about and you know, the comp in Burlingame is a really just terrible conversion. Burlingame's on the peninsula. It is very close to South San Francisco. To get a fully leased comp at an almost 6 cap rate, I think, it probably illustrates that conversions aren't that appealing. I would expect, you know, good quality purpose-built lab in Burlingame to be at least 100-150 basis points lower than that.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah. And most conversions, not all, but almost all don't work.

[Dylan Burzinski, Senior Analyst at Green Street Advisors]

Okay, that's helpful. I guess just looking at the supply picture, are there certain markets or submarkets where you're starting to see, you know, supply pick up and maybe become more of a risk here?

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

From a supply standpoint?

[Dylan Burzinski, Senior Analyst at Green Street Advisors]

Yeah.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

I mean, the numbers for availability are still kind of where they've been over the last few quarters. I mean, the biggest supply overhang in any of our markets is in South San Francisco, and it remains that way. That has not really changed. There's a lot of talk about supply in Greater Boston. Majority of what's talked about hasn't broken ground. Some assets have. A lot of them are in the Somerville area, which is not competitive to where our product is, so we're not too concerned about it. But yeah, I think the supply story is always one that we have to talk about.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

People are trying to get involved in the business, but the best locations are very difficult to get, and so people have tried to fan out in other areas such as Somerville and, with limited to no success, I think, at this point.

[Dylan Burzinski, Senior Analyst at Green Street Advisors]

Okay, thanks. That's it from me.

[Operator]

The next question comes from Jamie Feldman of Wells Fargo. Please go ahead.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

Great. Thanks for taking my question. I know you spoke a lot about how differentiated Alexandria's portfolio is and leasing demand is. If you look at the market stats, it does kind of show in some of these markets you're seeing flattish rent and concessions rising and net effective rents declining month-over-month or maybe quarter-over-quarter. Are you seeing that at all in your portfolio? Are you still pushing rents? I know you said the concessions haven't grown a lot, but can you just provide some more color on how that really looks for your business versus maybe what we're seeing overall in the market?

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Jamie, it's Dean here. Net effective rents have been positive over time for our business, so it's not declining. It's increasing.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

Can you say maybe by how much, like quarter-over-quarter, if you were to do it on, like, a same-store basis, how much you're pushing net effective rents?

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

I don't have it right in front of me, Jamie Feldman. I don't have the exact statistic, but I do recall reviewing it over the last month, and it was very solid positive trend. I mean, Look, our rents, cash and GAAP rents are up. Those are significant increases period-over-period. Net effective is just trailing that a little bit, but still directionally very substantial, right? 'Cause Net effective is based off your GAAP rents rate. Very strong.

[Peter Moglia, CEO and Chief Investment Officer at Alexandria Real Estate Equities]

Yeah. I mean, I wouldn't doubt, Jamie, that other developers are offering concessions to try to bridge the gap between the quality and reputation that we have and what, you know, what they offer. Our numbers are still stable at this point.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

That's great news. I saw, you know, I noticed you did the $105 million forward equity agreement in the fourth quarter. You know, typically this time of year, sometimes you'll do a much larger one. Can you just discuss, you know, the decision to do equity at all this quarter and just how you think about, you know, why you didn't do something bigger?

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Jamie, it was Dean. As we looked at our wrapping up the year, there was an opportunity to raise a very modest amount, as you'd mentioned, $105 million. We looked at our overall capital that we raised during the year, which I commented on. It blended in very attractively. While it was done at $150, I think the overall blended common equity proceeds were about $189 per share. Just keeping things in perspective there, it was a modest amount that we raised. Jamie, going back to your other question. I just needed a second to pull it. One second, I just lost the page. On rental rate growth, we were at...

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

31% GAAP, 22% cash for the year. Net effective for the year was something around 37%.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

Yeah, I guess I was thinking more in terms of just in the market today. I mean, you have a nice baked-in mark-to-market that's gonna show up in leasing spreads. Are you able to still, you know, versus last month, keep pushing rents? Sounds like you think you are on a net effective basis, but I was just hoping to get color on that.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

It sounds like you're asking what the first quarter's going to look like. Look, Jamie, in the fourth quarter and in the year for 2022, we're very strong. I don't have an outlook going into the first quarter for net effective. Again, 2022's up 37% on a net effective basis.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yeah, directionally, just look at our guidance for GAAP and cash too.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

Okay, that's great. I guess just going back to the equity raise. It sounds like you kind of think about it as on a 12-month view, like that kind of cleaned things up for 2022 and then 2023 kind of is a fresh start...

