Earnings Call Transcript - ARE Q1 2021

Operator, Operator

Good day, and welcome to the Alexandria Real Estate Equities First Quarter 2021 Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference 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 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 Marcus, Executive Chairman and Founder

Thank you, Paula, and welcome everyone to our first quarter call. Joining me today are Dean Shigenaga, Steve Richardson, and Peter Moglia. We wish everyone a safe and healthy year ahead. We also want to acknowledge the entire Alexandria team for their outstanding performance in the first quarter, which has been excellent by all standards. We are proud to maintain a high level of operation in the second year of the COVID-19 pandemic. As I often reference Jim Collins' insights from 'Good to Great' concerning our Annual Report, Alexandria has achieved three key outputs that define a great company: superior results, distinctive impact from our social responsibility programs, and lasting endurance, evident as we mark several decades since our founding in 1994. We take pride in our six pillars of lasting social responsibility efforts: accelerating groundbreaking medical research; harnessing the agrifood ecosystem to fight hunger and improve nutrition; supporting the resilience of military families; addressing the opioid epidemic and innovating addiction treatment; empowering underserved students for long-term success as principled leaders; and creating sustainable solutions for homelessness. Alexandria is also featured in the January-February 2021 NAREIT magazine cover story, highlighting our innovative, data-driven care model aimed at tackling the opioid crisis, which we launched in Dayton, Ohio. We are now looking to apply a similar model to address the worsening homelessness issue in urban areas, recognizing it as a healthcare challenge rather than merely a housing one. Our leadership in sustainability continues to grow, and we are on track to achieve our first net zero energy building in South San Francisco, which would make it one of only 70 such buildings worldwide. We are very proud of this anticipated milestone. For this quarter, I believe the overarching theme is exceptional core and internal growth, alongside significant value creation and external growth, both contributing to our impressive earnings results. As the leading landlord in life science real estate, we are witnessing historically high leasing demand for our top-tier properties. Reflecting on our past, we completed our Series A financing 27 years ago, marking our journey to a current market cap of $32.5 billion, now among the top 10 REITs. I recall my first REIT conference in New Orleans back in 1994, where I knew nobody – we have certainly come a long way since then. Despite the ongoing challenges presented by COVID-19, we take great pride in our results, and I want to extend my gratitude to our dedicated team memebers. Dean will elaborate on our impressive internal growth, particularly distinguished by rental rate growth seen in the San Francisco Bay area, marking one of our strongest leasing quarters ever. Steve and Peter will also highlight our remarkable value-creation growth, especially from our successful collaborative Fenway blockbuster transaction, which sets a high bar for future growth. It's also important to note our partial interest sale this quarter, which established a benchmark valuation for our first-class lab spaces in South San Francisco, a significant achievement led by Steve and Peter, especially the contributions of Peter, who has brought remarkable joint venture expertise to our team over the past 20 years. We completed the quarter with a robust balance sheet, and Dean will discuss this further, noting we have no debt maturities until 2024. As many of you are aware, we have filed an S-1 with the SEC to raise $250 million for an Alexandria-sponsored SPAC, addressing a genuine need within our core agrifood tech industry, but we won’t be discussing this further during our quiet period. Turning to the life science sector, the demand for Alexandria lab spaces in our cluster markets remains strong. The FDA approved 14 new drugs in the first quarter, with 36% coming from our client tenants. Additionally, there is notable bipartisan support for a proposed significant budget increase for NIH, CDC, and HHS. The public markets also had a strong quarter, raising $4.5 billion through 29 IPOs and $12.6 billion in follow-on offerings, indicating a thriving capital market environment. The biopharma sector continues to invest heavily in their R&D efforts, with expectations exceeding $225 billion for all of 2021. I want to briefly address some proposed corporate tax changes announced by the current administration, which could adversely affect U.S. manufacturing, R&D, and the repatriation of crucial supply chains highlighted by the pandemic. Such changes pose a significant threat to American competitiveness, overshadowing the impact on everyday life and public policy. It's interesting to recognize the paradox of the current pandemic; large corporations have often faced criticism yet the significant progress in overcoming COVID-19 can be attributed to the vaccines developed by the biopharma sector in collaboration with the government’s rapid efforts. We are grateful for these developments. To echo Alex Gorsky, the CEO of J&J, he emphasized the importance of maintaining a market-based and innovation-driven biopharmaceutical industry to ensure optimal healthcare outcomes, which holds true. As I conclude, I’d like to share a quote from Steve Prefontaine, a renowned runner: “To give anything less than your best is to sacrifice the gift.” With that, I’ll now turn it over to Steve Richardson.

