Earnings Call Transcript - ARE Q2 2024

Operator, Operator

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2024 Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to Paula Schwartz. 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 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 would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Joel S. Marcus, Executive Chairman and Founder

Thank you, Paula, and welcome, everybody. With me today are Hallie, Peter, and Marc, and we welcome you to our second quarter earnings call. Thank you, and congratulations to the Alexandria family team for another very solid second quarter operating and financial performance given the continuing uncertainty of the backdrop, as soaring U.S. debt and government spending problems continue unabated. And while reflecting on our efforts, we think about the Navy SEAL credo: The Only Easy Day Was Yesterday. Huge congrats to our team on the June 2024 release of our corporate responsibility report, which reinforces our longstanding operational excellence across our one-of-a-kind Labspace platform and the team for securing 100% of our electricity needs from renewable energy for 100% of our Alexandria paid accounts in our Greater Boston cluster market, a phenomenal achievement. Thank you, team. In thinking about long-term strategic planning since the bull market of the life science industry turned in February 2021, it's clear that the market moved from a historical long bull run to a bear market, as I said, in February 2021. We’ve worked every single day to re-engineer and fine-tune our long-term competitive advantages of this leading Labspace platform. Our goal is still in alignment but has fundamentally shifted following the 2008 and 2009 great financial crisis and the subsequent bear market: we are preparing to emerge from this sector bear market with the acumen and business strategy necessary to fuel our life science industry and tenant growth just as we did during the historic bull market from 2014 to 2021 with record-breaking earnings growth for our sector. Our competitive advantages include, importantly, our first-mover advantage in top life science clusters. We continue to refine and refocus our footprint, which you will see with our quarterly actions. High-quality assets aggregated in desirable, well-amenitized mega campuses indicate our monumental effort, driven by our re-development and development endeavors in each of our large mega campuses. Our goal to reduce non-mega campus pipeline and sell our non-core assets over time is critical to our strategy. High-quality cash flows and our substantial, embedded future net operating income will be further secured by this platform focus. Our longstanding tenant relationships that demonstrate stellar brand loyalty persist—Lilly is a great example with multiple strategic relationships there. We remain backed by our fortress balance sheet with significant liquidity, unique deep life science expertise, a hallmark that distinguishes this company from day one, and our long-tenured and highly experienced management team. Now, turning to the second quarter and our future planning, it goes without saying that we had solid FFO per share growth of 5.3% for the second quarter and 6.3% for the first half of the year, especially positive given the backdrop. An astounding 74% of our ARR comes from the mega campuses, and we aim to improve that over 90% in a short timeframe, securing our strategic moat. Notably, 53% of our ARR comes from investment-grade or large-cap companies, showcasing the strong quality of cash flows. Furthermore, 96% of our leases include contractual rental rate increases, offering robust future protection. Our occupancy remains stable, and we had a strong leasing quarter with impressive economics. Our EBITDA margins are best-in-class, and we are diligently seeking to reduce our go-forward CapEx and G&A. Anchored by our fortress balance sheet, with strong liquidity, we have almost one-third of our debt not due until after 2049, with an average term of 13 years. Over the coming months, we are laser-focused on leasing the remaining approximately 1 million square feet, rolling this year and gearing up for significant rollovers in 2025. Additionally, we are concentrating efforts on our '24 and '25 deliveries to improve leasing beyond the current 87% to drive NOI growth. Our advancements in capital recycling for 2024 and beyond show significant promise. The life science industry, which Hallie will address in depth, remains the crown jewel and a cherished sector of our economy, recognized globally for its innovation in new medicine discovery. It is essentially the only industry fundamentally enhancing health, well-being, and life quality. We have built Alexandria to be at the forefront of this vital life science industry as it recovers from the aftermath of the COVID-19 crisis. Without further ado, let me turn it over to Hallie.

