Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q3 2021
Operator, Operator
Good day, and welcome to the Alexandria Real Estate Equities Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the call over to Paula Schwartz with Investor Relations. Please go ahead.
Paula Schwartz, Investor Relations
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 may 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 would 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, to Alexandria’s third quarter 2021 earnings call and our seventh consecutive quarter in the COVID-19 pandemic, which for sure has forever changed our world and our lives in very fundamental ways. With me today are Jenna Foger, Peter Moglia, Steve Richardson, and Dean Shigenaga. In honor of my favorite NCAA basketball coach and in his final year as Head Coach for Duke men's basketball, Coach K has said imagination has a great deal to do with winning. I would like to say to our extraordinary Alexandria family, thank you from the bottom of our hearts for a spectacular third quarter and the operational pace and execution tempo that really defines operational excellence, as well as for your great imagination as Coach K said in all things big and small. Moving on to the keys to Alexandria's stellar third quarter performance by all metrics amid a historic demand environment, I think importantly, the best is yet to come. Continuing historic high demand for Alexandria's best-in-class lab space — the niche we invented — and our mission-critical and operationally excellent lab operations. Year-to-date, and others will talk about this, we've leased 5.4 million square feet and looking for a great fourth quarter to end the year. Alexandria is at the vanguard in the heart of meeting this historic high in unprecedented immediate lab space demand from many of our over 750 client tenants. Moderna is a prime example, and another one which Dean will talk about, a big tenant in South San Francisco for a full building, as well as critical paths for future growth which is so needed. Thus the need for acquisitions, redevelopment and developments, and has been repeatedly said, by life science tenants and their brokers, if any other company is going up against Alexandria for leasing space, the tenant will almost always pick Alexandria. We are proud to partner with Moderna on their Cambridge headquarters and core R&D facility. As Dean and others will talk about, it will be the most sustainable lab building in Cambridge with very strong economics and really great value creation. We're honored and proud that Alexandria has strategically significant tenant relationships and a stellar brand reputation across all of our cluster markets. We're also fortunate to continue to demonstrate pricing power in each of our core cluster markets. The war for talent, like other industries, in the life science industry is creating an even greater set of space needs and demands in the core key life science clusters, which is very good for Alexandria. We see an accelerating leasing demand even above and beyond what we see this quarter in several of our key cluster markets continuing. Rental rate growth continues strongly and excess supply is not a current threat. Alexandria's differentiated expertise and unique platform with its compelling internal and external growth drivers and outlook translates into genuine earnings power. As indicated in the press release and supplemental, our visible multi-year highly leased development pipeline is expected to generate approximately $615 million in future incremental revenue. Beyond that, the future leasing prospects really look extraordinary as I've said. The biotech boom and historic Life Science demand driven by strong industry fundamentals is evident. The 21st century is really the biological century as biology is in transition from an empirical science of trial and error to a real science with much more predictable and scalable outcomes. We are witnessing an industrial revolution in biotech. As we accelerate the application of new and innovative tools, we will see an acceleration in value creation. Products will come to market faster, for less capital, and with fewer failures. The Life Science industry and its ecosystem and its positive impact on humanity is truly a crown jewel of the United States and a testament to the free enterprise system of innovation. It's important to remember politically that those who seek to create a cradle-to-grave entitlement society should not use this industry as if it's fully covered. Finally, I want to turn to the second anniversary of our OneFifteen Project in Dayton, Ohio, which this month we celebrate. Sadly, overdoses have claimed a staggering 96,000 lives during the 12 months ending March 2021, a 30% increase from the year before. OneFifteen is an innovative data-driven non-profit evidence-based healthcare ecosystem dedicated to the full and sustained recovery of people with addiction and, as I said, in Dayton, Ohio, OneFifteen is revolutionizing the way addiction is treated through its tech-enabled care platform, which applies analytics to measure the effectiveness of various treatments and choices throughout the full continuum of care and continuously evolves its approach based on insights derived. Since its opening in 2015, OneFifteen has served almost 4,000 individuals struggling with addiction and conducted over 9,000 telehealth visits since the start of the COVID-19 pandemic. With our OneFifteen partners, we’re unwavering in our commitment to help people recover from addiction and live healthier lives while revitalizing the community. We would like to see this model replicated across the country. But politicians seem wholly ineffective, even given the large amount of capital that came to the cities and states during COVID-19. Our goal is not only to have OneFifteen serve as a model for success against opioid addiction in Dayton, but we hope to bring that model to address the homeless crisis on the West Coast. With that, I’d like to turn it over to Jenna Foger, who will comment on some important COVID-19 matters, the NIH, and the FDA. Take it away, Jenna.
