Earnings Call Transcript - ARE Q1 2022

Operator, Operator

Good afternoon, and welcome to the Alexandria Real Estate Equities First Quarter 2022 Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Paula Schwartz of Investor Relations. Please go ahead.

Paula Schwartz, Investor Relations

Thank you, and good afternoon, everyone. This 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, everybody, to today's call, April 26, 2022, previewing or highlighting our first quarter. And I want to also let everybody know with me today are Dean Shigenaga, Peter Moglia, and Stephen Richardson. I want to make a shout-out happy birthday to someone very special listening here today. I want to welcome and thank you for joining our first quarter earnings call, and want to wish everyone blessings and just watching the war in Ukraine gives us pause to appreciate everything we have. The good to great author, Jim Collins, has spoken about Alexandria. We have achieved three outputs that define a great company: superior results, distinctive impact, and lasting endurance. And I want to congratulate the entire Alexandria family team on a first quarter earnings performance really by all metrics exemplifying Alexandria exceptionalism at its finest. In fact, as Jim Collins said, our superior performance. I want to thank the entire family team as well for what they do each and every day for this mission-driven company, profoundly committed to driving forward our distinctive impact approach to address some of society's most pressing challenges through our long-standing bedrock social responsibility pillars. As Jim said, our distinctive impact, and we have worked in these pillars, accelerating groundbreaking research, medical research, harnessing the agro-food ecosystem to combat hunger, empowering underserved students to achieve long-term success, bolstering the resilience of our military, conquering the opioid epidemic, building a model for comprehensive and sustainable solutions to address homelessness, one of our newest programs, addressing the mental health crisis with a focus on helping children cope with suicide loss, another new focus, and supporting museums to preserve our history and honor our greatest heroes, also a new focused pillar. I want to also share that next month, May 2022, we'll celebrate our 25th anniversary of Alexandria's initial public offering. Since our IPO in 1997, we've maintained the highest standards of excellence and continue to drive long-term value for our stockholders, significantly outperforming major indices and companies. With the total shareholder return through the end of the year from '97 of 2,532%, which has beat the NASDAQ average for that time of 1,291%, we beat Warren Buffett at Berkshire during that time at 953%, the MSCI REIT index, all REIT index at 939%, the S&P 500 for that time frame, 790%, the Russell 721%, and the FTSE NAREIT Office Index at 552%. As Jim Collins said, Alexandria has lasting endurance. I want to move to the first quarter, characterized by Alexandria's preserving its very strong core, while stimulating strong and continuing future growth. Alexandria continues to have pricing power in each of our core markets. As Dean will talk about, our very strong NOI growth in the first quarter and out of a sense of conservatism, we raised our midpoint of our guidance by $0.02 given the macro environment. But on the other hand, we have very strong conviction for the coming three quarters of 2022 and the delivery of strong NOI growth, both internally and especially from our stellar external value creation pipeline. Steve will highlight our second highest leasing quarter in the company's history, and Alexandria continues to experience the strengths across each and every one of our markets here in our overall portfolio. Dean will highlight our very strong same-store performance and increased guidance as we continue to see positive occupancy gains and strong rental rate growth. With our extreme attention to each and every detail of our unique and special life science real estate business, we're seeing modest increases in our development yields as well as we're highly focused on tightly managing all aspects of our business with a tough macro environment and with rising recession risks. Today reminds me of 1979 with government policies failing the American people. Alexandria has been very focused on tenant quality, and 50% of our annual rental revenue is from investment-grade or publicly traded large cap tenants. I think it's pretty amazing that Alexandria's tenants have made astounding progress in developing groundbreaking medicines. 48% of FDA novel therapy approvals have been granted to Alexandria tenants since 2017, almost half of all approvals. The life science industry has seen the explosion of biotech over the past decade from 2013 to 2021, with fund flows up generally 5x historical averages, advancing broadly innovative pipelines for large unmet medical needs. And every one of us knows either a family member, a friend who suffers from some form of disease still not treatable effectively with today's medicines. The move in inflation starting in the first quarter of '21. Now we're five quarters into it, coupled with the myriad of problematic U.S. policies and macro threats have ended that boom. And over the last five quarters, what has emerged are the haves and have nots. The have nots are a range of small and mid-cap biotech companies with programs that are preclinical as well as many are in the clinic have seen their values drop, and the open markets of the last nine years, by and large, are closed. The haves are large biotech as well as biotechs that have reached commercial stage, together with big pharma and are flush with cash as ever, being estimated to be over $500 billion of available immediate cash. Alexandria's tenant selection has been a cornerstone of our unique business model, and has enabled us to select and grow with the best high quality and most innovative tenants, which is one of the absolute bedrocks of our business model. And with that, let me turn it over to Steve for some details on the quarter on the growth side.