Hallie Kuhn, SVP of Life Science and Capital Markets

Thank you, Joel, and good afternoon, everyone. Today, I will review the 2Q24 life science industry performance, which shows strong demand across our diverse tenant base and the remarkable innovation propelling the life science sector's growth. I want to underscore two main points: first, the $5 trillion sequentially growing life science industry continues to attract robust capital from diverse sources; second, life science innovation advances at a historic pace, yielding new medicines that extend and save lives. Starting at the beginning of the innovation cycle, biomedical and government institutions accounting for 10% of our ARR catalyze discoveries that enhance our understanding of disease biology and early medicine development. Alongside the NIH budget of $49 billion in 2024, $57 billion was contributed to biomedical research last year through nonprofit organizations. While institutions drive early innovation, private biotech companies, which represent another 10% of our ARR, provide the necessary fuel for advancing research discoveries into potential new medicines. Private life science venture funding was robust this quarter, exceeding $12 billion. While this figure is down from the peak in 2022, this year is on track to be the third-highest year in life science venture dollars deployed. Next, we focus on pre-commercial public biotech companies that represent 9% of ARR. Remarkably, follow-on financing and private placements reached historic highs, exceeding $10 billion in the second quarter, with 2024 financings already surpassing the total for the full year 2023. While this uptick contrasts with limited IPO volume and the XBI, which has seen moderate growth this year but lags the broader market, we advise caution as the XBI is not necessarily an accurate reflection of public biotech performance. The real picture presents a divide; biotechs that achieve clinical milestones retain ample liquidity and experience positive stock performances, while those lacking significant milestones face challenging market conditions. Our commercial-stage biopharma companies and large multinational pharmaceutical companies represent 17% and 20% of our ARR, respectively. This sector is committing historic levels of capital to internal R&D and external innovation, with R&D spending nearing $300 billion in 2023. M&A activity remains high, driven by an estimated $200 billion to $300 billion of revenue at risk due to patent expirations within the next five years. In 2022, over $60 billion in M&A was announced, reflecting the continuing trend. In leasing, this cohort demonstrates the necessity of recruiting and maintaining scientific talent vital for developing new medicines to meet growth targets. A recent example being the 127,000 square foot lease we announced this quarter with a large multinational pharmaceutical company at our SD Tech by Alexandria mega campus in San Diego. Our life science product, service, and device tenant segment, representing 21% of ARR, is notably influenced by the BioSecure Act, which, if passed, would limit the utilization of select Chinese contract manufacturing and research organizations. We view this potential legislation as largely positive, as it includes grandfathering provisions to minimize any near-term impacts on biotech companies while incentivizing U.S.-based contract manufacturing organizations to move capabilities back to the U.S. The output of the entire innovation cycle results in novel medicines reaching patients. As of June, the FDA has approved 21 novel small molecule and biologic therapies and separately approved 5 novel gene and cell therapies. Of the approximately 500 novel FDA therapies approved since 2013, 50% were developed by Alexandria tenants. One noteworthy approval this month was for Alexandria tenant Eli Lilly’s novel antibody for early Alzheimer’s disease treatment. As many present understand, Alzheimer’s significantly affects one in every nine individuals over 65 in the U.S. While newly approved Alzheimer’s medicines can slow the disease, they are not a cure, and substantial work remains. Just as ten years ago, obesity treatment was deemed too complex to address with medicines, the GLP-1 therapies recently developed by Alexandria tenants Eli Lilly and Novo Nordisk may herald a transformative future for diseases like Alzheimer’s. To conclude, the life science industry showcases sustained strength, propelled by rapid innovation and bolstered by diverse funding sources. As a trusted partner to the world’s premier life science companies, our mission is unwavering: to create and cultivate life science ecosystems and clusters that empower the world’s leading innovators in their noble pursuit to advance human health and cure disease. With that, I will hand it over to Peter.