Jenna Foger, Executive Vice President
Thank you so much, Joel. Good afternoon, everyone. As we begin to turn a new corner on this COVID-19 pandemic, which I'll speak to in a moment, life science industry fundamentals, as Joel highlighted, continue to be very strong and provide the industry with the unique structural integrity to weather broader market volatility and cyclicality. The confidence of these drivers and key advances in our understanding of biology and next-generation modalities will continue to fuel life science demands well into the future. So as we spoke about last quarter, owing to the expediency at which the industry and our tenants move to protect the country and the world, we now have the tools and a roadmap at our disposal to end this pandemic, while also ushering in a historic new era for biotech and scientific innovation. Now turning to our COVID-specific updates, by the numbers according to the World Health Organization, there have been a staggering 242 million confirmed cases of COVID-19 worldwide, about 20% of these reported in the U.S. alone, including over 4.9 million cumulative deaths. In the U.S., the incidence of new COVID-19 cases has, welcomingly, declined over 55% from its recent September peak of over 160,000 new cases to now 70,000 new cases, and we hope to see this trend continue. Three of the most widely distributed vaccines worldwide and authorized by the FDA have been developed by Pfizer, Moderna, and Johnson and Johnson. Roughly 67% of the vaccine-eligible population in our country, that's 12 and older, have been fully vaccinated, which is just over 57% of the total U.S. population. We hope with boosters and expanding indications that the number of fully vaccinated individuals will continue to rise. As we saw last week, the FDA authorized the use of Moderna and Johnson and Johnson boosters, in addition to Pfizer's already authorized booster shots, as well as mixing and matching booster doses between Pfizer, Moderna, and J&J in eligible populations. In light of the evolving data on the duration of immunity and COVID-19 variants, concerns including the common Delta variant, and now the Delta plus variants hitting U.S. soil, it's highly likely that COVID-19 vaccines will be required long-term. Regarding vaccine efficacy, in a study evaluating the real-world effectiveness of the Pfizer and Moderna vaccines at preventing symptomatic illness, the Moderna vaccine had an efficacy rate of 96%, and Pfizer at 89%. As we've all heard, breakthrough infections have occurred in a high single-digit percentage of the vaccinated population. However, while current vaccines may not entirely prevent transmission or contraction of COVID-19, they do significantly prevent severe disease and deaths, with over 90% of all hospitalized COVID cases represented by unvaccinated individuals. With regard to vaccine safety, there have been very few vaccine-related adverse events, less than seven per million reported overall, with nearly all cases resolving without long-term side effects. Given such a strong efficacy and safety profile, the FDA granted full approval for Pfizer's mRNA-based vaccine for people 16 and older, and Moderna’s mRNA-based vaccine is likely to achieve full approval for its vaccine for ages 18 and older in the fourth quarter. Concerning pregnancy in women of childbearing age, based on the safety data generated to date and how we know vaccines work in the body, the CDC and top health officials have encouraged any Americans who are pregnant, planning to become pregnant, or currently breastfeeding to get vaccinated against the Coronavirus as soon as possible. With regard to children, Pfizer reported that its COVID-19 vaccine for ages 5 to 11 was safe and nearly 91% effective. On the basis of this data, the FDA is expected to authorize Pfizer's vaccine for this population in the fourth quarter. Moderna also announced that its COVID vaccine is both safe and highly effective in children ages 6 to 11, and they will submit this to the FDA. For young children ages six months to four years, vaccine authorization will likely come in early 2022. Despite these advances in vaccines, given that COVID will likely remain on the planet for the foreseeable future, albeit as an endemic virus, with seasonal and sporadic geographic peaks, therapies will continue to be important in mitigating the severity of COVID-19. Most notably, this past month, Alexandria tenant Merck, in collaboration with Ridgeback Biotherapeutics, submitted an EUA application to the FDA for the oral antiviral molnupiravir. This drug demonstrated a 50% reduction in hospitalization or death in patients with mild or moderate COVID-19. If authorized, molnupiravir will be the first oral antiviral therapy for COVID-19; it's a big deal. It's far easier and more cost-effective to administer broadly compared to the current antibody treatments in the mild and moderate COVID-19 population. Despite the COVID fatigue that we all absolutely feel regarding the multitude of challenges placed upon our societies and the world, the scientific advances achieved at unprecedented speed are the one saving grace of this tragic period in our history. The scientific attitude and adaptability of so many of our tenants to translate their broad platforms and decades of work into safe and effective vaccines, therapies, and testing in just a year’s time is remarkable. The application of these tools will forever transform the way we develop vaccines against novel targets and also augment future surveillance testing and our nation's pandemic preparedness overall. Touching on another topic regarding the NIH and FDA leadership, the pandemic has also underscored how critical these agencies are, and that solid support for these key federal agencies is paramount for national security, ensuring that the U.S. maintains its leadership in advancing scientific and biomedical innovation, and maximizing our ability to address current and future health challenges. Interestingly, over the past several weeks, the leadership positions at these two agencies have received increasing attention. On October 5, long-tenured NIH Director Dr. Francis Collins announced that he would be stepping down as the Director of the agency by the end of the year. Dr. Collins is the longest-serving presidentially appointed NIH Director, having served three U.S. Presidents over more than 12 years. During his tenure, the NIH has received increasing bipartisan support, and the agency's budget grew from $30 billion in 2009, when he started, to nearly $50 billion in the upcoming fiscal year. The Biden administration is undergoing a formal process to name Collins' replacement, which is expected later this year or more likely early next year, and we're optimistic that his successor will continue to bolster biomedical and public health research in this country. As for the FDA, Acting Commissioner Dr. Janet Woodcock has led the agency since the beginning of the Biden administration. Under her leadership, in addition to the COVID-related emergency authorizations that I just spoke about, the FDA’s CDER has approved 40 new molecular entities through the third quarter, putting the agency on pace in the 2020s for a near-record high of 53 approvals. Because Dr. Woodcock's term ends on November 15, the administration now needs to select and appoint a new Commissioner in the coming weeks. Similarly, on October 14, the Biden administration announced that it’s likely to nominate Dr. Robert Califf as the next Commissioner of the FDA. Dr. Califf is a cardiologist by training and the current Head of Clinical Policy and Strategy for Verily and Google Health. He also served as FDA Commissioner from 2016 to 2017 at the end of the Obama administration, after being appointed Deputy Commissioner in 