Steve Richardson, Executive Vice President

Thank you, Joel, and welcome everybody as well. As we presented during the last quarterly call, 2020 represented an exceptional year of high-quality growth for Alexandria, as we increased the asset base by 27% to nearly 50 million square feet. Now, the first quarter of 2021, a truly blowout quarter by all metrics, has clearly signaled the continuation of this exceptional growth trajectory and definitively affirms Alexandria’s leadership role in the now core life science asset class, and its highly valued status within the broad life science ecosystem. The Company’s 27-year commitment to operational excellence at every level fuels the following outperformance highlights for Q1. Accounts receivable, we’ve collected 99.4% of our April AR billings as of today. And again, Alexandria’s labs are essential infrastructure and have been operational from day one of the pandemic. Some detail on leasing outperformance. During Q1, we leased approximately 1,677,000 square feet, which notably represents the second highest quarterly leasing activity during the past five years, an amazing statistic considering the broader turmoil in the office market. Peter will touch on this in more detail, but the current and near-term development pipeline continues to deliver value in a de-risked manner as we are at 76% leased and negotiating, even while adding 1 million square feet of new starts during this quarter. The core in particular is exceptionally strong. We continue to highlight and bring everyone’s attention to the embedded growth and value within the core operating platform, comprised now of nearly 34 million square feet with cash increases this quarter of 17.4% and GAAP increases of 36.2%. On occupancy, also very, very solid with 94.5%, which has grown in excess of 2 million square feet this quarter, compared to Q4 through our strategic acquisition activity. And we want to continue to bring to everyone’s attention the near-term opportunity for increasing cash flows through the lease-up of 1.2 million square feet of existing inventory provided by these recent acquisitions. Overall, on market health, demand continues to be robust in our core clusters, and our mega campus offerings provide a significant competitive advantage to the Company. Importantly, subleases are in tight check as since the start of 2021, just two subleases have been brought to market in one of our clusters, and both of those subleases have already been put under LOI. Supply, more broadly, is constrained for 2021 across all of our markets. And in the two largest markets for 2022, we’ve seen nearly 50% of the supply is pre-leased in Greater Boston, and in the San Francisco Bay Area, we’re monitoring just two projects for potential vertical activity in 2022. And as we’ve stated before, Alexandria’s mega campus, high-quality Class A product offerings continue to outperform any inferior one-off Class B office conversions in isolated locations. The year 2020 was truly an amazing year for Alexandria at the vanguard and heart of the life science ecosystem. And now, the first quarter of 2021 has exceeded those accomplishments with stellar performance. And in conclusion, I’d like to add to Joel, shout out to the entire Alexandria team for this quarter’s achievements. With that, I’ll hand it off to Peter.

