Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q2 2023
Operator, Operator
Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2023 Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the 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 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, everyone, to our second quarter earnings call. Our unique company, which pioneered the lab space niche, continues to perform well in both good and challenging times, demonstrating the resilience of our distinctive business model in this post-pandemic era. In fact, COVID-19 has reaffirmed the enduring strength of our life sciences industry fundamentals and the necessity for our essential lab space infrastructure. This favorable context for one of the nation’s most mission-critical industries that we serve continues to support our business, driving demand for our world-class brand along with our highly differentiated assets and operations. I want to express my gratitude to every member of the Alexandria family team for an operationally and financially excellent second quarter. A special thanks goes to the finance and accounting team for winning the 2023 NAREIT Gold Award for the best REIT reporting and transparency, achieving an unprecedented eighth award, the most ever by any REIT. Alexandria is truly a best-in-class REIT, which pioneered the lab space niche and has made a transformative impact on our life sciences industry over the last 29 years. We take great pride in the strong balance sheet we have built since the days of the financial crisis when we were a small and unrated REIT. Upon closing our $1 billion line of credit accordion add-on, one bank congratulated us on the successful expansion of our credit facility to $5 billion. This is a significant achievement in an environment where many real estate owners are struggling to obtain debt capital and reflects the strength, quality, and sustainability of the Alexandria platform. Now let me share some highlights from the quarter. Dean will provide more details, but I want to offer some perspective first. The second quarter was very strong, generally in line with our 5- and 10-year historical performance metrics and certainly outside the extraordinary results during COVID. We saw strong growth in FFO per share in both the second quarter and the first half, approaching 7%, especially in a challenging macro environment, and significantly exceeding consensus. We also had a strong leasing quarter with 1.3 million rentable square feet, surpassing the historical run rate of about 1.1 million square feet, and NOI increased nicely, nearly reaching $200 million for the quarter. Positive rental growth, stable occupancy, and solid same-store NOI increases reflected the ongoing strength and overall stability of our fortress balance sheet. Our ability to reaffirm and maintain strong guidance across all metrics demonstrates our continued confidence and our tenants' demand for essential lab space, along with our success in operating in a moderately elevated supply environment. Lastly, I would like to make a few remarks on the life sciences industry, which Jenna will expand on shortly. A couple of key observations: M&A, an essential component of capital recycling, is on the rise, primarily driven by bolt-on product deals, which is a positive indicator. Series A rounds in 2023 so far have averaged about $60 million, an all-time high, with biologics attracting the bulk of early-stage investments. With that brief introduction, I will turn it over to Jenna Foger.
Jenna Foger, Senior Vice President and Co-Lead of Science and Technology
Thank you so much, Joel, and good afternoon, everyone. This is Jenna Foger, Senior Vice President and Co-Lead of our Science and Technology team here at Alexandria. Today, I'm going to comment on the solid fundamentals of the secularly growing life science industry, how these fundamentals contribute to the continued vitality and health of Alexandria's best-in-class life science tenant base and innovation as a long-term driver of life science industry growth. The secularly growing life science industry, which has an estimated market value of over $5 trillion and approximately $450 billion in estimated 2023 R&D funding, fuels continuing demand for Alexandria's essential 24/7 lab space infrastructure across our cluster markets. This industry is driven by the achievement of scientific, clinical, and commercial milestones and is not significantly impacted by market cyclicality or by some of the macro trends impacting commodity REITs today. With over 10,000 diseases known to humankind and less than 10% addressable with current therapies, the incredible innovation taking place within our lab-based facilities is and will remain a national imperative. Taking a closer look at the health of our tenant base, beginning with multinational pharma, which makes up 17% of our ARR, this segment continues to operate from a position of strength. In 2022, biopharma deployed an estimated $267 billion into R&D, representing a 57% increase in biopharma R&D spend over the past 10 years, which is expected to continue to increase. Given the immense capital firepower on the balance sheets of large-cap pharma in excess of $300 billion and the healthy pressure on pharma to continue to pad its late-stage pipelines with sources of new revenue, there's been a significant uptick in M&A, as Joel mentioned. The first half of 2023 M&A deal value has already totaled $97 billion, surpassing total M&A transaction values for the full years '21 and '22, pumping additional liquidity into the sector. We also see increased pharma partnering activity across our regional ecosystems as well. Transitioning to private venture-backed biotech, which makes up 10% of our total ARR, we continue to see healthy life science center activity with a significant $17.7 billion invested in the first half of 2023, which, while down from the record pandemic period peak, life science venture activity remains quite strong by historic standards and in line with 2018 and 2019 levels. Given the record high years of venture fundraising by life science venture funds in '21 and '22, there is still plenty of dry powder to deploy. Of course, given the broader capital market context and a very narrow IPO window, venture capitalists are more discriminating, disciplined, and demanding of new and future investments, with the expectation that companies may need to stay private for longer. Private biotechs with tenured management teams, strong differentiated technologies, and a clear line of sight to value inflection milestones consistent with our own tenant underwriting selection criteria are the ones that continue to rise above the fray. As for public biotech, our public biotech tenants with marketed products make up 14% of our ARR and include companies such as Amgen, Gilead, Vertex, and Moderna. This is also a very healthy segment of our tenant base with substantial revenues and continues to be a critical contributor to innovation and partnerships across our ecosystem. For our preclinical and clinical stage public biotech comprising 10% of our ARR, compelling clinical data remains king, and this segment of our tenant base continues to perform. Tenants such as Black Diamond, Medicine, and Biomass Fusion, to name a few, have recently raised substantial follow-on public equity financing on the heels of promising clinical data. As we always have, our science and technology team continues to meticulously underwrite and monitor all of our tenants very closely. Notwithstanding, in the process of developing novel medicines, there will always be some that fail in every type of macro market environment. And this is, of course, baked into our model. With deep tenant base