Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q2 2022
Operator, Operator
Good afternoon, and welcome to the Alexandria Real Estate Equities Second Quarter 2022 Conference Call. 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, Investor Relations
Thank you, and good afternoon, everyone. This call contains forward-looking statements within the meaning of the Federal Securities Laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.
Joel Marcus, Executive Chairman and Founder
Thank you, Paula, and welcome everyone. Thank you for joining Alexandria's second quarter 2022 earnings call. With me today are Hallie Kuhn, Steve Richardson, Peter Moglia, and Dean Shigenaga. Despite a challenging macroeconomic climate, we are fortunate to have a unique public company with a visionary mission to create and grow life science ecosystems that inspire and enable innovators to enhance human health by curing diseases, saving lives, and greatly improving nutrition. We at Alexandria have worked diligently to earn the trust of our client tenant base within our top-tier assets. Since 1994, we have aimed to be the trusted lab space partner for life science companies. Now, 28 years later, we have gained the trust of over 1,000 diverse, high-quality companies who rely on us for our reputation. They trust us daily with their most valuable assets, their talent, and thousands of dedicated professionals in science, technology, and business who depend on our lab space and the ecosystems we develop to attract and keep the best talent to advance their science. We provide an inspiring and healthy workplace for them. They entrust us with billions of dollars in research and development to be safe and operational, and they align with us in our mission to partner at the highest level of operational excellence to enhance human health. In this market, our results shine amidst the macroeconomic challenges we all face, including a slowing economy, weak consumer sentiment, higher interest rates, and ongoing structural inflation. Congratulations to our Alexandria family on a successful second quarter report. As Dean will explain shortly, we've raised our guidance for the second quarter to $8.41 FFO per share, indicating an almost 8.5% growth this year and combined with over a 3% dividend, making a solid total of 11.5% in this economic environment. We have seen significant rental rate increases and leasing activity. It's noteworthy that 87% of our leasing comes from existing tenants. We've tailored our demand from our over 1,000 tenants, with 92% of the leasing in the first half of 2022 stemming from this base. In the second quarter, we signed 2.3 million square feet, achieving a third all-time high, alongside a record 34% increase in cash rental rates and a 45% GAAP rental rate, marking a truly historic achievement. Additionally, 50% of our annual rental revenue comes from investment-grade companies, and 80% of our tenants are not early-stage biotech firms. Peter will elaborate on our substantial capital recycling efforts of about $0.5 billion in the second quarter as we realize the value created over the last decade. He will also highlight the robust external growth engine we've refined for the current economic landscape. Dean will discuss our strong balance sheet and liquidity, which is crucial during turbulent capital market conditions; fortunately, thanks to our team, we have no debt maturities until 2025, preventing any FFO dilution from refinancings. Steve will speak about our impressive internal growth, and I encourage you to check Page 33 of the supplemental information. Dean will also address the end of free rent, providing clear visibility for future growth. Our margin remains strong at 70%, and we are very proud of our tenant collections at 99.9%, indicating no significant credit issues. Hallie will share insights about our remarkable and irreplaceable tenant base of over 1,000 tenants and the ongoing vitality of the broader life science industry. The life science sector transcends just early-stage biotech. Alexandria and its exceptional tenant base are well-equipped and prepared for this evolving environment. With our superior assets and decades of relationships, we continue to surpass what are considered competitive and speculative products that may never come to fruition. Finally, I want to acknowledge Steve Richardson, our retiring Co-CEO. On behalf of the entire Alexandria family, I want to express our profound gratitude for the past 22 years. Your humble leadership has set a high standard for all of us. Queen Elizabeth recently spoke about leadership at her birthday celebration, and you embody her words perfectly by encouraging everyone to collaborate and leverage their talents for a common goal. In closing, I’d like to quote from the film Band of Brothers. We are all part of one great band, and we will see a world where we can coexist freely, and the legacy of hope and love will shine through. Now, I will pass the time to Hallie Kuhn.
Hallie Kuhn, SVP of Science & Technology and Capital Markets
Thank you, Joel, and good afternoon, everyone. I'm Hallie Kuhn, SVP of Science & Technology and Capital Markets. Today, I'm going to start by covering the bedrock of Alexandria's business. Specifically, as Joel mentioned, Alexandria's world-class and leading stable of over 1,000 tenants. As part of this review, I will cover the health of the life science industry and then pivot to a number of recent FDA approvals that reflect the industry's collective drive to develop life-saving therapies. The life science industry is large, diverse, and complex. Alexandria's tenant base reflects the diversity with over 1,000 tenants that span multinational pharma, public and private biotechnology companies, life science products such as enabling research tools, and manufacturers of complex medicines, and top-tier investment-grade companies and institutions. So let's break this down segment by segment, starting with multinational pharma. Alexandria is proud to call 17 of the top 20 biopharma companies our tenants, including BMS, Eli Lilly, Sanofi, Takeda, Merck, and Pfizer, just to name a few. Looking at large-cap focused indices such as the Dow Jones U.S. Select Pharmaceutical Index, you'll see that these companies continue to outperform broader indices, including the Dow, S&P 500, and NASDAQ. Biopharma deployed over $200 billion into R&D in 2021, and the top 20 biopharma have an estimated $300 billion cash on hand to put towards M&A and partnerships as they look to bolster their pipelines with innovative new medicines. Next, public biotech companies. With small and mid-cap companies having received outsized focus over the past several months as indices such as the XBI have tumbled, this segment contains many of the most innovative and well-funded large-cap companies in the industry with names such as Alexandria tenants Alnylam and Vertex. Indeed, the majority of our ARR across public biotechnology companies is from those with marketed or approved products. Across pre-commercial companies, we have a deeply technical and experienced science and technology team that employs a rigorous underwriting and monitoring process to select the fastest-growing and most promising companies. Our over decade-long relationship with Moderna is a great example. Just three years ago, Moderna was in this pre-commercial category and is now a leading global commercial-stage biotech. On to private biotechnology. While funding has slowed across all industries compared to 2021 due to macro market conditions, venture funds continue to raise historic levels of capital and deploy it at a sustained pace. $30 billion was deployed into private biotechnology companies in the first half of 2022 compared to a record-breaking $39 billion in