Earnings Call Transcript
ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE)
Earnings Call Transcript - ARE Q2 2019
Operator, Operator
Good day and welcome to the Alexandria Real Estate Equities Second Quarter 2019 Conference Call. All participants will be in a 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 I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.
Joel Marcus, Executive Chairman
Thank you, Paula and welcome everybody to our second quarter call. With me today are Dean Shigenaga; Steve Richardson; and Peter Moglia. I want to start by focusing on the cover page of our 2Q19 press release and supplemental, which features our recently developed Vertex Pharmaceutical West Coast research base, designed in the shape of two human lungs together with a quote from the mother of the two children suffering from cystic fibrosis, which I quoted in the first quarter call. This is our solemn mission to build the future of life-changing innovation as we have each and every day over the past 25 years as the originator and innovator of the life science real estate niche and we thank each and every team member of the Alexandria family for their important contribution each and every day. As we sit here after the close of the second quarter, we really are very proud of a couple of aspects. I think we've reached a point where we can say we really have built a fortress balance sheet with over $3.4 billion in liquidity and a weighted average remaining debt term of greater than 10 years, and Dean will highlight some of the capital accomplishments this past quarter. We also have a pipeline that could enable us to double rental revenue from January of 2018 to December 2022. We have the strongest client tenant base with 53% of our annual rental revenue from investment-grade or publicly traded large cap client tenants with a weighted average lease term of 8.4 years. In addition, we had a robust 2Q cash same-store growth number that Dean will talk about as well and Steve will highlight robust cash re-leasing spreads this past quarter. Notably, we increased our quarterly dividend by 3.1% during the second quarter as well. In July, we were proud to be notified that we were selected by NAIOP as the 2019 NAIOP Developer of the Year for our outstanding design, work, sustainable outcomes, scientific prowess and connected campuses driven by our unique and differentiated mission and deep thoughtfulness toward enhancing the communities in which we work. And if we focus for a moment on the next life science frontier, it's pretty clear that the sheer scale of unmet medical needs for patients suffering from diseases of the brain is quite staggering, the cost to society enormous. Just the nine most common neurological diseases are estimated to cost the United States $800 billion a year. Dementia today affects 50 million people worldwide with 10 million new cases diagnosed every year. Alzheimer's alone affects almost 6 million Americans and more than 1 million Americans live with Parkinson's at a total cost of about $50 billion plus a year, nearly double previous estimates. It's estimated by 2050 that more than 12 million Americans will suffer from some form of neurodegenerative disease. In the realm of psychiatric diseases, nearly one in five adults, almost 50 million people experience some form of mental illness in a given year, costing our economy almost $200 billion of lost earnings alone, while approximately one in 25 people, 11 million daily suffer from a form of mental illness depression, now the leading cause of disability worldwide and has become the major contributor to global burden of disease. On the addiction front, and we touched upon our efforts in the opioid abuse area last quarter, the abuse of illicit drugs as well as alcohol and tobacco in the US costs us almost three quarters of a trillion dollars annually related to costs from crime, lost work productivity, and healthcare. The ongoing opioid epidemic is now estimated to cost the US over $500 billion annually, largely driven by the immense scale of preventable fatalities caused by opioid overdoses, where on average 130 Americans die each and every day. Imagine if that were considered a war, how that would be covered by the press. Discovering new treatments and cures for diseases of the brain has become a goal of ever-increasing urgency and one on which Alexandria is laser-focused on with our financial capital as well as our human capital. And with that, let me turn it over to Steve to give some highlights of the quarter.