relationships across every facet of the industry and in each of our regional ecosystems and, of course, the highest quality infrastructure and operations, we get ahead of potential tenant challenges to backfill and further enhance our tenant roster. Reflecting the health of our current tenant base in 2Q '23, tenant rent collections were at 99.9%, and we've already collected over 99.7% of July rent. Now a word on innovation: catalyzed by groundbreaking technologies, new modalities, massive unmet medical need, and strong fundamentals, the life science industry remains uniquely positioned to tackle and solve our most persistent and major health care challenges. The emergence of a new golden age of biology only bolsters the strength and growth potential of this vital industry. In this new historic age, the FDA has approved over 450 new drugs over the past decade, and 2023 is on track to be a near all-time record high year of new drug approvals, starting the year off with over 60 PDUFA dates set on the FDA calendar to review new drug applications. Collectively reflecting the productivity and impact of the life science industry to bring new medicines to patients, many of our tenants are at the forefront of this innovation. To name a few, Pfizer and GSK, each received new approvals this year for their respective RSV vaccines, an incredible feat given a long history of failed vaccine development in RSV. And Biogen's tofersen also received a Vanguard approval for ALS, a debilitating neurodegenerative disorder lacking current treatments. These trends reaffirm the fundamental truth Alexandria recognized nearly three decades ago. Our fully integrated mission-critical lab space infrastructure centered in core hubs of innovation is essential for our tenants to advance scientific discoveries and improve human health. Through every market cycle, Alexandria's tenants rely on a central lab-based infrastructure for the intended purpose to provide 24/7 compliant fully integrated and workflow optimized facilities to house, operate, advance, and help safeguard, in aggregate, billions of dollars of scientific research, specialized equipment, pipeline programs, and commercial assets. It is the advancement of this science and related intellectual property in Alexandria's lab space building that drives the utilization of and demand for space. Much like a data center that is constantly and consistently capturing and storing data throughput, the volume, velocity, and value of the scientific throughput occurring in our spaces at any point in time is not correlated with the volume of people flowing in and out of our buildings and campuses. As such, a more relevant metric for measuring the utilization of Alexandria's lab space assets by our tenants is energy consumption. And we have seen consistent same-store electricity energy consumption across Alexandria's lab space asset base today as we did in pre-pandemic years. Equally as important to note, within Alexandria's lab space assets, the laboratories and adjacent non-technical space cannot be decoupled. Each tenant base floor and building plan is fully integrated and intentionally designed to enable seamless workflows between laboratory and non-technical spaces within the leased premises. Remember, the majority of tenant employees in our lab space assets interact with the science in the lab in some ways, including to conduct experiments, analyze and interpret data, plan new experiments, make business decisions about the data, or engage in other related activities. This is the nature of life science companies' research workflows, critical aspects of which clearly cannot be performed from home. And lastly, collaboration is also fundamental to innovation and overall life science industry productivity and really critical for translating discoveries from academia into treatments, diagnostics, and cures by biotech and pharma companies. It is also a key reason why 17 of the top 20 multinational biopharma companies lease space from Alexandria across our regional markets to access this early innovation. And I point to the recent example from Verve and Lilly collaboration in Greater Boston, Pipeline Therapeutics, and J&J collaboration in San Diego as two recent examples of collaboration across our campuses. Now, given the proprietary and regulatory considerations, these collaborations are, of course, intentionally and tightly managed by executive teams, and employees from one company are not wandering back and forth between discrete tenant spaces to collaborate ad hoc. Clearly, more or less people in a building or on a campus is not correlated with more or less collaboration. So to wrap my comments, while today's broader macro environment will continue to warrant extreme prudence, it is an opportunity for the best life science companies reflected across Alexandria tenant base to benefit from the secularly growing life science industry's solid fundamentals and to continue to advance the technologies and medicines that will bring the most value to patients. And with that, I pass it off to Peter.
Peter Moglia, Chief Operating Officer
Thanks, Jenna. A few days ago, when reading a capital markets report, I came upon the line, 'uncertainty is arguably the harshest enemy of investing.' It was a very concise way of describing what we have all been seeing in the broad economy over the past couple of years. It has even hit the somewhat insulated life science industry over the past few quarters, manifested by slower decision-making and the tightening of budgets by executive teams and boards. Nonetheless, progress continues in the labs, milestones are being achieved, and success is being rewarded. The golden age of biology will not be stopped. The flywheel is starting to turn again, and we're excited to see the like-changing innovations that inertia will bring, and Alexandria is perfectly positioned to capitalize on it. I'm going to briefly touch on our development pipeline, leasing, supply, and asset sales and then hand it over to Dean. In the first quarter, we delivered 387,076 square feet in four projects into our high barrier to entry submarkets, bringing total deliveries year-to-date to 840,587 square feet covering seven projects. Annual NOI for this quarter's deliveries totaled $58 million, bringing the year-to-date total incremental additions to NOI to $81 million. The initial weighted average stabilized yield is 6.4%, influenced by a build-to-core project in East Cambridge housing the next generation of companies from the investors who brought the world Moderna. Development and redevelopment projects saw an uptick in activity for the quarter with approximately 142,000 square feet of leases signed, covering six multi-tenant projects. As of quarter end, we have another 42,000 square feet under negotiation. During the quarter, we placed a lab conversion opportunity at 401 Park Drive and the ground-up development of neighboring 421 Park Drive, both located in the Greater Boston submarket of Fenway into near-term projects expected to commence construction in the next three quarters, stabilizing in 2025 and beyond. A portion of the 421 Park Drive project is in process of being presold to a research institute, which will be highly complementary to the development of the mega campus, and the proceeds will help fund the remaining 392,000 square feet of development. This transaction, along with a joint venture that will fund the remainder of 15 Necco, which closed in April, are great examples of the optionality Alexandria has to fund its value creation pipeline. At quarter end, our pipeline of current and near-term projects is 70% leased and is expected to generate greater than $605 million of annual incremental NOI, primarily through the second quarter of 