the first half of 2021 and still up over 50% compared to the first half of 2019 and 2020. Indeed, companies like incoming New York and Bay Area tenant, Icon Therapeutics, with a stellar management team and highly differentiated platform, recently raised over $0.5 billion. This is not to say that investment thesis hasn't shifted. With downward pressure on valuations, they are refocusing towards the most innovative companies with experienced management teams, but market resets are ultimately healthy for a sector in the long run as companies are forced to double down on their core strength and talent is diverted to the most promising applications. Now for life science products, services, and devices. This diverse set of companies enables breakthrough research from the bench to bedside. It is the companies like Illumina developing cheaper, faster, and more efficient research tools to understand the genetic underpinnings of disease. If a company is identifying diseases at the earliest stages when treatments can be more effective, it’s the contract manufacturers producing complex medicines for next-gen therapies. As the picks and shovels, so to speak, of the industry, these companies' business models are not the same as those developing novel medicines with a quicker path to market and revenue. So while there is no simple index or measure that is a perfect proxy for the strength of our top-tier tenant base, from the beginning of the year through the second quarter, the Dow Jones U.S. Select Pharmaceutical Index, which captures many of our top 20 tenants, outperformed the Dow by 11 points, the NASDAQ by 25 points, and the XBI by 29 points. Moreover, the life science industry is less cyclical than other industries as products are developed over a longer period with novel medicines taking an average of 10 years from early development to commercialization. Developing new medicines is not easy and market dynamics aside, companies will experience challenges and even failures along the way. But with 1,000 tenants and over 87% of leasing stemming from preexisting relationships, our unique model and deeply experienced team positions us to proactively manage potential risks and bumps in the road. To end, I'd like to take a step back and acknowledge the mission-critical nature of the life science industry to our society. Each approval from the FDA marks the potential for a healthier, longer life for each of us listening on the call today and our loved ones. New therapies improve and extend quality of life, prevent costly hospitalizations, and ultimately, reduce long-term health care costs. We are proud and humbled that as novel therapies approved by the FDA in 2022, half by Alexandria tenants, a stat that holds true for the past decade. Approvals from tenants this quarter include an RNA-based treatment of hereditary transthyretin-mediated amyloidosis, a small molecule treating obstructive hypertrophic cardiomyopathy, and a first-in-class immunotherapy targeting metastatic melanoma. To paraphrase Roger Perlmutter, former CSO of Merck and the CEO of the previously mentioned Eikon Therapeutics, novel medicines can change the world and most have yet to be discovered. And with that, I'll pass it over to Steve.
Stephen Richardson, Retiring Co-CEO
Thank you, Hallie. The second quarter of 2022 was an absolute blowout quarter in nearly every regard, the demand and really the intensity of the strong commitment to Alexandria's brand of highly differentiated mega campuses and operational excellence continue to provide for superior financial outperformance. I'd like to give a big shout out to the entirety of the Alexandria team as the following results are amongst the best in nearly every category. As Joel noted, Alexandria is truly a one-of-a-kind company and hence has definitively proven its ability to deliver excellent results throughout a wide array of macroeconomic conditions. As we've discussed and Hallie referred to as well a number of times over the years, the companies in the life science industry have a long-term horizon for their pursuit and commercial life-saving and life-changing novel medicines and therapies. Research and discovery in the laboratory, multi-stage clinical trials, and commercial rollouts can and do take a decade or more. Alexandria's unique capabilities and team have successfully identified the most promising life science companies and ultimately attracted the world's leading investment-grade pharmaceutical and big biotech companies to its mega-campuses in AAA locations adjacent to the country's leading research institutions. The second quarter exemplifies this powerful combination of trusted relationships with high-quality companies and their long-term horizons and some consider the following. 87% of the leasing activity overall was from Alexandria's existing relationships and absolutely essential and unique to Alexandria-only enabling success during turbulent macroeconomic quarters. And during Q2, 88% of the leasing activity in the development and redevelopment pipeline was from Alexandria's existing relationships. Consider how powerful that statement is for successfully growing the company's high-quality on-balance opportunities not only for a few quarters but for many years. The stability and trusted nature Alexandria has become a bedrock in value consideration for our tenants. And as the company has grown to more than 1,000 tenants this past year, this presents an exceptionally powerful competitive advantage for the company's future growth and a substantial barrier for others to be dabbling in a highly sophisticated and technical nature of mission-critical life science real estate. Beyond the ground reality for Alexandria this quarter is a vigorous and highly productive effort from across the entire company. The leasing activity of approximately 2.3 million square feet is in the third-highest quarterly leasing volume in company history. Record rate increases with renewal leasing spreads of 45% GAAP, 44% cash represent the second highest and the highest rental rate growth in the company's history, respectively. The portfolio mark-to-market remains strong at approximately 7.5 percent and as we noted in the last two quarterly calls this is significantly greater than the mark-to-market of 17% at the end of 2020 and in line with the end of 2021's 30.4%. Accounts receivable for the entire Q2 was 100% including 100% from our publicly traded biotech tenants and that continues as we've achieved 99.9% so far during July. Early renewals for this quarter were similar to Q1 at a rate of 50% of leasing, a strong validation again of the health of Alexandria's tenants and their long-term planning horizon that we noted at the start of my comments. We have exceptional health of our value creation pipeline with a total of more than 900,000 square feet of leasing which contributes to a highly de-risk nature of the pipeline as 78% of the 7.8 million square feet which is projected to generate $665 million of incremental revenue is leased or negotiating, and Peter will provide additional detail and color during his comments as well. Now, let's move on to supply and demand. Demand was consistent with the past two years with no significant drop in our quarters. We do see the demand in the market highly competitive for life science projects and end markets, the actual each HVAC capacity, actual electric capacity, actual operational experience an operator might have. We continue to monitor supply at a very similar level, including the actual assets because differences between purpose-built Class A facilities and Class B purpose-built we also look at the potential impact overall level of the market in new developments. So let's build up the specific reality in the field and supply. Current