Alexandria Real Estate Equities Inc

NYSE:ARE

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

[Paula Schwartz, Investor Relations]

Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company’s actual results may differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s periodic reports filed with the Securities and Exchange Commission. And now, I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

[Joel Marcus, Executive Chairman and Founder]

Thank you, Paula, and welcome, everybody to our second quarter call. With me here today are, Jenna Foger, Peter Moglia, Steve Richardson and Dean Shigenaga. We want to welcome all to this second quarter call and also as I always try to do to recognize and thank the entire Alexandria family team for one of the best quarters in the entire history of the company with an operational tempo really like none other, while working virtually for many of us for most of the past, now we into our second year of COVID. Michael Jordan once said some people want it to happen, some people wish it to happen, others make it happen. Alexandria makes it happen. We are deeply mission-driven and thankful for all that we do and urge you to read about many of our important programs and activities in the corporate social responsibility area in our press release.

For a moment keys to the second quarter, historic high demand for Alexandria's lab space and our critical lab operations, which go along with that. Alexandra is at the vanguard of meeting the historic and high unprecedented demand from many of our more than 750 tenants for growth needs now, and a critical path for future growth very importantly. Fundamental drivers of demand are the strongest we've ever seen. Rental rate growth continues unabated and no excess supply on the horizon at this time. We're very proud that we've got almost 7% quarter-to-quarter per share FFO growth, more than 40% rental rate growth, almost 18% NOI growth, almost 8% same store NOI growth and a $1.3 billion plus annual NOI run rate, not to mention about $545 million in incremental revenue in our development and redevelopment pipeline.

Alexandria truly has a demonstrable pricing power advantage in each of our cluster markets. And when the Life Science tenants choose, they almost always prefer Alexandria's lab space and our operational excellence based on our critical lab operations. Nature, a biotechnology magazine back in April wrote the following; 2020 was a year that smashed many records, biotech savior role in the pandemic, attractive a stampede of private and public investors alike. The pandemic apparently reinforced the requirement for long term value based investors of any kind to have exposure to life sciences. And life science demand has in fact, at an all-time high as the world has recognized the importance of next generation therapies to solve current and future really difficult healthcare challenges, and Jen will talk a bit more about it.

I'm going to highlight just a couple of things for the moment. The pandemic has underscored the support for the national institutes of health and investment in basic science, which are keys to ensuring that the US maintain its leadership position in life science and maximizing national preparedness to address current and future healthcare challenges. There is a proposal right now to increase the fiscal year '22 NIH budgets up to $51 billion, nearly a 20% boost over a fiscal year of '21. The FDA Center for Drug Evaluation and Research, better known as CDER, has approved 23 new molecular entities in the first half of 2021, putting it on the pace to exceed 2020 is near record approval high of 53. Following a historic year of 2020, venture capital and life science continues at a very strong pace of almost $36 billion already raised in the first half of 2021 on pace to eclipse 2020s all time high of $46 billion. This unprecedented level is likely to continue throughout the year due to substantial dry powder available to life science funds and increased investment from institutional, generalists and traditional life science investors.

Following a record 2020 for IPOs and follow on offerings, the first half of this year have continued to reach new highs with over $8 billion raised in 52 IPOs and over $17 billion raised in many follow-ons, positioning 2021 for an all-time record year of public market investment in life science. R&D continues with amazing productivity and resilience through COVID, enabling the industry to expediently deliver novel vaccines and therapies to combat the global pandemic. New biology, drug discovery platforms and increasing focus on complex medicines as the future therapeutic innovation have all demonstrated the life science industry's ability to effectively drive solutions to current and future healthcare challenges and yield strong returns to investors.

And maybe a final comment would be as project Warp Speed did in bringing a historic public private partnership together of the government on the one hand and the private industry, biotech and pharma companies on the other hand at a warp speed rate to bring research and development and commercialization of the COVID vaccine in record time, as well as ensure a timely manufacturing supply. We really do need a 21st infrastructure package, not a 20th century package like the one Congress is now debating. We need to make the US self sufficient in semiconductors. We only produce now about 11% to 13% and self sufficient in next gen manufacturing of complex medicines.

And so with that, let me turn it over to Jenna.

[Jenna Foger, SVP, Science and Technology]

Thank you so much, Joel, and good afternoon, everyone. As Joel highlighted last quarter, we continue to be reaffirmed by the fundamental future's shares is a tremendous paradox of this pandemic moment for the life sciences industry. Despite the challenges of these past many months, COVID has illuminated the power of science and the industry's ability to transform the future of human health. Not only as so many of our tenants in the industry, as Joel mentioned, risen to the challenge of combating this global pandemic, but R&D and bio innovation broadly have persisted with amazing productivity, resilience and expediency throughout this time and we cannot stress enough how critical it is for us as a whole to preserve and prioritize, and continue to catalyze this groundbreaking innovation has and will continue to save so many lives.

Now turning to COVID specific update for a few moments. According to the World Health Organization, as of this morning on a global scale, over 194 million confirmed cases of COVID-19 including over 4.1 million death. A total of 3.7 billion vaccine doses have been administered worldwide with nearly 10% of these doses in the US alone. Roughly 57.5% of the vaccine eligible population in our country that's [thousand] over have been fully vaccinated by either tenant Pfizer or Moderna 2-shot mRNA-based vaccine or tenant Johnson & Johnson single-shot. This is just over 49% of the total US population and we hope this number of fully vaccinated individuals will continue to steadily rise. These numbers are astounding.

And before we get into the where are we now, I want to emphasize that despite the COVID fatigue, we all continue to feel even despite some relief from the easing of restrictions over the past few months, albeit with the likely return of some new ones, none of where we are in the recovery process can be taken for granted. The fact that the biopharma industry spearheaded by many of our tenants was equipped with the know-how, resources and technology to create safe and effective vaccines to combat a novel viral pathogen would have been unimaginable just a few decades ago. The fact that our tenants Pfizer, Moderna and Johnson & Johnson were able to develop, run robust clinical trials, manufacture and distribute billions of vaccines at scale in less than 12 months is absolutely unprecedented. These vaccines achieve such astounding safety and efficacy in the 90-plus percent range when the FDA has set the original bar at 50% with an amazingly low incidence of side effects reported from the millions of people who have now received that is truly astounding.