Stephen Richardson, Chief Investment Officer

Thank you, Joel, and good afternoon, everyone. Steve Richardson here. As we conclude Q1 2022, I want to emphasize two key factors that are fueling Alexandria's ongoing success. First, there is strong demand for our unique and differentiated facilities. Our operational excellence and mega campus offerings continue at robust COVID and post-COVID levels, with leasing during Q1 reaching 2.5 million square feet, including 1.4 million square feet from our development and redevelopment pipeline. This represents the second highest quarterly leasing volume in our history for both categories, following record leasing activity in 2021, particularly in Q4. Second, the overall quality and longevity of our leasing results, especially this quarter, are remarkable. We secured a long-term lease with Bristol-Myers Squibb for a new Class A laboratory office facility with 427,000 rentable square feet at our Campus Point Mega campus. This partnership is the outcome of our long-standing relationship that began in 1998, establishing deep trust and confidence throughout their organization. Bristol-Myers Squibb is now our largest tenant, present in five of our core clusters, creating a significant competitive advantage. This achievement underscores the value of our brand and our relationship with BMS, highlighting our capability to provide a facility designed to meet their crucial needs and attract top talent, setting a new standard for mega campuses. Additionally, we signed a lease for a Class A plus laboratory office facility with Eli Lilly, encompassing 334,000 rentable square feet at our Seaport campus for their Institute for genetic medicine. Our partnership with Lilly, which began in 2000, has also been exceptional. The two decades of collaboration have fostered trust as we developed world-class facilities, enhancing their ability to attract top scientific talent in the Boston area. These examples showcase Alexandria's strong standing within the life science ecosystem. Our growth engine is robust, with over 1,000 tenants giving us insights into their current and future needs and allowing us to excel in operational expertise and amenity offerings crucial for talent retention and recruitment. Our leasing achievements reflect the dedication of the Alexandria team to our mission. Moreover, demand for our facilities is demonstrated by impressive results: growth within our core has added significant value, with renewal and re-leasing spreads of 23.2% cash and 39.8% GAAP, excluding short-term swing space for BMS as we begin construction on their flagship facility. Our portfolio mark-to-market remains strong at about 30%, significantly above the 17% mark-to-market at the end of Q4 2020. Early renewals this quarter were 51%, slightly below our historical rate, but indicative of our tenants’ desire to secure their laboratory office spaces. The health of Alexandria's value creation pipeline is also outstanding, with the 1.4 million square feet being the second highest in company history and contributing to a highly de-risked pipeline, with 77% of the projected 8 million square feet generating $665 million of incremental revenue already leased or under negotiation. Peter will provide more details on this during his comments. Regarding supply and demand, as mentioned during our recent Investor Day and in our Q4 2021 earnings call, the demand for Alexandria's mega campuses is strong. Our critical relationships in the life science ecosystem position us well to engage innovative companies. We are aware of market supply at a detailed level, including actual assets and capital sources involved in potential projects. In 2022, vacancy rates remain low in our largest clusters, with new supplies being minimal, around 1% in our key markets. For 2023, actual projects under construction are only about 25% of what various reports may suggest, which often include planned or proposed projects. The 2023 deliveries are leased or will contribute only 3% to 4% to market availability, likely decreasing further in subsequent quarters. Beyond 2024, there are no projects currently being constructed within this timeframe in our primary markets. Planned or proposed projects exist, but it remains to be seen whether capital partners will invest significantly in these speculative projects. Lastly, I want to highlight the distinct quality that life science tenants find in Alexandria's Class A plus facilities compared to one-off buildings in less desirable locations. In conclusion, Q1 2022 was strong, positioning the company well for immediate and long-term value through our core operations and our extensively leased and negotiating pipeline of 8 million square feet, leading the REIT sector in development and redevelopment. Now, I will turn it over to Peter.

