Alexandria Real Estate Equities Inc

NYSE:ARE

Earnings Call Transcript 2022-Q3

[Operator]

Good day, and welcome to the Alexandria Real Estate Equities Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I’d 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 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.

I’d now 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 the Alexandria’s third quarter earnings call. With me today are Peter Moglia, Dean Shigenaga and Hallie Kuhn. First of all, thank you to our Alexandria family team for their continued exceptionalism in the phase of a challenging macro environment, mostly self-inflicted by a really deleterious set of government actions and policies, coupled with the Fed, which has been slow to act. I think I would characterize third quarter is really an exceptional quarter and when you look at earnings in this challenging macro environment delivering 9.2% and 8.3% FFO per share growth for the third quarter and then 2022 year-to-date is really exceptional especially again given the size and scope of the company with almost 75 million square feet in its total asset base.

I’d say the health and resilience of the broad and diverse life science sector, the niche, which we pioneered, remains strong and there is a continuing strong R&D investment, Hallie will speak to this. But in general, we’ve seen life science R&D funding in 2021 approaching almost $500 billion. I think the number is actually about $480 billion, which is astounding and $1.8 trillion since 2017, and we expect totals in 2022 to be very strong continuation of that. I think it’s also important to recognize that the strong life science sector employment trends remain positive, and the core strength of the life science industry and our key cluster markets remains resilient and continuing strong.

And I think the overwriting macro observation would be the long-term healthcare needs of this country certainly aren’t going away. Innovation in medicine is really a national imperative and just look at the mental health problem across this country as one simple example. And as I’ve said many times before, there are about 10,000 known diseases to human kind and really that we’ve only addressed as a society about 10% with addressable therapies and very few real cures. Biotech, I think, remains resilient. Clinical data, regulatory updates and M&A can be idiosyncratic events that really are unaffected by economic trends, and Hallie will talk about that. I think demand continues very solidly for our high-quality and well-located assets, which are really powered by asset level operational excellence, second to none.

Alexandria has the greatest knowledge, and I think this is a pretty unique experience and expertise by orders of magnitude with respect to life science real estate niche, which we created and informed by our over 1,000 client tenants were 87%, an important number to remember, of our leasing comes from. We have a level of knowledge and understanding of the true life science real estate demand that just isn’t out there if you hang a for lease sign and hire a broker. Alexandria continues to experience strong leasing spreads and rental rate increases. And I think we’re very proud that we’ve got 99.9% collections this quarter, truly stellar. Our industry-leading roster of the 1,000 tenants create drives and create stable long-term duration cash flows, and our high-quality and diverse industry mix is really unmatched.

And I think one of the great stories of the day, I’ll talk about in a moment, will be the balance sheet. But among industry-leading fundamental metrics for the third quarter, which are notable and Dean will talk about some of the details there, are a 10.6% same-store NOI growth increasing over the last few years and the significant strategic value creation harvesting of over $2 billion, which Peter will detail. And I think something we’re very proud of having lived through the 2008, 2009, really financial crisis. And with this team steering the ship as an unrated REIT in those days, today we have matured and really have a fabulous fortress balance sheet. We’ve worked very hard to put together over many years. I think it’s important to note Alexandria out of 127 REITs as of June 30th has the second best debt maturity profile of all of them, and that’s pretty amazing. Dean will highlight our liquidity of over $6 billion. And I think we were both, I think, strategically informed and I think executionally aware when we timely executed both equity and debt transactions in both January and February of 2022 earlier this year before the Ukraine invasion.

And again, almost coming to the end of my comments, the strong and flexible balance sheet in addition to, I think, fabulous liquidity, our remaining debt term is over 13 years. Our average weighted average interest rate is about 3.5% and we’ve got almost 96% of our debt, which is fixed rate and again no debt maturities into 2025. And I think as many of you know and we’re working on, we are crafting a well-thought-through set of alternative plans for 2023, which we’ll unveil at Investor Day. And as you look out at the world today and you just look at what happened at the PRC meeting this past week, where the President actually had his former person who turned over the reins of power to him kind of ushered out a little bit in front of the entire party Congress there. It creates the impression that we might not only have a ground war in Europe, but we might have a friction over Taiwan in a kinetic sense. And so that’s something to think about. And so we’re planning hard about all eventual outcomes that could be very significant black swan events to the United States of America.

So with that, let me turn it over to Hallie.

[Hallie Kuhn, Vice President, Science & Technology]

Thanks, Joel, and good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. As Joel mentioned, today, I’m going to provide an update on the life science fundamentals driving the long-term growth of the industry, tenant health and how Alexandria proactively work with the vanguard of this highly dynamic industry and a challenging macro environment to continue to grow our one-of-a-kind and truly world-class company. First and foremost, while we are in a cyclical downturn, innovative medicines take on average over 10 years to develop, meaning that the life science industry is not cyclical, but is largely event and product driven. And the life science industry is still in its early innings and poised for growth.

As the recent expansion of complex modalities such as cell, gene and RNA-based therapies reflect, the pursuit for new and better medicines is truly the growth industry of this century, and there still remains immense challenges to solve. Every day in the U.S., an approximate 1,670 people will pass away from cancer, every four minutes today an individual will die from a stroke and every 37 seconds someone will pass away from heart disease. Not to mention, the 90% of known diseases that have no available treatment. While the macro market conditions are not to be taken lightly, the life science industry is on a steep, long-term growth trajectory.

So where do the fundamentals stand to drive and sustain this long-term growth? I’ll start by walking through the multiple sources of life science funding. Notably, through the third quarter of 2022, venture capital funds have raised an all-time high of $149 billion, eclipsing 2021’s historic year with $144 billion raised. Given the average funds investment period is four to five years, the significant amount of dry powder will continue to translate into well-funded private biotech companies for years to come. Companies with the most innovative technologies and experienced founders and management teams continue to successfully raise capital, and we continue to see healthy demand across this segment.