The fact that the biopharma industry, government and many other public and private agencies came together to ensure all of these are transpired at a pace and level sufficient to provide adequate vaccine supply to inoculate the entire US population as we now have unlike most nations around the world is not to be undervalued. And the fact that we have a regulatory agency in the FDA that has worked around the clock to review thousands of COVID-19 related applications to maximize the availability of high quality testing and safe and effective vaccines and therapies against COVID-19 cannot go unrecognized.

So where are we now? It's been just over 18 months since the first US COVID case was reported on January 21, 2020. Yet despite all of the progress with vaccines, et cetera, countries around the world are still very much combating new COVID-19 surges, driven most recently in part the increasing prevalence of the so called delta variance. In the US, this highly continuous Delta variant, approximately 50% more transmissible with 1,000 times higher viral load account for at least 83% of COVID cases. Average daily confirmed COVID case count now exceed 50,000, which is X that of the mid-June lows with hospitalization and deaths rising as well. And as such, it seems that as of this morning, requirements are likely to resume in various parts of the country. However, as worrying as this trend may seem breakthrough infections, those are infections that occur in vaccinated people are still relatively uncommon. And the vast majority of these breakthrough cases have not caused serious illness, hospitalization or death. More than 95% of people hospitalized for COVID-19 are unvaccinated and the vaccine still remain effective even against the Delta variant. So while they may not entirely prevent transmission, they do seem almost entirely able to prevent severe disease and death.

With regards to vaccine safety. There have been very few adverse events, less than seven per million reported overall with nearly all cases resolving and without long term side effects reported. As such, the strong safety and efficacy profile will likely garner full FDA approval for mRNA based vaccines for Pfizer and Moderna this fall. With regards to pregnancy and women of childbearing age, though data is more limited, based on the safety data generated to state and how we know vaccines work in the body, the CDC does encourage pregnant women to get vaccinated, especially given that pregnant and recently pregnant women are at increased risk for severe illness from COVID-19. With regards to children, Pfizer has an emergency use authorization for children over 12 and the FDA is urging Pfizer and Moderna to expand their studies in children aged 5 to 11.

So what's next and where are we headed? The evolving data on the duration of immunity and COVID-19 variance of concern suggests that COV-19 and the need for vaccines and boosters will likely persist long term. However, the faster we can vaccinate the population in this country and increase access to vaccines in the rest of the world, the more effectively we can slow the emergence of new variants and the sooner we can turn the virus into a less deadly pathogen even if still contagious. And given that COVID will likely remain on the planet for the foreseeable future, therapies are going to continue to be important in mitigating the severity of COVID-19, such as recently authorized to our tenant Vir and GSK for their new antibody. Equally as important is continued COVID testing, of course, for active virus and symptomatic individuals as well as surveillance testing across the population to detect new outbreaks, sequence emerging variants and track overall transmission.

The last point I want to make is regarding the FDA, which has received somewhat on yielding flack over the past several months despite the herculean COVID efforts while maintaining a near all-time record high pace of new drug approvals, as Joel highlighted. This criticism is in mounting on account of several factors, including the lack of a fully appointed FDA commissioner, the growing backlog of review requirements for new investigational drug applications given the strong pace of innovation of our industry, the lack of fully approved vaccines despite they’re being authorized under the emergency use authorization pathway and most recently, the historic at highly controversial approval of Biogen ADUHELM to treat Alzheimer's disease. This was the first approval in nearly two decades for this chronic neurodegenerative diseases affecting over 6 million people in the US alone.

I will save commentary on all of this for another time, but it needs to be said that without the FDA's steadfast and tireless work throughout COVID to maximize the review of the immense COVID relating testing, therapeutic and vaccine applications will try to keep a pace with the record numbers of submissions from the industry, we as a nation would fall way behind. It is nothing short of astounding and worthy of the utmost recognition. The FDA is critical for ensuring the safety of all drug products that are available in the US while balancing efficacy and expediency. The future productivity and leadership of the agency, which will be announced by November of this year, is of the utmost importance to all of us, as the FDA is instrumental in ensuring the continued pace and vitality of biomedical innovation in our country.

So in summary, thanks to the heroic work and collective investment of so many of our tenants in the industry, we have the tools and the roadmap at our disposal to end this pandemic. Biopharma is emerging from COVID as a dawn of historic new era for biotech and scientific innovation. The world recognizes the value of this industry and the potential for next-generation medicines as evidenced by Moderna and Pfizer's next-generation vaccines to address current and future healthcare challenges. And clearly, the paradox of this pandemic moment has only reaffirmed why Alexandria has dedicated our business, our passion and our purpose to help drive this mission critical industry forward.

And with that, I'll turn it over to Steve.

[Steve Richardson, Co-Chief Executive Officer]

Thank you, Jenna. I'd like to take a step back at the start of my comments and provide some historical context for the accelerating demand, which really translates into leasing at warp speed for Alexandria's mega campuses. At Alexandria's Annual Investor Day during December 2017, we presented a bold framework to nearly double the company's annual rental revenues from a little more than $800 million to $1.5 billion by the end of 2022. We are pleased to share those annualized revenues for Q2 2021 are in fact in excess of $1.5 billion, and so the Alexandria team has accomplished this lofty goal in an accelerated time frame more than one year sooner than anticipated. The company has also grown from a mission critical operating asset base and development pipeline of 29 million square feet at the end of 2017 to a total of 62 million square feet at the end of Q2 2021. Truly exceptional growth, more than doubling the footprint of the company, and importantly, concentrated in our core clusters with disciplined execution, enabling the continuation of high quality cash flows.