2026. The decline from 72% leased last quarter was due to the addition of the new Fenway projects. Excluding those additions, the pipeline would have been 74% leased. Transitioning to leasing and supply. Once again, our strong brand loyalty, mega campus offerings, and operational excellence continue to drive strong leasing numbers in a challenging market. We are pleased to report leasing volume of 1.3 million square feet achieved in the second quarter, which again exceeded our five-year pre-2021 average and is the 13th consecutive quarter where we have achieved a leasing volume above 1 million square feet. Rental rate increases were 16.6% and 8.3% on a cash basis reflective of leasing volume heavily weighted towards Seattle, Research Triangle, and Maryland. Despite spreads coming down from the COVID rocket ship numbers, net effective rents remained strong in our operating assets due to their generic build-out, which enables renewals in the re-leasing of vacant space with minimum CapEx. Another positive realized this quarter was a notable increase in demand, ranging from 15% to 20% in our top three markets, a sign that perhaps investors are seeing the light at the end of the tunnel when it comes to economic uncertainty, but also likely driven by significant dry powder they need to put to work. There has also been an increase in 100,000 square foot plus requirements in a few regions driven by large pharma and biotech anticipated venture creation investments. Alexandria is well positioned to capture this demand because many of these opportunities are coming from existing relationships, which typically account for a significant amount of our leasing. In the first half of the year, we have leased 2.55 million square feet, of which 82% was generated from existing tenants. In addition, our mega campus offerings providing the ability to scale in a wide variety of amenities are the clear choice of high-quality companies. We spent considerable time during our G&A REIT meetings discussing supply and recently covered it in our white paper. The data presented in those meetings and the white paper was from the first quarter of '23, and we'll update it for you here. As a reminder, we perform robust on-the-ground, building-by-building analysis to identify and track new supply from high-quality projects we believe are competitive to ours in our high barrier to entry submarkets. We focus primarily on high barrier to entry markets and our brand mega campus offerings in AAA locations, and operational excellence enables us to continually mine our vast, deep, and loyal tenant base to drive our leasing activity, which will likely lessen the impact of generic supply. In Greater Boston, unleased competitive supply remaining to be delivered in 2023 is estimated to be 1.6% of market inventory, a slight increase of 0.01% over last quarter. In 2024, the unleased competitive supply will increase market inventory by 5%, a 0.3% reduction due to the lease-up of that inventory during the quarter. In San Francisco, unleased competitive supply remaining to be delivered in 2023 is estimated to be 6.6% of market inventory, which is unchanged. In 2024, the unleased competitive supply will increase market inventory by 8.8%, a 0.3% reduction due to a downward revision of estimated square footage to be delivered during the year. In San Diego, unleased competitive supply remaining to be delivered in 2023 is estimated to be 3.5% of market inventory, which is a decrease of 0.8%, due mainly to projects being delivered with unleased space now reflected in direct vacancy. In 2024, the unleased competitive supply will increase market inventory by 4.9%, a 0.4% reduction due in part to a pause in conversion projects and a decrease in the scope of another one. Direct and sublease market vacancy for our core submarkets is updated as follows: Greater Boston direct vacancy stayed stable at 2.8%, but sublease vacancy increased by 1.5% to 5.4% for a net increase in available space and operation of 1.5%. San Francisco direct vacancy stayed stable at 2.3%, but sublease vacancy increased by 2.7% to a total of 6.2% for a net increase in available space and operation of 2.7%. San Diego direct vacancy increased from 4.1% to 4.8%, largely due to delivered unleased new supply, and sublease vacancy increased by 1.8% for a net increase in available space in operation of 2.5%. We are tracking new supply to be delivered in 2025, and we'll update you on those statistics next quarter. For our current read, the volume will be below 2024 deliveries, likely due to high construction costs, higher cost of capital, a lack of available debt financing, and adequate supply currently under construction. I'll conclude with an update on our value harvesting asset recycling program. We are quite proud and fortunate to own assets in a scarce asset class. As you all know, the past few months have had little transactional activity in the broad markets. But because of the attractiveness of our product type, Alexandria has been able to make great progress towards reaching our value harvesting goals. At quarter end, we had closed $701 million of sales, including the 15 Necco sale announced last quarter and have another $175 million pending for a total of $876 million, which is a little over halfway to our midpoint guidance. We have a number of other efforts in progress or soon to be launched that would exceed our guidance if we choose to execute on all of the opportunities. The vast majority of those identified assets are non-core non-campus assets we plan to fully dispose of and reinvest the proceeds into our value-add pipeline. Notable sales closed in the first quarter include the sale of 100% interest in 11119 North Torrey Pines Road for $86 million or $1,186 per square foot at a strong 4.6% cap rate. There is a significant mark-to-market on the asset when the lease expires in approximately 4.5 years, but a fair amount of capital will be needed to execute on that opportunity. This asset was a one-off for us, and there was no opportunity for us to aggregate a campus around it. We sold 20.1% of our joint venture interest in 9625 Towne Centre Drive, an asset jointly owned with an institutional partner who wanted to exit their position and initiated the sales process for their interest only. Given the strong demand for this University Towne Centre asset, we decided to participate in the sale, which captured $32 million in proceeds at a strong 4.5% cap rate, reflective of the high-quality building, tenant credit, and the future mark-to-market opportunity we will participate in with our continued ownership. A portfolio of non-core assets inclusive of our Second Avenue assets in Waltham and our legacy non-mega campus affiliated 780 & 790 Memorial Drive asset located in Mid-Cambridge sold for $365.2 million or $852 per square foot at a combined cash cap rate of 5.2%, reflective of a mix of credit quality, some vacancy, and term. We also completed the sale of a pure office asset 275 Grocery in Newton, Massachusetts. Originally planned for conversion to lab as part of an assemblage of adjacent assets into a mega campus with green line access, the opportunity did not come to fruition, so we made the prudent decision to sell this non-core office asset. The $214 per square foot price reflects its 70% occupancy and the negative sentiment of office buildings outside of cluster locations and a significant amount of capital needed to reposition the asset. Overall, we are very pleased with the results achieved thus far in our value harvesting asset recycling program. As mentioned, we have identified more than enough non-core opportunities to achieve our goals to fund our 2023 growth, primarily through dispositions. With that, I'll pass it over to Dean.