Peter M. Moglia, Chief Operating Officer

Thank you, Hallie. A respected economist recently articulated that pent-up demand from the pandemic continues to be a critical source of inflation, which partially explains why the raising of short-term rates has been ineffective. This demand-driven recovery should fuel healthcare growth in 2024, regardless of interest rates or the outcomes of the upcoming elections. I will address our development pipeline, leasing, supply, and asset sales before handing it over to Marc. In the second quarter, we delivered 284,982 square feet, 100% leased, with 92% of the space situated in mega campuses located in high-barrier-to-entry submarkets. The incremental annual NOI generated during the quarter amounted to $16 million, bringing our year-to-date total to $42 million. Development and redevelopment leasing of approximately 341,000 square feet surpassed last quarter's volume, driven by strong credit tenant leasing. Our ability to successfully execute on our development and redevelopment pipeline, while others face challenges, results from our strong brand built on operational excellence and the allure of our mega campus platform, which houses 69% of our current pipeline. Projects slated for delivery in 2024 and 2025 are 87% leased, while those expected to stabilize in 2026 and beyond are 40% leased or under negotiation thanks to our consistent execution this quarter. Our pipeline is projected to generate an impressive incremental NOI of approximately $480 million in the near-to-medium term, with $187 million expected by Q4 of 2025 and the remaining $293 million from the first quarter of '26 through Q1 of '28. To ensure successful execution, we only need to average around 61% leasing per quarter through Q1 of '28, which we achieved this quarter. Regarding leasing and supply, the market is seeing a flight to quality. Failed projects often emerge in tertiary markets, run by inexperienced entities lacking the necessary skills or capital for tenant improvements. The majority of fully vacant buildings in our regions are recent deliveries from these developers, who struggled to select suitable sites, treating life science as if it were standard office space. High-quality locations in core innovation areas coupled with high-quality sponsorship matter. Many new entrants are learning this lesson the hard way. Alexandria establishes the standard for sponsorship in life science real estate, as seen in our consistent occupancy, tenant retention, and strong tenant relationships, which constituted 83% of our leasing during the quarter. Our insights reflect the formidable moat created by our high-quality mega campus model, operational excellence, and fortress balance sheet. Although tenant searches widened with fresh supply, the strike zones tightened. Quality tenants wary of inexperienced developers favor the trusted brand. We leased 1,114,001 square feet during the second quarter, highlighted by robust leasing in our development and redevelopment pipeline. GAAP and cash rental rate increases were 7.4% and 3.7%, respectively. Over 90% of our renewals were either neutral or showed positive mark-to-market. Looking ahead, 2024 will see peak new deliveries, with a subsequent reduction in 2025 to half of what we deliver in 2024. We expect minimal new deliveries from inexperienced developers after 2025 unless projects currently under construction are delayed. I'll conclude with an update on our value-harvesting asset recycling program. As mentioned previously, our transactions will be heavily weighted towards the third and fourth quarters, but we are making significant headway. During the quarter, we closed on a $60 million non-income-producing asset in New York and increased our pending transactions subject to letters of intent or purchase and sale agreement negotiations to approximately $806.7 million. Cumulatively, with $77.2 million in closed sales and $27 million in forward equity settlements projected for 2024, we anticipate closed and pending transactions reaching $884 million, about 59% of our midpoint guidance for dispositions, partial interest sales, and equity. Interest in our non-core asset sales remains steady, and we believe anticipated rate cuts, coupled with a thawing financial market, will attract more buyers and positively impact values. The reduced financing available to investors is causing the widely reported slowdown in capital markets activity. Capital flows significantly influence valuations, and commercial real estate debt has declined as a percentage of GDP for the last two years before Q1 of '24. However, this trend seems to be reversing, as first-half 2024 new CMBS issuance is up nearly threefold compared to last year, potentially providing positive momentum for our ongoing and future efforts. With that, I will pass it over to Marc.