2015. Dr. Califf is very well-known and dear to us at Alexandria as a regular participant in the Alexandria Summit for the past several years and a partner in our OneFifteen Project to address the opioid epidemic, as Joel just spoke about. Dr. Califf's nomination would be viewed very favorably by the life science industry, key investors, and stakeholders. Clearly, the strength of the FDA is instrumental for ensuring the continued pace and vitality of biomedical innovation in our country. As I wanted to highlight, in addition to the COVID-19-related updates that we'll likely see in the fourth quarter, the FDA will also announce a handful of major approval decisions before the end of the year. Decisions that have positive outcomes will bring critical new drugs to patients as well as billions of dollars of additional revenue to the sector. For example, Eli Lilly is expected to submit an application for accelerated approval of an Alzheimer's therapy known as donanemab. Given the controversy surrounding the FDA’s positive approval of Biogen's Aduhelm for the same application, the approval of Lilly's drug would likely inform future approvals in this area. There's also a major decision regarding a new class of drugs for severe atopic dermatitis from Pfizer and AbbVie, and several other awaited approvals for growing biotechs, including the approval of intracellular therapies for the treatment of bipolar disorder from longstanding Alexandria tenant. Just to wrap up, before I turn it to Steve, I wanted to share a quote from former FDA Commissioner Dr. Scott Gottlieb in his new book, Uncontrolled Spread: Why COVID-19 Crushed Us and How We Can Defeat the Next Pandemic. In his book, Gottlieb writes, 'The brief history of COVID shows that innovation can't always be predicted. We don't know which platform will yield answers for future threats. As part of our national preparedness, it will be important to stockpile countermeasures to known risks. But it's equally important to support the development of novel technology platforms that have broad applicability over a range of potential threats. The use of mRNA to customize synthetic vaccines shows the value of having agile competencies at the ready.' These are the technologies we will need to reduce our nation's vulnerability. The opportune focus and unique ability to fulfill that responsibility as a life science industry continues to reaffirm why Alexandria has dedicated our business, our passion, and our purpose to help drive this mission-critical industry forward. With that, I'll turn it over to Steve. Thank you.
Steve Richardson, Chief Operating Officer
Thank you, Jenna. Good afternoon, everyone. Alexandria’s brand power in the market is not only delivering the exceptional results today that you've seen, but also provides clarity for the potential trajectory of the company's future growth and enhanced dominant position in the life science ecosystem. Peter and I just completed an intensive on-the-ground tour through a few of our cluster markets, and the energy and enthusiasm for Alexandria's entire offerings as an integral part of the life science ecosystem was abundantly evident. The Class A plus quality and the mission-critical nature of the facilities that is so important during this time of COVID-19, coupled with the creation of true renaissance life science centers on our mega campuses, provides a set of highly desirable and sought-after destinations. The numbers the team are posting bear out this leadership position. The highlights include superb leasing milestones: year-to-date leasing is 5.4 million square feet, the highest annual leasing run rate in the company's history, achieved during just these first three quarters of 2021. As noted earlier by Joel, featuring the largest lease in the company's history to Moderna at 325 Binney Street for their 462,000 square foot state-of-the-art headquarters. It's critical to note two important aspects of this leasing activity. One, it is occurring in our core sub-markets where we have high barriers to entry, low vacancy, and a first-mover advantage. Two, it is also occurring in the development and redevelopment pipeline at an accelerated rate, with 1 million square feet of leasing in the segment during Q3 reaching the second highest leasing level for development and redevelopment projects, further validating Alexandria’s strategic and robust acquisition activity during 2021. Let's turn to the strategic expansion of our asset base. Q3 was a very productive quarter, with completed acquisitions totaling 5.6 million square feet. A number of key aspects of this expansion of our asset base include the following: 4.9 million square feet of this total were highly accretive value creation opportunities. We were also able to continue either doubling down in our core markets, as evidenced by 325 Binney Street, or strategically expanding the boundaries of these sub-markets. These critical decisions on acquisitions are informed by our unrivaled network of 750 tenants to meet their current needs and provide a path for future growth. In total, we have now increased the total asset base from 47 million square feet to 64 million square feet during the past four quarters, a significant increase of 36%. The core is also outperforming, with renewals and releasing spreads of 19.3% cash and 35.3% gap during Q3 — impressive numbers. I also want to underscore and highlight that our mark-to-market across the portfolio has moved up to 25% on a cash basis today, nearly doubling and significantly up from 13.6% in Q1 of 2019. Our AR balance of 99.4% in October continues our hard work. We really do have a dream team in the operational realm, and a big shout out to the folks who make this happen every day. Occupancy is increasing. As noted throughout the year, we expected occupancy to increase excluding the recently acquired projects with vacancy; we've delivered on those goals. We were at 97.1% as of June 2020, and we’re now at 98.5%. Turning to market health, on the demand side, Joel and Jenna highlighted the key components driving demand in the life science industry. The seasoned executive life science management teams driving this demand are requiring high-quality facilities and deeply experienced operational teams, as clearly evidenced by our leasing volume and velocity. These companies are investing hundreds of millions of dollars in life-changing therapies and require exceptional performance from a world-class team and technically sophisticated facilities. Downtime or mistakes that may destroy experiments in years of work are unacceptable risks. Alexandria, as a pioneer of this life science niche, has earned a reputation as a trusted partner to provide operational excellence for these mission-critical facilities. On the supply side, as I mentioned earlier, Peter and I recently toured a few of our regions firsthand to evaluate the competitive supply on a granular level. It is clear there is no aggregation of disruptive large-scale projects delivering during the 2020 to 2023 timeframe. There are, in fact, a handful of one-off buildings in the market, but we have seen our qualitatively superior mega campuses compete very well against this type of offering. We are also closely monitoring the potential for projects beyond this timeframe that definitely advance genuine life science competition, but in many cases, they require many quarters or even years of entitlement, permitting, and horizontal infrastructure work before any decision to go vertical might be made. In conclusion, as we close towards the end of 2021, the first three quarters of this year have yielded a tremendously productive foundation to continue the company's integral and indispensable role in the life science ecosystem. With that, I'll hand it off to Peter.