And as we fielded questions during the 2020 as to whether the healthy leasing activity for Alexandria's mega campus platform was perhaps a short term blip driven by COVID-19, the second quarter of this year's leasing volume of more than 1.9 million square feet, the highest quarterly leasing volume in the history of the company is again evidence of the company's unique position as a trusted partner to the growing life science industry, providing a durable and sustainable competitive advantage in the market. I'll go ahead and review a few of the exceptional highlights, including the following, leasing outperformance. As we just stated, the 1.9 million square feet lease represents the highest quarterly leasing activity during the 27 year history of the company. Truly leasing at warp speed. I'll direct you to Page 2 of the supplemental where it indicates the 3.4 million square feet under construction is 80% leased and the additional 3.6 million square feet anticipated to commence construction during 2021, 2022 is 89% leased and negotiating. So robust leasing and our growth pipeline provides exceptional clarity, and these projects in total will drive incremental revenues in excess of $545 million.

We also have exceptional core results. Cash increases this quarter of 25.4% and GAAP increases of 42.4%. Occupancy remained very solid at 94.3% in the operating portfolio, which would have been 98.1% if we're not for the 1.4 million square feet of vacancy in recently acquired properties, which provide for near term incremental annual rental revenues in excess of $55 million. In market health, demand, as we've outlined, continues to accelerate and Alexandria is branded in highly desirable mega campuses. And supply does continue to be restrained during 2021 across all of our markets, and we do not see any disruptive large-scale projects delivering 2022, '23. We're closely evaluating Greater Boston's ground up pipeline, which is 56% leased. And in the San Francisco area, we are monitoring leasing activity at two or two ground-up lab projects. And as we've stated before, there have been no significant lab sublease spaces put in the market for several quarters now. So in conclusion, the first half of 2021 continues the very strong outperformance by Alexandria and our intent focus on operational excellence has positioned the company very well to enhance its industry leading brand.

With that, I'll hand it off to Peter.

[Peter Moglia]

Thanks, Steve. I'm going to update you all on our development pipeline and construction cost trends, comment on our recent asset sales and report on a couple of comps that reflect that the private market appetite for life science assets is still very healthy. As Steve and Joel both noted, we're experiencing historic demand and have responded by executing our differentiated life science strategy at an accelerated pace through expanding our collaborative campuses and asset base in each of our cluster markets. A significant sign of the health of the underlying life science industry is that we're expanding significantly in almost all of our markets. In many of our submarkets, the supply and demand imbalance has been exacerbated by lack of near term opportunities to expand, leading Alexandria to push the boundaries of those markets. Examples of this are successful forays into Watertown and Seaport in Greater Boston, new mega campuses in Sorrento Mesa and expansion of San Diego Science sector to the north and east, and a highly successful mega campus underway in San Carlos.

This high demand paired with our highly experienced development teams resulted in another very productive quarter for Alexandria. In the second quarter, we delivered 755,565 square feet, spread over five assets located in South San Francisco, San Carlos, Long Island City, San Diego and the Research Triangle. This is double what we delivered in the first quarter and these deliveries will provide more than $31 million in annual rental revenue over the next year. In addition, this historic demand has led to improved quarter-over-quarter leasing and leases under negotiation numbers despite adding two new assets that have had little marketing time. Assets contributing notably to this outcome include; 840 Winter Street and Waltham Mass, which is a testament to our ability to capture demand from companies needing facilities for next gen manufacturing; 3160 Porter Drive in Palo Alto, a joint effort with Stanford to commercialize the University's most innovative science; and 5505 Morehouse in Sorrento Mesa, which is benefiting from Alexandria's place making expertise and strong demand drivers in San Diego.

As illustrated on Page 2 of the press release, this historic demand and our corresponding strategic response has led to our current pipeline growing to 3.4 million square feet in 33 properties that are, as Steve mentioned, 80% leased or under negotiation. In addition, we expect to have another 3.6 million square feet in 19 properties commenced construction this year and next that are already 89% leased or under negotiation. As Steve also mentioned, these properties will cumulatively add approximately $545 million of annual rental revenue once fully delivered. I felt it necessary to remind everybody of that. Construction costs remain elevated from some trades and commodities holding study and others continuing to be unexplainable and unprecedented levels. Lumber is a positive story and could be a microcosm for what will happen with other commodities. A year ago, lumber was $500 per thousand board feet, which was about $100 above its historical norm. It climbed to $1,700 per thousand board feet in early May but has since dropped back down to $600 per thousand board feet and is still dropping. The reason for the drop was a large number of residential projects were put on hold due to the price of lumber. With this pullback in demand, the mills have been able to catch up, leading to stabilization in pricing. A correction due to a decrease in demand is essentially what's going to eventually normalize all construction commodities.

Copper has shown signs of signs of dropping but it's still 2 times above historical norms. Alternatives such as aluminum are being considered to alleviate the pricing pressures. And if there's enough adoption, it could lead to a stabilization in pricing. Despite the promising news with lumber and copper, rolled steel remains very volatile and is not showing any signs of stabilizing. Rolled steel is used for things such as metal decks, metal studs and duct work. So it's very impactful on multilevel buildings with large HVAC needs, such as lab buildings. So we have to keep our cost escalation assumptions on the high end despite the noted drop in some commodities. The reason being reported is both a commodity and labor issue at the shops that create the products from raw materials. COVID caused many to shut down. And then when demand exploded, the shops had a hard time getting the labor to come back. The shops try to solve this by scheduling longer shifts but the amount of rolled steel showing up was not enough to support those shops. Thus, prices remain very high with metal studs up 75% since January. We want to assure you that we're keeping a very close eye on commodities and have been developing strategies to counter these increases. And together with our prudent underwriting, we will continue to deliver our projects on time and on budget as we always have.

