Earnings Call Transcript - ARE Q3 2020

Operator, Operator

Good day and welcome to the Alexandria Real Estate Equities Third Quarter 2020 Conference Call. [Operator Instructions] Please note, this event is being recorded.

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'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Joel Marcus, Executive Chairman and Founder

Thank you, Paula, and welcome, everybody, to Alexandria's third-quarter call. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, and Jenna Foger. I'd like to welcome everybody from the Alexandria team and family, wishing and hoping you're all well, safe, and COVID-free. As all of us know, 2020 has been an astounding year with a confluence of an international pandemic from Wuhan, China; a deep shutdown recession; civil strife; coupled with a heated and complex election upcoming here next week. 2020 started off very sadly with the untimely death of Kobe Bryant, not only a great athlete but a special human being. I want to make just a brief quote from one of his great quotes. He often said, 'Great things come from hard work and perseverance.' Those of you who knew or watched or admired Kobe, he was always the last guy to finish up and the first guy to start, one of the hardest-working people anyone could ever imagine. And that really exemplifies our team, and I want to thank our team from the bottom of my heart for doing such a great job. Alexandria has really uniquely achieved three outputs that are very rare in corporate America today and define a truly great company: continuing superior results, continuing distinctive impact, and lasting endurance. Again, we want to thank our entire team for a stellar third quarter as we are all building the future of life-changing innovation during COVID-19, which one could never imagine. A couple of comments. I wanted to comment on the recent Blackstone transaction where Blackstone announced the recapitalization of its life science real estate business. It only serves, I think, to reconfirm once again the great vote of confidence in the life science real estate niche we pioneered in 1994. The transaction implies an approximate $1,070 price per square foot for that 13 million square foot portfolio. Compared to where Alexandria trades more or less today at about $950 a square foot, I think that's a very good benchmark for us. Blackstone timed its 2015 purchase quite ideally as the biotech industry was emerging from about a five- or six-year bear market in the 2013 and 2014 timeframe. When they acquired the assets, most of the buildings were older than Alexandria's and were not in as strong locations as we were. They've clearly enhanced that portfolio since, and kudos to them for doing that. I want to mention our third-quarter activity on our Research Triangle acquisition, which is particularly noteworthy. A large acquisition, about $590 million purchase price, about $265 a square foot for 2.2 million square feet over about 300 acres, 20 buildings with very high credit tenants but also significant value add. This acquisition substantially increased our footprint in Research Triangle, motivated by our need to accommodate numerous inbound substantial tenant requirements, both who needed existing solutions and build-to-suit capabilities. We now have three mega campuses in the Triangle: the Alexandria Center for Life Science – Durham; the Alexandria Center for AgTech; and the Alexandria Center for Advanced Technologies. We see continuing strong demand for life science space across our markets, particularly from our own tenant base. Also, it's important to remember, two key truths revealed by COVID-19: one is the resilience and the need for domestic medical supply chains to be based in the United States, crucial for national security and medical supply. It reinforces that complex medicines are really the future of health care. The famous COVID-19 antibody cocktails would be a good example of that. I wanted to mention a little about Operation Warp Speed, initiated by the Trump administration, supported by more than $10 billion in funding through the CARES Act. Operation Warp Speed, led by probably one of the most skilled vaccine developers in the world, Moncef Slaoui, aims to deliver 300 million doses of a safe and effective COVID-19 vaccine in the first quarter as part of a broader strategy to accelerate the development, manufacturing, and distribution of COVID-19 vaccines, therapeutics, and diagnostics. All in tandem, very different than the government has ever operated before, really a great credit to public-private partnerships. The Warp Speed partnership includes selected biopharma companies and key federal science agencies, including BARDA, CDC, DoD, FDA, HHS, and the NIH. As of October 21, this initiative announced funding decisions totaling over $13 billion for over 10 companies to support vaccine therapy and manufacturing efforts. Nearly all of them, except for maybe one, are our tenants: Moderna, GSK, Sanofi, Pfizer, Novavax, AstraZeneca, J&J, Merck, Regeneron, Emergent Bio, and Fujifilm. Quite a huge feat, I think, considering the onset of this pandemic. It's worth noting there is speculation that this was not a naturally occurring virus but one that was man-made in a lab in Wuhan. A couple of comments on the life science industry: a real shout-out to the great public-private partnerships formed in many different fashions. The life science fundamentals throughout 2020 have remained fundamentally strong, especially given the critical nature of the fight against COVID-19. This has led to substantial progress and acceleration including late-stage vaccine trials and therapeutics along with improved and expanded testing. The life science industry has not slowed down its pace. Important to remember, investment in innovation goes well beyond COVID-19. The industry's commitment and investment in innovation, along with the FDA's ability to operate at a high level despite the pandemic, has led to 40 new drug approvals as of the end of September, putting us on pace to meet or exceed the average of 51 approvals from the past couple of years. I was on a call last week with Commissioner Hahn. It's a tremendous credit to him and the entire professional workforce at the FDA for their 24/7 effort during this time. Life science venture funding has continued to flow at a strong pace in the third quarter, setting new quarterly records at almost $12 billion, with over $30 billion raised through the first three quarters, really surpassing all previous annual totals. It's essential to remember that most of this investment, about 80%, comes from Alexandria's core markets, especially greater Boston and San Francisco, which capture around 60%. Capital flows to early-stage companies and the public markets continue at a fast pace. There have been 47 pharma and biotech IPOs in the first three quarters of this year, raising almost $9 billion, larger than any previous year. The companies have been able to access capital markets at historic levels, approximating almost $35 billion in follow-on offerings, surpassing the previous high of about $29 billion in 2015. Overall, it's been a strong tailwind for the industry. With that, I'd like to turn it over to Jenna Foger, our Senior VP of our Science and Tech team, who will talk about the latest developments in the vaccine therapeutic area. So Jenna, please?