Peter Moglia, Chief Investment Officer
Thanks, Steve. Hello, everybody. I'm going to update you all on our high-value creation development pipeline and construction cost trends. Then, I will comment on our recent partial interest sale in Mission Bay and some market activity that we believe represents overzealous behavior by new entrants in the life science real estate market that should lead to challenges for such groups. As Joel mentioned in his opening, historic demand for our differentiated life science campuses has continued in the third quarter, and we expect this to continue to at least the near to medium term, as record levels of government, venture capital, and biopharma investment continue to disseminate into Alexandria's cluster markets to discover, develop, and manufacture new modalities, such as cell, gene, and RNA and DNA therapies. The resulting growth of our underlying industry gives us high conviction to continue at an elevated pace of development, redevelopment, and to acquire assets to backfill the pipeline we are advancing today. This historic demand paired with our long-tenured development experience and expertise resulted in another outstanding quarter for Alexandria. We delivered 238,163 square feet spread over six assets, including Arsenal on the Charles in Watertown, which continues to be one of the hottest markets outside of Cambridge, 3160 Porter Drive, which is now materially oversubscribed with tenants looking to tap into this unique partnership we have with Stanford, and our two ground-up developments in Research Triangle, which are capitalizing on strong demand for research development and manufacturing space from therapeutic and agricultural technology companies. These deliveries will contribute $14.3 million in NOI over the next year. As Joel and Steve noted in their comments, during the quarter we were very excited to add 325 Binney Street to our under-construction pipeline. This new 462,000 square foot high-performance development targeting LEED Zero Energy certification showcases Alexandria’s climate-resilient design solutions as well as our mission-critical efforts to catalyze positive change to benefit human health and society. It is 100% leased to Moderna, an example of a highly disruptive and visionary company that has grown with Alexandria since shortly after it was founded. Early on, we identified the team and the transformational potential of its mRNA platform, and we have both invested and provided the company with mission-critical real estate over the past 10 years. This is truly a testament of our ability to recognize and become a trusted partner of the most impactful life science companies in the world. Including 325 Binney, we have added over 1.1 million square feet of new development to our pipeline, and net of deliveries, increased assets under construction from 3.4 million square feet to 4.3 million square feet. This increase in our pipeline is warranted by the demand I mentioned previously and evidenced by the tremendous leasing activity of over 1 million square feet for the quarter, truly historic demand from the life science industry and tremendous execution by our leasing professionals. I’ll now comment on cost trends. As reported over the past two quarters, construction costs remain elevated, driven by supply and demand dynamics for materials. But two other factors have begun to exacerbate the problem: labor shortages and supply chain problems. Nine months into 2021, previous-year projects that had been put on hold due to COVID and new 2021 projects have created a double-barrel demand for construction resources at a time when fabrication shops are struggling to procure raw materials and restart due to labor shortages. The result has been record escalation for concrete, steel, wood, aluminum, and glass. Most of these commodities are sourced from the United States, but there are still a number that come from foreign sources such as steel from Canada, Asia, Mexico, and Brazil, glass from Thailand, and resins used for pipe and specialty products, such as benchtops for labs from Asia and Europe. As we all know, there have been significant supply chain disruptions around the world, none more apparent than the backlog of cargo ships in Southern California, which last Tuesday reached an all-time high of over 100 ships waiting to unload thousands of containers outside the ports of Long Beach and Los Angeles, a bottleneck that is expected to continue into next year. In addition to supply disruptions, construction costs are being impacted by labor shortages. There is a lack of skilled workers to keep up with the accelerated demand caused by a number of factors, including GC discovering that some of the workforce laid off or furloughed during COVID are not returning due to retirement or finding other jobs. It could get worse if OSHA adopts vaccine mandates, as the construction industry is one of the highest unvaccinated workforces. Unfortunately, higher costs are not the only consequence of material and labor shortages. Material shortages cause longer lead times that can delay deliveries. Based on our deep experience and expertise, lead times have generally increased by six to eight weeks for most common materials. Even longer for materials comprised of metal and PVC or those needing computer chips, such as building control. Alexandria is employing a number of mitigation measures to offset these impacts. To date, we've been successful in staying on budget and schedule with the vast majority of our projects. Increases in rents have enabled us to maintain our yields, but future projects may trend slightly lower as escalations and longer lead times impact our underwriting. We are fortunate that the demand for life science real estate investments continues to drive lower cap rates for stabilized buildings, allowing us to maintain our spread. Speaking of cap rate compression, during the quarter, we sold additional interest in our 409 and 499 Illinois and 1500 Owens assets while recapitalizing them with a new partner. In our original recapitalization done in December 2015, we achieved a total valuation of $1,021 per square foot and a blended cap rate of 4.6%. In this transaction, we achieved a blended cap rate of 4.2% and a price per square foot of approximately $1,362, representing 33% appreciation over the whole period. To date, we've achieved a healthy unlevered IRR of 10.4% on those assets. Finally, an observation on those clamoring to position themselves to capture the growing life science real estate demand: I referenced earlier. City Office REIT's sale of two parcels in Sorrento Mesa to Sterling Bay and Harrison Street for $576 million illustrates a gold rush mentality proliferating across our markets. City REIT’s announcement stated that the south portion of the site was allocated $181 million of purchase price. A rendering of the site shows a very tight 2.0 FAR density of development that would imply a purchase price of $261 per square foot of land. To give you some context, our basis in the recently acquired land at 6250 to 6460 Sequence Drive, a far superior location in the same Sorrento Mesa sub-market, would have a basis of approximately 25% of that if we were to build it to the same density. Our plans contemplate a much more inviting campus with open space and amenities, so our basis will be more like 50% of theirs, but you get the point. This is a great example of why we are in an incredibly advantageous position to capture any tenant requirement we want to capture. We are highly disciplined and have superior locations, superior bases, superior execution, and a superior brand. With that, I'll pass it over to Dean.