Peter Moglia, Chief Operating Officer

Thank you, Steve. I'm going to update you all on the value creation pipeline, discuss the continuation of construction costs and supply chain macro issues, and comment on the 100 Binney disposition. Leveraging our unique market industry insights and the proven expertise of our best-in-class team, our value creation pipeline is tactically broadening our core clusters to meet the needs of our world-class tenant roster. Reflecting the continuing strong demand referenced in Steve's comments, and our ability to capture it due to our trusted brand, AAA locations, inspiring aesthetics, operational excellence, curated amenities, and capability to elevate the tenant experience, our value creation pipeline of projects that are either under construction or expected to commence construction in the next six quarters has increased to 8 million square feet that is projected to add more than $665 million in annual rental revenue, primarily commencing from the second quarter of this year through the first quarter of '25, a $55 million increase over what was discussed last quarter. As of quarter end, 77% of this remarkable pipeline was either leased or under negotiation, which means we have an executed LOI. With an astounding 94% of the activity coming from existing relationships, highlighting the incredible loyalty to our stellar brand. Our tenant base is an award for talent and recognize that space at Alexandria's campus is mission-critical in that fight. Without question, our ability to offer our tenant-base scalability and comprehensive amenity offerings through our mega campuses is a truly unique differentiator and why Alexandria is the clear choice to provide mission-critical facilities to the life science industry's most innovative and successful companies. During the first quarter, we delivered 566,655 square feet from 10 projects located in 8 different submarkets, reflecting the diversity of our pipeline made possible by strong demand across all regions. The deliveries provide strong GAAP yields at approximately 6.7%, translating to approximately $36.1 million of annual NOI. Alexandria's tremendous execution on our value creation pipeline represents a key component of our compelling growth engine, and an example of this is the extraordinary job our highly seasoned development teams are doing in managing cost escalations and supply chain disruptions that continue to proliferate throughout the construction industry. Approximately a year ago, in our first quarter call for 2021, we included commentary on construction cost trends because construction cost inflation was anticipated to be outsized due to the double demand for materials and labor caused by the simultaneous restart of paused and new projects, combined with shortages in materials and labor due to closing of mills and fabrication shops, weather events, and the loss of workers who migrated to different careers. It was all expected to be transitory, and even last quarter, we noted expectations for things to start normalizing in 2023. However, war, COVID in China, and transportation issues have become the latest antagonist in the story and reversed any thoughts to the near-term stabilization. The war in Ukraine's biggest impact on construction costs is an astronomical increase in fuel costs. Sustainability experts will tell you that the embedded carbon of constructing a building is equal to the carbons used to operate the building for 30 years, much of it coming from fuel earned by the trucks delivering materials to the site and the machinery that produces the earthwork on the build. In addition to fuel, the war has reduced the supply of critical semiconductor materials such as palladium and nickel, exacerbating the chip shortage, which affects such things as building control systems and emergency generators, the latter of which can now take up to a year to deliver. Other raw materials that come from the area are used to make certain metals like aluminum and contributing to their inflation. Transportation issues proliferate throughout the economy and construction is no exception. If you spend any time on a construction job site, you will marvel at the amount of coordination that needs to take place as trucks come in and out of the job delivering materials or hauling things away. In addition to the cost of fuel, inflationary pressures coming from an estimated 50,000 to 80,000 trucker shortage emanating from outdated compensation models and the allure of last-mile delivery companies reducing the pool of candidates. In addition to trucking, we're keeping our eye on labor negotiations for over 22,000 dock workers on the West Coast. The deadline to reach an agreement is July 30. And if they strike, it could place pressure on alternative ports and further delay delivery of materials. Specific material problems today include steel, copper, and aluminum, roofing materials, elevators, HVAC equipment, switch gear, transformers, and emergency generators. Materials and equipment are both expensive and tough to get. Many of these items take twice as long to get than in normal times and continue to go up in price by double digits. Rest assured, we are tightly managing these conditions. As mentioned last quarter, the biggest asset we have to leverage is our decades of experience in developing purpose-built laboratory buildings, enabling us to mitigate delays. Currently, approximately 82% of our costs, or development and redevelopment projects, aggregating to 5.4 million square feet are subject to guaranteed maximum or other contracts that enable us to mitigate the risk of inflation. We have contingencies behind those contracts to account for scope creep and unknowns. The voracious demand for high-quality life science assets in key cluster markets led to a highly competitive bid for our 100 Binney asset. Our excellent execution led to our third asset sold with a valuation exceeding $1 billion, and the fourth to achieve a sub-4% cap rate. We sold a 70% interest in the 432,932 square foot lab office building anchored with long-term credit tenants for a purchase price based on a total valuation of which we received proceeds exceeding $700 million. The cash cap rate was a record for our capital recycling program at 3.5% and enabled us to harvest a profit of approximately $410 million. The price per square foot of $2,356 exceeds the record price we set last quarter in the sale of 50 Binney to 60 Binney by 3.7%, which is meaningful considering the uncertain interest rate environment we were and continue to be in during the quarter and the disruption caused by Russia and Beijing of Ukraine that happened on February 24. With that, I'll pass it over to Dean.