I'll conclude by commenting on our recent sales and provide a couple of comps that were announced recently. I discussed our record 4% cap rate at 213 East Grand last quarter, but I want to add that in addition to achieving that cap rate, we also achieved an unlevered IRR of 9.6% and a value creation margin, which is calculated by dividing our gain by gross book value of 56%. This quarter, as disclosed on Page 3 of the press release, we once again demonstrated our ability to create tremendous value for our shareholders by selling 70% interest in 400 Dexter, located in the Lake Union submarket of Seattle for 4.2% cash cap rate with a gross value equaling $1,255 per square foot. We achieved 12% unlevered IRR on this sale and a value creation margin of 61%, a truly remarkable outcome and it's very reflective of the high quality assets we've developed and continue to develop in the Seattle region and elsewhere.

Outside of those Alexandria transactions, there are a couple of transactions of note in our submarkets that reflect the high value that private investors are putting on life science assets today. In Sorrento Mesa, an asset known as The Canyons, which contains a little over a third of lab and manufacturing space with the balance being office sold at 4.48% cap rate and a value of $575 per square foot. The cash flow is from a credit tenant and there is no near term upside, so the cap rate really reflects the yield a private investor was willing to pay in a submarket that a couple of years ago would have commanded a cap rate with a six handle. In a similar vein, the other comp we're reporting comes from Rockville, Maryland, which was received to be a seven cap rate submarket by some analysts not too long ago. 9615 Medical Center Drive, located in the Shady Grove submarket and adjacent to a number of Alexandria properties, was sold to a US insurance company for 5.18% cap rate and a valuation of $610 per square foot. The asset is a leasehold interest subject to a long term ground lease that happens to be owned by Alexandria. Thank you.

And with that, I'll pass it over to Dean.

[Dean Shigenaga, President and CFO]

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We reported exceptional operating and financial results for the first half of '21 and provided a very strong outlook for the remainder of the year. Revenue and net operating income for the second quarter was up 16.6% and 16.8% over the second quarter of 2020, respectively. And NOI for the second quarter was up 6.9% over the first quarter of '21. Now venture investment gains included in FFO per share were $25.5 million for the second quarter and was consistent with the first quarter of '21.

Now looking back over the last two quarters, we raised our outlook for FFO per share $0.03 when we reported first quarter results. And during the second quarter, we raised our outlook for FFO per share again by another $0.02. Now this $0.02 increase was announced in connection with our Form 8-K filing date at June 14th when we were substantially through the second quarter and had solid visibility into the strength of core results for the quarter. Same property NOI growth for the first half of '21 continue to benefit from our high quality tenant roster with 53% of our annual rental revenue from investment grade rated or large cap publicly traded companies. Same property NOI growth for the first half of '21 was very strong at 4.4% and 7.4% on a cash basis. High rental rate growth on lease renewals and re-leasing the space was the key driver for the improvement in our outlook for 2021 same property net operating growth to 2% to 4% and 4.7% to 6.7%, an increase of 30 basis points and 40 basis points, respectively.

Now while the primary focus of our acquisitions for 2021 has been driven by strong demand from our tenant relationships for both current and future development and redevelopment projects, certain acquisitions have also included operating properties with opportunities to drive growth and cash flows through lease-up of vacancy. Now these operating properties have contributed to NOI growth in the first half of '21, it's important to highlight that the lease-up of 1.4 million rental square feet of vacancy at these properties will provide further growth in annual rental revenue in excess of $55 million. Now occupancy that we reported for June 30th was 94.3% and 98.1% on a pro forma basis, excluding vacancy from recently acquired properties. And it's also important to highlight that if we set aside recently acquired properties, our occupancy is on track to improve by 100 basis points in 2021.

Now we believe it's important to highlight the strategic benefits of having the team with tremendous experience and expertise with designing, building and operating sophisticated laboratory office buildings and the team with decades of trusted partnerships with our highly innovative tenants. As mentioned earlier, we have one of the highest credit tenant rosters in the REIT industry. We have one of the highest adjusted EBITDA margins in the REIT industry at 69%. We reported our lowest AR balance since 2012 at $6.7 million, truly amazing when you consider that our total market capitalization was over $26 billion as of June 30th. And we continue to consistently report high collections at 99.4% for July. We reported record leasing velocity at over 3.6 million rentable square feet executed in the first half of this year. And this run rate is significantly exceeding the strong leasing volume for 2020 and on track for exceptional rental rate growth in the range of 31% to 34% and 18% to 21% on lease renewals and re-leasing the space, that last figure is on a cash basis, by the way.

Now as a trusted partner with access to over 750 tenants in our portfolio, we are well positioned to capture the tremendous demand from our tenant roster and life science industry relationships. We have a super exciting pipeline of projects under construction, aggregating 3.4 million rentable square feet, 80% lease negotiating. Near term projects starts 89% leased were under negotiations, aggregating 3.7 million square feet. Now this aggregates about 6.9 million square feet, 90% of which is related to space requirements from our existing relationships. These projects will generate an amazing amount of incremental annual rental revenue exceeding $545 million or 34% increase above the second quarter rental revenues annualized of $1.6 billion. Now importantly, we also expect to start additional projects between now and December of 2022.

Our venture investments portfolio continue to highlight the exceptional talent of our science and technology team for underwriting high quality innovative entities. As of June 30th, unrealized gains were $962 million on an adjusted cost basis of $990 million. Realized gains on our venture investments for the second quarter were $60.2 million, including $34.8 million of realized gains excluded from FFO per share. Now for the first half of '21, we realized gains aggregating about $57.7 million that related to significant gains in three investments that were excluded from FFO per share as adjusted. Now we're pleased that the venture investment program is generating capital exceeding our initial forecast for 2021, and we hope this will be in the range of about $100 million plus for the entire year.

Now continuing on to our very strong and flexible balance sheet to support our strategic growth initiatives. We continue to be very pleased to have one of the best balance sheets in the REIT industry, providing us access to attractive long term cost of capital. We remain on track for net debt to adjusted EBITDA of 5.2 times by year-end. Our fixed charge coverage ratio for the fourth quarter has increased to greater than 5 times. We continue to maintain significant liquidity of $4.5 billion as of June 30th. We're in a solid position with debt maturities with our next maturity, representing only $184 million comes due in 2024. And while it's challenging to predict when owners of real estate will decide to sell, two to three transactions drove most of the amount of acquisitions and accounted for about half of our target for 2021. For the remainder of the year, our goal is to remain very selective with acquisitions.