Steve Richardson, Chief Operating Officer
Thank you, Joel. Steve here. We're very pleased to report the company's unique cluster campus business model is not only driving superior operating and financial results, but it continues to provide tremendous value to our tenants and stakeholders. Alexandria's dominant franchise and brand, its best-in-class team and highly differentiated campuses continue to exceed expectations and drive significant internal and external growth opportunities for the company. I'll provide a granular analysis of the following key clusters and metrics. In the Mission Bay, SoMa submarket, Alexandria’s leadership role dating back from 2004 in establishing Mission Bay as one of the country's most vital life science translational research clusters has and continues to provide significant value. Our campuses, totaling 2.7 million square feet, have been nearly 100% leased for a number of years. Our lab vacancy is 0% and the tech vacancy in the market is 1.3%. Lease rates for existing lab and tech space is now in the high-60s to low-70s triple net, while we anticipate new deliveries to exceed 80s triple net. Significant lease transactions include Pinterest’s 488,000 square feet lease at Alexandria’s unique 88 Bluxome project in SoMa, as well as Sony leasing 130,000 square feet; Autodesk, 117,000 square feet; Glassdoor, 116,000 square feet; SamCERA, 116,000 square feet; Workday, 74,000 square feet; and Zoom, 64,000 square feet. It’s very important to note the overall high regard, respect, and leadership position of Alexandria, as epitomized by last week's decision by the San Francisco Planning Commission to provide Alexandria with the only full project approval in Prop M allocation for our new Class A plus game-changing 88 Bluxome Mixed-Use Urban Campus in SoMa. I just want to step back and take a moment to say how proud we are of the company and the team for this accomplishment, as we're very thoughtful at the very outset to embrace exceptional design, sustainability, and very importantly, the community and its needs, resulting in a full project approval and the only Central SoMa project to have secured an anchor tenant, Pinterest and now nearly 60% leased. We are very honored to have received this overwhelmingly positive endorsement from both the city and the community. Moving further south in South San Francisco, we're very well positioned in this submarket. Our campuses totaling 2.2 million square feet are 99.3% leased, including the delivery of Merck’s Class A 300,000 square foot Innovation Center at the start of 2019. We've taken a balanced and prudent approach towards expanding our South San Francisco campuses and are very pleased with the leasing progress at our new ground-up, 315,000 square foot, two-building campus on Haskins Drive, with a signed LOI for nearly 30% of the space. The South San Francisco vacancy rate is just 2.9%, but we're closely watching the supply pipeline with a potential for significant blocks of space coming to market if speculative construction were to advance. Lease rates are now in the mid-to-high 60 triple net and new leases in South San Francisco include Atreca for 75,000 square feet, Cytokinetics for 235,000 square feet, and Tolerion for 25,000 square feet. Finally, talking about leasing and same-store performance, which was stellar this past quarter, we leased 819,000 square feet this quarter for a total of over 2 million square feet in the first half of 2019. Again, a testament to Alexandria’s world-class leasing and operations team, with 61% of these leases being early renewals. So it's clear that there's a continued sense of urgency in our campuses. Historical increases in renewals and re-leasing rates for this quarter were 17.8% cash and 32.5% GAAP for the 580,000 square feet in this pool, and when you look at the same-store growth of 9.5% cash basis, which splits roughly between the burn-off of concessions and step-ups, it was a very healthy and stellar quarter. And on that note, I'll hand it off to Peter.
Peter Moglia, Chief Investment Officer
Thank you, Steve. This is Peter Moglia, everybody. I'm going to spend the next few minutes updating you on our near-term pipeline, our acquisition in the seaport area of Boston and give you some thoughts on recent capital flows into the life science real estate area. During the second quarter, we placed 218,061 square feet into service from six different 2019 deliveries that I'll touch on. In South San Francisco, we delivered 24,396 square feet of our 279 East Grand project anchored by Alphabet’s Life Sciences subsidiary, Verily. We've now delivered 78% of that project at a strong yield of over 8%. We delivered another 27,164 square feet at 188 East Blaine, our new flagship property on Lake Union in Seattle and are on track to meet or exceed our pro forma cash yield on cost of 6.7%, which is strong when considering Class A operating assets in this market continue to trade at sub 4.5% yields. 12,822 square feet was delivered at 266 and 275 Second Avenue in Waltham, and that property is now fully leased with the remaining 19,000 square feet under construction and expected to be delivered in the fourth quarter. The initial stabilized cash yield on this redevelopment is 7.1% in a market where stabilized lab buildings have historically traded in the low side 6% range. A significant portion of Phase I of Alexandria Center for AgTech located in the Research Triangle market was delivered in the second quarter, bringing that highly unique 97% leased project to 74% delivered. We delivered the remaining 76,400 square feet of 681 Gateway in South San Francisco this quarter, and more importantly, increased the pro forma initial cash yield from 7.9% to 8.2%. Completing second quarter deliveries was 3,450 square feet at our multi-tenant 80,000 square foot building at 704 Quince Orchard Road in Gaithersburg, Maryland, where we remain on track to deliver an outsized 8.8% initial stabilized cash yield. Looking further out, our 2020 development and redevelopment pipeline currently consists of about 2.2 million square feet, and Dean will provide some high-level information on this commentary in his commentary. Next, I'd like to talk a little bit about our Seaport acquisition. The acquisition of 5 and 15 Necco, also known as Innovation Point, represents a strategic opportunity to expand Alexandria’s unparalleled world-class franchise in the Greater Boston area. Innovation Point in part delivers a fully renovated 95,000 square foot historic building, 5 Necco Street that will be the global headquarters for GE. GE will occupy approximately 75,000 square feet or all of the office space in the building for a 12-year term. It also provides Alexandria the opportunity to deliver an iconic 330,000 square foot to 360,000 square foot world-class Life Science building with a robust and vibrant set of retail and ground floor amenities at 15 Necco Street. The existing approvals will enable us to expedite the entitlements and likely put us in a position to break ground in early 2020. When combined with our adjacent 10 Necco asset, the acquisition provides Alexandria the opportunity to scale this campus to between 600,000 square feet and 650,000 square feet over time. Finally, in light of substantial capital flowing into the Life Science Real Estate niche that we created and pioneered, we'd like to remind investors and analysts that there have been others in many of our markets for a number of years. It has not affected our ability to grow and thrive in any of them because Alexandria is much more than a landlord or capital allocators. We are a long-term, highly ethical and trusted partner to our tenants who put their mission-critical facilities needs in our hands because they know we have the tenure and expertise to build and operate them to the highest standards. We understand their science, business, and strategic goals. We provide highly curated cluster campus environments that accommodate their growth and allow them to recruit and retain the industry's best talent. We are solidly positioned to continue to lead this ecosystem in building the future of life-changing innovation. And with that, I'll pass it over to Dean.