Jenna Foger, Senior VP, Science and Tech

Thank you, Joel, and good afternoon, everyone. So as this unprecedented pandemic continues, resulting in a record surge in COVID cases across the country, making an indelible mark on the global economy, society, and significantly impacting public health, the need for safe and effective treatments and vaccines to combat this coronavirus is paramount. Skepticism and impatience have set in as we all navigate this uncomfortable experience of waiting. Never before has the work of our tenants in the life science industry been more critical. The nearly 100 tenants working on meaningful COVID programs represent a beacon of hope for an end to this pandemic. Collectively, our tenants in the life science industry also provide long-term solutions for human health, urging us to rethink prevention, overdue innovation, infectious disease, neglected therapeutic areas, and paradigms for R&D collaboration, next-generation manufacturing, and supply chain efficiency. Clearly, a safe and effective vaccine is essential to meaningfully reopen society and restore the global economy. As such, researchers globally are working with unprecedented speed and collaboration on at least 135 distinct coronavirus vaccine programs, with nearly 50 vaccine candidates already in human trials. As Joel mentioned, a cornerstone of the U.S. government's effort to expedite the development, manufacturing, and distribution of COVID-19 treatments and vaccines is Operation Warp Speed, with most of its grant recipients being Alexandria tenants. Among these efforts, I want to highlight four of the most advanced vaccine programs from Pfizer, Moderna, AstraZeneca, and Novavax, each being a top tenant for Alexandria, each applying slightly different underlying technology and approaches to vaccine development. Each of these companies has reported clinical data suggesting initial safety and efficacy, and all are currently conducting major Phase III studies with tens of thousands of subjects worldwide. Key data readouts from these companies are expected in the fourth quarter, between probably November and December. So what do we make of this? The constant flow of headlines suggests it is highly likely that at least one, and likely more than one, of these initial Phase III trials will report interim efficacy results in November and December. If they do, the FDA could grant emergency use authorization by year-end or early 2021, allowing high-risk populations, such as healthcare workers, to begin receiving the vaccine in the coming months. The FDA has set the minimum standard efficacy threshold for all COVID vaccines at 50%, meaning a vaccine must protect at least 50% of those receiving it to gain emergency use authorization. Analysts have begun to predict efficacy more likely in the range of at least 70%, but of course, all of this remains to be seen. As more data becomes available and vaccines begin distribution, if safety and efficacy persists, these companies and others could receive FDA approval in the first half of 2021, leading to widespread distribution of safe and effective vaccines next year. Given the global population, this will not be a winner-take-all opportunity; no single company will supply global demand in the near term. Over time, the most effective vaccines will likely enjoy more upside. Of course, many questions remain, and we'll continue to learn more in the coming months as more data is released. Just as it's unclear how long natural immunity lasts following COVID-19 infection, the durability of a COVID-19 vaccine is still an open question. Will COVID be like SARS or MERS, subsiding over time, or will it be more endemic or flu-like, creating a longer-term market opportunity for current treatments and developments? Furthermore, we are navigating challenges related to capacity, access, distribution, logistics, and early adoption in real-time. Meaningful strides are being taken by our tenants in the life sciences to mitigate many of these complexities. Additionally, new antibody therapies from companies such as our tenants Vir in collaboration with GSK, Eli Lilly, and AstraZeneca could serve as a bridge to a vaccine, administered prophylactically or to help lessen the severity of COVID-19. Key data readouts will be forthcoming over the next few months as Eli Lilly's single-agent antibody and Regeneron's antibody cocktail await emergency use authorization and potential approval. Notable advances in COVID-19 treatment include the FDA's first COVID-specific approval of tenant Gilead's antiviral drug Veklury or remdesivir for hospitalized COVID-19 patients. The FDA also granted emergency use authorization for convalescent plasma for hospitalized patients with severe disease. The NIH has included in its guidance the use of dexamethasone or steroids for hospitalized COVID patients requiring supplemental oxygen. These notable efforts from our tenant base and the life science industry are, in large part, due to the fact that as the coronavirus made itself known to the world nearly a year ago, these companies were already equipped with the R&D infrastructure, technology platforms, resources, and talent necessary to mobilize quickly against this global health crisis. It is our honor to continue serving at the forefront of this essential life science industry and to support the heroic work of our tenants and campus communities as they strive to bring an end to this pandemic while addressing 10,000-plus diseases and innovating the future of drug discovery. With that, I will turn it over to Steve. Thank you.