Dean Shigenaga, Chief Financial Officer
All right. Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We reported very solid operating and financial results for the second quarter and six months ended June 30, 2023. Total revenues for the second quarter were $713.9 million, up 10.9% over the second quarter of 2022. NOI was up 12.2% over the second quarter of 2022, driven primarily by the commencement of $58 million of annual net operating income related to the 387,000 rentable square feet of development and redevelopment projects that were placed in service in the second quarter. The significant NOI growth from completion of pipeline projects was the key driver of our outperformance this quarter in comparison to consensus. Additionally, we slightly beat other key line items relative to consensus. FFO per share diluted as adjusted was $2.24, up 6.7% over the second quarter of 2022, and we're on track to generate another solid year of growth in FFO per share growth of 6.4% at the midpoint of our guidance for the year. Now high-quality life science entities continue to appreciate our brand mega-campus strategy and operational excellence by our team. 49% of our annual rental revenue is generated from investment-grade or large-cap publicly traded tenants, and this statistic represents one of the highest quality client rosters in the REIT industry today. Our collections remain very high at 99.9%. Our adjusted EBITDA margin remains very strong at 70%. Same-property NOI growth was very solid and in line with guidance for the full year. Same-property results for the second quarter were up 3% and up 4.9% on a cash basis, and for the first half of the year, up 3.4% and up 6.5% on a cash basis. As a reminder, our outlook for 2023 same-property NOI growth remains very solid at a midpoint of 3% and 5% on a cash basis. Now turning to leasing. Quarterly leasing results are driven by a relatively small volume of and mix of transactions that drive the overall rental rate growth related to lease renewals and re-leasing the space. Now for the second quarter, leasing volume was 1.3 million rentable square feet, and rental rate growth on lease renewals and re-leasing the space was up 16.6% and 8.3% on a cash basis. Now rental rate growth for the second quarter was driven by transactions based out of the Seattle region, Maryland, and Research Triangle in comparison to record rental rate growth in the first quarter of 48.3% and 24.2% on a cash basis, which was driven by transactions out of Greater Boston, San Francisco Bay Area, and Seattle. Our outlook for rental rate growth on lease renewals and re-leasing space remained solid at the midpoint of 30.5% and 14.5% on a cash basis. The overall mark-to-market for cash rental rates related to in-place leases for the entire asset base remains very strong at 19%. Now capital expenditures generally fall into two key categories. The first category is focused on development and redevelopment, and redevelopment specifically is the first-time conversion of non-lab space to lab space through redevelopment. Now the second category is non-revenue-enhancing capital expenditures. And our non-revenue-enhancing capital expenditures over the last five years have averaged 15% of net operating income and have been trending lower for 2022 at 13%. For 2023, this is closer to 10% based upon the second quarter '23 net operating income on an annualized basis. Tenant improvement allowances related to lease renewals and re-leasing the space have been very modest at about $16 per square foot for the first half of the year, and these costs are included in the non-revenue-enhancing capital expenditures that I mentioned earlier. Second quarter occupancy was in line with expectations at 93.6%, consistent with first quarter occupancy. Our outlook for 2023 reflects flat occupancy from the second quarter to the third quarter and occupancy growth in the fourth quarter. The midpoint of occupancy guidance is 95.1%, and occupancy as of June 30 of 93.6% included vacancy of 2.2% or approximately 900,000 rentable square feet from properties that were recently acquired in 2021 and 2022. Now 23% of the recently acquired vacancy has already been leased and will be ready for occupancy over the next number of quarters, and an additional 14% is under negotiation. Now a huge thank you to Marc Binda and his entire team and our important relationship lenders under our $5 billion line of credit. During the quarter, we increased aggregate commitments available under our line of credit to $5 billion, up from $4 billion. Now this has allowed us to increase liquidity on our balance sheet to over $6.3 billion as of June 30. Now during the first half of '23, we had remained very flexible with our strategy and pivoted toward outright dispositions versus sales of partial interest. Our team has made excellent progress on dispositions and sales of partial interest for the first half of the year and are working on a number of transactions for the second half focused primarily on outright dispositions. There are more details on Page 7 of our supplemental package for your reference. Now turning to consistent growth in dividends from our high-quality cash flows. We have a low and conservative FFO payout ratio of 55% for the second quarter annualized, with a 5.2% increase in common stock dividends over the last 12 months. We're projecting $375 million, representing a three-year run rate of over $1.1 billion in net cash flows from operating activities after dividends for reinvestment. Turning to venture investments, realized gains from our venture investments included in FFO for the second quarter was $22.5 million and has averaged about $25 million per quarter for the last eight quarters. Gross unrealized gains on our venture investments as of June 30 were $373 million on a cost basis of just under $1.2 billion. Now on external growth, we have $605 million of incremental net operating income from our pipeline of 6.7 million rentable square feet. Now projects aggregating 3.7 million rentable square feet are expected to reach stabilization in the remainder of 2023 and 2024. These projects are 94% leased and will generate $277 million of incremental net operating income. Additionally, we have another 3.7 million rentable square feet expected to reach stabilization after 2024 and will generate another $328 million of incremental net operating income. Turning to guidance, our detailed updated underlying guidance assumptions are disclosed beginning on Page 4 of our supplemental package. Our per share outlook for 2023 was updated to a range plus or minus $0.03 from the midpoint of guidance down from a range plus or minus $0.05 last quarter. Our range of guidance for EPS is from $2.72 to $2.78, and our range for FFO per share diluted as adjusted is $8.93 to $8.99, with no change in the midpoint of $8.96. This represents a strong 6.4% growth in FFO per share following excellent growth last year of 8.5%. Our strategy for dispositions and sales of partial interest for 2023 reflects our focus on enhancing our overall asset base through outright disposition of properties no longer integral to our mega-campus strategy, with fewer sales of partial interest. Now this is reflected in the transactions we have completed to date in 2023 and our target transactions for the second half of the year. This strategy did result in an update to sources and uses of capital due to the replacement of a potential sale of a partial interest with an outright sale of properties. Now while this change did not result in a change in gross construction spend, it did reduce funding for construction spend by a potential JV partner that was replaced with funding from an additional $225 million in dispositions of real estate. Let me stop there and turn it back over to Joel to open it up for questions.