Dean Shigenaga, Chief Financial Officer
All right, thanks, Peter. Good afternoon, everyone. Year-to-date 2021 has really been an exceptional year of financial and operating performance for Alexandria. Our brand and trusted partnerships with some of the most innovative life science entities combined with operational excellence has allowed our team to generate strong results. Our internal growth has been very strong. Statistics from our pipeline of development and redevelopment projects are record-breaking and provide visibility for growth into the future. Total revenues, net operating income, and adjusted EBITDA for the third quarter were very strong and were up 20%, 21%, and 22%, respectively, over the third quarter of 2020, all really amazing and impactful results. I should point out that these stats exclude the impact of the termination fee recognized in the third quarter of 2020. Our internal growth and operating results continue to reflect the strength of our unique and differentiated business model and strength of our brand. Our same property performance represents one of the highest quality growth engines within the REIT industry, of which we are immensely proud. We have one of the highest quality tenant rosters in the REIT industry, with 53% of our annual rental revenue from investment-grade or large-cap publicly traded companies, an important statistic that should be noted. Occupancy has been very strong and improved this year to 98.5%, about 80 basis points from the beginning of the year, excluding the impact from vacancy in recently acquired properties. Importantly, 1.4 million rentable square feet of vacancy from recent acquisitions represents about 4.1% of our operating rentable square footage, and is a significant opportunity to increase cash flows. Additionally, 41% of this 1.4 million rentable square feet of vacancy is leased or under lease negotiations. As Joel stated earlier, we are seeing increasing leasing demand in several of our key life science cluster markets. Same property NOI growth was strong at 4.1% and 7.3% on a cash basis and is headed toward the upper end of our ranges for 2021 guidance. Same property NOI growth projected for the full year of 2021 is very solid, up 100 basis points and 70 basis points on a GAAP and cash basis respectively, from our initial guidance for 2021, really highlighting the improvement in our outlook since the year's beginning. Once again, we are proud of the strong internal growth engine we have. Leases executed in the nine months ended September 30 at over 5.4 million rentable square feet represent another company record, and this leasing volume was completed with exceptional rental rate growth up 39% and 22.3% on a cash basis. Let me take a moment to highlight the seasonality of operating expenses related to higher utility expenses. With warm summer weather, we had higher repairs and maintenance in the summer months versus what might occur during the winter months, and higher property insurance premiums were due to their policy renewal which took effect on June 1. With 92% of our leases being triple net, these increases are generally recoverable from our tenants, and therefore have minimal impact on net operating income. However, the increase in operating expenses has a slight and only temporary negative impact of 1% to 2% on operating and EBITDA margins for the quarter. Additionally, vacancy from recent acquisitions slightly reduced margins. It is important to recognize that our adjusted EBITDA margins remain one of the top in the REIT industry, and we expect the favorable resolution of vacancies from recently acquired properties over the next number of quarters. Now turning to real estate, our trusted partnerships with key life science entities, our brand, and operational excellence among many other items really stand out today, as highlighted by strong demand for our pipeline of development and redevelopment projects. We have 7.7 million rentable square feet either under construction or commencing construction over the next six quarters, with projects approximately 80% leased or under negotiation, highlighting continuing historic demand, with 93% of this representing transactions with existing relationships, including a number of deals coming from our tenant base of over 750 entities. The 7.7 million rentable square foot pipeline is up 731,000 rentable square feet over June 30. Some key highlights in the quarter included that we commenced construction on 1.2 million rentable square feet that is on average 60% leased or under negotiation, including 325 Binney Street, which is 100% leased, and 751 Gateway in South San Francisco, which is 100% under negotiation. These are impressive leasing statistics, and we just commenced construction. Both cases resulted from stellar existing relationships leading to full-building users. We added approximately 480,000 rentable square feet of space targeted to commence construction over the next six quarters. About 20% of that space is under LOI negotiations today. Our team executed 1 million rentable square feet of leasing in the third quarter related to the development and redevelopment space, including the 462,000 rentable square foot lease with Moderna for 100% of 325 Binney Street. We expect demand from our development sites and projects will provide us with the opportunity to commence construction of additional development and redevelopment projects. Turning to our venture investments, I'd like to express gratitude to our science and technology team for their leadership in underwriting life science industry trends and high-quality investment opportunities. Our venture investment cost basis only represents about 3.2% of gross assets, and unrealized gains were $930 million on a cost basis of about $1 billion. In the third quarter, we realized significant gains from three separate transactions aggregating $52.4 million. Year-to-date through September 30, we have realized significant gains from six separate