Our team is advancing a number of important decisions, primarily focused on partial interest sales in high value, low cap rate properties for reinvestment into our strategic value creation development and redevelopment projects. Now to date, in 2021, we have completed $580 million at cap rates in the 4% to 4.2% range. And we have about $1.4 billion in process at various stages and expect to move along other dispositions that will push us well above the top end of our range for dispositions, which are currently at $2.2 billion. Now we are targeting about $1 billion in dispositions to close in the third quarter and the remainder in the fourth quarter. Importantly, each of these key pending transactions will continue to highlight the tremendous value we have and continue to create for our stakeholders.

Now as a reminder, please refer to Page 6 of our supplemental package for a detailed and updated guidance assumptions for 2021. This guidance is an update to our guidance for the year that was disclosed on our Form 8-K dated June 14th. We narrowed the range of guidance from $0.10 to $0.08 for both EPS and FFO per share. EPS was updated to a range from $3.46 to $3.54 and FFO per share as adjusted was updated to a range from $7.71 to $7.79 with no change in the midpoint of FFO per share diluted as adjusted of $7.75. Now as a reminder, since our initial FFO per share guidance for 2021, we have increased the midpoint of our guidance by $0.05 for growth in 2021, representing an increase of 6.1% over 2020. Now before I turn it back over to Joel Marcus, I just wanted to highlight that we recently published our annual ESG report, highlighting continued leadership in sustainability, social and governance matters. I also wanted to express our team's appreciation for continued recognition by an independent panel of judges for a six NAREIT Gold Award for Communication and Reporting Excellence to the investment community. So congratulations to our team for outstanding execution, and I'll turn it back to Joel.

[Joel Marcus, Executive Chairman and Founder]

Thanks very much, Dean. Operator, we can go to questions, please.

[Operator]

We will now begin the question-and-answer session [Operator Instructions]. Our first question will come from Manny Korchman with Citi.

[Michael Bilerman, Citi]

So Dean, in your last comment, you talked about going forward being more selective on acquisitions. I was wondering if you can, or maybe Peter, sort of talk about what's going to change in your approach or your underwriting, or the yields you're targeting relative to the feracious appetite that you've had in putting capital out, how will deals going forward be scrutinized versus the deals that you've done?

[Joel Marcus, Executive Chairman and Founder]

Maybe it's best to amend that word, selective, and think about it as being a bit more patient. We've had -- if you just look at the quality of deals we've done, we don't change our underwriting. We don't change our focus. It hasn't changed for a very long time. We look at -- if you look at the two big deals we did this year, both were aimed at, one, creating a new submarket in Boston and the other was extending the Alexandria Center for Life Science at Kendall Square. Both of those to meet kind of historic high demand. But we're mindful of the overall capital markets. So I think we're being just a bit of a slower pace, but I wouldn't say the selectivity or the change in the underwriting or how we do things, or what we do is any way shape or form changed.

[Michael Bilerman, Citi]

And from the capital markets, you've shown a lot of discipline in prefunding a lot of these deals through forward, through deb, or through straight equity offerings. Is it more of a concern about where the markets are going, Joel, in your mind about funding future deals?

[Joel Marcus, Executive Chairman and Founder]

Well, I think one has to just be mindful that if you look at -- we’re probably at a historic high with GDP right now. We're probably peaking. And it's just hard to know where the market might go. So we're just going to be careful about, stepwise about how we do things. We also have no anticipation of when -- I think Dean said this pretty clearly. We don't know when an owner is going to bring an asset to market. And so that oftentimes drives decisions as to the 750 tenants, many of whom have active current requirements and many of whom want a path to future growth. So we just have to be -- maybe the best word to use is judicious rather than selective and that's not necessarily parsing words. So I think we're just going to be judicious about how we go forward. There's only so many big acquisitions one can continue to do and that actually exists. So I think the market will determine that.

[Michael Bilerman, Citi]

I think judicious, it definitely sounds like more of the word rather than selective in the comments. And then secondly, just on supply, Joel, in your opening comments, you basically said that it's not a concern of yours. Now you're obviously, as an entity, building a ton, others are building a lot. Is it just the level of preleasing and tenant demand that causes you not to worry about the levels of development going on in life sciences and just the overall excitement that there is on behalf of a lot of corporate landlords to do it?

[Joel Marcus, Executive Chairman and Founder]

So I'm going to ask Steve to comment. But I would say we're always worried about everything. I think when you look at -- and we're fans of Jim Collins. We always have productive paranoia. And so we're always -- every day we wake up, we assume nothing and we have to prove everything. And so I don't think it has to do with our not or our not worrying or so forth. But I think if you look in each of the key markets, you look in the Bay Area, you look at the Greater Boston area, the supply chart really is focused out several years. It's not focused on '21, '22 or even '23. You start to see bigger blips, for example, Kilroy's capability to do large scale projects in the Oyster Point area in South San Francisco. Pretty large numbers but those are out quite a number of years. They're also at a disadvantage because they have a substandard location to kind of the gateway location. But Steve, do you want to comment on kind of on the supply overall issue? I think you have a good perspective on that.

[Steve Richardson, Co-Chief Executive Officer]

Look, we have been in these markets for more than two decades. We track this on a building-by-building parcel-by-parcel basis. So we have absolute granular information and insight on these projects. And just to add to what Joel said, when you look at Greater Boston in that pipeline, projects that actually have gone vertical that are under construction, more than half of that is already leased, and those will extend into 2022 and 2023. So when you look at that, you really don't see very significant pieces being added to the overall inventory from that basis. Other people may be talking about supply but again, four or five years out, inevitably, the markets will change. Office will always be an alternative for all of these new entrants as well. And then in the Bay Area, as Joel said, there's two or three projects we're monitoring. There is leasing activity there. So there is additional supply but we don't see large, disruptive, very large projects that are well under construction that have no leasing activity. So again, we do monitor it on a very granular basis and that's what we're seeing over the next year or two or even two and half years.