Dean Shigenaga, CFO
Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I'll briefly cover five key topics today, including our second quarter results and continued strength from both internal and external growth, our strong balance sheet today, our recently published corporate responsibility report, venture investments, and then lastly, our updated guidance for 2019. Total revenues for the second quarter were up a significant 15% over the second quarter of 2018, reflecting continued outstanding execution by our best-in-class team. Our adjusted EBITDA margins continue to remain near the top of the REIT industry at approximately 79% for the second quarter. Same property NOI growth for 2Q was up 4.3% and significantly at 9.5% on a cash basis compared to the second quarter of 2018. Our team executed very well across key drivers of our same property results. We completed an outstanding volume of leasing activity in the first half of '19, aggregating 2.1 million square feet, including 1.1 million rentable square feet related to lease renewals and re-leasing, with strong growth in rental rates of 32.6% and 20.1% on a cash basis over the expiring rental rates. Very strong execution of leasing supports our high and stable occupancy in our same property pool of approximately 96% to 96.5% for both the second quarter and the first half of 2019, and our very favorable structure with annual contractual rent escalations of approximately 3% drives growth in same property cash NOI year-to-year. Continued strong external growth and a few important key highlights for you today. Now that we're about midyear through 2019, it's clear our team has executed extremely well on the delivery of projects in the first half of the year, with a number of highly leased projects aggregating about 1.5 million rentable square feet targeted for delivery through the remainder of 2019. Our team has also done an outstanding job this year working with key relationships in the Life Science industry, successfully executing almost 950,000 rentable square feet of leasing related to the development and redevelopment projects. As Peter mentioned, we have grown our pipeline to about 2.2 million square feet of projected deliveries with initial occupancy in 2020, which are weighted to the second half of '20. We will have more details to share over the next two quarters. In aggregate, our projects undergoing above-ground vertical construction with initial delivery dates through 2020 are now 74% leased plus an additional 5% are under advanced negotiations. We also have a pipeline of strategic growth opportunities, including certain pending acquisitions, which provides important visibility of potential deliveries beyond 2020 aggregating 10 million square feet. Our team has placed our balance sheet in a very strong position today with significant flexibility. Our strategic pursuit of opportunities to refinance outstanding debt and extend our maturity profile with attractive, low-cost, long-term fixed-rate debt continued into 2019 for the third year in a row. In March and July of 2019 alone, we raised $2.1 billion with a weighted average coupon of 3.86% and an amazing term of almost 18 years. The proceeds of our most recent $1.25 billion bond offering in July were used primarily to execute a tender and redemption of our outstanding bonds that were scheduled to mature in 2020 and 2022. Upon completion of the redemption scheduled for later in August, we will be in a very strong position with no debt maturities until 2023. We have no significant remaining debt capital requirements for 2019, however, we are working with one of our JV partners on a potential early refinancing of a construction loan maturing in 2021. The weighted average remaining term of our debt has been extended to 10.1 years, which notably is longer than our weighted average remaining lease term of 8.4 years. During the second quarter, we completed transactions aggregating 8.7 million shares of common stock at a weighted average price of $144.50 per share for proceeds that will generate $1.2 billion. $86 million closed in the second quarter. 8.1 million shares remain subject to forward equity sale agreements that we expect to settle in 2019. We've got tremendous liquidity as Joel highlighted earlier of $3.4 billion, while our net debt to adjusted EBITDA and fixed-charge coverage ratio is on track for our goal of 5.3 and greater than 4 times respectively by the fourth quarter. As a mission-driven urban office REIT focused on making a positive and lasting impact on the world, we're honored to highlight our recently published annual corporate responsibility report and our focus on leadership and environmental, social, and governance matters. Our strategic business initiatives are well aligned with those of our highly innovative client tenants, highlighting the importance of our initiatives. Key highlights from our corporate responsibility report include; 58 LEED certified or in-process certifications, that upon completion will represent over 50% of our annual rental revenue recognition as leaders in workplace health and wellness, and key philanthropy initiatives with over 2,600 volunteer hours by the team, alongside key social initiatives like our partnership with Verily, an Alphabet company, to design and develop a fully integrated campus ecosystem in Dayton, Ohio for people recovering from opioid addiction. Lastly, we are making continued progress on our 2025 goals to reduce energy