Moving on to the equity markets, while the IPO window largely remains closed, the market is responding positively to meaningful data readouts. As an example, two tenants in our San Francisco Bay Area region recently announced positive Phase 1 and Phase 1/2 clinical data, sending shares up 60% and 70% respectively.

And just as a reminder, within the public biotech tenant category, the majority of our ARR comes from tenants with marketed products, including many large cap tenants with strong balance sheets such as Vertex and Moderna.

Next, large pharma continues to outperform the broader markets with significant cash on hand to put towards internal growth and external M&A and partnerships, which is critical for biopharma as it looks to backfill their pipeline with innovative, new products.

Biopharma R&D spend totaled $262 billion in 2021 with the top 20 biopharma putting on average over 20% of revenues back into R&D. Notably, at the end of the third quarter 17 out of the top 20 biopharma where Alexandria Tenants. A stat as of today has increased to 18 of the top 20 biopharma.

While M&A has largely focused on bolt-on acquisitions, partnerships continue to be an important source of non-dilutive funding for private and small-to-mid bio cap companies.

With respect to government funding, the NIH budget continues to increase year-over-year with broad by bipartisan support. The proposed 2023 budget is $49 billion, a 9% increase over 2022. This space total does not include an additional $12.1 billion proposed for pandemic preparedness and an additional $1.3 billion for program evaluation, which would bring the total NIH budget for 2023 to $62.5 billion.

With respect to notable clinical and regulatory developments, this quarter saw critical late-stage clinical readouts and an accelerated approval for indications in schizophrenia, Alzheimer’s and ALS, all of which are devastating diseases with limited treatment options. Tenant BioNTech also published promising early clinical data, demonstrating their novel mRNA therapies can train the body’s immune system to identify and kill cancer cells. A testament to the opportunity of mRNA technology beyond COVID vaccines.

On the regulatory front, the FDA continues to approve new therapies at a sustained pace, including 28 new drug approvals from the FDA’s drug division, CDER, this year. The FDA’s Biologic Division, CBER, approved two gene therapies just this quarter, increasing the total U.S. gene therapy approvals from two to four, and there are an astounding 500 cell and gene therapies in clinical development. The fundamentals remain strong amidst the backdrop of a volatile and uncertain economic conditions.

Switching to tenant health, as our 99.9%, 3Q collections and historic tenure occupancy of 96% at test, our asset base is in a great position. As you can see on Page 17 of our sup., our life science tenant roster is diverse spanning multinational pharma, life science product service and devices, public and private biotech and institutions, and benchmarking ARE to just one of these segments does not capture the strength and depth of our asset base.

Critically, maintaining the health of our over a 1,000 industry-leading tenant roster is not a static process, but a highly proactive effort that incorporates our deep understanding of the life science fundamentals, intimate knowledge of our tenants’ work, preexisting relationships, and a dedicated and passionate team focused on best-in-class operational excellence.

Our job is to engineer outcomes. This work comes in many shapes and sizes, whether it’s creatively utilizing our over 40 million square feet operating asset base to provide critical space to accompany ahead of a future delivery or swapping a good but perhaps stagnant tenant with a fast growing tenant and taking advantage of the nearly 30% mark-to-market rental increases across our asset base, all with the goal of continued optimization of leases to innovative high credit tenants.

I’ll leave you with a quote from David Ricks, CEO of Eli Lilly, who we had the pleasure of hosting, for not one, but indeed two ribbon cuttings celebrating new Eli Lilly spaces at Alexandria properties just last week. In regards to the life science industry, he said, the games for winners are bigger than ever. Being nimble, fast and attuned to the outside world and having the right people, all these basics matter more than ever. Indeed, this is a sentiment that applies broadly beyond the life science industry and is one we hold deeply at Alexandria.

With that, I will pass it off to Peter.

[Peter Moglia]

Thank you, Hallie. I would like to start by thanking all the teams of the company for your never-ending dedication, high quality work product, and collaborative spirit that made Steve’s transition to retirement seamless as we all expected it would be. Steve continues to be actively involved in certain projects and we consider him an invaluable resource to the executive management team.

Since Steve is no longer on the calls, I’ll cover leasing as well as updating you on other key topics of the day, such as the development pipeline, construction costs, and the harvesting of our value creation.

As we sit here today, Alexandria has an equity market cap and credit rating in the top 10% among all publicly traded U.S. equity REITs. A North American asset base of 74.5 million square feet, 431 properties in operation, development, or redevelopment, and over a 1,000 innovative tenants to inform our investment and operating strategies. We should note that it has taken over 28 years to reach these milestones. One cannot create such a dominant position in an industry overnight, and it takes far more than great real estate to do it. Our vast network, operational excellence and technical know-how are just a few of the many reasons we are one of a kind company in a class by ourselves.

The life science industry has grown significantly in recent years with the success of new modalities such as mRNA and cell therapy, and we have grown along with it by capturing the majority of investment opportunities that have come about from those inventions and others. With the onset of market volatility, we are seeing a normalization of demand, and although in the near term we don’t anticipate seeing the same level of activity we saw in our record breaking year of 2021, we continue to see healthy demand manifesting into solid leasing numbers.

With respect to the leasing of our value creation pipeline, which is expected to add approximately $645 million in incremental annual rental revenue from 4Q 2022 through the third quarter of 2025, we leased approximately 330,000 square feet in the third quarter. Although that total is approximately one third of the record-breaking 2021 quarterly average, it is 18% higher than the previous five-year average, indicating we have returned to a normal run rate of leasing. With that leasing, our 7.6 million square feet of projects under construction and pre-leased near-term projects reached 78% leased, up 4% over last quarter.