[Operator]

Our next question will come from Sheila McGrath with Evercore ISI.

[Sheila McGrath, Evercore ISI]

Acquisition cap rates have compressed for life science as we can see at 400 Dexter. How should we think about the development yields for your current pipeline? Should we expect some of the newer projects to have a little bit or some compression in the development yields versus historic yields?

[Joel Marcus, Executive Chairman and Founder]

So Peter…

[Peter Moglia]

I think it's fair to say that there's been a tremendous amount of growth in rents. So that will help keep the returns buoyant, but with that has come a growth in the cost of land. There's been some, obviously, some cost increases that I just went over in my comments. But I think it's fair to say that our goal of development, redevelopment, having a minimum spread of 150 bps over exit cap rates will continue. And so that's a very important number for us. We often exceed that well over 200 bps in many cases. But yes, just the cost of capital is advantageous. So you can develop something to a six and it'd be very accretive, especially if you can sell it for a four.

[Sheila McGrath, Evercore ISI]

And then I was wondering if you could provide a little more detail on the Sorrento Mesa acquisition of existing buildings. Will you redevelop those buildings and add density or knock some down, what are the plans there?

[Peter Moglia]

I think we've got a number of scenarios that Dean and team have explored. But you're right, I mean the advantage or one of the great things about that acquisition is the ability to combine it with an existing property and create a 2 million square foot mega campus. Will that certainly contain new buildings? Whether they're all new and some are redeveloped is still to be undertaken or to be decided. But we're very comfortable with our basis there and we've got a lot of optionality with the existing buildings, but also our basis is good enough that if we take a couple down, we can build bigger ones at good yields.

[Sheila McGrath, Evercore ISI]

Okay. And last question. Leasing spreads were almost a record quarter. Was that driven by any one particular transaction or market? And where do you think in-place rents for your portfolio compared to market right now?

[Joel Marcus, Executive Chairman and Founder]

Yes. So, pretty broad, Sheila, and not based on any single one. But Steve, you could -- or Peter, you can give some view on that, on the uptick.

[Steve Richardson, Co-Chief Executive Officer]

Yes. The mark-to-market, Sheila, it's Steve here, has actually increased over the past several quarters. We're roughly 23.5% on a mark-to-market basis across the entire portfolio. So, I think, that's clear evidence of the continued healthy demand and rent growth.

[Peter Moglia]

We were in the mid-teens not that long ago. So, that's a pretty significant increase.

[Operator]

Our next question will come from Anthony Paolone with JP Morgan. Please go ahead.

[Anthony Paolone, JP Morgan]

Joel, you mentioned some of the record capital formation in the form of venture capital IPOs, and I think the NIH as well. In the past, that -- those numbers have ebbed and flowed. I'm just wondering what you think happens to space demand, if there's any sort of pullback in that capital formation this time.

[Joel Marcus, Executive Chairman and Founder]

Yes. So, that's a really good question, and welcome to the call, Tony. This is a kind of a historic biotech bull market. It's really been going into its seventh year, which is pretty historic. I think, which gives us good comfort is on the private side, a number of the venture firms -- quite a number of the venture firms have raised record amounts of money, and those funds usually take multiple years to invest two, three, sometimes four. And so, that's going to give a runway to private companies, let's say there was a black swan event or something forbid happens that just causes the market to sell off pretty drastically.

I think we're very fortunate. As Dean said, we have a historically high credit profile in our asset base. So, that's good. I think the companies that would be most at risk would be newly public companies now that are outside of the private venture or private equity financing. They're public now. And if the markets shut down, they have capital, they'll have to adjust their burn rate and be careful because they won't be able to go back to the capital market. So, I think that -- we saw that in '08 and '09. It was the newly public companies, companies that were preclinical particularly or in the clinic and needed a number of years of runway. So, that would be a downside scenario. But as I said, I think for -- at least for the coming couple of coming quarters, we see a pretty steady flow of capital. We don't see any interruption. But, you never know. If China decides to make Taiwan like Hong Kong or something like that and decide to reunify, that could cause the markets to certainly freeze up. I mean, they're already attacking a lot of the tech companies and so forth. So, I think, China remains a huge question as to the impact on the market and what their intention is.

[Anthony Paolone, JP Morgan]

Okay. Got it. Thank you. And then, just the other question I have is you mentioned your pricing power advantage and tenants wanting to be in your portfolio. Are you being asked to go to either new markets, new submarkets to satisfy some of the demands of your tenants? And just updated thoughts on potentially going to those places, if so?

[Joel Marcus, Executive Chairman and Founder]

Well, I think what is true of this industry for a long time, and I've said this for a long time, the life science clusters generally take a generation to grow, 25 years or more. And we see, for instance, New York’s now just into the 12th year of that gestation period. And because of the density of players, the ecosystem being collaborative and cooperative as opposed to tech, which is more a little bit those guys like to be more isolated, there's an employee base there. Most companies looking to expand are opting to stay in the existing markets. I do not see and have not seen, and Steve or Peter can certainly comment, any big move toward new markets or other locations. Obviously, if somebody wants to go somewhere, I mean, we'll look at it and we'll think about it, but it's got to be a pretty convincing and persuasive situation.

[Operator]

Our next question will come from Jamie Feldman with Bank of America. Please go ahead.

[Jamie Feldman, Bank of America]

Thanks. If I could just add on to Tony's question. I mean, what about on the international? I mean, clearly, your platform has absolutely proven itself. Do you have any thoughts about trying to do it again in other markets around the world?

[Joel Marcus, Executive Chairman and Founder]

Well, I think if you look at this quarter's results, you would ask the question why would you ever want to or need to. We spent time in India and exited India, realized that the Indian Supreme Court invalidated the Gleevec patent and so novel research just isn't going on there. We have one remaining project in China, which is partially leased up. We compete against government properties that get free rent for three years for Chinese tenants. So, that's not a really great market to grow in. I mean, Europe is fine, but it still is, by and large, their socialized medicine system. So, not a place you would think about booming R&D. So, we're very happy with the markets we're in and with our current operational view of things, Jamie.