Marc E. Binda, Chief Financial Officer

Thank you, Peter. This is Marc Binda, CFO. Hello and good afternoon, everyone. We reported solid operating and financial results for the second quarter. Total revenues and NOI for 2Q '24 increased by 7.4% and 9.4%, respectively, compared to 2Q 2023, primarily driven by strong same-property performance and our effective execution of development/re-development strategies. FFO per share diluted, adjusted for the quarter, was $2.36, marking a 5.4% increase from 2Q 2023 and exceeding consensus estimates. We reiterated the midpoint of our full-year 2024 guidance for diluted adjusted FFO per share of $9.47, which represents a 5.6% increase over the prior year. The key assumptions for adjusted FFO generally remain within our prior guidance ranges and have not changed, with the exception of the change to our sources and uses pertaining to the Tech Square ground lease amendment, which I will elaborate on later. I'll start with internal growth; our solid operating results for the quarter stemmed from our disciplined execution of our mega campus strategy, tremendous scale, and longstanding tenant relationships, along with the operational excellence of our team. 74% of our annual rental revenue derives from our collaborative mega campuses. We have high-quality cash flows, with 53% of our annual rental revenue coming from investment-grade and publicly traded large-cap tenants. Collections remain strong at 99.9%, and our adjusted EBITDA margins are robust at 72% for the quarter. In terms of leasing, we observed high volume during the second quarter and the first half of 2024, totaling 1.1 million and 2.3 million square feet, respectively. The second quarter leasing activity was up 27% from the average of the latter half of 2023 and consistent with our historical quarterly averages from 2013 to 2020. Our tremendous scale, high-quality tenant roster, and brand loyalty continue to benefit us, with 79% of our leasing activity over the past 12 months coming from our existing tenant relationships, including the notable 127,000 square-foot development lease this quarter with a multinational pharma company at our mega campus development in Sorrento Mesa. The rental rate increases for the first half of '24 were impressive, reaching 26.2% and 15% on a cash basis, and we project solid growth for the full year ’24, ranging from 11% to 19% and 5% to 13% on a cash basis. The rental rate growth for lease renewals and the re-leasing of space during this quarter was 7.4% and 3.7% on a cash basis. Lease terms on new leases finalized in the first half of 2024 averaged 7.7 years, which aligns with five out of the past ten years that showed lease terms falling within the seven to eight-year range. The overall mark-to-market for cash rental rates across our entire asset base holds steady at 12%. Transitioning to leasing costs, TIs on renewals and re-leasing for the quarter amounted to $31.83, aligning with our historical average of $31.07 per square foot since 2020, while the year-to-date figure is significantly below our historical average at $25.32. Total non-revenue-enhancing expenditures, encompassing TIs on renewals and leasing, are anticipated to range from 12% to 13% of net operating income in 2024, below our five-year average of around 15%, underscoring the durable nature of our laboratory infrastructure. Same-property NOI growth for 2Q24 was strong at 1.5% and 3.9% on a cash basis, primarily driven by strong rental rate growth and leasing volume. We maintain our outlook for full-year same-property growth consistent with our last update of 1.5% and 4% on a cash basis at the midpoints. Our occupancy rate for the quarter was solid at 94.6%, which is consistent with the previous two quarters. As for lease expirations, our team has effectively managed the 2024 leasing expirations, leaving modest unresolved expirations for the end of the year totaling 637,192 square feet, excluding the 350,000 square feet associated with the New York asset we disposed of in July. As we look toward the first quarter of 2025, we identified several key lease expirations summing up to 600,000 square feet, equating to $37 million in annual rental revenue, which are likely to experience 12 to 24 months of downtime on a weighted average basis, primarily stemming from a lease expiration with Moderna at Tech Square, which has just expanded into 462,000 square feet at the new 325 Binney project. Looking ahead, we expect these spaces may require time for re-leasing and repositioning and are likely to stay as operating assets. Please refer to footnote number 5 on Page 23 of our supplemental package for more details. In terms of external growth, we continued executing on our development and redevelopment strategy this quarter by delivering 284,982 square feet from the pipeline, generating an additional $16 million in annual net operating income. We anticipate a significant increase in incremental annual NOI on a cash basis of $80 million from executed leases, as the initial free rent from recent deliveries will be rolled off over the next seven months on a weighted average basis. As a