Peter Moglia, Senior Vice President

Thanks, Steve. I’m going to provide an update on our development pipeline, comment on the increase in construction costs, and discuss a couple of life science sales. We continue to operate at a productive pace, delivering 376,645 square feet this quarter, including the full delivery of 9804 Medical Center Drive in Rockville, Maryland to a high-quality cell therapy company at an 8% cash yield, exceeding our initial disclosure by 80 basis points. This project outperformed due to our exceptional team, who managed to reduce overall costs through effective schedule management, alternative construction methods, and strong coordination with tenants. Additionally, we fully delivered the 100,086 square-foot 1165 Eastlake Avenue East building in Seattle to Adaptive Biotechnologies, a leading public company in immune medicine working against COVID-19. This building is unique, situated on the edge of Lake Union with expansive views of the lake and downtown Seattle. Leasing activity in our pipeline remains strong, with around 789,000 square feet leased during the quarter and about 450,000 square feet under executed letters of intent. Highlights include the successful leasing of 3115 Merryfield Row ahead of its 2022 delivery date, significant progress at Alexandria Center for Life Long Island City, which is nearing half-leased, and increased activity at both SD Tech and our recently acquired 201 Brookline asset in the Fenway area of Boston. At SD Tech, we executed letters of intent that increased its lease negotiation status by 37%, as tenants recognize the appeal of our transformation of this historical tech campus into a well-amenitized science and technology hub. Despite these accomplishments, the market response to our Fenway transaction at 201 Brookline has been even more impressive. When we closed that deal in late January, the asset was only 17% leased. Currently, we have letters of intent that, when finalized, will raise that percentage to 84%. This reflects the trust life science companies place in our esteemed brand, which has attracted these opportunities in large part due to Alexandria. Overall, with the addition of five new projects and the full delivery of 9804 Medical Center Drive, we now have around 4 million square feet under construction, which is 66% pre-leased and 76% committed, including signed letters of intent. This is just 2% below the committed leasing percentage from last quarter, even with the addition of 1 million square feet of new projects. In light of recent news regarding anticipated inflation, we wanted to update you on construction cost increases relevant to our pipeline. The projects listed on page 42, comprising the 4 million square feet under construction, are mainly under guaranteed maximum price contracts, shielding us from escalations not already negotiated. Projects still in negotiations have been conservatively underwritten with a cautious escalation range factored into our budgeting. The 80 basis-point yield for 9804 Medical Center Drive I mentioned earlier reflects our prudent underwriting and excellent budget management. Entering 2020, we expected growth in the real estate sector to persist, but the global pandemic disrupted our personal and professional lives unexpectedly. As noted in our first-quarter call last year, Alexandria had to temporarily suspend seven projects due to COVID-19. Fortunately, life science was deemed essential, allowing us to resume operations relatively quickly, unlike many other developers, who faced project suspensions or cancellations. This led to a reduction in general and subcontractor backlogs. For a time, most major contractors feared the worst and laid off workers. Demand for materials decreased, causing overall construction costs to drop below pre-COVID levels, with costs in California falling as much as 2%. However, as vaccine effectiveness became evident toward the year’s end, the construction industry experienced a rapid recovery, particularly in residential and advanced technology sectors, with life science and healthcare also contributing significantly. One of our major contractors had to adjust quickly and is currently dedicating 10 hours a week to hiring as backlogs increase. In addition to labor shortages, costs are impacted by a lack of subcontractor capacity. Manufacturers of glazing, ductwork, and other prefabricated materials are overwhelmed with work, often raising prices to manage their backlog. Moreover, demand for raw materials is creating upward pressure on steel, copper, lumber, and plywood, with steel prices rising 20% from April 2020 to February this year, copper by 37%, and lumber and plywood by 62% over the same timeframe. Despite these high percentages, materials constitute only 30% to 35% of the total cost. Therefore, we expect 5% to 6% annual increases overall in the coming year. Alexandria consistently monitors this data, incorporates it into our underwriting, and employs strategies to mitigate its impact. As a leading developer with strong relationships with major contractors and subcontractors, we can leverage preferred pricing and priority status. We maintain a great reputation among our vendors, treating them as partners, enabling us to deliver on time and within budget regardless of market conditions. I’ll conclude by discussing some private cap rates relevant to your net asset value models. Our partial interest sale of the 300,930 square-foot 213 East Grand building in South San Francisco was completed at a record 4% cap rate, which translates to a value of $1,429 per square foot. This is significant for our overall valuation, as South San Francisco is one of our largest submarkets, where we own or are developing 3.3 million square feet. Although rental rates on that asset are about 20% to 25% below market, the lease extends for another 12 years. We believe this yield reflects what investors are currently willing to pay for our first-class, stabilized assets. We also noted that Blackstone sold a 454,000 square-foot, 96% leased Science Technology Park at Johns Hopkins to Ventas for $272 million, which equates to $600 per square foot at a 4.8% cap rate. While the asset has strong tenancy, the surrounding neighborhood poses challenges, making this a positive result for Blackstone and further highlighting the high demand for life science assets today. Now, I’ll pass it over to Dean.