Operator, Operator
Operator Instructions. And our first question today comes from Steve Sakwa with Evercore. Please go ahead.
Steve Sakwa, Analyst
Dean, I was wondering if you could just provide a little bit more color on that occupancy build that you talked about. It sounds like things are flat Q2 to Q3. But to get to the midpoint, there's a pretty big uplift, I guess, from 93.6% to 95.1%. So are there a bunch of signed leases that are just not commenced yet? Or is that based on kind of incremental leasing you think you're going to do? Just kind of help us walk through that bridge, please.
Dean Shigenaga, Chief Financial Officer
Sure, Steve. So the growth in occupancy anticipated in the fourth quarter, some of it is from signed leases. We have about 400,000 square feet of executed leases that will commence in time for the occupancy growth by the end of the year. That includes some of the spaces that I mentioned in the recently acquired vacancy. We also anticipate some leasing activity that we need to complete in order to drive that occupancy growth. And then we also have some key spaces being delivered out of our development pipeline, which by the time they're delivered should be pretty much close to 100% leased. And that doesn't have quite the same impact of delivering space to tenants out of the operating portfolio, but there is a slight benefit from that as well.
Steve Sakwa, Analyst
So just as a quick follow-up, could you just help frame maybe the spec leasing that you think you need to get done maybe as a range that the team needs to complete over the next five months to hit that target?
Dean Shigenaga, Chief Financial Officer
I don't have that figure readily available, but if you review our leasing activity volume from the record periods in 2021 and 2022, we’re back to a quarterly run rate of about 1.2 million to 1.3 million rentable square feet. A portion of this comes from our development and redevelopment pipeline, as well as previously vacant properties. On average, our run rate for renewals and re-leasing is around 1 million square feet per quarter, with only part of that tied to fourth quarter deliveries. Most spaces, like with any real estate company, can be ready for delivery immediately, but only a fraction can be delivered right away. While it's not a large number, we need to focus on completing some leasing activities and capitalize on those opportunities.
Steve Sakwa, Analyst
Okay. And just a second question. I know that you had talked about the Toast termination. But I think there's just maybe some confusion or uncertainty over kind of the dollar amount. Maybe when it hits, how it might have been in guidance or not in guidance. So could you just maybe walk through the space take back, maybe some offsets to the termination fee, and maybe what flowed through in Q2 and what we should expect in Q3 from that transaction?
Dean Shigenaga, Chief Financial Officer
Sure, Steve. This is a good example of space that we proactively reclaimed in the second quarter. The tenant in question had an existing lease from an acquisition we finalized in January 2021. Toast was located at 401 Park in the Fenway submarket. During our examination for the acquisition, our team discovered several floors in this office building that were suitable for conversion to lab space through redevelopment. These floors were specifically earmarked for redevelopment. After our successful leasing of 201 Brookline, which was a development site at the Fenway campus that the seller had begun construction on but was only 20% pre-leased when we acquired it, our team quickly filled the remaining space at rental rates considerably higher than our original projections. When the chance arose to reclaim space from Toast, we took back a total of approximately 133,000 rentable square feet, with about 111,000 square feet available in the third quarter for redevelopment, and the remaining 22,000 square feet set to return to us by the end of 2024. Ultimately, after accounting for the deferred rent write-off, we will continue to receive revenue from Toast over time, covering the quarterly rent due, which was about $1.59 per quarter. This arrangement enables us to generate revenue through the end of 2024, and the net benefit we anticipate is a slight increase compared to prior rental income. For 2023, we expect to gain roughly $2 million in FFO, and a similar benefit in 2024. The important takeaway is that we were able to accelerate the introduction of new lab space at 401 Park following our successful lease-up of 201 Brookline, allowing us to commence redevelopment earlier than we originally planned.
Operator, Operator
Thank you. And our next question today comes from Joshua Dennerlein with BOA. Please go ahead.
Joshua Dennerlein, Analyst
I appreciate all the color. Maybe a follow-on based on the occupancy earlier, but focused on the lease rate growth. It looks like your guidance is still assuming an acceleration in the second half of the year off of 2Q growth rates. What gives you the confidence that you'll see that reacceleration?
Dean Shigenaga, Chief Financial Officer
Can you clarify, were you asking about occupancy or rental rate growth?
Joshua Dennerlein, Analyst
Rental rate growth.