reminder, the $80 million figure pertains to previously completed projects, distinct from the projected go-forward $480 million NOI associated with current projects. We have $5.4 million of rentable square feet within development and redevelopment projects that are 61% leased or under negotiation, projected to deliver $480 million of incremental annual net operating income over four years, including $187 million over the next six quarters. In July, we successfully extended our ground lease at Alexandria Technology Square, necessitating a rent prepayment of $2,135 million for the fourth quarter of '24 and the first quarter of '25, which will be amortized into non-recoverable ground rent expense beginning in 3Q '24 through 2088 on a straight-line basis. We increased our guidance range for disposition sales, partial interest, and common equity to reflect funding for the initial ground lease payment due in 4Q '24. Notably, we consider the Tech Square asset to be a generational asset located adjacent to MIT in Cambridge, at the center of innovation. Since acquiring this mega campus in 2006, the NOI has nearly quadrupled. Despite the anticipated prepayment of rent, we believe this adjustment results in a favorable annual ground rent cost relative to the market over the next 65 years, ultimately enhancing the long-term value of the campus. On another note, we remain focused on completing our current construction projects expected to yield $480 million of incremental NOI through 1Q ’28 while also engaging in necessary pre-construction activities to expedite the delivery from lease execution. Capitalized interest has shown a decline for three consecutive quarters, primarily due to project deliveries from the pipeline contributing $187 million of incremental annual net operating income and a drop in average real estate basis subject to capitalization, reducing from $1.9 billion since 3Q '23 to 2Q '24. Our outlook for capitalized interest for ’24 aligns with our prior guidance, assuming around a 10% decrease in average basis subject to capitalization for the full year compared to ’23. Transitioning to the balance sheet, we boast one of the strongest balances sheets among publicly traded U.S. REITs, seeking opportunities to bolster it further. Our corporate credit ratings are in the top 10% of all publicly traded U.S. REITs. We maintain low leverage at 5.4 times net debt to adjusted EBITDA on a quarterly basis. Our attractive debt profile includes fixed-rate debt making up 97.3% of our total debt and an average remaining debt term of 13 years. We also benefit from strong liquidity of $5.6 billion, supported by our $5 billion revolving credit facility. We are pleased with the recent agreement to extend our credit facility through January 2030 and appreciate the tremendous support from our banking relationships in facilitating our mission. We maintain a disciplined approach to long-term funding for our business and capital recycling from dispositions and partial interest sales to minimize common stock issuance. Our disposition strategy centers on outright asset sales not integral to our mega campus strategy to refine our asset quality. We may also consider decreasing the size of our future pipeline through asset recycling among the current pipeline and into our mega campuses. In July '24, we finalized the sale of our vacant non-laboratory building in Manhattan for $60 million. This property had been identified for sale in 4Q '23 and was marketed after the lease expiration for the entire building in July '24. The total of completed and pending dispositions, alongside a modest amount of equity raised from our ATM program, aggregates to $912 million, representing 59% of the midpoint of our guidance of $1.55 billion. While the macro environment remains challenging, we are cautiously optimistic regarding our ability to execute the disposition plan for 2024 at values indicative of reasonable capital costs. Based on our outlook today, we plan to pause any future issuances under the ATM program, at least for the next quarter. We also intend to fund a substantial portion of our equity needs from retained cash flows after dividends, projected at $450 million at our 2024 guidance midpoint. Our cash flows remain strong, supporting annual common stock dividend growth with an average annual increase of 5% since 2020, accompanied by a conservative FFO payout ratio of 55% for 2Q '24. Realized gains from venture investments, alongside adjusted FFO per share, totaled $33.4 million for the quarter and $62.2 million for the six-month period ended June. Based on the first half of ’24, realized gains are anticipated to remain at the higher end of our full-year guidance range of $95 million to $125 million. Gross unrealized gains on our venture investments as of 2Q '24 stood at $284 million, based on a cost basis of $1.2 billion. We have updated our 2024 guidance for EPS to be in the range of $2.98 to $3.10 and reiterated our guidance for diluted adjusted FFO per share with no change to the midpoint of $9.47, reflecting solid 5.6% growth in FFO per share for 2024. With that, I'll hand it back to Joel.