Dean Shigenaga, President

Thank you, Peter. Good afternoon, everyone. I want to start by congratulating our team on an outstanding quarter characterized by exceptional execution. When comparing the first quarter of 2021 to the fourth quarter, we've achieved some of the strongest operating and financial results in the company's history, with our unique life science real estate platform playing a crucial role in this growth. Our experienced team, strong partnerships in the life science sector, and high-quality campuses in major innovation hubs are driving significant growth and value. Now, regarding the allocation and sources of capital, we are committed to being disciplined with our capital allocation toward projects that will generate substantial long-term cash flows and value for our company and shareholders. In the first quarter, we strategically boosted our current and future pipeline of development and redevelopment opportunities with $1.9 billion in acquisitions. These acquisitions also included cash flows that significantly contributed to our strong NOI growth during the quarter. Importantly, we've added several high-quality development and redevelopment projects to our pipeline through these acquisitions. Another significant contributor to our NOI growth in the first quarter was the completion of development projects, totaling 376,000 rentable square feet, which were fully leased and delivered around mid-quarter. As of March 31, we had 4 million rentable square feet of top-tier laboratory space under construction, which was highly leased at 76%. Included in this were 1 million rentable square feet of projects that we added in the first quarter. Over the last four quarters, our team successfully executed leases totaling nearly 1.8 million rentable square feet related to development and redevelopment projects, including 789,000 rentable square feet in the current quarter, showcasing our status as a trusted partner to the life science industry. We are very pleased with our capital allocation to these value-creation projects, expected to generate significant value, as demonstrated by the partial interest sale we completed in the first quarter at an impressive cap rate of 4%. Our pipeline of near-term and intermediate-term projects totals 9.2 million rentable square feet, positioning us well to meet the demand from our extensive network in the life science and agtech sectors. We have also been strategic and disciplined regarding our sources of capital, capitalizing on the exceptional growth in private market valuations of our properties. As Peter mentioned, we completed a 70% partial interest sale at $301 million for a Class A property in South San Francisco, leased long-term to Merck. This transaction sold at a record cap rate of 4% at $1,429 per square foot, resulting in a remarkable profit margin of 53%. This underscores the tightening cap rates and increasing price per square foot for high-quality life science properties. Proceeds from real estate dispositions continue to serve as a significant low-cost component of our capital sources each year. We have completed real estate dispositions totaling $324 million so far and have several transactions in progress that should help us meet our real estate disposition forecast range of $1.25 billion to $1.5 billion, with more details to come next quarter. Additionally, we anticipate generating capital for reinvestment from our venture investment program, which I’ll elaborate on shortly. Moving to real estate, our core growth driver, we reported total revenues of $480 million in the first quarter, which annualizes to $1.9 billion, reflecting a 9.1% increase over the first quarter of 2020 and more than double the total revenues of $1.9 billion from five years ago. Our exceptional real estate performance has resulted in solid growth projections for 2021. We achieved strong cash net operating income growth of 10.3%, and congratulations to our leasing team for their remarkable execution during this period, as we recorded the second highest number of leases executed in the company's history at 1.7 million rentable square feet. We also saw continued rental rate growth on lease renewals with rates increasing by 36.2% and 17.4% on a cash basis. We are well positioned today and have updated our outlook for rental rate growth for 2021 by 100 basis points, projecting a range of 30% to 33% overall and 17% to 20% on a cash basis. Our record leasing activity related to development and redevelopment projects over the last four quarters amounts to 1.8 million rentable square feet, including the 789,000 square feet executed this quarter. We're off to a strong start and are on track for solid same-property NOI growth for 2021, with first-quarter same-property NOI growth of 4.4% and 6.1% on a cash basis. The strength of our real estate segment has led us to enhance our outlook for same-property NOI growth in 2021, which has increased by 50 basis points to a range of 1.5% to 3.5% and by 30 basis points on a cash basis to a range of 4.3% to 6.3%. Our EBITDA margin remains robust at 69%, one of the highest in the REIT industry, and our occupancy stands strong at 94.5%, which is a critical area for driving cash flow growth in 2021 and 2022. Please refer to page 25 of our supplemental package for details concerning the recently acquired vacancy of 1.2 million rentable square feet, of which 26% is leased and will see most occupants moving in over the next two quarters. We forecast solid occupancy growth in 2021 of 100 basis points, split between the third and fourth quarters, and expect stronger occupancy growth into 2022. On the topic of venture investments, our portfolio continues to perform exceptionally well, with unrealized gains of $729 million as of March 31 on an adjusted cost basis of $912 million, which represents only 3.2% of our gross assets. Realized gains from our venture investments included $24.3 million in FFO per share, which is up $2.7 million compared to the fourth quarter of 2020. Looking ahead, we expect realized gains from our venture investments to fall between $25 million and $27 million per quarter. Notably, we recorded an additional gain of $22.9 million from an investment in a privately held clinical-stage biopharmaceutical company focused on oncology that was acquired by a larger biopharma firm. This significant gain is excluded from FFO per share as adjusted. Additionally, we hold significant unrealized gains of $725 million in our venture investments and aim to create opportunities to reduce future equity capital needs by approximately $100 million in 2021. Now, regarding our strong and flexible balance sheet, which supports our strategic growth objectives. We're proud of our team's achievements over recent years; our corporate credit ratings from Moody’s and S&P are among the top 10% of all equity REITs. Over the past nine quarters, we have issued $6.2 billion in unsecured senior notes, accounting for 72% of our total outstanding debt at an average effective rate of 3.26% with a term of nearly 16 years. This debt capital has included both growth and refinancing initiatives, extending our weighted average remaining term of debt to 13 years, securing long-term fixed-rate debt at favorable terms. The bond offering we completed in February 2021 exemplifies this strategy, where we seized a favorable interest rate environment to issue $1.75 billion in unsecured notes, partially refinancing $650 million in notes due in 2024. In summary, our balance sheet statistics for the quarter and year indicate continued improvements, positioning our net debt to adjusted EBITDA to reach 5.2 times by year-end. Our fixed charge coverage ratio is also strong, having increased to 4.7 times for the first quarter on an annualized basis, while we maintain significant liquidity of $4.3 billion. As mentioned earlier, we have no debt maturities until 2024, with only $184 million due in 2024. Finally, as we conclude, I want to direct your attention to pages 11 and 12 of our supplemental package for the latest guidance assumptions for 2021. Our improved outlook for 2021 reflects our strong real estate performance, including enhanced rental rate growth and increases in same-property and overall net operating income. We have updated our diluted EPS guidance to a range of $1.58 to $1.68 and adjusted FFO per share to between $7.68 and $7.78. The midpoint of this FFO per share range is $7.73, which marks an increase of $0.03 from prior guidance, translating to an estimated growth of about 5.9% over our robust FFO per share results for 2020 of $7.30. With that, I’ll hand it back to Joel. Thank you.