transactions aggregating $110.1 million. Moreover, this represents over $100 million of capital that we did not anticipate at the beginning of the year, and we were able to reinvest into our business. Our team is pleased with the overall improvement in our corporate credit profile; S&P just upgraded our rating to BBB+ with a positive outlook, highlighting our unique and differentiated business model, strong brand and execution, high-quality cash flows, and strong credit profile among many other items. Thanks to our entire team for continued solid execution across all areas of our business. We remain on track for net debt to adjusted EBITDA at 5.2 times, and fixed charges greater than 5 times by the year-end. As we near the end of 2021, we focus on finalizing several key partial interest sales with high-value low cap rate transactions and other dispositions. Each transaction is moving along as expected, and we target completion of the sales later this year, which will generate about $1.7 billion in capital. The timing of a couple of key dispositions depended on lease negotiations before we could present the deals to potential investors, and therefore, we target to close in the fourth quarter. Our team continues to focus on making a positive and lasting impact on the world; they have received recognition for leadership in ESG. MSCI just released results highlighting an A rating for Alexandria, representing one of the top ratings in the REIT industry. GRESB also released results of the 2021 assessment, highlighting Alexandria as a global sector leader and a five-star rating in the diversified sector for buildings and development, as well as one of the top two in the science and technology sector for buildings and operation. Our team has commenced construction on 325 Binney Street, which is the ground-up development fully leased to Moderna, designed to be the most sustainable laboratory building in Cambridge. Key items in the design include the use of geothermal energy for heating and cooling and an innovative building envelope and management system, plus other sustainable attributes designed to eliminate 95% or more fossil fuels and achieve LEED Zero Energy. This building has been designed to mitigate risks associated with flood precipitation under a business-as-usual scenario. We're extremely excited to be an important strategic partner to Moderna for about a decade now and very pleased they selected our team to assist with their strategic priorities, including the development of their next super innovative and sustainable lab building. Now turning to guidance, we updated our conservative guidance for 2021, including narrowing the range for EPS and AFFO per share from a range of $0.08 to a range of $0.02 per share. Our 2021 guidance for diluted EPS is now ranged from $3.91 to $3.93, and FFO per share adjusted diluted is ranged from $7.74 to $7.76, with no change in the midpoint of $7.75. Strong demand for space and the increase in our asset base has enhanced our outlook for rental rate growth on lease renewals and releases by 2% and 1% on a GAAP and cash basis, respectively. We also updated our 2021 guidance for dispositions, as we have four transactions in process that will generate $1.7 billion, as highlighted a moment ago. We updated our construction span for an increase of about $200 million at the midpoint, primarily due to the acceleration of leasing and tenant space requirements related to our development and redevelopment projects. As a reminder, we are about five weeks away from issuing our detailed guidance for 2022, and therefore we are unable to comment on 2022 guidance-related matters. Let me end there and turn it back to Joel.
Joel Marcus, Executive Chairman and Founder
Operator, if we could go to Q&A.
Operator, Operator
We will now begin the question-and-answer session. Our first question will come from Manny Korchman with Citi. Please go ahead.
Manny Korchman, Analyst
Hey, good afternoon, everyone. The topic of labor and materials potentially being an issue has come up a couple of times in this call. I was wondering just from your tenants' perspective, is labor an issue there? Certainly, this is a hot spot within the economy, and these companies are doing well. Are there enough scientists and other talented staff members to staff all these incoming companies?
Joel Marcus, Executive Chairman and Founder
Yeah. So Manny, welcome. This is Joel. I alluded to that in my comments that there is, in fact, truly across the U.S. for many industries kind of a war for talent. This is true in the life science industry. So far, we haven't seen any egregious shortages. What I did say is that if somebody is going to not only create a company but try to scale it, they’ve got to be in the critical key existing clusters. You can't wander off and try to scale a company in Chicago or Denver or someplace like that in a way you could otherwise do, say, in Boston or San Francisco. It just doesn't work that way. The pool of talent doesn't exist if you look at R&D, commercial, clinical, etc. At the moment, in the existing clusters, things seem okay. But there clearly is a war for talent.
Michael Bilerman, Analyst
Hey, Joel, just taking that one step further. This is Michael Bilerman here with Manny. Good afternoon. As you think about the overall space in the life science facility, outside of people, there's obviously an increased use of robotics and other things that have gotten smaller over time. I think about our PCs that used to be the hunks on our desk that are now in our pocket. How do you think about sort of just the evolution of what's being done in your labs and life sciences buildings just from an efficiency standpoint? And could you see that evolve like law libraries went out the window? Is that at all a risk? I'm not trying to undermine the demand of the business; I understand that side of it very well, but I'm just trying to think about the use of space and robotics and all that to do more in less space.