vacancy rates continue to be very tight with availability in our core clusters remaining less than 1% which is generally consistent with market conditions during the past several quarters. There is not significant subleases in the market which is in contrast to what other assets are experiencing, and if they are of high quality, they are moved very quickly. As we look at 2022 the unleased new supply is adding very incrementally 1% to 2% of our key market, reflecting strong demand. If we look ahead to '23, we drill down on each and every project at our core markets and determine which projects are actually vertical and well underway. Ultimately, Alexandria has significant differentiation in the market and as I mentioned at the outset of my comments, this new set of projects is only becoming more intensive and accelerating as companies need a trusted and eminently capable operator for the mission-critical operations. In conclusion, the great progress made on the construction and leasing of our high-quality value creation pipeline paired with our ability to realize strong exit cap rates during the quarter once again demonstrates our ability to create significant long-term enduring value for our shareholders. Thanks for listening. And with that, I'm going to go ahead and pass it over to Dean.
Dean Shigenaga, CFO
All right, thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. Our team is very pleased for their 7th year of recognition as winner of the Large Cap NAREIT Communication and Reporting Excellence Award, 6-time Gold Winner plus one Silver Award, which is truly awesome. So congratulations team. At the end of June, our team published our Annual ESG report highlighting key areas of our leadership in ESG and our focus on making a positive and lasting impact on the world. Key topics included in our ESG report include among many others, first, managing and mitigating climate-related risks, including continued development of our science-based targets to reduce emissions. Two, highlights of the design of what is expected to become the most sustainable lab building in Cambridge and to future all-electric buildings in our San Francisco Bay Area market. And then three, our eight unique and important social responsibility pillars. Now turning to the quarter and the first half of the year. Our first quarter and first half results were very strong and significantly beat consensus. We also raised our strong outlook since our initial guidance for 2022 by $0.05, including $0.03 with the second quarter results here. Our projected growth in FFO per share is very strong at 8% over 2021. Total revenues for the first quarter and the first half of the year were strong and up 26.3% and 27.2% respectively over the same periods for 2021. FFO per share for the second quarter was strong at $2.10, up 8.8% over the second quarter of '21. Now huge thanks to our entire team for truly exceptional execution in 2022. We have generated one of the most consistent and strong operating and financial results quarter-to-quarter and year-to-year within the REIT industry. Now, as you've heard from us today over 1,000 plus tenants and other life science industry relationships is really driving strong demand for ARE's brand. ARE is the go-to brand and the trusted partner to the life science industry; we have the best team, the highest quality facilities, the best locations, and tremendous scale for space optionality to address demand. Our EBITDA margin was 70% and is one of the best in the REIT industry. This strong EBITDA margin also highlights the efficient execution of operational excellence by our team. We had strong occupancy at 94.6%, up 60 basis points since 12/31/2021, and our occupancy guidance range for 2022 from 95.2% to 95.8% highlights continued strength in occupancy growth. Record leasing volume and rental rate growth for the second quarter of 45.4% and 33.9% on a cash basis and really strong rental rate growth outlook for the entire year at 32.5% and 20.5% on a cash basis, highlighting the strength, again of our brand and execution. We have very high collections of July rent at 99.9%, as of July 22, which was about three weeks into July and consistently low AR at $7.1 million as of June 30. These are pretty amazing statistics for one of the largest REITs in the industry and not surprising given the high credit and diverse tenant roster our team has curated over the years. Our strong same-property NOI growth for the second quarter was 7.5%, 10.2% on a cash basis. This strong performance highlights the strength of our brand and trusted partnerships that continue to drive strong demand for lease renewals and re-leasing of space and expansion of space with ARE. Now, same-property occupancy was very exceptional for an asset base with consistently high occupancy, but it was up 140 basis points in the second quarter compared to the second quarter of 2021. Now turning to our strong and flexible balance sheet. We have one of the top overall credit ratings in the REIT industry ranking in the top 10%. We've got no debt maturities until 2025. Over 98% of our outstanding debt is subject to fixed interest rates, we have $5.5 billion of liquidity. The weighted average remaining term of outstanding debt was 13.6 years and one of the highest in the REIT industry. Our net debt to adjusted EBITDA is on track to hit 5.1 times by year-end, really highlighting our focus on continuous improvement in our balance sheet and credit profile. Forecasted cash at the end of the year of about $250 million is expected to reduce our incremental debt capital needs for 2023, and this is really important in this higher interest rate environment. And then we really have achieved really strategic execution in 2022 on our capital plan with only slightly above 10% of our overall growth sources of capital remaining for the rest of 2022. Now at the midpoint of guidance for this year on dispositions, we have $740 million remaining and we have the potential to exceed the midpoint of that guidance. Our updated capital plan reflects a significant reduction in uses of capital for the second half of the year aggregating about $635 million across both acquisitions and construction spend as we prioritize our allocation of capital. We are on track to reinvest about $2 billion of cash flows from operating activities after dividends over a 10-year period ending on December 31, 2022. Now, this includes about $300 million in cash flows from operating activities after dividends at the midpoint of guidance for 2022. Now turning to our Venture Investments. This program and component of our business is really consistently generating realized gains. Realized gains for the second quarter were $28.6 million and $51.8 million for the first half of the year, and we are on track with projected realized gains for 2022 that should be consistent with the $105 million in realized gains in 2021 or almost $26 million per quarter. Now, our team has delivered very strong operating and financial results in the first half of 2022 and our improved outlook for the year remains very strong with EPS diluted ranging from $2.14 to $2.20 and FFO per share as adjusted diluted from a range of $8.38 to $8.44. FFO per share is up $0.05 from our initial guidance provided at Investor Day on December 1 of '21, including the $0.03 increase with second-quarter earnings here, and we expect strong FFO per share growth of 8.4% now for 2022 over 2021. Now, we refined our capital plan for the back half of the year, including the following items. We're really just focused on real estate sales for the rest of the year. We have no equity required for the remainder of the year, and we significantly reduced our forecasted uses of capital by $635 million really on the back half of this year.