Joel Marcus, Executive Chairman and Founder

So, operator, if we could go to question-and-answer, please?

Operator, Operator

Our first question will come from Manny Korchman with Citi.

Manny Korchman, Analyst

Hey. Good afternoon, everyone. This question might be for Steve. As you discuss with your tenants regarding the markets they are exploring, it seems like you are venturing beyond your main cluster markets and making investments outside of those core areas. Is this driven by the tenants' preferences, or does it reflect where the Company sees current opportunities?

Joel Marcus, Executive Chairman and Founder

Yes. Well, this is Joel. So, let me address that from a broader perspective. I don’t think we can say we’re targeting just our core cluster markets. The core cluster market you mentioned, like Fenway, is really about the Greater Boston area, where Cambridge has been a standout. There are several nearby suburbs that have some connection to Cambridge that are quite appealing. The Seaport has been involved for a long time, and many other areas have seen life science activities. So, this reflects our overall growth strategy. We are very selective about our locations and approach. Fenway was a natural choice for us. I believe I mentioned last quarter that we’ve had our sights on Fenway for over a decade, as it connects to Longwood, where we have been active, and is certainly one of our core markets. However, I wouldn’t classify it as being outside of our core market by any means. Steve, do you want to add anything to that?

Steve Richardson, Executive Vice President

Yes. I would add to that. Manny, it’s Steve here. It is an expansion, incremental expansion of the core clusters. So, it’s not new markets or new clusters. I would absolutely characterize it as expansion of existing core clusters.

Dean Shigenaga, President

Manny, it’s Dean here. The majority of the dispositions planned for the remainder of 2021 will focus on partial interest sales. These will be high-value transactions with low capitalization rates and very appealing costs of capital. There may also be some outright sales over the next year or two, but we will keep you updated on that.

Joel Marcus, Executive Chairman and Founder

Yes. I want to add to what Dean mentioned. Manny, you noticed our decision to sell the Stripe and Pinterest buildings, which we developed beginning around 2014 in San Francisco. We sold those buildings entirely. We are also considering some other assets, so it may be a combination.

James Feldman, Analyst

I guess, my first question, can you just talk about market rent growth? I mean, I know the condition is very tight. You guys are talking about very strong fundamentals. But, what have you seen across the markets year-to-date?

Joel Marcus, Executive Chairman and Founder

Yes. I think, I’ll ask Steve to comment. But I think it's fair to say that across almost all the markets, maybe New York City would be the exception. We've seen, as I say, exceptional demand for Alexandria owned and operated first-in-class assets and I think that's really cut across all markets. But Steve, you could give some macro color?

Steve Richardson, Executive Vice President

Yes, I do want to underline that it has been across all the markets, certainly, Research Triangle in Maryland, we've seen nice growth there as well as Seattle, San Diego, Cambridge, San Francisco. And I guess, Jamie, when you look at our re-leasing and renewal stats, this quarter, it's 17% plus cash and 36% GAAP. In the last four quarters, 2020 in entirety, was in that range as well. I think that really speaks for itself as you see rent growth overtime here on these Class A assets.

James Feldman, Analyst

So can you quantify how much you think rents are up today over a year ago? I know you have lease spreads with the actual market rents? I guess I'm curious based on the rising construction costs and pricing power, just how it's holding up?

Steve Richardson, Executive Vice President

I would broadly say that lease rates are exceeding the anticipated construction costs increases. So it's all positive.

Peter Moglia, Senior Vice President

I can just give anecdotally our analysis showed that just quarter-over-quarter, so 4Q to 1Q, market rents were up over 3.5% just for the quarter. So you can annualize that you know double digits.

James Feldman, Analyst

And then can you talk about the business plan at Watertown mall and why focus on that sub-market versus some of the other Boston sub-markets?