Stephen A. Richardson, CFO

Thank you, Jenna. Good afternoon, everyone. The very strong results we've achieved during the third quarter are a testament to both the clear vision the company has had since its inception more than 25 years ago, and a highly creative and entrepreneurial team that has skillfully adapted to this tumultuous time. Alexandria's mega campuses are now not only essential and mission-critical, but they are also especially desirable in capturing a significant majority of the life science growth in the marketplace. The Alexandria brand is highly valued across the entire life science ecosystem for its well-earned trusted relationships, impeccable integrity, and unparalleled expertise and experience. These timeless elements are foundational for tenants to seek out a collaborative and mutually beneficial multidimensional platform for their growth with Alexandria. As challenges increase for navigating success in eradicating disease and improving global nutrition, particularly with a once-in-a-century pandemic upon us, Alexandria stands out as an innovative, insightful, and unique partner, as the following results clearly demonstrate. In terms of operational excellence, the company has collected 99.7% of its accounts receivable during the third quarter and 99.7% during October. The 24/7 nature of these labs and the fundamental value they provide for our tenants is evident in these operational statistics. On the leasing front, we have continued outperformance. During the third quarter, we outperformed the second quarter leasing activity with a total of 1.2 million square feet leased, bringing us to nearly 3 million square feet leased year-to-date, which is impressive considering our 10-year leasing average is 3.9 million square feet. Alexandria's team is fully engaged, and our tenant base is thriving and expanding. To underscore our leasing outperformance, this quarterly run rate during COVID is approximately equal to or better than the leasing run rates during the first, second, and third quarters of 2019. It's noteworthy that 80% of our development pipeline is currently leased or in negotiations. Our core remains strong with rental rate increases of 30.9% cash and 39.9% GAAP for renewals and re-leases. Early renewals for the third quarter exceeded our historical levels, reaching 86%, indicating a strong sense of urgency among our tenants. Our mark-to-market is at 16.4% cash, a 90 basis points increase from the second quarter, and 17.1% GAAP, up 120 basis points over the same period. Occupancy remains solid at 94.9% across 31.2 million square feet in the operating portfolio. Considering the recently acquired lease-up opportunities, we would otherwise be at 97.7% occupancy, reflecting a 60 basis points increase from the second quarter. Market health is robust, with strong lab demand of 3.2 million square feet in the Bay Area of San Francisco, 2.5 million square feet in the greater Boston region, and 2.1 million square feet in San Diego. Importantly, there's a market acceleration toward high-quality, COVID-safe campuses, evidenced again by our ability to capture a dominant share of promising and strong credit life science companies. In conclusion, Alexandria's pioneering efforts have positioned the company at the intersection of science and global health. The team is entrepreneurial, creative, and fully prepared to decisively capitalize on opportunities to partner with our tenants for the benefit of health across the globe. With that, I'll pass it to Peter.