During the quarter, we delivered approximately 330,000 square feet at a weighted average yield of 7.1%, which will add approximately $30 million in annualized NOI to our P&L.

Transitioning to overall leasing. The third quarter results continue to demonstrate Alexandria’s ability to outperform even in turbulent times due to our significant differentiation among all who seek to participate in life science real estate, which can be summarized with four unassailable attributes. Irreplaceable AAA locations adjacent or in close proximity to the country’s best life science research institutions; operational excellence in the running of our tenants’ mission-critical facilities; mega campuses providing highly valued optionality, scalability and amenities; and a curated roster of over 1,000 tenants, including the most impactful and creditworthy research companies and entities in the world, providing unmatched industry insight.

Despite current macroeconomic conditions, demand for Alexandria’s best-in-class facilities continues to be at pre-2021 normal run rate. Examples of this include, in the third quarter, leasing volume was 1,662,069 rentable square feet which is above our 10-year quarterly average of 1.3 million square feet and well above our pre-2021 five-year average of 1.1 million square feet.

Year-to-date leasing volume of 6.4 million square feet is above our five-year average of 6 million square feet, and we still have the fourth quarter to add to these totals. In the third quarter, cash and GAAP increases continued to be very healthy, with 22.6% cash increase and a 27.1% GAAP increase. Our operating asset mark-to-mark continues to be healthy at approximately 30%.

In our quarterly examination of construction costs, the theme that jumps out at us is that overall cost and supply chain issues are starting to ease, but contractors don’t trust what may happen tomorrow. The disruption brought about by COVID in 2020 was exacerbated by the stimulus implemented to mitigate it, and as we all know, has led to inflation not seen since Jimmy Carter’s presidency. This inflation caused serious losses to the construction industry as contractors were legally bound to deliver projects within lump sum or gross maximum budgets that had become grossly underfunded with every passing month as the economy opened and pent-up demand for construction materials and labor through the system violently out of equilibrium.

These losses have caused contractors to keep pricing high despite anticipated reductions in cost. Therefore, we need to remain cautious about projecting any easing of conditions until the construction market can be confident, another sue is not going to drop and that time has not come yet. It’s easy to understand this mindset because evidence of an easing is only anecdotal at this point. Steel, copper, lumber and labor costs had shown signs of leveling off, but escalations from the third quarter of 2021 to the third quarter of 2022 totaled 12.3%, well above normal. And lumber just spiked again two weeks ago.

That said, supply has started to catch up with demand. Inventories and materials are still low, but improving. Freight transportation is trending down contractor backlogs, though strong through 2023, are finding openings due to canceled projects and fewer new projects are starting. This opening up of capacity has slowly returned the ability for general contractors to get three bids from some subs.

Grassroots to normalization, you could call it. But there are storm clouds on the horizon in the form of billions of dollars of work anticipated to build mega chip factories and the $1.2 trillion infrastructure investment and Jobs Act signed into law last November, which could roll back any easing of construction chain conditions.

Overall, we do expect construction costs to begin reverting to the mean due to the easing of contractor backlogs and relatively better availability of materials, but Alexandria will continue to conservatively underwrite construction cost escalations in our pro formas. We have a deep and experienced team that works in lockstep with our underwriters to ensure we are accounting for the latest trends in our current and future projects. Interest rates continue to wreak havoc on investment markets, and we feel fortunate that our scarce product type continues to be in demand during such a turbulent time.

Evidence of this can be seen on Page 5 of the supplemental, where we present the results of certain asset dispositions, which have raised $2.2 billion in capital to-date, including $1.26 billion in the third quarter. Included in those dispositions was the completion of the previously announced partial interest land sale at 1450 Owens and Mission Bay to a development JV partner for a land value of $324 per buildable foot.

The sale of a portfolio of assets spanning the submarkets of South San Francisco and Greater Stanford for a 5.2% cash cap rate. A one-off asset along the I-15 corridor for a 5.3% cap rate, two assets on Carol Road and Sereno Mesa for a 4.6% cap rate, a partial interest sale of a campus in Sereno Mesa for a 4.6% cap rate and the partial interest sale of a high-quality asset in Merryfield Row and Torrey Pines for a 4.1% cap rate. The low five cap rates achieved in the San Francisco portfolio and the I-15 sale in San Diego are indicative of the age of the assets. Still attractive workhorse assets, they do not reflect the higher end profile of our core. The strong sub-five cap rates for the partial interest sale of the Summers Ridge campus and the Carol Road assets are more representative of our asset base.

The Merryfield Row asset is purpose-built lab by Alexandria and like many of our other purpose-built assets is one of the best located and most attractive asset and its submarket. In this case, Torrey Pines. The 4.1% cap rate was influenced by the growth in rents in Torrey Pines since the lease was signed, but the lease is almost 12-years of term remaining before that upside can be realized. So it’s quality and location really drove the value.

I’d also like to note that the scarcity value we talk about being a driver for keeping our cap rates lower relative to other product types can be seen in transactions by others. Just last month, Biogen completed a sale leaseback in Cambridge for $2,185 price per square foot value and the Carlyle Group sold a 77,000 square foot Blackstone Science Square building in Mid-Cambridge for a 4.1% cap rate at a price just short of $2,000 per square foot. As the Fed continues to pull levers to battle inflation, we expect we will see cap rates move up, but much less on a relative to other product types and thus, we remain well positioned to fund our value creation pipeline efficiently and at a relatively attractive pricing by harvesting our value creation among other sources.

With that, I’ll pass the call over to Dean.