Joel Marcus, Executive Chairman and Founder

So the answer is we won't talk about that specifically. But we've been in Watertown for maybe as much as 20 years. We've felt that was an attractive adjacent sub-market to the Cambridge market. Life Science has always enjoyed going there. We clearly made a big move with the Arsenal on the Charles and that campus and what we're doing to redevelop and develop that. The Watertown mall is kind of an adjacency. And what you're looking at is kind of a mega campus in Watertown. We're seeing some great R&D continuing to favor that market. I think if you look at that versus some of the sub-markets in and around the Greater Boston Market where transport is really, really difficult, I think Watertown is one which is, I think, easier to both ingress and egress and that's been a real attractive thing as well. But as far as this specific asset, I don't think we want to comment.

James Feldman, Analyst

And then finally, you guys have commented on constrained supply in '21 and '22. I think you were talking mostly about new construction. Can you just talk about conversions and what you think will be competitive in '21, '22 and even into '23 as you look across the major markets?

Joel Marcus, Executive Chairman and Founder

Yes. Steve can share his thoughts on a broader level. There has been a lot of speculation, but not much substantial evidence to support it. We have seen a few attempts that ultimately failed, and these options aren't appealing for top-tier companies seeking high-quality spaces. We haven't witnessed the expected surge in conversions that others have mentioned. However, Steve can provide more insight on this.

Steve Richardson, Executive Vice President

Look, you can put a flyer out. You can send out blast e-mails and say your office building is going to accommodate lab users. But until you go ahead and actually start making investments in the base building infrastructure and advancing that, tenants are not going to be attracted to that type of offering and that type of entity with a one-off building. Again, they're in kind of isolated locations. They're not always in the core life science clusters. So as Joel said, I think there's a lot of talk out there but we don't see a lot of action. Inevitably, there will be a handful of 50,000 to 100,000 square foot offerings but nothing that really competes with the million-plus square foot mega campus that's fully amenitized with brand new or newly redeveloped Class A product that we're offering. We monitor every market very closely.

Peter Moglia, Senior Vice President

I'd like to add, purpose-built, which is what we have trumps a conversion every day of the week. When conversions generally are going to require compromise to the tenant's plans, there are areas in the building where the structure is not going to work for heavy equipment, the plumbing or the shafts won't be available because there's another tenant in the way. I mean, it is just a very challenging thing. We've done it ourselves a number of times. We know the challenges we've been able to overcome them and provide great product. But at the end of the day, purpose built will always be much more attractive than an office conversion.

Sheila McGrath, Analyst

I was wondering if you could give us a little bit more detail on the One Investors Way transaction in the Route 128 submarket. Just what kind of yield that should be since you brought the tenant with you and just the plans for that expansion as well.

Joel Marcus, Executive Chairman and Founder

I believe yields will likely be reported in future submissions. At this stage, I hesitate to quote specifics. However, it's evident that Moderna has become an essential company, and for the past decade, vaccines were almost an afterthought in their business strategy. We are in a key position for mission-critical manufacturing for the vaccine, and they are exploring numerous chances to broaden that effort. Vaccination will not be a one-time event but will resemble flu shots, requiring regular boosters. This aligns with their strategic plan to supply the U.S. and the world with necessary vaccines now and moving forward. The ongoing evolution is expected as variants will necessitate adjustments to the vaccine. Therefore, as the primary landlord for Moderna, it serves both our interests to make this collaboration a reality. I hope this provides a useful framework. You can anticipate yield information either next quarter or soon after.

Sheila McGrath, Analyst

And I was wondering if you could comment on two markets. Research Triangle Park following Apple's announcement. Just remind us what your holdings are there and how proximate you will be to Apple's expansion, number one. And then number two, just you haven't touched on New York City in a while. Just wondering if you could update us on life science demand and that third building that you have.