Joel Marcus, Executive Chairman and Founder
I think that trend has been going on for quite a while. A lot of innovation has made things that are repetitive, and by nature lend themselves to a more automated approach. But, science is executed by people with sophisticated backgrounds, so forth. The need is there; you can't do science at home, and you can't do science purely robotically. A lot of judgments and insights are needed. Jenna, you've worked at the bench, so maybe you can comment directly.
Jenna Foger, Executive Vice President
Yeah, I think, on that point, robotics innovation broadly allows many of these companies to build larger, broader, and more robust platforms. Companies are working more efficiently, but they're working on kind of parallel streams at once. I don't think that that — I think robotics has enhanced what companies are looking for, but hasn't necessarily changed the real space needs.
Michael Bilerman, Analyst
A real threat that you're mindful of?
Jenna Foger, Executive Vice President
No.
Michael Bilerman, Analyst
Okay. Thank you.
Operator, Operator
Our next question will come from Rich Anderson with SMBC. Please go ahead.
Rich Anderson, Analyst
Hey, thanks. Good afternoon, everyone. I want to ask my first question regarding CapEx. It looks like the supplemental indicates it's a lumpy number; TIs have been running anywhere from $20 million to $50 million in the past five quarters. I'm wondering, when I think about the triple net nature of your portfolio, the relative newness of your portfolio, which is largely born from your own development, and just the strength of the life science marketplace, do you feel as though that CapEx, which seems to be all over the map, is trending down? Or, relatively speaking, to the size of your company?
Joel Marcus, Executive Chairman and Founder
So Dean, you want to take that on? Peter, and Steve, you can chime in there.
Dean Shigenaga, Chief Financial Officer
Hey, Rich, it’s Dean here. Generally, I would say there's one overlay to your question; what you're highlighting is that the newer assets may have a little longer time before it starts to generate some requirements for capital. Our portfolio has a range of assets, but if you look back over an extended period, our CapEx, I'll call it the bad bucket of CapEx — anything except for redevelopment and development CapEx — has ranged anywhere from 10% to 13%. I don't think it has generally moved in any one direction in the last five or eight years. It's been consistent.
Rich Anderson, Analyst
Okay. And Dean, while the $1.7 billion of dispositions targeted for the fourth quarter is a key variable to getting to your leverage target, what is the risk that one or more of those fall off completely or delay into next year? You might have to explain a little higher, at least after a temporary leverage position until they get done.
Dean Shigenaga, Chief Financial Officer
Well, the reality is there's always some risk, but we've moved the transactions along in a good fashion and have expressed expectations from both sides to bring closure to these transactions this year. So we feel comfortable, Rich, but we need to get them done, as you point out.
Rich Anderson, Analyst
Okay. And just a quick one, maybe for Joel. Dr. Califf, the new incoming FDA Commissioner, is obviously a friend of the firm. Obviously, he's going to do his job, not play favorites, I'm not suggesting that. What is his awareness of Alexandria? Is there anything beneficial that can come to you from that relationship? Or is it just business as usual?
Joel Marcus, Executive Chairman and Founder
No, I mean, I think that's something we would never even think about or have a mindset about. I think the relationship we have — I mean, Rob was a practicing cardiologist; he worked at Duke for many years. He has a wide network across the U.S. How we look at him is, he's served in the position before, he's well-liked, he's a very smart guy, he's very compassionate. If the nomination happens, he seems to be at the top of the administration's list; I think it would be very good for the industry as a whole, not singling us out in any way because he's been there, he knows how to get things done.
Rich Anderson, Analyst
Okay. Thanks very much.
Joel Marcus, Executive Chairman and Founder
Yep. Thanks, Rich.
Operator, Operator
Our next question will come from Anthony Paolone with JP Morgan. Please go ahead.
Anthony Paolone, Analyst
Yeah. Thank you. My first question relates to just the mark-to-market. Listening to Steve's comments about how that's changed, and looking at your guidance for cash leasing spreads over the last several quarters. It seems like the market rents have been moving high single digits annually. Do you think it continues at that pace? And then two, it seems like we haven't seen your peak mark-to-market leasing spreads yet. Is that fair?
Joel Marcus, Executive Chairman and Founder
Maybe, Steve, do you want to comment on that? There are pretty good observations there.
Steve Richardson, Chief Operating Officer
Sure. Yeah, Tony, Steve here. This is across the entire portfolio. This is very broad-based. Number one, and as we've been seeing, when you see these leasing statistics and the acquisition work we're doing, it's responding to the industry. We do have a lot of confidence, based upon our network of what the future holds. That relates to the mark-to-market as well and the potential for further increases.
Anthony Paolone, Analyst
Okay. And then for Peter, in the past, you've done a nice job going through cap rates. Can you maybe touch on that through your markets?
Peter Moglia, Chief Investment Officer
I would broadly say that a couple of years ago, there were markets like Research Triangle or Maryland, where people thought you're in the 6.5 to 7.5 range, and I would say today, I would doubt that there'd be any asset we would sell on our balance sheet in any market that wouldn't have a cap rate with a handle greater than 5. You're going to see sub-4 cap rates, but nothing really goes below that. Until interest rates go up, all real estate kind of gets hurt by that. I don't think you're going to see anything above a 5 cap rate, at least in life science for the near future.
Joel Marcus, Executive Chairman and Founder
Yeah, in the core cluster markets.
Anthony Paolone, Analyst
Got it. Thank you.
Operator, Operator
Our next question will come from Sheila McGrath with Evercore ISI. Please go ahead.