consumption, carbon pollution, portable water consumption, and increase our waste diversion rate. We also want to congratulate our team on their fourth NAREIT Gold Award for communication and reporting excellence in the large-cap category. Our team is proud to be recognized for their efforts to create clear, concise and efficient disclosures for the investment community. During the second quarter, we recognized $21.5 million of investment income, including $11.1 million of unrealized gains. In the second quarter, importantly, we also recognized $10.4 million of realized gains. As you look back over the last several quarters, realized gains from venture investments have averaged about $10.7 million per quarter. Closing here on guidance, since our first quarter earnings call, we updated guidance on June 20 through an 8-K filing and further updated our guidance yesterday, primarily for the improvement in our outlook for 2019 rental rate growth when comparing expiring rates on lease renewals and re-leasing spaces. Our range increased by 1% at the midpoint to 28.5% and 17.5% on a cash basis, which represents our second increase in our rental rate outlook for the year. Our EPS guidance was updated to a range from $2.39 to $2.47, and we increased the midpoint of our guidance for FFO per share diluted as adjusted by $0.01 to $6.96, with an increase of the lower end of our guidance range by $0.02. Guidance was also updated for the outstanding execution by our team on the opportunistic bond offering and refinancing of our 2020 and 2022 bonds, as I highlighted earlier. Please note, as we have disclosed for several quarters now, a 117,000 rentable square foot property located in San Diego is now vacant, resulting in a temporary 49 basis point decline in overall occupancy by September 30th, while we renovate and re-tenant this property. Additionally, as disclosed on pages four and six of our supplemental package, an acquisition of an operating property in San Diego, which includes several buildings aggregating 560,000 rentable square feet with in-place leases, has an occupancy of 76% and this will further reduce our overall occupancy by another 57 basis points, representing an opportunity for our team to grow cash flows from this property post-acquisition. Please refer to page six of our supplemental package for further details on our guidance assumptions for the year.
Joel Marcus, Executive Chairman
Operator, if we could go to question-and-answer, please.
Operator, Operator
Sure, thank you. We will now begin the question-and-answer session. The first question will be from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Jamie Feldman, Analyst
Great, thank you. I guess starting with Dean, you've raised a lot of capital in the quarter and slightly after. Can you just give us your thoughts as you look out through 2020 and the development spending, what you think next year's capital plan might look like compared to this year?
Dean Shigenaga, CFO
So Jamie, thank you, it's Dean here. Good reminder that we do plan to hold our Annual Investor Day event on Tuesday, December 3rd later this year at our New York Center in New York City. As we think about this time every year, we get questions about the next year and our preference is to respond to those questions about our outlook once we publish that on the morning of our Annual Investor Day event. But broadly, I think if you look back over the last several years, our objective with capital and our capital raising needs each year will remain to be very disciplined and prudent with funding our needs from various sources as we have historically.
Jamie Feldman, Analyst
Okay. And then, we've seen a pickup in value-add or development-related acquisitions over the last couple of quarters. Can you just talk about maybe the returns you're getting or what has made those types of opportunities surface for you guys? Looks like you've even got more to close going forward?
Peter Moglia, Chief Investment Officer
Hey, Jamie, it's Peter. Look, the volatility and interest rates in the latter part of last year, I think woke up a lot of people holding real estate and made them decide, if I'm going to sell, I'm going to sell soon. Of course, that has tempered, and we're looking at continuing to analyze a low rate environment. Nonetheless, a lot of opportunities have come into the market in great locations where we wanted to expand. So we've been able to capitalize on that, especially considering our stock has performed well and our cost of debt has gone down due to Dean and his team's great work. So with all those things aligning, we’ve gone ahead and purchased some assets and we strive for a good spread over exit cap rates of at least 150 basis points or something ground up, and we’ll continue to maintain that.
Jamie Feldman, Analyst
Okay. You’re saying the acquisitions you’re underwriting are 150 basis points better than ground up?
Peter Moglia, Chief Investment Officer
That's typically the target; we sometimes do better. It's going to depend on the risk, obviously. But we're certainly aware of risk-adjusted return concepts. I think we do a good job of allocating capital that way.
Jamie Feldman, Analyst
Okay. And then just as you think about the legislative environment or regulatory environment, especially related to drug pricing, have you seen any change in tenant behavior or any thoughts that you can pass along on how your tenants are acting or how you think they might act going forward?