Joel Marcus, Executive Chairman and Founder

So let me maybe take those in reverse and maybe speak to New York City. So as everybody knows, many on this call either live or work in New York and have seen, over the last year, what's happened there, still a somewhat tough place to be. Security is still an issue. Unfortunately, crime rates and shootings have gone up, really skyrocketed in enormous fashion. So we're very focused on the security of our campus. Our campuses is almost full, although we're creating some additional space in the existing two buildings and moving a number of tenants around to accommodate growth. And we're also filling up Long Island City, which is kind of a nice relief valve. We're in discussions with the city on the North Tower. We are going to break ground here over the past many months. But clearly, because of what's going on there and the change in the macro environment, we didn't go forward instantly. We had to rejigger kind of what we're thinking about but we're in discussions with the city to see how best we can move that forward. I think you have to remember, New York, growing a cluster is like having a baby for 25 years, and it's painful, right? And we're just finishing the first decade. And literally, New York, when we came and launched our first building there in 2010 and then into 2011 and beyond, literally no life science research was done there, world-class academic work, world-class clinical work, one incubator up on the Columbia campus. Pfizer had a headquarters there. But by and large, no research. Since then, we've made enormous strides. We've gotten venture capital off the ground there. A lot of companies have started. But we don't see big companies. They're reluctant and haven't really been successful in moving any big companies there. The recent tax efforts by the state certainly are aggressive to, I think, growth in New York, adding on to the tax burden in New York City, New York State, et cetera, and then a federal is kind of hurtful. So New York has a range of issues. It's great substrate, great NIH money, venture is formed. But it's going to take another decade or part of a decade and a half to really grow that into a real life secondary market like some of the others that you know much better. So it's a work in process. We see some company formation. There's certainly institutional demand and so forth, but it's different than the other markets. So maybe moving to Research Triangle, and I might have either Peter or Steve give any macro comments as well. But we made a move last summer. We felt that Research Triangle was an important part of the life science landscape, it has been for many years. We have both several mega campuses, both on the life science side and now the first one of its kind here in the US, maybe in the world, on the agri-food side, agri-food tech. And so we think it's a very, very good location. It's attracted a lot of brains from many places around the country, anchored by the three great universities, UNC, Duke and NC State. And it's been just a really, really good place to be. It used to be looked at as kind of a manufacturing or kind of a tertiary kind of location. I think today, it's moved up and become one of the hot and truly important places. And people like to live there, I think that's going to be important going into the future. Is it a good place to live? And if you compare walking around in the Triangle versus New York City, New York City is tough these days. You see what's going on in the subways. And hopefully, governance will get better, security will get better and improve and hopefully, COVID will recede. But walking around in the Triangle is like being in heaven. So I think that's why a lot of companies have been moving there and we've increased our footprint pretty dramatically. But Steve, you really started a lot of our efforts down there. So maybe a comment or two for you.

Steve Richardson, Executive Vice President

Yes, the Apple footprint, I think, will be transformative for the park for sure. And we do have one of our campuses in the Kit Creek area with a number of buildings that are in close proximity there. So we think that will help continue to really invigorate the campus going forward, as Joel has been outlining, and in particular, really help these specific assets. So we're very enthusiastic about their presence there.

Richard Anderson, Analyst

Joel, you mentioned your frustration with the corporate tax sort of narrative going on and impact on repatriation. Were you seeing any tangible evidence of kind of the onshoring of the supply chain and impacts positively to your tenants that could actually reverse course if this were to happen? I'm wondering if it's more of a storyline as opposed to something concretely underway at this point.

Joel Marcus, Executive Chairman and Founder

I think the changes have been significant, not just in biopharma and medical technology. The tax reform in 2017 was quite dramatic, allowing multinationals that previously faced full US corporate tax rates to bring back cash from overseas, known as the GILTI tax, at substantially lower rates. This led many companies, including major pharma and tech firms like Apple, Facebook, Google, and Microsoft, to repatriate large amounts of capital to invest domestically. We saw a few years of positive capital repatriation and reinvestment in the United States. Then COVID highlighted the vulnerabilities in medical supply chains, with 70% of them, including critical intermediates for pharmaceuticals and PPE like plastic gloves, sourced from abroad. We have been witnessing a strong trend of moving that supply back to the U.S. This shift is broad and encompasses more than just medications. Announcing a reversal or the intention to shift supply chains away during a pandemic could be detrimental. It's hard to predict how far along we are in terms of the pandemic, but I had a conversation with a startup that immediately set up its operations and intellectual property in Ireland to take advantage of the lower tax rate of 12.5%, while our rate may go up to 28%. China stands at 25%, and most countries have rates below 28%. This is not ideal for fostering job creation and boosting the economy after the pandemic's toll. I feel strongly that there are better strategies than becoming anti-competitive. The administration's plan for a global minimum tax through the OECD seems improbable, as it’s unlikely that countries will agree to that. Overall, it's discouraging news.

Michael Carroll, Analyst

And then just, I guess, last question for me. Can you talk a little bit about, I guess, the mentioned in the earlier prepared remarks about the model to help combat homelessness in Seattle. I mean, how far along is this process? And I guess, what type of timeline do you have in mind or when you'll be able to provide us more details on what that plan is and how it's going?

Joel Marcus, Executive Chairman and Founder

So it's still in the early feasibility stage. I think understanding homelessness, much like drug addiction, is hard. If you imagine the homeless population, it's highly stratified. There are those that are down on their luck, have financial issues. There's a large cohort that have serious addiction issues. There's a large cohort that have serious mental illness, et cetera. So it's not just saying, okay, let's just find housing. That's a solution that many jurisdictions are pursuing, but it doesn't help. It's like detoxing somebody who's addicted to opioids and then putting them back on the street, that doesn't work more than 28 days. So we're trying to adapt this model, the continuum of care, the complete care, data-driven but with deep research, and so we're in the feasibility stage. So I'm not sure I can give you yet. Maybe over the next quarter or so, I'll be able to give you more details. But we think it's an imperative that we attack this problem, and I think we may have a model that will help a lot of people here. But it's no easy thing. It isn't like putting up a few simple apartments. It's way, way more complicated than that.