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Um-

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

In terms of, you know, how you would raise equity.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Well, maybe I think probably what's more important, Jamie, on the broad bucket of solving for equity-type capital, as I mentioned, we remain focused on dispositions and partial interest sales of JV-type capital for a significant component of our capital plan for 2023. We've got a couple transactions that are fairly advanced right now, you know, executed LOI and moving through. You know, it's only January 31st, and we feel like we're in a good spot moving on our capital plan there. We gotta keep in mind that that's an important component as well, Jamie, as it has been for many years now.

[Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo]

Okay, great. Thanks for the thoughts.

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Yep. Thanks, Jamie.

[Operator]

The next question comes from Omotayo Okusanya of Credit Suisse. Please go ahead.

[Omotayo Okusanya, Managing Director at Credit Suisse]

Hi, yes. Good afternoon, everyone. Just a quick question on capitalized interest. I think there was a comment made earlier on that CIP would peak in first quarter and then slowly start to decline as you have deliveries. I believe the CIP guidance is meaningfully above last year. Could you just help us kind of reconcile the difference? Is it just higher cost of capital being used to capitalize the CIP, or how do we think about that? Thank you.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Is your question just the growth year-over-year?

[Omotayo Okusanya, Managing Director at Credit Suisse]

Yes.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Um-

[Omotayo Okusanya, Managing Director at Credit Suisse]

Because-

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

The year-over-year growth is more of just a function of the size of activities undergoing construction today. As you know from our disclosures, we have $7.6 million either under construction or near-term starts, on average, 72% leased. If you look at the fourth quarter capped interest, which is reflective of the average basis under construction, it was $79.5 million of capped interest for the quarter. It was $73 million in the third quarter, so I'll call that up about $6 million. It was $68 million the prior quarter, so up about $5 million quarter-over-quarter.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

If you were just to continue to project out that $4 million or $5 million increase quarter-to-quarter, you can kind of project out what half the year would look like and just double that from that point forward, you're now at the bottom end of the range of our guidance.

[Omotayo Okusanya, Managing Director at Credit Suisse]

Mm-hmm.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Directionally, it should make sense if you look at it from a run rate perspective. Again, year-over-year, it's up significantly because the amount of construction activities are actually up year-over-year.

[Omotayo Okusanya, Managing Director at Credit Suisse]

Mm-hmm. Good. Well, that's helpful. Thank you.

[Dean Shigenaga, President and CFO at Alexandria Real Estate Equities]

Yep, thank you.

[Operator]

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

[Joel Marcus, Executive Chairman and Founder at Alexandria Real Estate Equities]

Thank you, everybody, and we look forward to talking to you on the first quarter call. Be safe. Feel well.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Dean Shigenaga, President and CFO
• Hallie Kuhn, SVP of Science and Technology and Capital Markets
• Joel Marcus, Executive Chairman and Founder
• Peter Moglia, CEO and Chief Investment Officer

Analysts

• David Rodgers, Senior Real Estate Research Analyst at Robert W. Baird
• Dylan Burzinski, Senior Analyst at Green Street Advisors
• Georgi Dinkov, Equity Research Associate at Mizuho Securities
• Jamie Feldman, Managing Director and Head of Real Estate Investment Trust Research at Wells Fargo
• Joshua Dennerlein, Senior Equity Research Analyst at Bank of America Merrill Lynch
• Michael Carroll, Managing Director at RBC Capital Markets
• Michael Griffin, Senior Equity Research Analyst at Citigroup Global Markets
• Omotayo Okusanya, Managing Director at Credit Suisse
• Paula Schwartz, Managing Director of Investor Relations at Rx Communications Group
• Richard Anderson, Managing Director at SMBC Nikko Securities
• Steve Sakwa, Senior Managing Director and Senior Equity Research Analyst at Evercore ISI
• Thomas Catherwood, Managing Director and Real Estate Investment Trust Analyst at BTIG