[Jamie Feldman, Bank of America]

Okay. And then -- that's helpful. And then, thinking about New York, can you give us an update on when you think you might start the new project there? And with Long Island City, it looks like 100% leased in the supplemental. Just how are you thinking about other opportunities there away from the center?

[Joel Marcus, Executive Chairman and Founder]

Yes. I'll have Peter comment on Long Island City. We're not 100% leased there. That's been a slower lease-up than we would have wanted, partially in due to what happened with Amazon and so forth kind of put a chill on that submarket overall. We're working with the city right now going through a process. And I would just say, stay tuned there. I think, New York is the one market that brokers tout like this big demand, but the reality is the demand is much less. And the demand is primarily organic companies that are starting up, being formed, spinning out. You don't see any big companies moving to New York for obvious reasons, high taxes, governance issues to some extent. And just it's an expensive place to be. So, we're doing great at our center. But, it's a tough market. It's a heavy lift market. You really have to create the entities that stay there, and we've helped do that over the last decade. But it's different than Boston, which is experiencing record high boom. So, just fundamentally different.

[Jamie Feldman, Bank of America]

Okay. So, you said the Long Island is not 100% leased, the supplemental…

[Joel Marcus, Executive Chairman and Founder]

Yes. So Peter, do you want to talk about Long Island?

[Peter Moglia]

Yes. Long Island, according to supplemental is 41% leased and -- 41% leased and under negotiation on page 38. So, that's actually -- the leased percentage went up 10%. So, we have started to make some progress. We meet weekly about demand there and the different companies we're talking to. Essentially, there's a lot of slow decision-making going on there. I don't know if it has to do with just the state of New York City and if people are wondering when COVID is going to not be as impactful to life there, could be one reason. But as Joel mentioned, it's definitely a market where we've had to almost create demand. It's very organic. The tenant prospects we're talking to are almost exclusively New York-created companies. And we're not getting a lot of help from in-migration. But, we are seeing everything and capitalizing on some. And admittedly, it's been a slow process, but we do think we'll get that stabilized in the near term.

[Jamie Feldman, Bank of America]

Okay. Thanks. By the way, I was looking at Page 34, which I think showed that it is, but I see what you're talking about. Thank you.

[Peter Moglia]

34, Jamie, is what we delivered to date.

[Joel Marcus, Executive Chairman and Founder]

Yes. Parts of the building already delivered not the full building.

[Operator]

Our next question will come from Rich Anderson with SMBC. Please go ahead.

[Rich Anderson, SMBC]

So, on the dispositions, you're looking at $2 billion for this year. And I look back at what you've done in previous years, and this is -- this will be the most by a fair margin in other years. And I'm curious, obviously, you described capital flowing into the business, like I think used the word stampede, and we're all seeing that for all the good reasons. But, are you getting any reverse inquiry where you would have maybe not sold a partial interest or whatnot, but you were just giving an offer that was too good to refuse. Is that happening to you, or is this stuff you would have sold one way or another eventually?

[Joel Marcus, Executive Chairman and Founder]

I don't know. So, Peter, you could comment on that.

[Peter Moglia]

Yes, Rich. I mean, I'm very confident in saying that if I made a few calls and said, hey, anything you like, want to make an offer? And the other party thought we'd sell anything that they wanted. There'd be a lot of them. So, we have been the ones that have selected what to sell. And obviously, we've done quite well. The typical profile is something that we have already really maxed the value out on at least in the near to medium to long term. So, it's a good time to monetize. But, it's fair to say that our whole portfolio is very attractive to many investors today given the shine on the life science industry.

[Rich Anderson, SMBC]

Okay, great. And then on the development side, Peter, you mentioned you're underwriting cost inflation despite the comments on lumber. Can you say what type of inflation you're assuming when you underwrite a development? And on the other -- on the numerator side, what your assumption is for market rent growth? And, are you taking a discount to what you're seeing? I'm just curious if you could get a little bit more in the weeds of how you're underwriting a deal that so it pencils and it makes sense to go forward with it?

[Peter Moglia]

Yes. I'm not getting -- not to give away too much secret sauce, but I -- last quarter I mentioned when I addressed the cost that we look at escalations in the 5% to 6% range right now. And that may not seem like a lot, but labor is fairly stable. So, these large commodity increases and with materials being about 30% of the project, you can get to a weighted average of about 5% to 6%. Now, that's -- that could be double what a normal year of escalations could be. In certain times, things obviously fluctuate. But we, along with our real estate development team, the underwriting team, communicate constantly about these things. So, we make sure we get them right. And the proof is in the pudding. The yields that we publish, we hit like pretty much 100%.

So, other than that, we don't underwrite spikes in rents. I've talked about that before. We have a very good idea of what long-term growth looks like. We're probably more conservative than what actuals end up being, but that's great. Surprise the upside is always good. But yes, we're very comfortable with our current pipeline and the way we've underwritten it. And I think -- and I've been here for 23 years, been an underwriter for all that time and feel very comfortable with our process and that we'll continue to meet the numbers that we're publishing.

[Operator]

Our next question will come from Michael Carroll with RBC Capital Markets. Please go ahead.

[Michael Carroll, RBC Capital Markets]

Yes. Thanks. Joel, in your comments you discussed the need for the U.S. to be the leader in next-gen drug manufacturing. I'm not sure if I heard you correctly or not, but did you say the U.S. only produces 11% to 13% today. I'm not sure if you're referring to semiconductor production or next-gen manufacturing?

[Joel Marcus, Executive Chairman and Founder]

Yes, that was semiconductors.

[Michael Carroll, RBC Capital Markets]

Okay. Where is the next-gen manufacturing being done right now? I think, given the advancement we're seeing in technology, is it safe to assume that's going to be a bigger life science demand driver in general and for your industry?