Dean Shigenaga, Chief Financial Officer

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We reported very strong operating and financial results for the first quarter of 2022, highlighting that we are off to a great start and on track for 8% plus growth in FFO per share. Now this is impressive considering the consistency of bottom-line growth year after year and following the historic year in 2021 of operating and financial performance and significant achievements of historic milestones. We reported first quarter 2022 revenues of $576.9 million or $2.3 billion annualized, up 24.4% over the first quarter of '21, and NOI was up 22.7% over the first quarter of '21, highlighting very strong growth and outstanding execution by our team. Bottom line, we beat consensus this quarter and raised our outlook for FFO per share growth to 8%. More on this in a moment. Alexandria has tremendous scale in key innovation cluster submarkets across the country that allows us to provide optionality for innovative life science entities looking for high-quality laboratory space from a trusted partner. We have a very high quality and diverse tenant roster consisting of over 1,000 tenants that provides Alexandria a unique and strong position to address current and expansion space requirements. We continue to reap the benefits from these attributes as shown in our continued strong operating and financial results. We generated a REIT industry-leading adjusted EBITDA margin of 71%, highlighting highly efficient execution by our team. Occupancy was up 70 basis points to 94.7% since December 31, and our team is on track to achieve our exceptional growth in occupancy by the end of 2022 of 150 basis points in comparison to 12/31/21. Now the key takeaway from our leasing activity in the first quarter beyond achieving the second highest leasing volume in the company's history is that the strong rental rate growth in the first quarter of 39.8% and 23.2% was higher than the annual rental rate growth reported for the full year of 2021 and 2020. We are also on track to hit our very strong rental rate growth projections for 2022 ranging from 30% to 35% and 18% to 23% on a cash basis. Same-property NOI growth continues to benefit from strong demand from our tenants as they look to renew and expand with Alexandria. We reported same-property NOI growth of 7.6% and 7.3% on a cash basis. The primary driver of this exceptional performance was strong rental rate growth on renewals and re-leasing of space in recent quarters, a larger impact this quarter from a number of leases, and same-property NOI in the first quarter also benefited from 110 basis points in growth in occupancy. And for the full year of 2022, we expect a total of 150-basis-point increase in same-property occupancy. During the first quarter, $36 million of annual net operating income commenced on average on February 14 related to the 567,000 rentable square feet of development and redevelopment projects that were completed and placed into service, including a couple of projects that were completed earlier than projected. We completed acquisitions in the first quarter, aggregating 7.3 million square feet of development and redevelopment opportunities. Acquisitions in the first quarter also included some operating rentable square feet that added $75 million in annual net operating income that commenced on average on January 23. Now looking forward, our team has uniquely positioned Alexandria with excellent visibility of growth within the REIT industry with $665 million of incremental annual rental revenue to commence from the second quarter through the first quarter of '25. This represents significant year-over-year growth in net operating income for 2022, 2023, and 2024, from deliveries of development and redevelopment projects for the next 12 quarters. This represents 8 million rentable square feet that are 77% leased under advanced lease negotiation or subject to an executed LOI. We are pleased to have a super strong and flexible balance sheet, with credit ratings that rank in the top 10% of the REIT industry. As of March 31, we had $5.7 billion of liquidity, our net debt to adjusted EBITDA is forecasted to be 5.1x by the end of the year, representing a slight improvement from 5.2x as of the beginning of 2022. And our fixed charge coverage ratio is expected to be very solid at greater than or equal to 5.1x. And we remain disciplined with our strategy for long-term funding our business, with a focus on maximizing bottom line growth, maintaining a strong and flexible balance sheet, and reinvesting capital from real estate dispositions and partial interest sales. We intend to minimize the issuance of common stock. A typical operating property at stabilization of NOI for Alexandria would generally require long-term funding with 35% to 40% debt and 60% to 65% equity capital. Now the 60% to 65% amount of equity capital is much higher than Alexandria's average common equity issuances over the past 5 years, which has ranged roughly between 40% and 45% of our capital plan. The key reason for a lower amount of common stock issuances is due to the significant amount of value we monetize through real estate sales and partial interest sales for reinvestment into our business. Importantly, common stock issuances for 2022 is projected to be lower than the 5-year average of 45% of our capital plan due to the continued execution of real estate sales, both 100% outright sales and partial interest sales. Now as Peter Moglia highlighted, 100 Binney Street achieved a record $1 billion valuation based upon the partial interest sale of 70% of the property. We generated almost 140% profit on this development project that we built a handful of years ago; truly spectacular value creation and opportunity to reinvest capital back into our business. We also have another advanced negotiation for a sale of approximately $350 million range, plus up to an additional $1.5 billion plus in real estate sales and partial interest sales targeted for the remainder of the year. We are very pleased with our very proactive and opportunistic bond offering consisting of $1.8 billion in 30-year and 12-year unsecured notes, with a weighted average rate of 3.28% in a term of 22 years. Now to put this into perspective, if we had to issue 10-year and 30-year unsecured notes today, the rate would be in the low 4% and mid-4% range, respectively. Importantly, we remain on track for continued improvement in our balance sheet and credit profile. Now realized gains included in FFO from venture investments were $23.1 million in the first quarter, and over the last four quarters were $104.4 million or $26.1 million per quarter. Unrealized losses this quarter were $264.4 million, reflecting a decline in fair value of venture investments. Importantly, unrealized gains in our venture investments were $533 million as of March 31. Our team continues with their journey and leadership in ESG. Our next annual ESG report will be released in a couple of months in June. Key ESG leadership highlights since year-end include Alexandria's ranked the number five .685 Gateway located in our South San Francisco submarket, which is on track to achieve zero energy certification, was awarded and recognized for excellence in wood building design by Woodworks. Alexandria earned the first ever fit well life science certification at 300 Technology Square located at the Alexandria Technology Square mega campus in our Cambridge submarket. We received LEED platinum certification at 9080 Campus Point Drive, which is home to GredLabs, a dynamic proprietary platform purpose-built to accelerate the growth of promising life science companies. And our team is executing on the construction of what has been designed to be the most sustainable laboratory building located at 325 Binney Street in Cambridge, Massachusetts. Now strong operating and financial results for the first quarter supports our improved outlook for 2022, with EPS diluted ranging from $1.08 to $1.18 and FFO per share as adjusted diluted from a range of $8.33 to $8.43, up over 8% from 2021 at the midpoint of guidance. Now we increased GAAP same-property NOI growth by 40 basis points to a range of 5.9% to 7.9%. Straight-line rent is up $4 million to a range from $154 million to $164 million, and we increased the upper range of guidance by $500 million for real estate sales and partial interest sales to a range from $1.3 billion to $2.6 billion. Please refer to Page 6 of our supplemental package for detailed underlying assumptions included in our outlook for the full year of 2022. Thank you, and I'll turn it back to Joel.

Joel Marcus, Executive Chairman and Founder

So with that, operator, if we could open it up to questions.

Operator, Operator

And our first question will come from Jamie Feldman of Bank of America.

Jamie Feldman, Analyst

So I guess just a big picture here. There's been a lot of concern on the biotech funding outlook in light of capital markets volatility. It's sort of the CRO stocks at the life science stocks. Can you just give us your latest thoughts on how this might be impacting demand, the funding backdrop, any signs of weakness in areas? And then also, just thinking about leasing timing, are you seeing any delay in lease decision-making? Just how should we be thinking about reading the tea leaves here?

Joel Marcus, Executive Chairman and Founder

Yes, Jamie, thanks for the question. I think what I said in the prepared remarks is I think how you should frame the cornerstone and kind of bedrock demand situation; I think you've got haves and have-nots. So the have-nots, as I said, are companies—public companies by and large—because most private companies are generally well financed and the venture firms have raised mountains of capital. So they've got pretty long runways. But I think people who've gone public and some of who went public too soon are caught in a bit of a squeeze with cash burn, either if they're preclinical or somewhat into the clinic at various stages and maybe don't have early readouts of data. And so, for those, I think you can expect they will not be on track to expand. In fact, some will contract and reduce their workforce and maybe their space. We've seen some of that in different markets. But I think it's fair to say that the haves are those companies that are large-cap companies, big pharma, and the companies that have reached commercial stage are really very flush with cash, and we see no real change in growth trajectories of those companies, plus many in the private side who've raised massive amounts of cash. So I think you're going to find that operators who have leased to—and I can think of one group in Boston who lease to a variety—thank goodness, not us, of course—lease in new construction, lease to a variety of companies that are in the clinical stage; they're seeing—I can think of this one building. I won't say who the operator is, so I don't—it's not in Cambridge, it's out in the burbs. But they're going to see many of their tenants either sublease or try to give space back. So I think it's a tale of two worlds, and luckily, we're, I think, extremely well positioned in that.