Joel Marcus, Executive Chairman
Hey, Jamie, this is Joel. So we haven't seen any real impact at the moment. I think it's pretty clear though that from the executive branch to the legislative branch, in light of the impending 2020 election, each party wants to have some talking points about what they’ve accomplished on drug pricing. Unfortunately, they’ve focused on the 10% to 12% of the healthcare pie and haven't appropriately focused on the big numbers. But I think it's fair to say, given some of the movement in the Senate Finance Committee, that we’ll see something done over the next few months. My sense is that it is likely to dwell in a, some adjustment to Part D of Medicare. Remember, outside of the 8% to 10% of Americans who are not insured, two-thirds of people are covered by private pay or self-insured plans and one-third are Medicare. So the one-third is going to be focused on Part D. It's also important to remember there's this notion of trying to somehow index Medicare pricing to international standards, but that President can't enact that by Executive Board or individually. So that's something to consider.
Jamie Feldman, Analyst
If you would boil it down, what's your view on how this plays out for you in terms of your business?
Joel Marcus, Executive Chairman
I think that if there is a fixed Part D, that would impact what we call the oral oncology drug sector and the two biggest players in oncology, Bristol-Myers, Celgene and Roche have pretty dominant positions there. They'll have to think about how that impacts them; a company like Lilly wouldn't be impacted in any way, shape, or form. So I think it's selective. And remember, Medicare is about a third of overall drug costs, and it covers a third of US people, so it's not 100% by any means.
Jamie Feldman, Analyst
Okay, all right. Thank you.
Joel Marcus, Executive Chairman
You’re welcome. Thank you.
Operator, Operator
The next question comes from Manny Korchman with Citi. Please go ahead.
Manny Korchman, Analyst
Hey, good afternoon, everyone. Maybe this question for Dean. Dean, the accelerated acquisition pace in 2019, does that at all impact your goal of doubling revenues and does it sort of speed that up, or is this all contemplated and is this just going to be land bank through those years?
Dean Shigenaga, CFO
Manny, it's Dean here. The acquisition pipeline, as you can imagine, is unpredictable. It does add to our five-year growth plan in that sense. So it contributes positively towards that target, but that was not critical in our initial outlook that we had contemplated in our five-year plan.
Joel Marcus, Executive Chairman
And remember, that's a framework we haven't given definitive guidance on, as we only give one-year guidance.
Manny Korchman, Analyst
Okay. And then you talked about the competition, specifically in South San Francisco. Have you seen anyone coming into more of your cluster markets that’s more of a developer or a merchant developer trying to put up and get out, or is that limited to that one market?
Joel Marcus, Executive Chairman
Well, I think historically, certainly, over the last 5, 10, and 15 years, there have been both national and regional players in every single one of our markets. So I think that's just the way it has always been and hasn't changed much. There is a lot of capital moving into this sector, which is why Peter mentioned that he did, because people are looking at this as a valuable core asset. When we started out for many, many years, this was considered a funky oddball, a niche that wouldn’t group with retail, housing, office, and industrial, etc., but that's changed around, and that's why the cap rates have gone where they are. So that's a net positive process for us.
Manny Korchman, Analyst
Thanks, everyone.
Operator, Operator
Thank you. The next question is from Rich Anderson with SMBC. Please go ahead.
Rich Anderson, Analyst
Hey, thanks. Good afternoon. Dean, first to you. Why do a forward deal if you plan to settle it as soon as this year? I can understand having a longer tail to the plan. I'm just curious about your line of thinking there?
Dean Shigenaga, CFO
Sure, Rich. It's Dean here. Forward equity sale agreements generally, most of them are set for about a 12-month term, contractually. Very few extend meaningfully beyond that, it might go to 15 months, but not much beyond that. So conceptually, Rich, forward transactions are short-term settlements. I would say that most useful transactions on a forward are really focused on settling somewhere near-term over several quarters to match your funding requirements. And that's the reason why we use it, Rich; it's really to align with our timing of funding.
Rich Anderson, Analyst
Fair enough, just curious. Usually, it's a next year sort of event. But I understand the answer. So the second question is somewhat conceptual. You guys are doing a lot in the way of early renewal activity, 61% again this quarter. I'm curious if there's any impact on your ability to negotiate those rents? In other words, if someone’s coming to you early, do you think about the current market rent or do you think about what the future market rent would be for them, had they waited until they were contractually expiring? Hence, do you get a bigger number out of that in negotiation? Is that something that makes sense at all or is the market just the market?
Steve Richardson, Chief Operating Officer
Rich, it’s Steve Richardson. As you might imagine, it is all a balance, and we are certainly looking at an increasing rental rate environment, while tackling that. With that balance, we get the benefit of locking the tenant down. I think we are getting upside beyond what the rent is today. And really importantly, this is a metric we've noted for a long time; the reusability of these improvements, the lower CapEx requirement is really enhanced when we can renew somebody in our space that they've already invested in. So I do think we end up with an optimal balance where we get the best of all worlds there.