[Dean Shigenaga, President & Chief Financial Officer]

Thanks, Peter. Dean here. Good afternoon, everyone. Our team delivered on truly remarkable results for both the three and nine months ended September 30. Total revenues were up 20.5% and 24.8% for the three and nine months of 2022 in comparison to 2021. FFO per share diluted as adjusted for the three and nine months was $2.13 and $6.28, up 9.2%, 8.3% over 2021 and importantly, beat consensus. The strong financial and operating results reflect the strength of our brand, our scale, high quality and well-located properties and operational excellence, serving the mission-critical needs of some of the most innovative entities in the world. Congratulations to our entire team for truly outstanding executions over many quarters. This really stands out within the REIT industry, especially during this very challenging macro environment.

Our strong balance sheet and liquidity management highlights truly awesome execution by our team over many years. Our team is very pleased to have earned our corporate credit ratings that rank in the top 10% of the REIT industry. We are also very pleased to have further improved the strength of our balance sheet in the third quarter with a significant increase in liquidity.

We completed an amendment to our line of credit, increasing aggregate commitments to $4 billion, up $1 billion over the prior credit facility. A huge thank you to our important lending relationships for providing significant liquidity for our company. Our total liquidity as of September 30 is now very significant at $6.4 billion.

We are one of the very few REITs with no debt maturities until 2025. 96% of our outstanding debt represents long-term fixed rate debt and the percentage of fixed rate debt is expected to be even higher by the end of the year. Net debt to adjusted EBITDA is on track to hit our 5.1 times target by year-end.

Our total outstanding debt has a weighted average rate of 3.52% and a weighted average maturity of 13.2 years. The execution of our capital plan this year was exceptional given the macro environment. We did $1.8 billion of 12 and 30-year bonds with a weighted average rate of 3.28% in a term of 22 years, which was completed in February.

Most of our common equity for 2022 was completed in the first quarter and entirely completed by June 30. And then we turn to continued execution of our strategic value harvesting through outright sales and partial interest sales of real estate. Through September 30, we’ve completed $2.2 billion in sales, including $1 billion in the third quarter with gains or consideration in excess of book value of $1.2 billion, which is really significant value creation.

Now, our focus on real estate dispositions for 2022 leaves us with an advantage at year-end with about $250 million of cash that will reduce our debt needs for 2023. As we look forward, we will remain disciplined and careful with our allocation of capital. Briefly on dividends, our Board has been consistent over the past decade with growth in common stock dividends year-to-year, supported by strong growth in cash flows and our low FFO payout ratio, which is generally in the range of 55% to 60%.

Cash flows from operating activities after dividends are projected at the mid-point to be about $300 million for 2022, and to put this into perspective, over an approximate three-year period, this represents approximately $1 billion for reinvestment.

Now ARE pioneered our favorable lease structure with contractual annual escalations approximately 3%, triple net leases that provide for the recovery of operating expenses and the recovery of major capital expenditures.

Now, our team also curated a tenant roster of high-quality tenants, including 49% of our annual rental revenue from investment-grade and large-cap publicly traded entities. Occupancy is up 30 basis points since the beginning of the year and is expected to continue to increase by year-end, highlighting the strength of our brand and trusted partnership with our tenants.

EBITDA margins 69% really reflects the operational excellence and operating efficiency of our business, and this also represents an industry-leading statistic. Leasing was very solid in the third quarter at 1.7 million rentable square feet with rental rate growth on lease renewals and re-leasing a space of 27.1% and 22.6% on a cash basis.

TIs and leasing commissions on lease renewals and re-leasing the space for the nine months were down about 20% in comparison to the full year of 2021. And the third quarter included two long-term lease extensions of roughly 10 years with a 47% increase in net effective rent. Now, excluding these two long-term lease extensions with somewhat elevated TIs and leasing commissions in the third quarter, TIs and leasing commissions would have been relatively minor at approximately $25 per square foot.

Same-property NOI growth has been very strong for the nine months ended September 30 at 7% and 8.9% on a cash basis. And to put this into perspective, our 10-year average same-property NOI growth was 3.6% and 6.6% on a cash basis. The outperformance in 2022 relative to this 10-year average was driven primarily by 110 basis point year-to-date growth in occupancy with about a 2 times benefit to net operating income. And then really outsized benefit from significant early lease renewals that commenced very early in 2022, providing for a full year benefit this year.

Now, we continue to make excellent progress on leasing. Contractual lease expirations for 2023 represents only 6.6% of annual rental revenue down from 9% as of the second quarter. Now importantly, 2023 contractual lease expirations representing only 70% or 4.6% of our annual rental revenue remains in the category of too early to tell, meaning not already leased, not under negotiation or not targeted for redevelopment.

Turning to venture investments. These investments have generated consistent gains averaging about $25.4 million, which is included in FFO as adjusted over the last eight quarters. This is very solid and very consistent. Now, it’s important to highlight that on average over the last six years, only – about only 30% of the realized gains included in FFO were generated from our investments in publicly traded securities, 70% were generated from investments in privately held entities. Gross unrealized gains as of September 30 were $529 million, including $102 million and $427 million from publicly traded and privately held entities respectively.

Lastly on guidance, we updated our guidance for 2022 and narrowed the range for EPS and FFO per share from a range of $0.06 or range of $0.02 per share. Our 2022 guidance for EPS diluted is a range of $5.70 to $5.72 and FFO per share as adjusted diluted is a range from $8.40 to $8.42 with no change in the mid-point of $8.41. As a reminder, we are about four weeks away from the issuance of our detailed guidance for 2023. And therefore, we are unable to comment on details for 2023.

With that, let me turn it back to Joel.

[Joel Marcus, Executive Chairman and Founder]

Thanks, Dean. And if we could go to questions, please?

[Operator]

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Michael Griffin from Citigroup. Please go ahead.