Operator, Operator

Next question comes from Sheila McGrath of Evercore.

Sheila McGrath, Analyst

I was wondering if you could provide a little bit more detail on the partial sale where in-place rents might have compared to market and the weighted average lease term in that building? And was the pricing set before the shift in interest rates or just on the timing there?

Joel Marcus, Executive Chairman and Founder

Yes. So Peter, do you want to handle that?

Peter Moglia, Chief Operating Officer

Yes, sure. No, the pricing was set during the heat of everything, the war, interest rate volatility. So it is reflective of today's market conditions. The—I don't know what the—I don't have the memorized, but just looking at the top two leases, it was very likely close to 10 years, probably maybe 9. So definitely a long time before you realize any upside. And there is upside there probably somewhere in the neighborhood of about 27%, 28%. The rents were overall below market. But again, I think the price is reflective of the fact that someone is going to have to live with that return for a while. The credit there was really good. So there's nothing to worry about. But it was a very fair price considering the amount of demand is looking for high-quality projects, and that was probably the most high-quality project anyone could have found this year.

Joel Marcus, Executive Chairman and Founder

Yes. I mean, perfect tremendous location in the heart of Cambridge, brand-new construction more or less. And as Peter said, pretty good lease duration with very strong credit. So a real iconic, I think, investment.

Sheila McGrath, Analyst

Okay. That's great. And then just curious, inflation everybody is talking about it. Wondering, like when you look at new projects, would you consider most of your leases are with 3% escalators? Would you consider having a minimum tied to inflation or that's just not the market?

Joel Marcus, Executive Chairman and Founder

Yes. So I'll come in and then maybe ask Steve and Peter to comment. So over the history of Alexandria, we've kept kind of two approaches. One has been annual rental escalations, generally 3%, sometimes a little less, sometimes it's more, but average about 3%. And during different time periods, we have gone to a minimum, maximum of minimum 3 and max 6 based on CPI. We are involved in a number of negotiations where those—both of those are being discussed, and you will likely see some of those over time. But I don't know, Peter or Steve, if you guys have any other color on that.

Stephen Richardson, Chief Investment Officer

Yes, Joel, just to echo that, it's Steve, Sheila. That's exactly what we're doing. And we're being very targeted and thoughtful with the particular segments of the portfolio that we might do that for. So we think it's going to be very fair and reasonable. And so far, it's been understood and well received. So just at the beginning of the process here.

Operator, Operator

The next question comes from Manny Korchman of Citi.

Manny Korchman, Analyst

Peter, maybe one for you. Just as you think about which assets you want to keep, you guys have used the term iconic when referring to 100 Binney. How do you think about keeping iconic assets versus selling iconic assets? And especially in a market like that, that is so supply constrained, part of me wants to say why not keep the longer-term upside there, and part of it is you're getting a 3.5% cap rate. So how do you weigh all that?

Peter Moglia, Chief Operating Officer

Yes. I mean, as you said on the latter part of your comments, I mean being able to take advantage of market conditions where you can get a sub-4 cap rate and then plug that back into your next iconic asset at a 6 plus, it's just—it's hard not to do that. And remember, we are keeping a pretty material part of each of these assets that we're selling. We also accrue fees. And so there's some operating leverage that we can achieve there. It is—you look at the market, you see what you can monetize at the best price. And you only make that decision, though, if you have opportunities to reinvest that in something that's special. And if you look at our development pipeline today, we think it is full of the next wave of iconic assets. So we don't want to get too in love with things that are legacy. We appreciate them. We, again, don't sell them in whole, but there are other frontiers for us to conquer, and such as the Fenway where we believe there's going to be an incredible rent growth and appreciation as well. So we need to get the cash to make those accretive investments, and we pick carefully, but strategically.

Manny Korchman, Analyst

And then maybe on that deal specifically, how much was about managing tenant risk, if at all, with selling BMS and then having new projects with BMS coming in at the same time? I'm sorry, the tenant risk with BMS? Was a bit about managing your Bristol-Myers exposure?

Joel Marcus, Executive Chairman and Founder

Not at all. Not at all.

Operator, Operator

The next question comes from Rich Anderson of SMBC.

Rich Anderson, Analyst

So on the topic of dispositions, as much as $2.6 billion potentially this year. Last year, you had a whole lot of activity at the end of the year. year before, I think you did about $1 billion. So you're clearly identifying with some opportunities to raise capital in that format. But with rising interest rates and all that talk, do you think 2022 will be more of a ratable sort of level of dispositions across the year? Or do you think it could still be lumped towards the back half of the year, maybe in the sense of urgency to get some things done before just rates perhaps do play a role on cap rates?

Joel Marcus, Executive Chairman and Founder

Dean, you want to—

Dean Shigenaga, Chief Financial Officer

Rich, maybe it's helpful to look back to last year, just to give some context to the late year transactions. And you might recall our commentary over the last few quarters. The reason why we had a number of transactions really weighted into December last year had everything to do with specific leases that were significant to the transactions being extended, and it was super important to complete that before we went out and got deep in the marketing of the underlying asset for sale. And so a number of those transactions had that aspect, which delayed the transaction for execution until later in the year; but it was an important component to the valuation as well. So as you can imagine, it was important to get done. This year, we don't have that same issue across the transactions we're looking at today. So I think you'll see it be a little bit more spread out through the year than you did last year by far. We don't have those same challenges this year, Rich.