Dean Shigenaga, Chief Financial Officer
Our outlook for rental rate growth for 2023 is projected to be between 28% and 30%, with a midpoint of 28.5%, and a cash basis growth of 12% to 17%, averaging 14.5%. For the first quarter, we achieved record rental rate growth of 48% and 24% on a cash basis, mainly driven by Greater Boston, San Francisco, the Bay Area, and Seattle. The second quarter showed a different geographical focus, primarily including Seattle, Maryland, and Research Triangle, with rental rate growth of 16.6% on a GAAP basis and 8.3% on a cash basis, which is impressive given the current market conditions and within the REIT sector. We are pleased with the rental rate growth we delivered this quarter and believe we are on track to meet our guidance. Our confidence comes from our unique brand, our mega-campus strategy, and our operational excellence, which position us well to seize opportunities in the marketplace.
Joshua Dennerlein, Analyst
Okay. It's not based on stuff that's already signed. It's kind of just what you're seeing in the pipeline are signed? Just kind of...
Dean Shigenaga, Chief Financial Officer
Well, we're only 3 weeks or 3.5 weeks after quarter end. So, there's very little activity relative to what we're going to sign for the full six months as we look forward. So you'll have to stay tuned.
Joshua Dennerlein, Analyst
Okay. And then Peter, I heard you mention potential sales above your disposition guidance range. Just what would give you the go-ahead to make those additional sales?
Peter Moglia, Chief Operating Officer
We're going to market in a very targeted way so that we don't overdo it, if we don't need to. But if we end up with values that are highly attractive, we'll definitely consider selling that amount over what we need and apply that towards next year's program.
Joel Marcus, Executive Chairman and Founder
Any other question there?
Joshua Dennerlein, Analyst
I'm good.
Operator, Operator
Our next question today comes from Anthony Paolone with JPMorgan. Please go ahead.
Anthony Paolone, Analyst
First question, Dean, you mentioned a 19% mark-to-market across the portfolio, compared to about 27% at the beginning of the year. Can you discuss how much of this is attributed to higher rents and the adjustments closing some of that gap versus what has occurred in the market so far?
Dean Shigenaga, Chief Financial Officer
Tony, it's Dean here. Yes, so 19% is our current outlook for where we are today on the mark-to-market. Last quarter, you're correct, it was 22%. The quarter before that was 24%, and the quarter before that was 27%. So, we have made our way through some of the mark-to-market with leases that we've executed over the last number of quarters. So, it's primarily driven by that, maybe a slight adjustment here and there on our outlook on specific spaces. But most of the move is related to actual leases we've executed.
Anthony Paolone, Analyst
Okay. And then, I guess, you talked a bit about 401 and 421 Park Drive and the reason for kind of moving forward with that. But just in general, just think about incremental development and redevelopment, so for instance, in 2024, it looks like you got another 1.5 million or so to set up coming out of expirations for that. But just what's the hurdle to start new projects, whether it's pre-leasing, returns? Just how should we think about just what's coming out in the next 12, 18 months, whether it's the stuff expiring that will go into redevelopment or just new ground up?
Dean Shigenaga, Chief Financial Officer
Tony, to address your first question about exploration, in 2024 we anticipate several contracts for exploration. These opportunities mainly stem from recent acquisitions that have existing leases, some of which are nearing expiration. A portion of the total area, approximately 684,000 square feet, is earmarked for future development, with about 1.1 to 1.2 million square feet due to expire in 2024 and targeted for development and redevelopment. However, it's essential to note that the 684,000 square feet of future development won't begin immediately as it requires entitlements, design, and possibly some site preparation, all linked to mega campus prospects. Additionally, there are around 400,000 to 500,000 square feet of redevelopment opportunities, which can be initiated more quickly due to a shorter build-out timeline. As we evaluate these projects, it's crucial to remain disciplined in our approach to new developments, particularly in the current macroeconomic climate. Our focus will primarily be on projects within our mega campuses, utilizing well-located land for potential future development. We have the flexibility to address expansion needs from our clients without being obligated to rush into new expansions. Furthermore, as we explore development opportunities in our future pipeline, we will continue advancing preconstruction activities. Obtaining entitlements for large campuses can take years and involves extensive design work and infrastructure development before vertical construction can begin. These preconstruction steps add value and ultimately shorten the time from the start of construction to delivering Class A space to our clients. Therefore, to reiterate, we need to stay disciplined in our strategy considering the broader economic environment.
Joel Marcus, Executive Chairman and Founder
Yes. Maybe just a little more color, Tony. We have one new mega campus that we're entitling on the West Coast and one on the East Coast. And in both cases, we have, in one case, a current tenant, in the other case, a former tenant, approached us to take a significant portion of those campuses. So, we're actively pushing entitlements and thinking about site design and all those things. But before we would kick something off, as Dean said, and as Peter said many times, we want to make sure that our spread to our cost of capital is sufficient and long-term IRRs to be certainly positive.
Anthony Paolone, Analyst
Okay. And if I could just ask one last one. Just can you remind us just in the discussion around perhaps scientists working from home as well, just what's the split between lab and I guess, like workstation, office type space in your buildings today? And do you think that changes over time?
Jenna Foger, Senior Vice President and Co-Lead of Science and Technology
Tony, it's Jenna Foger over here. So, I guess a comment on that. So again, as I mentioned in my earlier comments, in our lab space assets, of course, the lab training on technical space cannot be decoupled. Historically, we've seen about a 50-50 split between the lab and the non-technical space. In some cases, we're seeing it kind of go up a bit to 55% or 60% lab that's mostly attributable to platform companies kind of prosecuting multiple platforms and pipeline programs at once. But yes, I guess that's probably a high-level thing.
Joel Marcus, Executive Chairman and Founder
Yes. And remember, Tony, too, and as we've pointed out before, COVID certainly enabled and caused a lot of companies to repatriate certain overseas processes back into the kind of the home lab and also with the much more sophisticated new modalities, cell therapy, gene therapy, et cetera. The enhancements and the complication of work environments have been expanded as well. So those are two kind of big macro forces that have made a big difference, say, over the last three to five years.