Joel Marcus, Executive Chairman and Founder
Thank you very much. And I want to apologize, Steve was on a cell phone and his line cut in and cut out, we'll work with the transcript providers and make sure the blanks are filled in. With that, we'd like to go to questions.
Operator, Operator
And our first question will come from Anthony Paolone of JPMorgan. Please go ahead.
Anthony Paolone, Analyst
Thanks. And first best wishes to Steve and thanks for all the help over the years. So I appreciate that. My first question is, as it relates to just the demand you guys continue to see in the portfolio, do you think the $3 billion in development spending and effectively roughly about the same amount of deliveries is sustainable and how we should think about what things look like going forward or is the second half of the year drop in spending likely to persist into next year and kind of indicate just slowing the pipeline?
Joel Marcus, Executive Chairman and Founder
Yes. So Dean, do you want to take that?
Dean Shigenaga, CFO
Yes. Tony, it's Dean here. When we did look over the last couple of months here at our capital plan on around construction spend, we did announce a significant reduction in spend for the back half of this year. But as you would expect, we look very carefully at spend for 2023. There were significant reductions there, but I don't want to get into the details of the capital plan specifically for next year, we'll get into that at Investor Day. What we are focused on though Tony as you can tell from our disclosures, the $665 million in incremental annual rental revenue as well call our priority focus, that's a fairly significant pipeline, both in revenue, but also 7.8 million square feet most of that, as you guys know is leased or negotiating at roughly 78%. So I'd call it we've refocused where we're paying attention to on allocating capital this pipeline is super important to us. So there are dollars that we will incur as we look into '23 related to that, but we're being mindful and disciplined and scaling back where we can.
Anthony Paolone, Analyst
Okay, got it. And then just in terms of in the portfolio, can you maybe take us inside some of the spaces and give us a sense as to how tenants are utilizing their space and whether or not just their own funding environment being more challenging is slowing up their hiring or growth plans, or just anything you see on that side?
Joel Marcus, Executive Chairman and Founder
So when you ask about how they're using their space, do you mean, I'm not quite sure what you're asking. The laboratories are operating full time, we've said, as you know, many times, you can't do lab work from home. Most of the life science tenants have a flexible work-from-home schedule. So they are, yes, white-collar folks are in several days a week and kind of move that around. I think that's kind of the norm. But there have been, I was at one of our mega campuses not too long ago and the parking lot was jam-packed, so people are back in a pretty important way. But I think the office part of the component still is kind of a hybrid work schedule, if that's what you're asking.
Anthony Paolone, Analyst
I'm trying to think through if capital was last point to fall and they have growth plans, do they slow up the need to take down as much space as maybe they would have otherwise right now?
Joel Marcus, Executive Chairman and Founder
Yes. Tony, you have to go back to what Hallie said, the industry is not a cyclical industry, the industry is event-driven and if one is working on a particular blockbuster drug or whatever, they're going to allocate capital obviously as prudently and as disciplined fashion as possible, but they're going to have to move forward, because that's where the value of the pipeline is part of the key value. So I think it's different than other sectors, whether you're in a law firm or a financial sector where you can move a whole bunch of things around because of just macroeconomics. But this is a very different industry. So I don't think you can kind of compare the two. Now tech tenants are well known, obviously, those guys clearly have slowed the pace of hiring, some of them have done some layoff work and so forth and so, we see that, we've got what 8% or so, less than 10% of our portfolio is tech-related. So that is, I think, well-characterized out there.
Operator, Operator
The next question comes from Jamie Feldman of Bank of America. Please go ahead.
Jamie Feldman, Analyst
Thank you. To start off, just congratulations also to Steve. It's been a pleasure to work with you all these years and we wish you the best going forward. I guess, we appreciate all the color, the additional disclosure on tenant segmentation, but can you talk maybe let's fast forward six months, nine months here and we look back and I'm sure there's going to be some distressed or something of some sort in your portfolio, like what do you think that actually looks like in terms of what the cycle does actually bring?
Joel Marcus, Executive Chairman and Founder
It's evident that looking back to the period of 2008 and 2009, there will be tenants, often small publicly-held companies, either in preclinical stages or already in clinical trials, managing their cash to reach important milestones for financing or possibly partnering or selling their company or product to a larger firm. This situation occurs frequently, and its evolution can be anticipated. A notable example from 2008 or 2009 involved a company that vacated an entire building on one day, and the very next day, Genentech-Roche occupied that space. Additionally, we previously discussed a tenant in San Diego that was looking to vacate around 20,000 square feet. We successfully found another tenant for that space, and the new lease had a mark-to-market increase of 50%. We believe we will effectively manage these situations and be better positioned than most due to our disciplined approach to leasing.