Rich Anderson, Analyst

Okay. Great. And Joel, you mentioned your haves and have-nots comment. But one name that jumped out to me when speaking internally with my—our biotech team was a name like Novartis, which is kind of registers as one larger-cap name in your top 10 that is seeing some significant layoffs. I'm curious if you guys have any comment about their situation specifically as it relates to demand? And any examples of larger-cap names that despite your comments might also be considering some significant levels of employee reduction.

Joel Marcus, Executive Chairman and Founder

Well, I mean, Novartis is one of the strongest, certainly, pharma companies in the world, and certainly one of the strongest companies in the world. All companies of large size, as you know, from your long history in this industry, go through rationalizations of different groups. I mean, Glaxo is an example, sold their oncology group at one point, which was a core, seemed to me to be kind of an odd thing to do. And then later on, essentially kind of restarted it. Different people are shuffling around different lines of businesses whether they be high-value ethical pharmaceuticals or more commodity-type products. So I think I would view that as having nothing to do with the industry itself, the state of the industry at this point, but rather a rationalization of that company's own operations. And whenever you get a new CEO or a change, a number of these companies kind of shift focus. And so that's something else that you're seeing from time to time. But I wouldn't read anything into that in particular.

Rich Anderson, Analyst

Okay. And then real quick, Peter, I think, as you said—or maybe it was even Joel that said development yields are modestly—development yields are modestly up for you. I assume that's not a comment generally about the industry. So do you have a sense, based on all the things you talked about, about delays about how far down development yields have come for your competition, not so much you?

Peter Moglia, Chief Operating Officer

Joel, do you want me to take that?

Joel Marcus, Executive Chairman and Founder

Yes, please.

Peter Moglia, Chief Operating Officer

Yes, Rich, the—I think we—just getting back to my comments, our team has done an incredible job in helping to mitigate cost escalations and locking things in early. And so because of that and because of the rent growth that we've experienced in all of our markets, we've been able to marginally increase our yields, as Joel mentioned. I—that what other people are doing, I'm not sure. They don't—certainly don't have the scale advantage that we have, the relationships that we have, probably not even close to the personnel we have. So I'd imagine that they wouldn't be able to do the same thing.

Operator, Operator

Our next question comes from Dave Rodgers of Baird.

Dave Rodgers, Analyst

Just again, with your comments about maybe recession as well as the have-nots. Maybe this question is for Peter. Is there anywhere on the life science investment sales spectrum that's being impacted by those types of comments or by interest rates and spreads? And I guess I'm just trying to get a better understanding if there's other competitive assets where maybe we're just not seeing enough of a spread between what's trading, and any examples you might have off the top of your head?

Peter Moglia, Chief Operating Officer

I can tell you, I mean, I was looking at our comp database yesterday, just seeing what changed from quarter to quarter. There's—a lot of things are still trading with the quality of tenancies completely all over the place, and things are getting for cap rates or more just a certain portfolio that BioMed sold in San Diego with a lot of cats and dogs was a sub-5 cap rate. So there is a lot of demand for exposure to life science assets. And so, unfortunately, for a number of investors, tenant quality probably hasn't been the focus. But we—rest assured anyone who is looking at our portfolio, we—our tenants are highly vetted, and that doesn't become a question. It's more about the location and lease expiration. Tenant quality is usually soon to be great because it is.

Dave Rodgers, Analyst

And then maybe just one follow-up question. I don't hope this is for Dean or maybe Steve, but it looks like Apple and Alphabet joined the top tenant list. I don't know if that was a function of acquisitions or perhaps sales or just new leases there, but they had some shorter duration. So I was curious if those were added and if those were kind of intermediate term redevelopment opportunities or just kind of good stand-alone investments?

Joel Marcus, Executive Chairman and Founder

Yes, this is Joel. Yes. The answer is yes and yes.

Operator, Operator

Next question comes from Michael Carroll of RBC Capital Markets.

Michael Carroll, Analyst

Just real quick back on to the have-nots. I think Joel, you were mentioning that there might be some have-nots to have to give back space in the suburban markets of Boston. I mean how much of that could come back to the market? Is it big enough to alter any of these markets where you could see vacancy rates kind of uptick? Or is it just more of a one-off type thing?

Joel Marcus, Executive Chairman and Founder

Yes. I don't think it's—we haven't seen any sign that it's a material impact, and we'll monitor that quarter to quarter. So I think, right now, it's pretty building and location specific and, obviously, tenant specific. But we haven't seen anything that I would say material as an overall trend at this time.

Michael Carroll, Analyst

Okay. And then related to the have-nots. I mean, I think in your prepared remarks, you said is basically companies that went public too quickly. What about the small to mid-cap private companies that you kind of indicated? Did they raise enough equity or capital, so they're really not an issue? Or is it more a muddle than that? It's kind of depending on the company that we're talking about?

Joel Marcus, Executive Chairman and Founder

Yes. So certainly, not all companies I would put in, they went to—went public too early. I would probably put those on preclinical. So if you've not even entered the clinic and you're going public, probably that's too early. I mean it's obviously case-specific, depends on what the technology is, what the opportunity is, what your shareholder base is from the private side and so forth. But by and large, there's a host of those that were preclinical that just went too early, maybe grew too fast and realized they've still got the clinical ahead of them. And then those that went public in the clinic, I think that's generally been a good game plan, but then didn't realize that after nine years, I mean, I've been saying that for a while, a nine-year bull market in the sector just doesn't continue unabated. So it tends to rationalize itself. And as I said, 5x the capital volume was being raised and kind of went into the industry, which is a lot. On the private side, as I say, many—I mean, again, it's very case-specific, but many of the companies who have blue-chip founder groups or investor groups who've raised large pools of money have good runway. So generally, a lot of those are not going to suffer maybe some of the challenges that may face a host of the public companies in the have-not sector, if you will.