[Michael Griffin, Citigroup]

Peter, it seemed like you talked pretty favorably about the properties, the attractive cap rate, particularly at the [indiscernible] asset in San Diego. I’m curious if these properties are so attractive, why did it make sense to dispose of these?

[Peter Moglia]

Just we have a number of properties on the docket to do the same thing, too. We’re recycling capital, putting it back into great projects we have in our value creation pipeline. So it was efficient capital to harvest and reinvest.

[Joel Marcus, Executive Chairman and Founder]

Well, and I think one of the other things is we have some fabulously large opportunities up on the Mesa and Torrey Pines, two very large-scale development sites that we’re working on. And so we have no shortage of Class A opportunities in the best submarket in San Diego.

[Nick Joseph, Citigroup]

This is Nick Joseph here with Michael. You touched on the macro concerns and Black Swan events and disruption in the construction market. So when you blend that all together, how do you think about the impact on development plans at least in the near-term?

[Peter Moglia]

Joel, are you taking that?

[Joel Marcus, Executive Chairman and Founder]

Could you repeat the question?

[Nick Joseph, Citigroup]

Yes. It’s on development starts. And I think in your prepared remarks, you kind of laid out some of the macro concerns, you talked about China, you talked about potential for Black Swan events. And then later, you talked about disruption in the construction market and maybe not seeing pricing come back yet. And so I’m wondering how that plays into your expectations on near-term development starts.

[Joel Marcus, Executive Chairman and Founder]

Yes. I think we’ll – if you’ll hold your question to Investor Day, I think we’ll be able to give you a very good view of that. And I think we have an interesting set of alternative plans given what may unfold in 2023, given how we think about Plan A, Plan B and Plan C that might unfold out in the general economy. But I think it’s fair to say and Dean can comment where we have very strong leasing opportunities, we’ll clearly look for ways to accelerate those opportunities and fund them carefully with the best sources of capital. But Dean, I don’t know if you want to comment any further. I think we wait until Investor Day to give you a eyeballs view of that.

[Dean Shigenaga, President & Chief Financial Officer]

Yes, I think what I would just add to Joel’s comments is that we sit in a pretty unique position. We have the benefit of some of the best located land parcels for life science use in these core cluster markets and really positioned from the standpoint of optionality is the best way of thinking about it. Meaning, we have the tenant roster that, as Joel mentioned, 87% of our leasing activity comes from. We have the land sites. So we really have the option to meet the demand. So we have that flexibility. And so I think that’s the best way of thinking about our pipeline. It gives us options. We don’t have to address it, but it gives us plenty of options.

[Nick Joseph, Citigroup]

Maybe just a follow up on that, just with the impairment charge in the quarter. Can you walk through that project and kind of the decision to walk away from it?

[Dean Shigenaga, President & Chief Financial Officer]

Sure. It’s Dean here. So as you know, the disclosures we had about a little bit more than $38 million in impairment charges. It was primarily related to 1 project that which we no longer chose to proceed forward with. It was a development project, about 600,000 rentable square feet. The parcel was located in California. We did not own the land. We had pretty significant cost incurred, but it was really our investment to date, which was significantly related to the entitlement work for the site.

And the reason for not moving forward with the project was very specific to the financial outlook for the project. There was no lease, re-lease negotiation related to the project to be clear. And beyond that, I guess, we’re not in a position to comment much further on the project. But as you’ve heard from us on this call and over the last several quarters, it’s really important to keep in perspective that we did lease about 2.7 million rentable square feet of development and redevelopment space just in the first three quarters of 2022. So it’s very specific to the project.

[Nick Joseph, Citigroup]

Thank you very much.

[Operator]

The next question comes from Anthony Paolone from JPMorgan. Please go ahead.

[Anthony Paolone, JPMorgan]

Thanks and hi everybody. Your 7 near-term development projects that you plan to start, are those yields locked up? Or is there any room for movement there if the environment changes here given what’s happened to rates or where do those stand?

[Joel Marcus, Executive Chairman and Founder]

Yes. So Dean, do you want to comment on that?

[Dean Shigenaga, President & Chief Financial Officer]

Yes. By and large, they’re getting close to being locked up in the sense of – as you go through a lease negotiation and execute a lease, both sides of the relationship landlord and tenant will work through a fairly detailed budget. Once the lease is executed, the tenant moves forward their side to refine their cost estimates as they get into really the details. So big picture, we have a sense of the yields. The exact yields will be refined as the tenant finalizes the extreme details of their build-out.

And then on the cost side, as you’ve heard from us for many quarters now, we do build in contingencies to protect us from construction cost escalations. And as we usually do, we’ll make disclosures of those yields as soon as we can. And generally, that time line is consistent with once the tenant finalizes the details of their project design. So it usually lags disclosures of lease-up. But I think the important thing to recognize is we had no changes in cost at completion for any of our projects on an unfavorable – from an unfavorable perspective nor on yields.

We did have one project that had an increase in cost at completion, but it corresponded with a pretty significant increase in revenue as well. So we’re generating for solid return on the incremental capital. So our team has done a tremendous job managing costs in a very unusual environment when you have to consider supply chain considerations and just continued escalations in construction costs.

[Anthony Paolone, JPMorgan]

Okay. I mean should we think about just expected development yields to go higher given just incrementally higher funding costs? Or I guess, to Peter’s point, maybe they don’t go up quite as much as rates. Just trying to think about where that could go as we start to think about the next round of starts.

[Dean Shigenaga, President & Chief Financial Officer]

I think it’s tough, Tony, to speculate about yields on a specific project because every project is very unique, the location, the nature of the build, the complexity of the build and specifically the back and forth negotiation with our relationship tenants. I would say, generally speaking, we’ll do the best we can to push yields in the right direction upwards by managing our construction costs carefully looking for opportunities to become more efficient, but that’s not a simple task as we all know, you can’t just cut cost. You have to do that very carefully. And hopefully, the rental rate environment continues to support upward movement in that direction, which would translate hopefully into ongoing upward direction in returns or yields. But Tony, just I don’t want to speculate specifically. Every deal is very unique, and we’ll take those decisions incrementally when they do come up.