Operator, Operator

Our next question will come from Dave Rogers with Baird.

David Rodgers, Analyst

On the leasing front, I wanted to ask a question about, you had two really good quarters of leasing and a number of quarters come together. Curious if you're seeing any slowdown, like there was some backlog maybe that had built up through COVID and that may get metered out a little bit more. Is that more a function of what you're offering in development? Just curious on kind of the pace of leasing into the second quarter? And then maybe the flip side, what's missing from the leasing pipeline, if anything, in terms of kind of your core tenant base?

Joel Marcus, Executive Chairman and Founder

I'm not sure I fully understand the first part of the question.

David Rodgers, Analyst

I think earlier, you made the comment about demand and some of the slowdown that was related to just not being able to build, for a little while, and there was a little…

Joel Marcus, Executive Chairman and Founder

I don't think we said that. Who mentioned it?

David Rodgers, Analyst

In terms of new leasing, I'm wondering if there's any indication of a slowdown as we move from the first quarter to the second quarter, or if there's any sign that the backlog from COVID is starting to decrease.

Joel Marcus, Executive Chairman and Founder

No. I think our comments should address that pretty directly, Dave. No, we don't see any of that.

David Rodgers, Analyst

And then not essentially related to SPAC, but is there anything in your own guidance at Alexandria that would be dependent upon that getting done?

Joel Marcus, Executive Chairman and Founder

No.

Daniel Ismail, Analyst

Joel, I appreciate all the comments relating to ESG. There are a variety of taxes or fines on greenhouse gas emissions proposed or in discussions across your markets. It seems like lab buildings are generally lumped in with office buildings in these proposed or enacted regulations despite the difference in use and potential energy intensity. Is that a fair characterization? And then does this come up in tenant discussions about the potential for, say, higher taxes or fines on building greenhouse gas emissions?

Joel Marcus, Executive Chairman and Founder

I think it has not, at the moment, doesn't seem to be a significant issue for tenants at this moment, although, they're looking for obviously very green and environmentally positive sustainable buildings, both inside and outside. And I think we've kind of been a leader here in the US and maybe even worldwide in the whole fit well or healthy environments inside. But Dean, do you want to comment because you're closest to that?

Dean Shigenaga, President

So Danny, I agree with what Joel highlighted. Our tenants haven't focused on your specific question but they have focused on really environmentally friendly, sustainable real estate solutions. If you look across their business, if you take just a sample of our top 20 tenants as an example and look at their ESG initiatives, sustainability is a high priority across their entire business, real estate being a very small component. They actually touch on real estate a little bit on a few of the top 20 tenants. And as Joel highlighted, carbon neutral, energy neutral buildings, et cetera, just beyond lead today is super important. Most of these biopharma companies today have set carbon neutrality goals that are well inside the broad 2050 type of target dates that some have put out there. And so I think overall, it's super important. I think for us, when we think about building green and sustainable buildings, it plays not only strategically important to our business but plays right into the strategies of our tenants as well. So I think it works well. And I think you pointed the obvious challenge that all companies are facing today is how do you read carbon neutrality today at a pace that needs to be faster than maybe possible at the moment, given technologies and solutions that are available. But if we don't put our best foot forward to be impactful here, we won't get anywhere close to some of the deadlines in different jurisdictions. But they're all different so it's hard to comment on broadly across the portfolio.

Daniel Ismail, Analyst

And then just last one for Peter, on the cap rate on the South San Francisco trade. How would you compare that cap rate across market cap rates, or how would you compare market cap rates across San Diego, south San Francisco and Cambridge? Are cap rates heading to parity in these markets or are there still decent spreads across these markets?

Steve Richardson, Executive Vice President

I believe your point about approaching parity is interesting. When you began your question, I noticed that the geographical differences in cap rates that were once clear are becoming less distinct. With cap rates at 4%, which we are already seeing in Cambridge, it's likely we could see them fall below 4% there in the near future. A top-tier asset in San Diego that had a cap rate around 5% two years ago is likely closer to a low 4% cap now. The geographic differences in cap rates are really starting to diminish. It's also clear that many investors are eager for Life Science exposure, which makes geography less of a priority in seeking that exposure.

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

I'd just say thank you, everybody, and please stay safe. We'll talk to you next quarter. Thanks, everybody.

Operator, Operator

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