Dean Shigenaga, CFO
Yes, and Joel and Jamie, if I could add, it's Dean here, just to put things into perspective, just from one simple statistic. If you look at occupancy from the end of '08 to the end of 2009, occupancy only declined 70 basis points, if you brought in that time period, just a tad, and you look at the end of '07 to the end of 2009, occupancy actually grew by 30 basis points. And I think the one fundamental difference between that period and today is that the life science industry in particular, the biotech industry has really gone through this period where I think you can almost call it the Golden Age of the biotech industry today with tremendous innovation going on relative to 2008. So it's a much more exciting and vibrant environment for the biotech sector.
Jamie Feldman, Analyst
Great, thank you for that. And then I guess just thinking about the cap rates on the asset sales in the quarter. How are those or how are they not representative of the broader portfolio? We've heard from brokers that maybe life science could still be trading in the threes, I'm just curious if that's just no longer a fact or maybe the Binney asset in particular that you sold is not a great comp to talk about kind of the best of the best in the portfolio?
Joel Marcus, Executive Chairman and Founder
Yes well, I'll let Peter take that, but let me just say if you remember the Binney corridor and I think you've heard that Jamie. It took us about a decade to assemble in title and build over 2 million square feet there. 300 Third was an asset we purchased before all that, it was actually an older building that had been built for Palm. And a converted asset so it doesn't really represent what we developed along that corridor, but that corridor is I think representative of a big kind of mega Class A campus. So I think keep that in mind as you think it's not a one-off, 100 Binney isn't just one-off Class A building. It actually represents all 2 plus million square feet there. But Peter you can give some details for sure.
Peter Moglia, Co-CEO
Yes sure Jamie fair question, you saw the 3.5 print last quarter and this is 4.3 the buildings are next to each other locationally. I would assess the difference Joel touched on it may be starting from where I was in my comments I think there are number of factors it would include interest rate creep since that trade certainly rates have gone up since the sale of 100 Binney. So that I’m sure factored into it. The age of building - 300 Third was built in 2000. And as Joel mentioned, it was a build-to-suit for Palm, 100 Binney was built in 2017. So 100 Binney is very new state-of-the-art HMH where 300 was not purpose-built for lab. I've talked and during other quarters, commenting on non-purpose-built buildings, and this one has similar challenges to others that we've seen in the market, namely because of their low ceilings there or the low floor-to-floors, there's 8.5 foot ceilings. We typically have 10-foot ceilings in our space. So when you shrink the ceiling down like that, it's just not as nice of an environment. And it has some other weird things. There's, the parking lots on the second floor of the building, and that just creates some operational inefficiencies when you're dealing with chemical storage and things. So you have that and then I'd say maybe one other item is that it's subject to a ground lease versus 100 Binney, which was a fee simple asset, and there's certainly a little bit of discount for that. So I think all of those things kind of aggregated to a 4.3 but I would also say in this environment of 4.3 is still pretty good, really good if you factor and also that 300 Binney is subjective a long-term lease and the buyer is not going to be able to market-to-market for quite a long time. So they certainly saw great value in the future appreciation.
Joel Marcus, Executive Chairman and Founder
And a great tenant in Alnylam.
Jamie Feldman, Analyst
Okay great, thank you.
Joel Marcus, Executive Chairman and Founder
Thanks Jamie.
Operator, Operator
The next question comes from Michael Griffin of Citi. Please go ahead.
Michael Griffin, Analyst
Thanks appreciate you having me on the call this quarter and Steve, congrats on a well-deserved retirement. Just wanted to touch on the suburban portfolio dispositions, can you maybe give some color as to why it made sense to sell these assets? And could you see potential sales from other similar properties in the future?
Joel Marcus, Executive Chairman and Founder
I'll let Peter provide some specific details, but I want to welcome everyone to the call. We acquired 60 West View, which was our first asset in the Massachusetts cluster. We gathered these assets as part of our early efforts to establish a presence in the Greater Boston area. At that time, we didn’t have the funds to purchase anything in Cambridge. Over more than a decade, we built a solid portfolio of well-maintained suburban assets with good credit ratings. Eventually, we identified opportunities to harvest value and reinvest, aligning with our shift towards the mega campus strategy in the Greater Boston region. This focus on larger campuses is where we want to direct our capital, and given our various needs, the decision was relatively straightforward and well-timed. Peter, you may want to add anything specific.
Peter Moglia, Co-CEO
Yes, I'd just say that I think the time was right. Those - there were 12 buildings in that portfolio. They were really good workforce buildings but relative to the rest of the assets that we have in our market that they were on the lower spectrum of quality and given the appetite for life science real estate I think we were able to get the pricing by selling in today that was very attractive and as Joel mentioned and I said on the comments, great opportunity to reinvest that into our value creation pipeline. So I don't think there's really - I think it's just really that simple, just really opportunistic time to sell assets and get maybe more for on than you would in another era.
Joel Marcus, Executive Chairman and Founder
Yes and I would say we don't also have a set of suburban assets like that really in - how they kind of originated and stuff really in any other market. So you can't really say oh, do you have other suburban portfolios. Like in the Bay Area, a portfolio, we would probably exit would be the East Bay, but we exited those before. So we don't have those kind of assets by and large.
Michael Griffin, Analyst
Great. I appreciate the color on that. And then just maybe stepping back a bit, obviously given the continued demand for life science, are you noticing more entrants coming into your markets, particularly on the conversion side of traditional office to life science product?