Peter M. Moglia, COO

Thanks, Steve. I'm going to briefly update you on our development pipeline, the impact of Prop 15 on Alexandria, and touch on a recent third-party asset sale in one of our submarkets. Overall, leasing activity was very robust, with over 300,000 square feet of leases completed and approximately 490,000 square feet put under LOI in the development and redevelopment pipeline during the quarter. This demand was led by our two Bay Area projects, 201 Haskins and the Alexandria District project in San Carlos. There have been a few adjustments to the development and redevelopment pipeline from last quarter. 945 Market Street in SoMa was sold for $198 million, as noted in our dispositions disclosure. Accepting the unsolicited offer made a lot of sense as an opportunity to recycle that capital into our already robust pipeline. 704 Quince Orchard Road in Gaithersburg, Maryland, and 9880 Campus Point Drive in San Diego were successfully completed during the quarter, putting them into operation. As those assets were removed from the pipeline, we have added two new assets, including the Parmer campus in Research Triangle that Joel referenced. That asset was acquired in the third quarter and has been rebranded as Alexandria Center for Life Science – Durham, comprising approximately 650,000 square feet of the 2.2 million square foot campus slated for redevelopment into research and manufacturing lab space, already 50% pre-leased. The second asset, Alexandria Center for Advanced Technologies, is also in the Triangle, featuring research and manufacturing space in two buildings that are a combined 40% pre-leased. We disclosed three new pre-leased projects in our San Diego region: 3115 Merryfield Row, also referred to as Spectrum 3, is a 146,456 square foot ground-up development, the fourth and final phase of our Spectrum campus in Torrey Pines. The project has substantial interest; 80% of the building is already under letter of intent. At Alexandria Point, we have pre-leased 100% of a new 171,102 square foot ground-up development on that mega campus to a credit tenant. The San Diego Tech by Alexandria project has kicked off its first ground-up development, with 59% pre-leasing of a 176,428 square foot building to a promising genetic sequencing company, a technology that's a major strength in the San Diego region. Regarding Prop 15, I'm sure everyone is aware of California's Proposition 15 ballot measure, which would overhaul state property tax limitations of 2% increases per year and replace them with market value assessments every three years for commercial properties valued over $3 million. If Proposition 15 passes, property taxes for some of our properties in California could substantially increase. Our current assessment is that we are in a strong position to absorb the impact should it pass, as our California asset base is relatively young; approximately 60% of our properties were purchased or developed over the past ten years. Our triple-net leases allow us to pass through substantial real estate and rent-related taxes to our tenants in the form of additional rent tenant recoveries. Consequently, we do not expect potential increases from tax reassessments to significantly impact our operating results or net operating income. Moving to the asset sale, over the past two quarters, we've discussed strong interest in lab office assets from diverse investors. Notably, Ventas purchased the Genesis Towers and 4000 Shoreline in South San Francisco for $1.02 billion, or $1,301 per square foot, at a 4.75% cap rate. Despite valuation surprises, we continue to believe it’s a good time to be in the market with assets in life science markets. During the third quarter, our deep knowledge, expertise, and experience will provide opportunities to grow our asset base at reasonable valuations. With that, I'll pass it over to Dean.