Sheila McGrath, Analyst
Yes, good afternoon. Joel, I was wondering if you could give us more detail on your thought process or strategic thinking on which buildings or markets you're choosing to sell partial interest in? Are you looking to lighten up in California given the business environment? Just a little more color on that?
Joel Marcus, Executive Chairman and Founder
Yeah, I want to be real careful there because we have transactions underway. Maybe I would say defer that to the next quarter, where we could come in on the full year. The mantra that we have is where we have assets where we've maximized value for Alexandria are ones that we certainly think about looking at. These are sophisticated issues and thoughts we go through, but I don't want to comment given the pending transactions.
Sheila McGrath, Analyst
Okay. And then if you could give us some insights on the recent entitlements that you received at Fenway Park, was the timing and square footage in line with your expectation? Will this extra 450,000 square feet be a near-term project?
Joel Marcus, Executive Chairman and Founder
Yeah. Peter, you could comment on the underwriting.
Peter Moglia, Chief Investment Officer
Yeah, Sheila, we actually underwrote a lower amount, a more conservative amount than we received. We're quite pleased with the outcome. We are already set to design a project on that site, it’s underway. The leasing that was done at the current development on the site has been terrific; we're in the 90% leased and negotiating and wrapping up any leases that we haven't ramped up over the next quarter. The Fenway market is exceeding our expectations. The outcome of the entitlements was tremendous, and we'll capitalize on that in the near future.
Joel Marcus, Executive Chairman and Founder
Yeah. Steve or Peter, could you comment on the leasing that was done there and how we've been able to bring our client base to that project from when we started early in the year until now?
Peter Moglia, Chief Investment Officer
Yeah, I'll start, and then Steve, you can add anything. When we bought that asset, the one that was underdeveloped was 17% leased at the time. Within, I think it was two quarters that we were preparing the supplemental, I called up our team and asked them about this amazing progress. They told me it was a great project. The previous developer was very good, but the market was waiting to see who would acquire it. Once they saw it was us, people were ready to commit. We went from 17% to 91%, at least, and negotiating in two quarters, and that was all because our brand was put on the building; people could trust we would do a great job of finishing development and operating it down the road.
Joel Marcus, Executive Chairman and Founder
Okay, great. Thank you.
Operator, Operator
Our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Jamie Feldman, Analyst
Thank you. Steve, in your remarks, I think you commented that you and Peter just kind of made the rounds around the markets and felt very good about supply through 2022 and 2023. Can you talk more about some of the details of what gives you that comfort?
Steve Richardson, Chief Operating Officer
Sure, Jamie, Steve here. As we toured through the markets and drilled down on a parcel by parcel or building by building basis, I think it's important to emphasize that there are many single buildings that may be either redeveloped from office to lab, or being advertised for that. Additionally, you may see a project that's either horizontal work going on, and people are discussing vertical for lab. That timeframe is now. You actually need to see that activity to deliver in 2022 or 2023. A lot is still in the entitlement stage or permitting, and could take many quarters or even years before any decision to go vertical might be made.
Joel Marcus, Executive Chairman and Founder
Yeah. If you overlay that, Jamie, with what Peter said about construction issues, it makes it all the more unbelievable that people could broadcast something when they couldn't accomplish it. So, that’s also the reality.
Peter Moglia, Chief Investment Officer
I’d just add that we didn't see anything that would reach the scale we can provide our tenants, as Steve mentioned. Lots of projects named, but they are essentially one-off projects. As we’ve discovered over the past few years with our mega campuses, there's just a lot of power and attraction that tenants have to that aggregation. What we saw in the markets when touring our sites was decent, but nothing that would compete with us on that scale.
Jamie Feldman, Analyst
Are there certain markets that you'll be watching more than others? It sounds like you're talking about 2024 at this point, but generally, where do you see the most potential supply risk?
Steve Richardson, Chief Operating Officer
We’re tracking each market closely, particularly San Diego, San Francisco, and Cambridge; we are monitoring those closely. I don't know that there's one market most concerning over others; we are monitoring it closely and broadly.
Joel Marcus, Executive Chairman and Founder
In the issue of predicting that far out is complex; the macro environment or micro demand environments will also influence supply.
Jamie Feldman, Analyst
Okay. And then, Joel, just listening to your comments at the outset of the call, it sounds like you're somewhat frustrated with the political environment. Can you...
Joel Marcus, Executive Chairman and Founder
I think, every — yeah, that's just not me. I think we're speaking about everybody these days; the old days of bipartisanship are gone. Everyone seems to want to railroad their ideas. I referenced the infrastructure package, which is being held up as ransom for a much broader cradle-to-grave social entitlement. If infrastructure is so important, why isn’t it just done, because that is bipartisan? This is a 20th-century infrastructure package, not one for the 21st century. If we don’t watch out, China’s going to eat our lunch over the next decade or two.
Jamie Feldman, Analyst
Okay. To ask the question, what concerns you the most as it pertains to your business specifically?
Joel Marcus, Executive Chairman and Founder
Well, I think that the way they are going after sources without regard to policy is concerning. It’s not a policy decision; it’s about where we can try to get $1 trillion, $2 trillion, $3 trillion without any thought to tax policy or health care policy. It’s all about finding funds for their needs, and that’s no way to run a government.
Jamie Feldman, Analyst
Okay, understood. Thank you.
Joel Marcus, Executive Chairman and Founder
Yep. 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
Thank you very much, everybody for your time and attention. Stay safe and God bless.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.