Joel S. Marcus, Executive Chairman and Founder

Thank you, Marc. Now we’ll go to questions, please.

Operator, Operator

Yes, sir. Today's first question comes from Joshua Dennerlein with Bank of America. Please go ahead.

Farrell Granath, Analyst

Hi. This is Farrell Granath on behalf of Josh. I quickly wanted to ask about the Alexandria Technology Square mega campus and the shift towards multiple tenants from a single tenant model. Could you discuss the driver of this change and whether you’re observing any demand shifts in the market for single tenants?

Joel S. Marcus, Executive Chairman and Founder

Well, I think there has been no fundamental change. As Marc mentioned, Moderna is moving out of that space in Tech Square 200 and relocating to their new R&D and HQ headquarters at 325 Binney. That means we’ll have laboratory assets left behind in that space. Our plan is to lease those generally as a multi-tenant setup. So, it’s not really a change. We've been aware for a long time that Moderna was leaving, and this is just part of their growth. Remember, Alexandria Technology Square is positioned right across from MIT’s primary science campus, making it arguably the best location globally for laboratory space.

Farrell Granath, Analyst

Great. Thank you. I also noticed a slight decline in the letters of intent for acquisitions between Q1 and Q2, which leaves me curious if you could comment on that and whether any circumstances, including pricing negotiations, are influencing this trend.

Joel S. Marcus, Executive Chairman and Founder

Peter, do you want to comment on that?

Peter M. Moglia, Chief Operating Officer

Yes, go ahead.

Joel S. Marcus, Executive Chairman and Founder

Go ahead, Marc.

Marc E. Binda, Chief Financial Officer

Yes, what you’re referring to is the leasing percentage on the development pipeline. We didn’t see leases drop off—they simply increased the size of one asset at 311 Arsenal, which has been phased back to us. So the project has gotten larger this quarter, and consequently, the lease percentage has decreased. This wasn’t an unexpected deviation.

Farrell Granath, Analyst

I believe what I was referring to was the page on acquisitions. I noticed a slight drop-off between the pending acquisitions signed letters of intent quarter-over-quarter. Can you comment on that?

Marc E. Binda, Chief Financial Officer

Yes, I don’t think there was anything surprising there. The pending items have indeed decreased marginally from last quarter. But I would say the change was pretty minimal, so there’s nothing alarming. Our focus remains on wisely allocating capital towards our active pipeline and prioritizing dispositions at this moment.

Anthony Paolone, Analyst

Can you talk about the cap rates related to the $806 million of pending sales and any updates regarding property values or cap rates across your markets?

Peter M. Moglia, Chief Operating Officer

Yes, certainly. The cap rates published will align with our statements regarding good quality assets that remain in demand. It's difficult to predict specific GAAP rates at this time, as they depend on the buyer's expected returns, which have shifted across recent quarters. I prefer to wait until the next quarter to provide you with the latest figures and insights.

Anthony Paolone, Analyst

You mentioned a greater focus on the mega campus strategy and shedding non-core assets. Do you have a percentage of the portfolio you could categorize as not fitting into the long-term strategy?

Joel S. Marcus, Executive Chairman and Founder

It's challenging to provide exact percentages. This company evolved over decades through individual acquisitions followed by redevelopments, resulting in a broad range of assets. The first mega campus we acquired was Tech Square in 2006, which really kickstarted this strategy. Our primary goal is to increase our mega campus annual rental revenue into the high 80s or low 90s in the coming years.

Michael Griffin, Analyst

On the leasing environment, I noticed a decrease in weighted average lease terms for renewals compared to last quarter. Can you provide insights on this? Is it reflective of tenant uncertainty?

Joel S. Marcus, Executive Chairman and Founder

I'll ask Peter for further insight on this, but as mentioned, individual leases that come up in any given quarter certainly influence these statistics. There's a noted increase in demand from earlier-stage companies. The revenue-generating firms are those in-between biotechs waiting for key milestones, and this has led to disruptions in traditional leasing transactions.

Peter M. Moglia, Chief Operating Officer

Yes, Michael, great observation. We've seen earlier-stage companies being very active, which results in them signing shorter-term leases due to expectations of growth—a challenge that validates our mega campus strategy, allowing these tenants to scale up.