Operator, Operator
Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.
Nick Joseph, Analyst
It's Nick Joseph here with Griff. Maybe just starting up a follow-up, I guess, on the lease termination with Toast. Just want to clarify, was the $16 million in guidance initially or is that new and incremental?
Dean Shigenaga, Chief Financial Officer
So Nick, the way to think about the arrangement with Toast is that the total consideration was around $15 million. The deferred rent number was reduced to that figure, which I believe was between $5 million and $6 million. The net amount earned over time effectively replaces the rent or cash flows that were in place before the Toast arrangement. So overall, at least through 2024, there's very little upside, just a couple million dollars in each year. This doesn't significantly change our net FFO. To answer your specific question, yes, the revenue we expect to generate from the lease with Toast was included in our guidance since it was already a lease in our business. Keep in mind, this building was acquired with the lease already in place back in 2021. For 2023, we expect a couple of million dollars increase in FFO.
Nick Joseph, Analyst
Got it. And then just on the capital plan. Obviously, the pivot, I guess, from selling more JVs to wholly-owned asset sales, can you just expand on that? Is that more of a pricing decision? Was it more strategic in terms of improving the portfolio by maybe selling some non-core? But how do you think about that broadly?
Joel Marcus, Executive Chairman and Founder
Yes, this is Joel. I'll have Peter respond to that. The Company started as a garage startup in 1994 and over the years, as it expanded into different regions, we accumulated a variety of assets. Initially, we didn’t implement a mega-campus strategy or even a campus strategy; we weren’t able to invest in areas like Cambridge back then. The assets we had were really solid workhorses located in strong areas with reliable tenants and cash flows. As we've transitioned over the past couple of years to a mega-campus strategy in core high barrier to entry markets, we’ve been able to divest those non-core assets. That’s the fundamental overview. Peter?
Peter Moglia, Chief Operating Officer
Yes. Nick, it was very tempting to bring somebody in to complete the funding of that JV development just like we did at Necco. But at the end of the day, it is part of a mega campus. It is one of the best assets in likely the world as far as long duration of value. And then reexamining our portfolio and seeing that we still had a number of assets that we could substitute and do just as well as far as getting the proceeds needed to fund our pipeline just made it much better story for us to keep 100% of that other development asset, sell the non-cores and really continue to improve our overall asset base towards concentrating it into mega campuses and lessening the one-off assets.
Michael Griffin, Analyst
This is Michael Griffin on here with Nick. Just one question around VC funding. I saw there was a report recently that showed some incremental positivity in VC funding in Boston. Is Joel's expectation for this to translate to your other markets? And kind of where do you need to see VC capital pick up in order to see incremental demand?
Joel Marcus, Executive Chairman and Founder
Well, I think I'll have Jenna kind of give you her take on venture capital. But remember, we've returned to kind of the high run rates pre-COVID. So it still is healthy. What you've seen is a slower allocation and greater reserves just given the macro market. But Jenna, maybe some numbers.
Jenna Foger, Senior Vice President and Co-Lead of Science and Technology
Yes, that's absolutely true. As I mentioned earlier, we've seen around $17.7 billion in the first half of 2023. This figure is consistent with, if not slightly higher than, the levels of 2018 and 2019, particularly across our market, with Greater Boston being the hub of life science activity. We're observing this trend throughout our ecosystem. Additionally, as Joel pointed out, there has been a disciplined allocation of capital as we anticipate a potential opening towards the end of the year and into next year regarding the IPO market, along with a rationalization of follow-on financings in the public sector. This is also affecting venture capital, as we are seeing an increase in pace, with plenty of investment opportunities available. Furthermore, as I noted, the life science center fundraising in 2021, 2022, and even early 2023 reached all-time highs, which means there is still substantial capital available to invest.
Joel Marcus, Executive Chairman and Founder
Yes. And remember the comment that I made: Series A, $60 million this year, all-time high, that's pretty astounding when you think about it.
Operator, Operator
Thank you. And our next question today comes from Michael Carroll of RBC Capital Markets. Please go ahead.
Michael Carroll, Analyst
I wanted to ask you, Peter, in your prepared remarks, you mentioned that the biotech flywheel is starting to turn again. Can you provide more details on that? Did the flywheel slow down in the past year or so, and now it's improving? Or were you indicating that tenants were just postponing decisions and are now becoming more active? Can you elaborate on that comment?
Joel Marcus, Executive Chairman and Founder
Yes. Mike, I’ll have Peter address that. It's important to note that the industry has experienced a significant bull market since around 2013 or 2014 until early 2021. This was the longest biotech bull market I've observed since the early days of Amgen, Genentech, and Biogen in the late '70s and early '80s. That’s noteworthy. Also, consider the exceptional growth and activity we saw in 2021 and into 2022. At the beginning of 2021, the biotech index began to rise, serving as a leading indicator for the broader market. It’s important to remember that biotech is part of the larger life sciences sector. Now, Peter?
Peter Moglia, Chief Operating Officer
Yes. So Michael, last quarter, in my prepared remarks, I had mentioned that we had seen a weakening in demand. And one of the positives that I pointed out in this quarter's comments is that we actually have had, I would call, a significant uptick, 15% to 20% in demand in our top three markets. That, coupled with some knowing financings that are happening, as companies have been getting good news, to me, it just feels like the wheel is starting to turn again, momentum is building, and I'm confident it's going to continue.