Michael Carroll, Analyst

Okay. Great. And then just last one for me. Steve, you kind of highlighted in your prepared remarks that there's no projects under construction that will be delivered in 2024 at least as of now. I mean, when would a developer actually need to break ground or go vertical to achieve the 2024 delivery date? Do they have another, what, six-plus months or so? Is that kind of fair to say?

Stephen Richardson, Chief Investment Officer

Michael, it's Steve. Yes, I think it's within that window. And the key is whether someone is going to actually start doing that and going vertical to deliver in that time frame. And what we've really done is drill down to the capital behind these operators. Obviously, the operators are going to be positive and bullish. But we just haven't seen that from the capital sources actually committing capital as of today.

Operator, Operator

Next question comes from Daniel Ismail of Green Street Advisors.

Daniel Ismail, Analyst

Great. Maybe going back to 100 Binney Street and the cap rate compression in Cambridge. I'm curious if you're seeing a similar level of price appreciation across markets, or are any markets accelerating? Or maybe moving slower than that clip you guys are seeing in Cambridge?

Joel Marcus, Executive Chairman and Founder

Well, yes, I'll ask maybe Peter and Steve. I would say, on your end, I think you guys need to revisit our NAV. I think you guys are off. But in any case, I think it's—when you look at Binney, Binney is in the heart of the Kendall Square and Cambridge epicenter. So the cap rate there is not real surprising for relatively new construction, high credit quality, and just an iconic location and building. And I think you can see across most of our markets, cap rates have held, I think, very strong and continue to be very positive in our favor. But I'd ask Steve and Peter to comment more detailed. Yes.

Peter Moglia, Chief Operating Officer

Yes, this is Peter. All the markets where there—I'd guess, said another way, none of the markets we're in would have a cap rate that would have anything greater than a handle on it, which is, as you know, remarkably different from a couple of years ago when people were thinking certain markets had 6% or 7%. Some of those markets now are in the 4s or 5s. So I would generally just say, as Joel mentioned, Cambridge is a special place. There are going to be a few submarkets where you probably go below 4% to the mid-3s like we just did. But who knows? I mean, there's certainly a lot of money chasing these assets and the competition for high-quality assets, when the investors are thinking, 'Hey, there's great rent growth here. I'll pay the price for it today,' who knows? We could certainly see breaking through 4% in other markets. But in general, cap rates for lab are like industrial, like logistics, storage or apartments. I mean it's just a hot industry. There's a lot of money out there to be invested, and they want to bet on winners, and winners are expensive.

Daniel Ismail, Analyst

Maybe the last point, I'm curious across those property sectors you mentioned, we've been noticing cap rates go either at or below borrowing costs. And I'm curious if that's a similar dynamic you're noticing across life science as well. I assume 100 Binney is—I believe it's unencumbered, but I would assume that the debt would be closer to that cash cap rate or if not a smidge below?

Peter Moglia, Chief Operating Officer

Well, you bring up a good point that actually we don't really talk about too much. But I mean, yes, our large partial interest sales are done with partners that are not buying with leverage. So they're putting this money to work and not looking to lever it up. They're accepting these returns. Frankly, we don't go into the secured market and buy anything on a levered basis. So it's kind of hard for me to comment, but I would imagine just seeing where rates are today, that negative leverage is probably the only leverage available if you want to buy a really high-quality asset.

Daniel Ismail, Analyst

Great. And then maybe just last one for me. On the Mercer Mega Block, can you remind us if the plan was always to bring in a partner? And if so, why not retain the entirety of that development for ARE?

Joel Marcus, Executive Chairman and Founder

Yes. Peter, you could comment.

Peter Moglia, Chief Operating Officer

Sure. We have a strategic partner in a couple of nearby assets that made a lot of sense for them to participate with us. I can't really go into the details. They'll become apparent later on. But this is a partner that is—we're in multiple markets with. They have a lot of trust in us. They're a great source of capital that's very attractive compared to common, and they were highly interested in getting involved, and we're keeping the majority share there, but it's also a good opportunity for us to finance something upfront rather than after the fact to keep the capital flowing to other projects as well.

Joel Marcus, Executive Chairman and Founder

I would also say we've seen great activity with credit tenants in that—for that location.

Operator, Operator

The next question is a follow-up from Jamie Feldman of Bank of America.

Jamie Feldman, Analyst

I appreciate your color on the construction pipeline, breaking out '23, '24 and beyond. Would you say that your appetite for speculative has changed at all in the last 6 months or so or even the last 3 months, just given it seems to be a growing pipeline and maybe more questions on the demand side?

Joel Marcus, Executive Chairman and Founder

Well, I think, Jamie, somebody mentioned, I don't know, or if not, we haven't really done speculative development since before the '08-'09 crisis when we were forced under contract in New York. We're building two towers. We stopped one after Lehman collapsed, we built the East Tower. And then luckily, we secured Eli Lilly as our anchor tenant there. But we haven't generally built specs since then. And when we tend to put up, if we go vertical, we generally always have either a signed lease, signed LOI, or we have, as a case of one project I can think of a series of companies who have told us they need growth at this point, and we've decided to go forward and work through the mechanics of documenting that. But we wouldn't just put up steel on the hope that they will come, not because of the current market, but we just haven't done that as a matter of policy in the company for literally more than a decade.