Joel Marcus, Executive Chairman and Founder
Well, I think as Peter said, the reality is data centers have been hot. Obviously, resi has been hot. Industrial logistics has been hot, and life science has been hot. But life science is a very - it's a much, much smaller overall asset base countrywide. And so, the scarcity is an important part of things. And as Peter said, I think a number of important high-quality investors have sought to look at these scarcity assets. But obviously, sometimes people make a decision. They don't like the asset they have. So they're looking at somebody else and saying, Gee, could we try to convert and do that and sure in markets there are those kinds of people. But by and large, I mean, we heard pretty big core stories on some conversions in the Boston region by people who have no idea what they're doing and tenants who are desperate to get out. So that's a story that will unfold pretty sadly for those folks.
Michael Griffin, Analyst
Got you, that's it from me, thanks for the time.
Joel Marcus, Executive Chairman and Founder
Yes.
Operator, Operator
The next question comes from Rich Anderson of SMBC Nikko. Please go ahead.
Richard Anderson, Analyst
Thanks and Steve, good luck honor and privilege to work with you. I'll look for you on Celebrity Row at Warrior Games going forward next season. So on the topic of conversion activities, it's interesting. A lot of your office peers have made that the bulk of their development or redevelopment business. Peter, to your comments about development costs going up and all that? And again, despite what you just said, Joel about some of the horror stories, do we expect the conversion business to start to whittle down or is it whittling down even though you don't consider it a competitive force for you guys? Is that something that could be an outtake from all of this disruption?
Joel Marcus, Executive Chairman and Founder
Yes, so Steve and Peter, you guys want to comment?
Peter Moglia, Co-CEO
Steve, do you want to go first?
Stephen Richardson, Retiring Co-CEO
Yes, sure. Maybe I'll jump in here, Rich, and thank you for the kind words there. Yes, we're already seeing - that's why I tried to break it down in terms of the properties themselves. So you look at these conversions. And then you look at the operators who are new to this with a one-off building. And then ultimately, the capital partners, and we have seen now projects that have been put on pause that those will ultimately be put on ice. And we just don't see capital that enthusiastic about committing significant dollars to these types of conversions given the overall macro environment, the complete lack of any tenant base mixed with a lack of operational experience. So I think more to come and more to unfold, but that's certainly the sentiment that we're seeing out in the market now and Peter can add to that too.
Peter Moglia, Co-CEO
Yes I would say we do quite a number of meetings about strategy and market updates on a weekly basis. We're covering we never going to long before we covering what could be coming up what have we heard with all the different regions and I had - by and large we don't hear a lot about potential conversions outside of you might see announced in the press. Most of it is potentially new development, but as Steve mentioned in his comments. We only see limited amount of that in 2022 and 2023 more has been announced, we'll see if it gets built. But I don't see or we don't see a lot of conversions outside of going back to the suburbs in Boston. We certainly know one of our - one of the office suites that has a lot of holdings out there I have talked about doing conversions and I'm sure are underway with a few, but we're not seeing - proliferate throughout our urban core very much at least at this point.
Richard Anderson, Analyst
Okay, great. I'll yield the floor. Good long in the call here. Thanks very much team.
Operator, Operator
The next question comes from Sheila McGrath of Evercore. Please go ahead.
Sheila McGrath, Analyst
Guys good afternoon, congrats Steve and all the best. Just a quick question on the dynamics of rental rates for new construction. Assuming as Peter outlined construction costs continue to go up and you want to maintain development yields, just curious if the new rents on new development to justify construction are like above prevailing market in various submarkets?
Joel Marcus, Executive Chairman and Founder
Yes so Peter do you want to talk about Blackstone's kind of market high they just are indicative.
Peter Moglia, Co-CEO
Yes, I mean, I think what Joel is referring to as I think they were at $137 a foot. And that's, by and large, one of the things that sets the market our new developments. And so, you get a rate like that and then a renewal comes up of another Class A property in the neighborhood and the landlord will ask for the same rent. So I would say that the new development kind of helps set the market and then the existing assets follow. So it's a good thing.
Sheila McGrath, Analyst
Okay great. And then on 1450 Owens, I thought that was an interesting structure. I guess, sort of to minimize construction spend. Just wondering if that something you would replicate on some of the pipeline going forward?
Joel Marcus, Executive Chairman and Founder
We've actually done it before. But Steve, you could talk about that.
Stephen Richardson, Retiring Co-CEO
Yes I think Sheila, that was a really great situation for both ourselves and the joint venture partner. We had the very left of sold, titled to go. So we have combination of a very attractive intrinsic land value plus preconstruction work that we done. And as we looked at partnering on that project just into the additional capital contribution to build to build will equaling the intrinsic value and the preconstruction work we had in there. So you're right. It's a very mutually rewarding way to move forward with that project.
Sheila McGrath, Analyst
Okay great, thank you.
Operator, Operator
The next question comes from Michael Carroll of RBC Capital Markets. Please go ahead.
Michael Carroll, Analyst
Yes, thanks I just wanted to touch back on suburban Boston sales I guess Peter you indicated that portfolio was at the lower quality spectrum. So could you comment how the 5.1 cap rate would compare to the rest of the portfolio. I mean is there an easy way to understand the cap rate difference between let's say newer buildings and the rest of the properties?
Joel Marcus, Executive Chairman and Founder
Yes the assets and the locations are even comparable but Peter you could answer.