Dean Shigenaga, CFO

Okay. Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. Our essential real estate portfolio continues to provide highly innovative entities with mission-critical research facilities focused on advancing human health. We're proud to be the key partner to leading entities across pharma, biotech, and AgTech, with a highly experienced team delivering operational excellence quarter-to-quarter and year-to-year. Our high-quality Class A properties and future development sites, along with our stellar tenant roster, continue to generate high-quality and growing cash flows. Growth in cash flows from operating activities has allowed us to increase our common stock dividend, most recently to $1.06 per common share or $4.12 per share annually, reflecting a 6% increase over the previous 12 months. We are on track to retain over $200 million in cash flows from operating activities after dividends in 2020 for reinvestment in our highly leased development pipeline. Our third-quarter results were strong, with total revenues up nearly 17% year-over-year, excluding the Pinterest termination payment, highlighting continued solid execution on internal and external growth. Adjusted EBITDA margin remained strong at 67% for the third quarter, ranking among the top in the REIT industry. The slight decline in third-quarter results was attributed to temporary vacancy for space that will be ready for occupancy in the fourth quarter and higher utility costs. Importantly, adjusted EBITDA margin is expected to improve to 68% in the fourth quarter. Rent collections have remained strong, as highlighted by Steve, at 99.7% for both Q3 and October, aligning with our expectations for mission-critical essential real estate. Year-to-date occupancy has been stable at 97.7% prior to the impact of recently acquired properties. For details on recent acquisitions, please refer to Page 24 of our supplemental package. Recent acquisitions will offer growth opportunities as our team works on lease-up initiatives. Operating results benefit from contractual annual rent escalations averaging approximately 3% from one of the highest-quality tenant rosters in the REIT industry. As referenced in our second-quarter earnings call, tenants took occupancy in the third quarter, concluding temporary vacancies as of June 30, leading to expectations for 2020’s results. Same-property NOI growth was 2.9%, with 4.9% on a cash basis for Q3. We reported continuing strong rental rate growth on lease renewals and re-leases of nearly 40% and 31% on a cash basis for the third quarter. During the quarter, our General Counsel resigned for family reasons. She was a top leader in the company and built a tremendous team during her two-decade career at Alexandria. We wish her well. In relation to her departure, we recognized a $4.5 million compensation expense in Q3. We have taken advantage of portfolio strengths and capital markets, showing neutral net cash flows for the first three quarters of 2020 and highlighting selective monetization of holdings. Unrealized gains significantly increased to $542 million as of September 30, with realized gains averaging $16.1 million per quarter over the last four quarters, totaling $17.4 million for Q3. Our team has diligently worked on active and near-term development projects. As Peter mentioned, we have 4.1 million square feet of active near-term projects that are highly leased or negotiating at 74%, generating significant cash flows. This includes great progress on our active pipeline, 80% leased or in negotiations. We added over 900,000 square feet to our active pipeline this quarter, which is 54% leased and negotiating, with an additional 500,000 square feet of near-term lined up, 80% leased or negotiating, and starting vertical construction from Q4 to Q2 of 2021. Thanks to our entire team for outstanding execution in our development and redevelopment pipeline. On to our balance sheet, I want to express gratitude to our relationship lenders and our team for completing an amendment to our unsecured senior credit line, establishing aggregate commitments of $3 billion, an increase of $800 million, and extending the maturity date by two years to early 2026. We secured a record-low 12-year bond deal at 1.875% in August 2020. The all-in rate for 10-year bonds for Alexandria remains attractive at approximately 2%. We are committed to maintaining a strong credit profile and are on track to meet our year-end target of net debt to adjusted EBITDA of 5.3x. We are proud to rank among the top 10 publicly traded REITs for balance sheet strength. We have a liquidity of about $3.9 billion, reflecting increased commitments from our October 2020 credit line amendment. Our weighted average term of outstanding debt is solid at 10.6 years, with minimal debt maturities until 2024. We updated our 2020 guidance and narrowed the range for diluted EPS from $3 to $3.11 and FFO per diluted share from $7.29 to $7.31. Our anticipated dispositions for 2020 include two key transactions progressing well, one expected to close soon. Due to confidentiality agreements, we cannot provide commentary until post-closing. As usual, please refer to detailed underlying assumptions provided in our 2020 guidance, starting on Page 10 of our supplemental package. We plan to provide our detailed assumptions for 2021 at our Annual Investor Day on December 1. Let me turn it back over to Joel.

Joel Marcus, Executive Chairman and Founder

Thank you. We'll proceed to the question-and-answer segment. Operator, please go ahead.

Operator, Operator

[Operator Instructions] The first question comes from Anthony Paolone of JPMorgan.

Anthony Paolone, Analyst

Okay. I think, Peter, you mentioned some challenges with some of the conversions to lab. With so much capital swirling around new submarkets and markets, can you comment on whether there's enough demand to go around for everybody?

Joel Marcus, Executive Chairman and Founder

Let me jump in before Peter comments, Tony. You need to look at where these conversions are happening and where demand wants to be, as those don't always align. For example, in Cambridge, the ability to add supply is challenging, and demand there is strong. It’s essential to isolate locations either currently under conversion or where there’s potential for conversion. You heard a bit about the downsides of conversions; they often don't pan out well in terms of satisfying tenant needs. Peter, you can comment.

Peter M. Moglia, COO

Yes. An article in Bisnow yesterday titled, 'Too Low, Too Fragile, Too Short-Term: Life Sciences Conversions Are Popular But Hard to Pull Off' summarizes the challenges. Office buildings lack the necessary infrastructure for efficient lab operations. Tenants wishing to convert often have to make unacceptable sacrifices. In contrast, Alexandria’s portfolio is purpose-built for labs, ensuring we remain the first choice for any requirement in our submarkets with proven operational expertise.

Anthony Paolone, Analyst

Okay. My second question, Joel. Last quarter or perhaps the quarter before, you made some comments about the election. It sounded like a blue wave would be a bad scenario. Can I get updated thoughts on a so-called blue wave and its near-term impact on the business?