Joel Marcus, Executive Chairman
But we're also mindful of relationships, and we're not pushing for the last dollar or last cent, because you can be penny-wise and pound-foolish in a sense. These relationships are long-term, and we want to be a partner, not a financial landlord who is pressing every last cent out of the property.
Rich Anderson, Analyst
Perfect answer. Thank you. And then last, on what I think is one of the jewels of the story, you’re pre-leasing of your development pipeline, upwards to 80%. I'm curious how much of that is, you start to deal, and you’re amazed by the level of pre-leasing you’re able to acquire in a relatively short period of time? Or do you manage it? In short, where are you and what type of pre-leasing do you need to just get the engine rolling on a development? And how does that vary from one market to the next? I imagine you'd be more willing to go spec in a Cambridge and less so in maybe San Diego or something?
Dean Shigenaga, CFO
Yeah, I think since the financial crisis, we've tried to match going vertical with commitments in hand. I think we’ve been fortunate, and with our relationships, we've been able to match those after the last many years with a very comfortable kind of dovetail. There's no magical number, obviously, as you can imagine; there would be more momentum in Cambridge than in New York City. But you have to have the touch and feel of that particular sub-market, so it’s differentiated.
Peter Moglia, Chief Investment Officer
Hey, and this is Peter Moglia. The other thing I would add is that it's a testament to how ingrained we are in the fabric of the industry, and each market that we’re aware of the demand well before the market is. So that allows us to plan for these things. And if you plan well, you can deliver quickly, and that’s what our tenants need. Our long-term presence in these markets, along with our teams that are highly experienced and have long tenure pays off in the ability to forecast when we should be delivering product.
Rich Anderson, Analyst
Okay, lastly, can you mention who the San Diego seller was?
Dean Shigenaga, CFO
No, we need to keep that confidential.
Rich Anderson, Analyst
Okay. Fair enough. Thank you.
Joel Marcus, Executive Chairman
Thank you.
Operator, Operator
The next question will be from Sheila McGrath with Evercore ISI. Please go ahead.
Sheila McGrath, Analyst
Yes, good afternoon. On 88 Bluxome, you have the approvals. That's great news. I'm just wondering the status of any lawsuits there and what you expect the timing to be, and is this going to be in two phases or is it all one phase?
Joel Marcus, Executive Chairman
Yeah, Sheila, I'm going to kick it over to Steve in a moment. But remember what Steve said, we're the only project to get full, one-time approval for the entire project, and we don't have to go back for any prior approval with a full Prop M allocation. No other developer in Central SoMa has that; they must come back. But Steve can speak to the lawsuits that I believe we're pretty optimistic on.
Steve Richardson, Chief Operating Officer
Yeah. Hi, Sheila, it’s Steve. That's exactly right. There are ongoing discussions; everybody is reasonably encouraged, and we would hope through the balance of the year that we would be able to resolve those, enabling us to kick off construction. So, again, we're very hopeful. That would be for the entire project as Joel just emphasized; we do not need to go back to the city, so we could kick off the entire 1 million square foot project.
Sheila McGrath, Analyst
Okay, great. And then just a question on Alexandria District for Science in the Greater Stanford area, that's a big project. It's already 37% leased. Just wondered if you could give us an update on that, and is that a ground-up development or was that a redevelopment?
Steve Richardson, Chief Operating Officer
That is a ground-up development? Yes, we're very pleased and I think this really speaks to what Peter discussed with our long-term presence there. The insight that we have with the teams on the ground allows us to have this type of success this early in a ground-up project, so we are very pleased with the progress.
Sheila McGrath, Analyst
Okay. And then two questions for Dean. On the forward equity, should – in terms of timing, should we assume that it is back-end weighted to the fourth quarter?
Dean Shigenaga, CFO
Yeah, that's fair to assume, Sheila.
Sheila McGrath, Analyst
Okay. And then on the other investment gains, is the active IPO market in biotech driving these realized gains a little bit higher this year? Should we assume a similar level as the first half of the year given current equity market conditions?
Dean Shigenaga, CFO
Sheila, it’s Dean here again. I'd say, when I think back over several years now or maybe even longer, because we've been investing in early-stage companies for quite some time. The liquidity events that drive realized gains have always been a combination of IPOs and M&A activity. That seems to be pretty true for the last number of quarters. The IPO market has been fairly active since 2013, but we still see a lot of M&A driving liquidity events and gains for this business.
Sheila McGrath, Analyst
Okay, thank you.
Operator, Operator
The next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.
Michael Carroll, Analyst
Yeah, thanks. I wonder if you guys can touch on your investment activity. I know Peter discussed this a little earlier. I know you've been acquiring a lot of future development sites. I mean, how do you underwrite that? And when do you break ground on those projects, once they potentially be stabilized down the road? And how willing are you to increase your land bank today?