Joel Marcus, Executive Chairman and Founder
Yes. I know that several companies are getting ready for an IPO in 2024, which hasn't been feasible in the public markets for this sector recently, except for very rare cases. This is a positive indication. People are considering the Federal Reserve's actions, possibly looking for a peak soon. Additionally, there has been a noticeable increase in M&A and partnerships, indicating strong activity. While there are always clinical failures across different modalities and therapeutic classifications, we have been seeing some very encouraging news lately, particularly in the areas of diabetes, obesity, and neurodegenerative diseases like ALS, which has personally affected one of our former directors. We are witnessing remarkable advancements in these fields.
Michael Carroll, Analyst
Okay. Great. And then like what is driving, I guess, that uptick in tenant activity, I guess, today? Is it just people are more comfortable with the overall market and are willing to make decisions? Are they more comfortable and are actually trying to execute and get financing, allowing them to kind of expand their research process? I guess what is driving that right now? And do you think that will cause incremental demand growth over the next few quarters? I mean, can we read that into your comments?
Peter Moglia, Chief Operating Officer
Yes. What's happening is that uncertainty has really held back the entire economy and the life science industry, but that uncertainty is beginning to fade. People are starting to recognize the potential for investment that has been sidelined. We believe this will lead to new company formations, and the scientific advancements continue to progress. When clinical milestones are achieved, companies are successfully raising significant funds. Additionally, major pharmaceutical and biotech companies are positioning themselves in our markets for growth. This is contributing to our optimistic outlook.
Michael Carroll, Analyst
Okay. Great. And then last question for me. On the supply front, have you seen a slowdown of some of those non-dedicated life science developers stop-breaking around the new projects? Has that occurred over the past quarter or so?
Peter Moglia, Chief Operating Officer
With a couple of exceptions that are inexplicable, yes. We're not seeing much of anything new breaking ground, but there are some folks that have decided to move forward, which will be in the numbers for next quarter's update on '25.
Operator, Operator
Thank you. And our next question today comes from Vikram Malhotra with Mizuho. Please go ahead.
Vikram Malhotra, Analyst
I just want to go back and get some more color. You talked about the 15% to 20% increase in the top markets. But in your comments, you also mentioned specifically 100,000 square foot deals, I guess, are back in the market and smaller ones picking up. Can you just give us more color? Are these new requirements for expansion in those top three markets? And then if you look into the second half as we think about the sustainability of the 1.3 million leasing, can you just give us color on the pipeline in terms of maybe qualitative and quantitative comments around kind of how the pipeline of deals are developing in the second half?
Joel Marcus, Executive Chairman and Founder
This is Joel. Regarding your first question, I want to be careful about discussing specific requirements due to the proprietary nature of our work. We deal with a mix of sole-sourced RFPs, broader RFPs, and requests from our existing tenants in different markets. We’re not prepared to make any comments on that right now. When it comes to leasing, we can only provide our best judgment based on Dean's guidance regarding rental rates, occupancy, and so forth. We haven't shared our expectations for 2024 yet, but we'll do so at the end of the year. It's important to note that we have a long history in this area, and most of our leasing comes from our existing tenants. This unique insight allows us to confidently pursue our business plan for this year, which we outlined last November. Beyond that, I’m not sure we can provide any additional information.
Vikram Malhotra, Analyst
Okay. I was just talking about like the second half of '23 in terms of the pipeline to hit the second half run rate of 1 million or whatever, 1.2 million feet in leasing. But I'm happy to clarify that off-line. I guess just, Dean, on the quarter, you mentioned there was a very modest pickup from Toast, but you did beat Street estimates. And I'm wondering if you could just clarify, a, from your vantage point, the source of that beat and then why that beat did not translate into an uptick in the guide? Is there something offsetting in the second half that kind of reduces the magnitude of the beat in 2Q?
Dean Shigenaga, Chief Financial Officer
Not in relation to NOI, Vikram. I believe that was just a timing difference. I can't comment on the various sell-side models that explained the timing differences. From our perspective, our deliveries were mostly aligned with our expectations, so that does not indicate any upside. Additionally, that was not the only item with a variance. When you examine the consensus, there were other line items affected. For instance, our G&A is lower than what consensus anticipated across the board. However, the main factor was the NOI line item.
Vikram Malhotra, Analyst
Okay. That's helpful. And then just last one. Specifically, I think one of your top tenants, maybe I'm pronouncing them wrong, Illumina, they called out reduction of real estate as a part of their cost reduction plan overall into the next year or so, call out, one or two specific projects on their call. And I'm wondering you have any update in terms of your exposure with them?
Joel Marcus, Executive Chairman and Founder
Yes. I'll make a comment. Remember, Illumina is still a pioneer and a leader in their field. They faced an activist challenge from Icon regarding some management strategies, particularly related to GRAIL, which the EU and the FTC raised concerns about regarding Illumina's acquisition of GRAIL. It's strange because GRAIL was originally developed and spun out from Illumina, so it doesn't quite make sense, but there seems to be an ideological aspect involved. Illumina remains strong and has a significant portion of the market left to penetrate. I'll ask Dan Ryan, who oversees operations in San Diego and has been closely involved with Illumina, to provide a broader perspective on what's happening at their campus.
Dan Ryan, Regional Head
Yes. They are currently subleasing approximately 300,000 square feet in the UTC area for office space, which is not on our campus. This space has been put on the sublease market. They continue discussions with us about possibly adding one or two buildings to the campus for laboratory life sciences and manufacturing, as they are in need of further innovation. Additionally, they have some real estate in the Bay Area that they no longer consider essential. We anticipate a return to San Diego, and I expect to discuss additional laboratory office space on campus with them later this year.
Joel Marcus, Executive Chairman and Founder
Yes. The two sites that they announced, they were retrenching from were not owned by and operated by us.
Operator, Operator
Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for any closing remarks.
Joel Marcus, Executive Chairman and Founder
Just want to say thank you, everybody, wishing you a great summer and look forward to our third quarter call.
Operator, Operator
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.