Joel Marcus, Executive Chairman and Founder

Ideally, a balanced government is always best. It's exceptionally hard to predict a blue wave and its implications as the Democratic Party encompasses a wide range of perspectives. Two immediate areas mentioned by Biden-aligned groups are Medicare negotiations for drugs administered by doctors and possible revenue sharing if intellectual property was developed outside the company, like federal labs or universities. It’s tough to speculate as those ideas could have varying impacts.

Anthony Paolone, Analyst

Would a blue wave lead to a pause in leasing as tenants figure out their environment?

Joel Marcus, Executive Chairman and Founder

No.

Operator, Operator

The next question comes from Jamie Feldman of Bank of America Merrill Lynch.

James Feldman, Analyst

Regarding supply, are there any markets where you're reconsidering new starts due to the capital flowing in?

Joel Marcus, Executive Chairman and Founder

We flagged South San Francisco in previous years as potentially having more oversupply than demand when Kilroy announced Oyster Point. Other groups built, but demand turned out to be strong, and the supply issue remained manageable despite our earlier concerns. We've been cautious in that area but feel great about our position, especially with the Haskins project.

Stephen A. Richardson, CFO

Our South San Francisco lab products are essentially 100% leased. Currently, Haskins reaches 88% leased and negotiating.

Joel Marcus, Executive Chairman and Founder

The strong demand has been propelled by big pharma entering South San Francisco, including 4 or 5 global companies that were previously absent. Furthermore, numerous second-tier companies have matured to commercialization. We continue to monitor supply closely but have no excessive concern.

James Feldman, Analyst

Any other markets you're watching as potential risks to supply?

Joel Marcus, Executive Chairman and Founder

We always consider Research Triangle a potential risk because there's ample land available. This is why we adopted a mega campus strategy, as many tenants prefer not to be in isolated locations. Recent expansions demonstrate that tenants seek existing solutions.

Operator, Operator

Next question comes from Manny Korchman of Citi.

Emmanuel Korchman, Analyst

Thanks for sharing insights on capital interest. With your increase in acquisitions, how open are you to larger deals, especially in Cambridge?

Joel Marcus, Executive Chairman and Founder

It's always difficult at the beginning of any year to predict the potential assets that might come to market. 2020 proved different than prior years. In terms of interest for larger portfolios, as I noted earlier, we didn't express interest in Blackstone’s assets back in 2015, and we wouldn't be interested in taking on giant scales that don't add value to us.

Emmanuel Korchman, Analyst

How are you viewing the manufacturing space in your portfolio now? How much might increase over time?

Joel Marcus, Executive Chairman and Founder

We’ve experienced manufacturing in the past; however, we don't engage in remote manufacturing plants. Our focus is on value-laden locations. Today, repatriating research and development manufacturing is critical for health care, encouraged by both current administrations. The rise of gene therapy necessitates local manufacturing as an integral part of R&D, creating tremendous opportunities as companies develop specialized capabilities, enhancing the chance for growth.

Michael Bilerman, Analyst

As you discuss international markets, have there been considerations for additional U.S. markets?

Joel Marcus, Executive Chairman and Founder

While we’ve signaled the possibility of exploring new markets, our existing ones are robust and currently absorbing our capacity. Right now, our focus remains on our core markets but the future is unwritten post-election.

Operator, Operator

The last question today will come from Daniel Ismail of Green Street.

Daniel Ismail, Analyst

Great. Another solid quarter for cash re-leasing spreads. Where do in-place rents sit relative to market rates?

Joel Marcus, Executive Chairman and Founder

Dean, can you provide insight?

Dean Shigenaga, CFO

Our portfolio’s overall rents have hovered in the upper teens on average, both GAAP and cash, holding steady due to supply constraints and strong fundamentals in our core markets.

Daniel Ismail, Analyst

Could you frame net effective rent growth year-over-year?

Dean Shigenaga, CFO

I don’t have specific numbers for this quarter, but net effective rents have been growing consistently over recent quarters. Changes in our portfolio mix may affect visibility as we have added diverse assets.

Daniel Ismail, Analyst

Regarding the H-1B visa program, how do you foresee potential impacts on the life science sector?

Joel Marcus, Executive Chairman and Founder

There are many scientists from abroad with specialized skills in the life science sector under this visa program. Preserving this program benefits our industry significantly, aiding in innovation and productivity.

Operator, Operator

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

Joel Marcus, Executive Chairman and Founder

Thank you. I apologize for the lengthy call during this third quarter of COVID. Looking forward to discussing the fourth quarter and year-end soon. Please stay safe.

Operator, Operator

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