Dean Shigenaga, CFO
So, Michael, it's Dean here. I think broadly what we'd like to comment on is that we’ve provided really nice visibility for our investors to think about how we can manage growth into the future because now we have a pipeline that goes beyond 2020 of about 10 million square feet. We just want to be able to provide strategic visibility for everybody, and I think we’ve accomplished that in recent quarters with adding to the pipeline.
Michael Carroll, Analyst
Okay, is there a limit to how much land you want to add to your land bank? Or is it just that market fundamentals are so strong you're willing to grab high-quality sites as you find them?
Dean Shigenaga, CFO
We've always been very thoughtful in that regard, Michael, concerning the amount of product we have. What we did on page two of our supplemental disclosure was add some visibility into that pipeline; about half of it is currently vertical, highly leased, 74% leased. Included in this bucket is the 88 Bluxome project, which is also about 60% pre-leased today. What I think that most of our investors should focus on is what's behind that. It's a fairly modest number. This is land that's either nothing vertical is going on with these land sites, but it's really strategic sites for future growth. That number is only 6% of our gross investment in real estate. So it’s pretty modest today.
Michael Carroll, Analyst
Okay, great. And then Steve, can you talk a little bit about your comments on the South San Francisco market? I know demand has been pretty strong, and I know one of your competitors had good leasing activity on one of their development projects. I mean, are you in that market? And then maybe can touch on the pending acquisitions regarding the three sites in the San Francisco Bay area?
Steve Richardson, Chief Operating Officer
Yeah Michael, hi, it’s Steve. We will provide further color when we're able on the pending acquisition certainly in the Bay Area. And on South San Francisco, we've been very thoughtful and prudent in our approach there. We’ve got a tremendous set of campuses, they are essentially fully leased, and adding products like we're doing at Haskins is the right thing to do at the right time. We're watching this supply very closely. There are a number of different projects that if people choose to build on a speculative basis could add more supply than we've seen there for a while. So we're monitoring this extremely closely, but right now we're taking a balanced approach.
Michael Carroll, Analyst
Okay, great. Thank you.
Operator, Operator
The next question is from Daniel Ismail with Green Street Advisors. Please go ahead.
Daniel Ismail, Analyst
Great, thank you. Peter, you mentioned the amount of new capital flowing into the space and with potentially lower rates. I’m curious to get your thoughts on where you see cap rates across your markets and have you noticed any accelerating cap rate compression in any specific markets?
Peter Moglia, Chief Investment Officer
Yeah, thanks Daniel. I wouldn't say that we've seen accelerated cap rate compression, but it has ticked down. I don't think anybody would have forecasted that at the end of last year. Right now, a well-located lab building in a core market is likely to be more valuable on a cap rate basis than an office building, which is unique considering what Joel said about how people looked at our assets back when we started. We expect this to continue; we get contacted quite a bit from people interested in our assets when we put them out for sale, and we have some pending transactions that have very high-quality investors interested. Next quarter, we will provide news on that, and I think everyone will be pleasantly satisfied with the cap rates we’ll show. So, it's a good time to be a laboratory owner for us, and that's another reason we continue to create value through acquisitions because we want to create even more.
Daniel Ismail, Analyst
And just a quick one for Dean, I noticed expenses picked up a little bit this year, or this quarter again. Anything we should know driving that, and maybe that outlook for the rest of the year?
Dean Shigenaga, CFO
Daniel, I think I missed the key part of your question.
Daniel Ismail, Analyst
It’s the expense growth this quarter; it looks like it picked up about 8%. Anything driving that we should know?
Dean Shigenaga, CFO
Nothing unusual in our operating expense growth. I think a little bit of repairs and maintenance and property taxes drove it lately. As we build out and renovate products, the different regions are sometimes slow to assess the values, and that creeps in over time without necessarily commencing in the year that we've delivered the product. Importantly, though, Daniel, as you know, our leases are triple net, so we're able to pass through almost all of our operating costs to our tenants, which mitigates volatility to our earnings or net operating income.
Daniel Ismail, Analyst
Great. Thanks, guys.
Operator, Operator
The next question comes from Tom Catherwood of BTIG. Please go ahead.
Tom Catherwood, Analyst
Thank you. So a question on San Diego. This cluster has always been somewhat unique for you guys in that it's been more spread out than some of your other markets. But in this quarter, you've taken down more land adjacent to your campus point projects and you’re looking at a substantially sized dense cluster there. Is this the case of just taking advantage of adjacent assets that came up for sale? Or do you think that a denser cluster in San Diego could help drive demand in rent growth?