Jamie Feldman, Analyst

Okay. That's helpful. And then if you think about your investment activity in the quarter, the projects you bought or even some of the more covered land plays, is it safe to assume there's also tenant interest in those projects, or the stuff you've been buying really is kind of a future land bank without the tenant in mind?

Joel Marcus, Executive Chairman and Founder

Generally, we like to—I can think of a number of situations in San Diego or other markets where absolutely specifically—or the Bay Area, the Peninsula, where we have specific tenant interest. Remember, Peter, Steve, and Dean have all mentioned, we've got now more than 1,000 innovative tenants. So the amount of information and the amount of requirements really come to us in a way that there's nobody else that could marshal that kind of a resource. And that gives us the confidence to make some moves where we know that we will be successful. There have been a recent—we're not going to confirm or deny anything, but a recent San Francisco Peninsula report on something on a project we're doing there, and that we have signed an LOI. I mean that's a good example. And again, I won't confirm or deny, but that's an example of if that was true, where it makes sense to do what we did. And that's kind of how we operate.

Jamie Feldman, Analyst

Okay. And then I was going to ask a follow-up to my original question on this call, which was, you started talking about the haves and have-nots. Is there a way to handicap the—like the percentage of the portfolio NOI that even is what you would consider more at-risk type tenants?

Joel Marcus, Executive Chairman and Founder

When you say more at-risk, what do you mean?

Jamie Feldman, Analyst

Well, you had talked about tenants that either—maybe they're running—they may run out of capital to fund their pipeline. Just not as well capitalized and so may end up needing some sort of recapitalization or running out of capital.

Joel Marcus, Executive Chairman and Founder

No, we diligence tenants before we sign leases or even letters of intent, and we monitor them oftentimes usually quarterly, but sometimes monthly. And if you look at—on Page 17 of the supplement, we give you a breakdown of our tenants. Half of our tenants are investment grade or large cap. We've got about 7% of the portfolio, which is private. We feel very good about the majority of—the vast majority of those companies because they generally are well-funded, and they've got a pathway for additional funding. We've got—in our public biotech, the vast majority of those, again, are well funded with cash runways that go out, oftentimes beyond leases. And if not, certainly multiple years or are waiting for readouts oftentimes for Phase III. So we feel pretty good about where we are. And if there's anybody that runs into a problem, we kind of know about it. I mean, a good example might be Nektar, which is in our Mission Bay portfolio. We have watched them for quite a while. We're very close to them. They're going to, I think, sublease their office space, which is with Kilroy. They've got space with us. That project is partnered, but we already have demand for backfilling that space should they decide to give it up, but they said they're going to keep a big chunk of their lab space, so I wouldn't expect them to give the majority of that up. So we've already—I mean that might be an example of something you're referring to. We're already well ahead of the curve there and could backfill that space probably at much higher rates.

Jamie Feldman, Analyst

Okay. And then on that lease, so 2030, I believe?

Joel Marcus, Executive Chairman and Founder

Yes, I don't have it in front of me, but it's a long-term lease. And the truth of the matter is, in some cases, and I would never say that with specifics to Nektar. But sometimes, you might hope a company would decide to give up a lease because you could backfill it at a much higher rate. So some of that you'll see happen, I'm sure in—I mean mission-based still, the vacancy rate there is literally 0 at this point for built-out lab space. And so the demand is significant. There's a high credit quality in that submarket that has a huge pent-up demand for space. I'll tell you that.

Operator, Operator

Our last question comes from Anthony Paolone of JPMorgan.

Anthony Paolone, Analyst

So I just want to make sure I understand what the—again, this have, have not discussion. And then looking at your mark—the mark-to-market of the overall portfolio. I think it was pretty flat from what you mentioned last quarter, I think 31% and now about 30%. So are market rents still going up? Or have market rents kind of just holding steady at this point? And what is the outlook for the rest of the year?

Joel Marcus, Executive Chairman and Founder

Yes. So, Steve, you could comment on that.

Stephen Richardson, Chief Investment Officer

Yes, Tony, it's Steve here. Yes, I don't know that drilling down on one specific quarter really tells a trend there. You are right. It's generally flat, but it's flat from an exceptional perspective. I mean, maintaining a 30% mark-to-market, I think, is extremely healthy. Look, again, as I said before, we are still in very low single-digit vacancies in these core markets, particularly for Alexandria's portfolio, as you see with our occupancy. We continue to see healthy demand. So our expectation is we will continue to see pricing power in the market.

Anthony Paolone, Analyst

Okay. Great. And then just last one for me. You closed on your Texas investment in the foray there. Can you tell us where you went?

Joel Marcus, Executive Chairman and Founder

Yes. So let me comment maybe on your first question first and then your second question. So I think if you—if somebody owns assets, I think the assets, and we’ve seen this in other cycles that are going to be the most at risk will be buildings in non-cluster environments, one-off buildings in suburbs and so forth that are not really high-quality buildings or in the best of locations. And so I think those are the ones that may end up—they're getting probably the poorest quality tenants and the ones that may have a struggle there. And luckily, we don’t have much of that at all in our entire portfolio. With respect to Texas, we’re still under a series of transactions. So I’m unable legally to comment on that, but I do hope that, at the next call, I said that last call, but we’re still in pending transaction. But hopefully, we’ll be able to give you color on the next call, Tony.

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

Simply to say thank you, everybody, be safe and God bless.

Operator, Operator

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