[Joel Marcus, Executive Chairman and Founder]

Yes. I mean, Tony, the one thing to think about what Dean just discussed about yields, how that bears on our decision-making is useful to think about our decision not to go forward with that specific project. So that clearly is – weighs on our decision to go or not to go in every single case.

[Anthony Paolone, JPMorgan]

Got it. If I could just ask 1 just clarifying question on the accounting. The – your gains and losses that are realized on the investment book that go through FFO, is that based on the most recent mark against what you realized your original cost?

[Dean Shigenaga, President & Chief Financial Officer]

Generally, it’s the original cost, Tony, unless for some reason, over the years, we’ve taken a write-down, which is a realized loss, i.e., in impairment. But traditionally, it’s against the – more often than not, it’s against our original cost basis, Tony. And I would also just point out that the key drivers between or around realized gains in our venture portfolio is really driven by liquidity events. So they’re natural events. Occasionally on the public side, which is only about 30% of our gains historically over the last six years, I mean, we ultimately sell a handful of public securities and that’s what ultimately drives some of the gains on the public side. But it’s a small piece of the overall mix on average.

[Anthony Paolone, JPMorgan]

Okay. Thank you.

[Operator]

The next question comes from Steve Sakwa from Evercore ISI. Please go ahead.

[Steve Sakwa, Evercore ISI]

Yes. Thanks. Good afternoon. I was just wondering, Peter, if you could talk a little bit more about the demand trends that you’re seeing, maybe by the type of tenant, by broad industry and maybe by your key clusters. You are seeing better demand on the West Coast, up in Boston, New York. Any color on regional demand would be helpful.

[Joel Marcus, Executive Chairman and Founder]

Yes. So this is Joel. Hey Steve and welcome back. I think we’d like not to answer that question at a granular level. I think it’s pretty proprietary and as we said, 87% of our leases this quarter, for example, came from our tenant base. And I think it would not be useful for us to go into granular detail on that. But I can tell you and Peter can comment broadly demand is solid in all of our markets at the moment.

[Peter Moglia]

Yes. I’d agree with that and as it consistent with my comments, I would say it’s a normalized rate that corresponds to the last few years if you take out 2021, which was an outlier. But it’s broad. And it’s still, we’ve talking about it for a while how all of our clusters have been doing well that continues to be the case.

[Joel Marcus, Executive Chairman and Founder]

Yes, and I would add a gloss on that, Steve. Think about what both Hallie and I said this is not a – these are episodic – this is an episodic industry, so to speak, not really driven macroeconomically. And so demand often is generated by clinical data readouts, regulatory readouts and updates and sometimes M&A where somebody buys a company and then wants to expand. We’ve seen that. We’ve seen it on the other hand where they may buy a company and roll it up, but oftentimes companies are bought for their talent unless you’ve got a kind of just a product opportunity. So I think that’s how you have to think about it.

[Steve Sakwa, Evercore ISI]

Great. And then second question, maybe just on the dispose, Peter, I know you provided a fair amount of detail on the cap rates. I’m just curious, the depth of the buyer pool and maybe how it’s changed? And do you have a sense for kind of where unlevered IRR expectations are for buyers of the various products that you transacted on in the last quarter?

[Peter Moglia]

We’ve had a consistent buyer pool and all of our activities over the last few years. We generally try to keep it limited. We don’t want to disperse too much information to a broad audience. And those players have continued to show up for our deals and it has resulted in the cap rates. So, on an unlevered IRR basis, yes, I’m sure that it’s higher than it was. I know in the peak times people were underwriting to a 5 or less. I can’t tell you what they’re doing today, but obviously it’s gone up. But with our product type, the rental growth, you can pay a 4 something cap rate. And with the annual increases in our leases and with market rent growth, you can exceed 6%, 7% pretty easily on an unlevered basis these days.

[Steve Sakwa, Evercore ISI]

Great. Thanks. Appreciate it. That’s it for me.

[Joel Marcus, Executive Chairman and Founder]

Yes. Thanks, Steve.

[Operator]

The next question comes from Rich Anderson from SMBC. Please go ahead.

[Rich Anderson, SMBC]

Thanks. Good afternoon. One of the things that sort of emerged from periods of dislocation, like seen in the REITs in the past as well as in biotech is increased M&A activity and its aftermath. We certainly saw some of that in the REIT space post-pandemic. I’m wondering, if you have a similar expectation in biotech. I know there’s been some sort of fringe type of activity, but is there an opportunity to see more in the way of M&A as a sort of indicator of emerging health from that space? And if so, do you see it as a benefit to you in terms of future leasing and so on?

[Joel Marcus, Executive Chairman and Founder]

Yes, so maybe I’ll comment generally and ask Hallie to also comment. I think Rich I don’t think we’re going to see any blockbuster M&A deals big company to big company or even big company to moderate size companies that impact what is perceived to be some competitive situation in a therapeutic class. The FTC I think under this administration has been fairly hostile to almost every kind in every industry get together because they claim it’s always not competitive or it diminishes competition, somehow increased prices.

So I think that’s – I mean, we’ve seen this play out a little bit with Illumina and GRAIL, and GRAIL was spun out of Illumina, so none of that makes particular sense. But I think it’s fair to say we will see and I think Hallie mentioned this and continue to see, we just saw recently Lilly just bought a bolt-on acquisition of a hearing loss company. I think you’re going to continue to see a range of bolt-on acquisitions for product opportunities. And I think sometimes it’s going to be a positive, sometimes it may not be. But overall, historically, if we look back at our 25 years of public company, it’s been generally pretty positive for us. But Hallie, any other thoughts you have?