Peter Moglia, Co-CEO
Well I think what you're trying to get to Michael is I would say that if we had a - so these were more of one-off buildings. But if we were to sell something in the suburbs that was more campus-like - I mean San Diego ago and itself is kind of suburban market. So you look at something like Campus Point right where you have this amenitized campus in a suburban spread out environment, but it's Class A and amenitized I mean that's going to have, that's going to be a low 4 cap rate. If we had something in the suburbs of Boston that was a similar type of development I would expect to similar type of cap rate. But these were lower quality these weren't really campuses they were one-off buildings of significant age and of credit tenancy in there was about a quarter when you looked over the spectrum of the tenant base. So it just as I termed it before kind of workforce they'll be leased over time as tenants need 30,000/50,000 square feet which is about the average size of those buildings. But they're never going to have huge rent growth because they are not that appealing to have somebody clamoring over it.
Michael Carroll, Analyst
Okay great. And then just really quick and we ensure in time. I know about 80% I guess of your process development projects are protected in terms of I guess development cost increases. Can you kind of talk about the near-term starts and how that's protected and if there is a risk to those budgets going higher or yields potentially going lower?
Joel Marcus, Executive Chairman and Founder
Yes so, look you can't do a - you get a gross maximum price contract until you actually have something to price. So whenever we start a project we obviously do a pro forma and then within that pro forma I believe that we have a very conservative approach with allowances for cost that should be adequate and then contingencies on top of that. And then we get the entitlements. We get permits and then we're ready to go out and supplying the project and it just takes time - you don't but it all out at once you buy out different trades at different times. So it's a process but we do it expeditiously and anything that we have that starts out. Again we have these underwriting contingencies that are in our pro forma so we have a really good idea what the yield would be and more often than not that initial yield can be done. We can do better because as we start to buy things out we can start removing some of those allowances and contingencies and end up by the time it gets put in to the supplemental you know highly confident in that yield. It may not be completely bought out by then but it's very close and if it hasn't been bought out it still contains good contingency to cover any unknowns or unexpected cost increases.
Michael Carroll, Analyst
Okay great thanks.
Operator, Operator
The next question comes from Dave Rodgers of Baird. Please go ahead.
Dave Rodgers, Analyst
Hi Steve, thanks for the help over the years congratulations and good luck as well. Peter, just on the investment sales side, maybe you've touched on a lot of different ways about this question. But when you talk to your JV partners that have been the consistent buyers of a lot of your better quality assets? Are they specifically asking for or indicating that they'd be interested in a different type of asset or a different price point at this point in time, just with respect to where debt costs are and their ability to kind of finance that spread?
Peter Moglia, Co-CEO
So the nice thing that we have in our - in the base of our great partner pool, and it really truly is a great group of partners that we've established significant relationships with is that when we do these JVs. They're done on an unlevered basis. So they're not necessarily beholden to what the rates are for secured debt at the time. Now, many of them may indeed finance their portfolios outside of asset-specific financing, but it is at a very low level. In fact, some of our partners though have so much cash to put out that they don't lever really at all. So it's been one of the things that I think has helped us achieve the cap rates that we've achieved and sell things at an expeditious manner because there is a hunger for those types of assets, and they're not those purchases aren't contingent upon financing. So we hear stories about deals falling out because the lender at the last minute decides not to fund. That fortunately for us, we haven't had to deal with that. And if we did an outright sale, and we've had bidders that have put financing contingencies in their offers, but we've had enough bidders that were willing to not have that contingency that we just so far knock on wood. Everything that we've put out there we've performed on and haven't had any disruption because of debt market volatility.
Dave Rodgers, Analyst
That's helpful thanks. And then maybe just one unrelated question with regard to the Texas investments you detailed, I think, a little bit more this quarter versus last. And I think last quarter, Joel, you had made the comment that you'd want to wait. I guess just more curious in terms of your thoughts, if you can comment further? Are you bringing existing tenants? Are there tenants in that market that want to be in those locations? What's driving that decision and what's your kind of vision for the investment there?
Joel Marcus, Executive Chairman and Founder
Yes, so that's a good question. So when it comes to Houston, one of our campus acquisitions was, in fact, made because of a specific tenant. And that tenant will grow there and will be an anchor to a larger project. When it comes to Austin, we have a cohort of important lab tenants, both credit and noncredit who want to be in that market. It is a new market. It is one that is not an existing cluster probably will take a decade to start to gel and then probably another 15 years beyond that to get to that 25-year mark. But I think what intrigued us about Texas and Austin in general is - and I've made this statement before, if you look at what Steve Jobs said about the 21st century, it was the century at the intersection of biology and technology. And so I think Texas is ripe for that intersection, and that's where this industry is really moving in an industrial fashion. So this is really kind of the first toe in the water with that thesis.
Dave Rodgers, Analyst
Great, thank you.
Joel Marcus, Executive Chairman and Founder
Yes, thank you.
Operator, Operator
The next question comes from Tom Catherwood of BTIG. Please go ahead.
Tom Catherwood, Analyst
Thank you and Steve, thank you for everything and best of luck just one question from me. Hallie and Joel really appreciated the commentary on your different tenant segments at the onset. One thing that's always struck us though is the early insights that the company gets through the Alexandria investment platform and incubators like launch labs. On that early stage side of the business, are you getting any leading indicators suggesting a shift that could drive future changes in trends? And is that changing your investment strategy at all?
Joel Marcus, Executive Chairman and Founder
So thank you for that question. Not really I mean I think the - I mean technology, and you saw the - if you looked at the cover of the press release and sub, we've highlighted Eikon Therapeutics based on Nobel Prize-winning technology and headed by Roger Perlmutter, who was CSO at Amgen. He was also Chief Scientific Officer at and Head of Research at Merck. And this is a great example of a using to some extent AI in the development of new innovative therapeutics. So clearly that intersection that I just talked about that Steve Jobs described is, we're certainly seeing way more of that today than we did before, but I think our early-stage efforts are really aimed at focusing on the next Alnylam's or the next Moderna's, two companies that we became associated with Alnylam in 2003 that started in 3,500 square feet in our Science Hotel and Cambridge and Moderna that started early on in Tech Square a couple of years after it had been founded by the flagship team, and our hope is to find those kinds of companies that have just totally disruptive technologies and lots of product opportunities and shots on goal, because those are the things that are going to move the dial and move the needle when it comes to human health, and by the way, both are huge, huge tenants of ours in many respects. So it all kind of works out, but that's kind of where our focus is, I don't know Hallie if you want to comment.