[Joel Marcus, Executive Chairman and Founder]

Yes. The answer is yes. One, it's still, in the early days; number two, because it's more integrated with the research and development side, they will tend to be either at the same location or nearby as opposed to a random manufacturing, if this was just normal synthetic chemistry pills and so forth. You could put it anywhere. You could put it in overseas or in any state. But, I think you'll see these will be much more integrated with the R&D function. And so, my guess is, the clusters as they are today, will be mostly benefited as opposed to other regions.

[Michael Carroll, RBC Capital Markets]

Okay. And when you're looking at this, I guess, this demand driver, I guess, how close do they need to be to, I guess, the headquarters? I mean, are they going to be in Cambridge, or is it going to be in like suburban Boston, or how close does the manufacturing need to be to get that synergy with the mines within the headquarters?

[Joel Marcus, Executive Chairman and Founder]

Yes. Well, I think, it depends on the stage of scale-up. But, in the early clinical, preclinical and clinical, you could see that being a part of the R&D effort. But then, when it goes to full scale, you could see that being in adjacent locations. I mean, Moderna's example is a great example. They did a lot of work inside Tech Square, but then they rebuilt their plant in Norwood, et cetera. So I think that's not -- although that's a vaccine, but that's somewhat emblematic of what you could see happen.

[Michael Carroll, RBC Capital Markets]

Okay. And then, I just want to -- I think, I heard you correctly, but this is going to be a driver for every cluster. I mean, is there some clusters that could benefit more than others?

[Joel Marcus, Executive Chairman and Founder]

Well, I think, the clusters that would benefit more are the really established clusters, obviously, the Boston market, San Francisco, Seattle, San Diego, Maryland, RTP, I mean, the ones that we're focused in. I think, secondary markets probably wouldn't do as well because you also need skilled workforce and you just don't find them. You're not going to find them in Charleston, South Carolina, per structure. Although that's a great place to be.

[Operator]

Our next question will come from Tom Catherwood with BTIG. Please go ahead.

[Tom Catherwood, BTIG]

Peter, maybe turning to the dispositions. Obviously, partial interest sales have been an important part of your capital sources over the past few years. When you're evaluating assets for disposition, past few years. When you're evaluating assets for disposition, how do you decide between an outright sale and a partial interest sale? And are you able to maintain enough control over the joint venture to make decisions kind of holistically across your cluster instead of prioritizing certain assets kind of to the detriment of others?

[Joel Marcus, Executive Chairman and Founder]

Yes. So maybe, Peter, let Dean take it first and then maybe you can kind of add the color around that.

[Peter Moglia]

Sure.

[Dean Shigenaga, President and CFO]

Yes. So Tom, one part of your question really touches on the complexity of managing good governance around your joint venture relationships. And I think that's what our team has tried to do is to be very respectful of these important relationships that are being established in markets and sometimes across markets. We want to be long-term partners and be mindful as much as we've got joint venture assets and wholly owned assets in a particular market. And so, that's important. From a technical control perspective, I think we're working with partners that understand that we have the expertise to make these successful and we've asked for reasonable leeway in the relationship to be able to execute in that fashion. And so, that's been important, I think, as an attribute from a partner perspective for us. So hopefully, that helps a little bit there, Tom.

[Tom Catherwood, BTIG]

Yes. That's really helpful. Thank you. Thank you, Dean. And then, maybe just focusing on a specific market, down in North Carolina. So back in August of 2020, you acquired the Alexandria Center for Life Science in Durham. And expectations at the time or that tenants would both expand within the research triangle ones that were there already, and then some would relocate to RTP from other areas to kind of looking for more talent. In the second quarter, occupancy in that Durham campus picked up I think almost 400 basis points alone. And then, you added another 885,000 square feet of development rights kind of in and around that campus. So, as you're now almost a year out from that large acquisition, how has the market performed there compared to underwriting? And then, what are your expectations for that going forward?

[Joel Marcus, Executive Chairman and Founder]

Yes. It's been pretty spectacular. Peter, do you want to maybe give color on that?

[Peter Moglia]

Yes. I can tell you that we're certainly above our rental assumptions, probably close to 10%. And then, we have definitely absorbed the vacancy faster than we had underwritten it. Yes, I give Joel a lot of credit. He definitely saw this trend coming towards RT when we made this deal and we've knocked it out of the park. It's really been great.

[Tom Catherwood, BTIG]

And is the idea with the expansion adding the additional almost 100,000 square feet. Is that...

[Peter Moglia]

Demand. There's great demand there, and that campus itself has built-in amenities. It has existing space that some tenants have gone into. And we know that those tenants will need to expand.

[Joel Marcus, Executive Chairman and Founder]

Yes. Tom, I think, what has distinguished Research Triangle for many years, it was kind of a 50-year-old backwater place that few companies went to and had a -- was a nice place to be. And then over the last number of years, it's emerged as a really powerhouse cluster. I mean, Apple is just now taking a gigantic stake down there. And I think what people see is, what they're looking at other places in the United States, people see a great quality of life, a modest cost environment, beautiful place anchored by three world class institutions and a really, really great workforce. So, we're seeing the incoming -- I mean, we kicked off the Beam next-gen manufacturing project. That's a company that's in Cambridge, but they came to us for their next-gen manufacturing gene therapy aimed at cancers and sickle cell, et cetera. And that was the best place because of the workforce. So, I think that, to me, has been the hallmark of that market. Great place to be, live, work, play, and really talented people, which you just can't find everywhere.

[Tom Catherwood, BTIG]

No. That’s really helpful. And it does sound like very different than what it was historically. So, that’s it from me. Thanks everyone.

[Joel Marcus, Executive Chairman and Founder]

Yes. Thanks.

[Operator]

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

[Joel Marcus, Executive Chairman and Founder]

Just to say thank you, everybody. And we look forward to talking to you on the third quarter earnings call. Take care. Be safe. God bless.

[Operator]

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