[Hallie Kuhn, Vice President, Science & Technology]

Yes, I agree with everything you mentioned, Joel. And maybe just to say that depending on the company and the outcome, it’s positive for the ecosystem whether or not there’s a real estate outcome. Thinking about some of the bolt-on acquisitions where it really is product driven, we see those executives go off to start new companies. We have deep existing relationships with them. They often go on to establish and grow their next large biotech. So in the long run, these events are positive for the ecosystem.

There are a number of examples where M&A over the years has led to really sizable footprints. BMS in San Diego is a great example of that over time with their acquisition of Signal about two decades ago, and then Celgene. And then as you saw in the first quarter this year, we announced their 420,000 square foot in development with us in San Diego. So over time, the acquisitions definitely can lead to additional space needs, but it’s very dependent on the type of acquisition. And again, the overall net positive for the ecosystem is really great as investors go to put their returns to work in terms of new companies and founders go off to start new endeavors as well.

[Rich Anderson, SMBC]

Okay, great. I’ll leave it with that. Thanks very much.

[Joel Marcus, Executive Chairman and Founder]

Thanks, Rich.

[Operator]

The next call comes from, excuse me, next question comes from Georgi Dinkov from Mizuho. Please go ahead.

[Georgi Dinkov, Mizuho]

Thank you for taking my questions. I guess, you mentioned that…

[Joel Marcus, Executive Chairman and Founder]

It’s hard to hear you. So could you maybe speak closer to the mic?

[Georgi Dinkov, Mizuho]

Yes. Can you hear me now?

[Joel Marcus, Executive Chairman and Founder]

Oh, perfect.

[Georgi Dinkov, Mizuho]

Okay. Sorry about that. Yes. So you just mentioned that supply is catching up with demand. So my question is, which markets have the most supplier risk? And how do you think about competition from office conversion?

[Joel Marcus, Executive Chairman and Founder]

Well, that’s a complicated question. I’m not sure we have the time or ability on this call to go in market-by-market, not sure we want to do it. But I mean, I think if you look at New York as a great example. We’ve pioneered the first commercial life science center and campus in New York City. There’s millions and millions, tens of millions, hundreds of millions of square feet, and there are a number of projects that are being worked on there. The demand has been fairly modest. It’s early stage. And it’s pretty clear that literally almost most buildings in New York can’t be converted from office to laboratory and probably wouldn’t want to be given the market. So, I think you have to look at that on a submarket-by-submarket basis. I don’t even think you could look at it as an overall market-by-market basis.

And we know from Boston, there have been a handful of conversions. We know, in particular, a recent case downtown, where somebody kind of jury-rigged an office building, brought in some smaller tenants, and we know the smaller tenants have experience both for the developer who’s never done it before and the tenant massive cost overruns on that conversion. So – but as I say, just look at, again, 87% of our leases come from our existing tenants, we feel very good about our ability to continue to generate steady demand in these markets. And we’ve been through the cycles. We are through the cycle in 2000, 2001, the big tech up bus bubble, if you will, and 2008 and 2009 with a big financial crisis. So, we’re fully prepared and I think our portfolio or asset base really is in great shape.

[Georgi Dinkov, Mizuho]

Okay. And given the rising recession concerns, how should we think about tenant credit risk or large cap, mid-cap or small cap biotech? And do you see any risk to occupancy in a downturn?

[Joel Marcus, Executive Chairman and Founder]

Yes. So, we’ve been very protected. I don’t know, Hallie, do you want to comment on that? Because you’ve had a number of conversations about the health of the – and the diversity of our tenant base and the credit quality.

[Hallie Kuhn, Vice President, Science & Technology]

Yes, absolutely. So, I direct you to look at Page 17 of our supplemental, which has a breakdown by ARR of our business types across the life science industry. And as we’d like to stress on other calls, small and mid-cap is a very small percentage of our overall tenant base. And what we’ve done as well in the past two quarters has broken down our public biotech segment by marketed products versus preclinical and clinical products. And as you can see, the majority are marketed. And these are, as mentioned on the call, there’s companies like Vertex, Moderna folks with incredibly large balance sheets and cash to deploy.

It’s important to know that our team and our diligence process is truly unique. We have a number of folks, including myself, with PhD backgrounds across the biotechnology space that significantly underwrite these companies, understand what their risk profile is, what their opportunity and growth profile are and then monitor them extensively as they progress. So all things put together, we have a really strong set of companies across all of our different business types, which collectively reflect the strength of our asset base.

[Peter Moglia]

Yes. And this is Peter. You should harken back to Hallie’s comments in the beginning, where she talked about the fact that it takes, on average, about 10 years to get something to the clinic. So demand for life science real estate is much more inelastic and can’t necessarily be varied due to current macroeconomic conditions. The companies need to continue to press on to get their revenue-producing project to market. We look – we did a look back to the great financial crisis a little while ago and noticed that the change in occupancy from the start to the end was negligible. I think it was maybe a 40 basis point swing at the trough. So our business is extremely resilient and it needs to be – or just because of the industry’s profile, it will continue to be, nothing’s changed from that aspect.

[Georgi Dinkov, Mizuho]

Great. Thank you. That’s all for me.

[Joel Marcus, Executive Chairman and Founder]

Yes. Thank you.

[Operator]

The next question comes from Dave Rogers from Baird. Please go ahead.

[Dave Rogers, Baird]

Hi good afternoon everybody. Dean, I wanted to start with you. I realize that you guys are going to wait maybe until Investor Day to talk about funding for projects you haven’t started yet. I was just wondering maybe if, Dean, you could give us a little sense of kind of your plan with cash flow, cash on hand and the recent sales to fund the stuff that you’ve already started that you still have to complete going forward.