Hallie Kuhn, SVP of Science & Technology and Capital Markets
Yes, thanks, Joel. This is Hallie, and I think you covered it well and to kind of parrot some of Joel's comments from earlier earnings calls, we're really in the early innings so to speak of these next-gen type therapies, is that when we think about gene therapies, cell therapies, mRNA therapies, we've seen a handful approved. But when you look at the stable of clinical and preclinical technologies, it's really mind-blowing how exponential it is and just repertoire of types of different therapies and types of different clients that companies are working on. So I would say we're early days and seeing kind of what's the next generation of these therapies is going to look like.
Tom Catherwood, Analyst
Appreciate the color. Thanks, everyone.
Joel Marcus, Executive Chairman and Founder
Yes. Thank you.
Operator, Operator
The next question comes from Georgi Dinkov of Mizuho. Please go ahead.
Georgi Dinkov, Analyst
Hi, thank you. First, congratulations on the strong quarter. And Steve, good luck to you. I guess, just a couple of quick questions for me, can you please remind us how you assess credit risk in both the property and the investment portfolio?
Joel Marcus, Executive Chairman and Founder
I'm sorry. How you?
Georgi Dinkov, Analyst
How you assess credit risk in both the property and the investment portfolio.
Joel Marcus, Executive Chairman and Founder
Well that's, we could write a treatise on that, when it comes to the investment portfolio, if you're looking at early-stage, we're looking at the things Hallie and I just described, great management teams, strong financial capability to attack some really big problems that have major unmet medical needs. I think when it comes to the tenants, we have a much different kind of focus, focus on stability, credit, opportunity. So they're kind of different in that sense, but both are rigorous, and we've had a pretty highly disciplined and highly skilled team in place for a long, long time, which is why I think we've been able to do a really good job at those underwritings.
Georgi Dinkov, Analyst
Okay, great. That's helpful. Thank you. And just I guess my second question, you mentioned core office utilization is lower, and we see it in core office tenants giving back space. I'm just curious, have you seen any life science companies giving back fewer core offices?
Joel Marcus, Executive Chairman and Founder
I don't think so. But I'd ask. Peter or Steve, have you seen that, I don't think so.
Peter Moglia, Co-CEO
The laboratory's office, associated with our laboratories, is where the scientists work, and they require that space for their tasks. It is not considered good lab practice to do documentation in the lab itself, so it's generally not feasible to return office space, as it is necessary for those working in the lab.
Georgi Dinkov, Analyst
Okay, great. Thank you.
Joel Marcus, Executive Chairman and Founder
Thank you.
Operator, Operator
Our last question will come from Daniel Ismail of Green Street Advisors. Please go ahead.
Daniel Ismail, Analyst
Great. Thank you. Steve, I'd like to echo the comments on that. Thanking you for your help over the years and best wishes in retirement. Joel, just a quick question on the comments you made about the Texas expansion. We haven't seen the migration of life science tenant to the Sunbelt like we've seen in the traditional office sectors. Do you think this is a trend that will likely pick up for starts or do you think this is more of a one-off and that the growth of the cluster market will take the time that you stated earlier?
Joel Marcus, Executive Chairman and Founder
Well, okay. Well, first of all, I think, by the way, we didn't have a slightly okay quarter, we had a really great quarter. So I would ask you to think about your comments on your review piece. Secondly, it's our intent, like it was in New York, we started in New York, there was one incubator in New York alone, there were no other commercial companies really operating. There were a handful of companies, and we've either built or helped move or really helped create that market and so our intent is to do the same in Texas. We're not waiting for tenants just to haphazardly move there somehow, but we have a pretty strategic plan to work with tenants who want to move there. Remember, a lot of cities these days, and you could pick out the names have governance problems, homeless problems, crime problems, high taxes, and poor governance. So there are a whole lot of folks very interested. We've seen that in financial services and now Citadel just announcing a big move from Chicago to Miami. So you're going to see with the 1,000 tenants I can tell you we have a whole lot of folks that want to move.
Daniel Ismail, Analyst
That makes sense. I appreciate it. And is cost of living a concern for the tenants or the cost of science rents in these life sciences customers.
Joel Marcus, Executive Chairman and Founder
So it's very compared to other business, a very small percentage of their overall cost structure.
Daniel Ismail, Analyst
Thanks. And then Peter, just the last question for you, in bidding terms in the last three months, I'm curious as you're out there acquiring assets or looking to sell assets, have those changed at, has become less competitive or more competitive or what have you seen in terms of bidding terms?
Peter Moglia, Co-CEO
There have been fewer buyers recently as we wrap up our program, but the pricing for high-quality land has remained stable. When it comes to selling our assets or entering joint ventures, we are selective about our buyers. It's difficult to determine a trend, but the interest from those we usually approach for opportunities has not declined, and they continue to be eager for more exposure.
Joel Marcus, Executive Chairman and Founder
Yes, I mean, it's based on a pure scarcity of really high quality, well-located laboratory assets. I mean that's the equation Peters laid out.
Daniel Ismail, Analyst
Got it. Makes sense. Thanks a lot.
Joel Marcus, Executive Chairman and Founder
Yes. Thank you.
Operator, 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
Okay. Thank you everybody. And we'll look forward to our third quarter call. Be safe. Take care. God bless.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.