Michael Griffin, Analyst

Do those smaller tenants require larger TI packages? I noticed free rent was stable quarter-over-quarter, while TIs and LCs seemed to increase. Was this driven by one specific lease?

Peter M. Moglia, Chief Operating Officer

Yes, as Marc previously noted, the TI/LC number is around our historical average and varies lease-by-lease based on tenant needs and space condition. Certain instances have necessitated a larger investment depending on lease type and condition, but your observation on TIs has not fundamentally shifted; they tend to fluctuate with tenant needs, and overall, $30 isn’t significant, especially amid rising construction costs.

Michael Griffin, Analyst

I noticed the 651 Gateway project has been delayed to ’26. Was this due to tepid demand in South San Francisco, and at what point do you stop capitalizing costs for this project?

Peter M. Moglia, Chief Operating Officer

Yes, South San Francisco has been facing notable supply issues. The project development reflected ongoing efforts, but the building's age and other delays add complexity. On timelines, Marc pointed out we assess ongoing activities and capitalized costs and will halt any expenditure if no further work is justified.

Rich Anderson, Analyst

Looking at leasing, you’ve indicated projections implying GAAP increases of about 8% in the latter half, and an average of 5% cash growth. Am I assessing that correctly?

Joel S. Marcus, Executive Chairman and Founder

Yes, that’s a good observation. The figures reflect a strong first half, and our guidance indicates robust growth despite situations that may imply a softening in leasing for the second half; but we remain optimistic about our guidance.

Richard Anderson, Analyst

Do you have a spread you consider in cap rates between core and non-core assets? What is your long-term hold versus non-hold differential?

Peter M. Moglia, Chief Operating Officer

Yes, effectively, long-term holds will center on mega campuses in prime areas, while we have additional quality assets supporting research that don't classify as mega campuses. There's typically a 100 to 200 basis point spread between prime and non-prime.

Joel S. Marcus, Executive Chairman and Founder

We've been gradually offloading non-core assets and continue to evaluate asset quality alongside revenues as we enhance our portfolio focus through adjacent strategic decision-making.

Dylan Burzinski, Analyst

Can you clarify the trend in retention rates? They've drifted down over the past six quarters, and should we expect this to persist due to new supply?

Joel S. Marcus, Executive Chairman and Founder

Marc, do you have the details on that?

Marc E. Binda, Chief Financial Officer

Yes, it’s important to recognize that just looking at renewals as a percentage of expirations provides a limited view. For instance, with Moderna departing from Tech Square but simultaneously committing to a significant new space, it’s easy to interpret retention incorrectly. If we normalize for vacated spaces, we don't see a discernible drop-off in retention.

Joel S. Marcus, Executive Chairman and Founder

The operational complexities and motivations for tenants are indeed multifaceted; they won't move purely over trivial differences in rent. Facility condition, landlord reputation, and reliability are critical factors in tenant decisions.

Omotayo Okusanya, Analyst

Focusing on the Boston market, you have several leases expiring in late 2024 and 2025. What’s happening with market rents relative to current in-place rents, and how might that affect future mark-to-market projections?

Joel S. Marcus, Executive Chairman and Founder

Marc, can you provide insight on the mark-to-market? Peter, any comments regarding market rents?

Marc E. Binda, Chief Financial Officer

Correct, our mark-to-market for our total portfolio is around 12%. We typically do not break this figure down by region. It’s reassuring that a portion of those leases is in Cambridge, where the market remains strong.

Peter M. Moglia, Chief Operating Officer

Across our primary markets, rents in Boston are stabilizing. While peak rent levels witnessed in 2021 and 2022 have softened, they remain above pre-pandemic standards. Though there's a greater emphasis on TI concessions today, we're pleased with the positive supply dynamics.

Joel S. Marcus, Executive Chairman and Founder

Wishing everyone a safe and healthy summer. We look forward to our third-quarter call. Thank you all.

Operator, Operator

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.