Joel Marcus, Executive Chairman
So this is Joel. Remember, San Diego was our first market, and I think Campus Point is pretty unique because it fits as part of a university town center, which is a more urban market than you would typically find, say in other parts of San Diego, compared to Torrey Pines, which is beautiful but isn't so urban. That is an important factor. We also have the premier campuses and a world-class set of client tenants there, both life science and tech. The opportunity to expand that campus by adjacency is prudent.
Tom Catherwood, Analyst
So will it be fair to say that you're starting to see some interest by tenants in getting those adjacencies to similar companies than you’ve seen, obviously not the same level, but as you’ve seen in Cambridge or in Mission Bay?
Joel Marcus, Executive Chairman
I think yes, and also we’ve been fortunate that existing tenants have wanted to expand. So having the ability to both build or provide product where there may be some near-term vacancy is a real plus.
Tom Catherwood, Analyst
Got it? And then, I know it was a small deal, but you announced the LaunchLabs partnership with Columbia University this quarter. I assume that’s the West Harlem campus, is that correct?
Joel Marcus, Executive Chairman
That's correct. The motivation for that is somewhat different than you might imagine. Broadly speaking, New York really is an early-stage company market. Cluster development takes about a decade or more to evolve; Boston, Cambridge is often termed second generational, so as San Francisco. New York is in its first decade and really needs to be created. We’ve tried to meet this reality with a product that makes sense, partnering with that by far the largest and most dominant institutions in the market.
Tom Catherwood, Analyst
Very fair. Thanks, Joel.
Operator, Operator
The next question comes from Dave Rodgers with Robert W. Baird. Please go ahead.
Dave Rodgers, Analyst
Hey, good afternoon. Steve wanted to start with you on the 88 Bluxome property. I think you've quoted a couple of times now about 60% leased or committed, and Pinterest only gets you a portion of the way there. Have you announced the second lease there? Can you give a little more color on that?
Steve Richardson, Chief Operating Officer
Dave, hi it’s Steve. Yeah, this is the historical relationship we had with the Bay Club. So that's the other lease that’s counting toward that occupancy percentage of the overall mixed-use complex.
Dave Rodgers, Analyst
Got you. That's helpful. Thank you.
Dean Shigenaga, CFO
The increase in capitalized interest I think, is purely a function of more land kind of acquired in the most recent quarter? Were there any other changes as you looked at that bucket of capitalized properties? No, I just – what has increased is the dollar basis on average days under qualifying activities, which could be construction, vertical construction, or pre-construction, which is entitlements. We have more activity today than we did last year as an example. And that's apparent as you look at our disclosures for products beyond 2019 as an example.
Dave Rodgers, Analyst
Right. It is, and I guess I was just thinking within the guidance that went up not versus last year, but in your own guidance. So I was just trying to reconcile any changes.
Dean Shigenaga, CFO
Yeah, yeah, Dave, you're right. In March, we filed an 8-K which highlighted an increase in our acquisition guidance. A significant portion of that is future redevelopment and development opportunities, which results in almost all those projects having qualifying activities requiring capitalization of interest. Net interest went down because there weren't any increases in interest costs anticipated. To round that out, Dave, we fund that with common equity, as that’s non-income producing, and there are no cash flows on the future development products. That kind of helps you understand why there's no increase in interest cost; it’s equity funded projects.
Dave Rodgers, Analyst
And you're capitalizing the average cost of debt, I assume, so that's the change?
Dean Shigenaga, CFO
I'm sorry?
Dave Rodgers, Analyst
Yeah, I get you. That’s helpful. I appreciate that. And then maybe the last question for Joel. Joel, I think in the last cycle, you go back to early 2000s, you guys were very aggressive buying buildings, land redevelopment, etc. Have you done anything differently? Or is it really just a market that's cooperating this time versus last time, kind of the market that sell out, if you will, for a couple of years?
Dean Shigenaga, CFO
Well, I think if you listen to the story, you would realize that Mission Bay took place in 2004-2005 and beyond where we shifted from single asset to a campus cluster strategy. We, in 2006, moved Big Time into Cambridge with Tech Square and the entire Binney Street development of over 2 million square feet. The RFP we won in New York reflects the pivot. So the actions in 2004, ‘05 and ‘06 have vastly impacted our growth over the last number of years. The leveraging and the investment-grade that we achieved in 2011 have significantly enhanced our balance sheet to the point where we are today. Nobody has this unique business model, and I think nothing is ever the same. If you look at some of the things we've done and some of the approaches we've taken in each of the markets, they are highly differentiated from where we were say, even five or ten years ago.
Dave Rodgers, Analyst
Right. Thank you.
Operator, Operator
Ladies and gentlemen, 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
Exactly at 60 minutes, 1 o'clock and 4 o'clock on the East Coast. Thank you very much, and we look forward to talking to you on the third quarter call. Be safe.
Operator, Operator
Thank you, sir. The conference has now concluded. Thank you for attending today's presentations. You may now disconnect.