[Dean Shigenaga, President & Chief Financial Officer]

Hey Dave, it’s Dean here. So, I guess as you acknowledge, we’re going to get into the details of our plan for 2023 in about four weeks at Investor Day. Maybe some high-level thoughts on the capital plan that you’re looking at on our active projects with a handful of projects that we’ve committed in the near term that are leased. So, we have about 7.6 million square feet. It’s 78% leased and this pipeline can generate $645 million of incremental net operating income, which is just spectacular. If you look at the most recent starts or the stuff that’s pending to start near term, just call it some projects could take up to three years to finish.

NOI will commence quarter-to-quarter, as you would expect, even starting next quarter on this pipeline. I highlighted earlier that if you look out over about a three-year period at our current run rate for cash flows from operating activities after dividends over three years, you’ve got $1 billion to reinvest. Equity capital – equity type capital for our pipeline includes this – we probably are sitting on about $6.8 billion of equity type capital and it’s this $1 billion of cash flows that I just mentioned, we had about 1.5 billion of outstanding forward equity contracts. And then obviously, our CIT [ph] related to just the $645 million of incremental NOI is all that stuff’s broad equity type capital.

Some of it’s incurred, some of it’s future cash flows. But if you look at that, some number approaching almost $7 billion that are typical leverage profile, assuming a five one year end target for net debt to adjusted EBITDA. This pipeline will generate probably 3.3 billion or something in that range of debt funding. That’s roughly one third debt, two-thirds equity on a leverage neutral basis. So as the EBITDA starts to come online, you can fund quite a bit from a debt perspective as well.

And so those are the numbers I would keep in mind broadly. We obviously continue to focus on real estate dispositions, given the strength of the private market values and the scarcity of our assets as Peter has been highlighting for a number of quarters. Obviously, over the next three years, each of the years or every year is very different. And therefore, the funding needs for each year will vary. Basically, there’s different timing from commencement of NOI and construction spend in each of the years, but it’s really important to point out that there is a path forward if we had to navigate a period without access to the capital markets. So call it, if the capital markets were shut for three years.

And I think from a risk management perspective or team analyzes this every quarter. And we do find comfort in the results, obviously, this is clearly not an operating scenario we would expect for three years. And I call it, one bookend scenario that you must evaluate from a risk management perspective. So I don’t want to get into specifics for 2023, but hopefully those broad strokes help you understand that. We’re reasonably well positioned in a – to address a, what could become even more challenging environment. We look forward to presenting the details of our outlook for 2023 at our Investor Day in late November.

[Dave Rogers, Baird]

We really appreciate that, Dean, that was helpful. And just one follow up from me, maybe to Joel or to Peter. Clearly, you’re getting the rent that you need on the development. So that’s continuing to grow and keep pace remotely with it sounds like inflation. What are you seeing on just market rent growth? You gave the mark-to-market earlier, but and obviously your spreads continue to kind of grab those – that mark-to-market. But I’m curious on what you’re seeing in market rents, maybe even a band. You don’t have to go market-by-market, but what you’re seeing kind of across the country?

[Joel Marcus, Executive Chairman and Founder]

Yes, so Peter, I don’t know if you want to comment. I think, we’re still seeing rent growth in almost not necessarily all of our markets, but in almost all of our markets. It certainly won’t keep pace with the hockey puck growth that you’ve seen over the last year or two, the kind of COVID years. But I think it remains, I mean, just look at the numbers we posted this quarter and last quarter was an indication of kind of where things are and how they look like they’re kind of settling out on a normal run rate. But Peter, I don’t know if you want to comment macro.

[Peter Moglia]

Yes, I mean, supply continues to be tight. So as new opportunities come about we are – we have continued to increase rents. We’ve – and what we typically, even in our new developments as we lease them up, that they do tick up a percent or two over time. So I guess macro wise, without trying to predict what the actual percentages are, they are still increasing at this point in time and we don’t see any evidence that that’s going to slow down.

[Joel Marcus, Executive Chairman and Founder]

Yes, and I think, again, you have to look at that question really almost has to be asked submarket-by-submarket, not market-by-market, Dave.

[Dave Rogers, Baird]

Well, I appreciate the color.

[Joel Marcus, Executive Chairman and Founder]

What goes on in Cambridge is going to be far different than what goes on in Somerville, for example.

[Dave Rogers, Baird]

No, that makes sense. We’ll look forward to getting into more details probably at the Investor Day. So Joel and Peter, thank you.

[Operator]

The next question comes from Tom Catherwood from BTIG. Please go ahead.

[Tom Catherwood, BTIG]

Thank you. Good afternoon, everyone. Peter, hey, looping back on the supply question. During prior quarters, you’ve mentioned that obviously you track all the planned or proposed development that’s out there in your markets and redevelopments obviously. But you’ve also commented that you didn’t think all of those were going to make it to market or get started. Given, the recent movement and rates and kind of lack of capital availability, have you seen any pull back in those starts? Or do you feel even more convinced that you’re not going to see all those come to market in the near to medium term?

[Peter Moglia]

Yes, and we have been receiving some anecdotes of projects that were on the radar that are not going to happen. Even a couple that started construction that paused, I mean, I talked about cost escalations in my prepared remarks, and they continue to wreak havoc and go into a lot of percentages because I didn’t want to talk for 20 minutes. But just year-over-year from Q2 2021, I’m sorry, Q3 2021 to Q3 2022, they were about 13.5%. So it has just become very expensive and I think that’s giving a lot of sobering up a lot of people that were ready to jump in and try to get involved. So we don’t expect there to be a huge supply problem in any of our markets.

From what we see under construction it looks to be a fairly normal rate in a normal environment at this point. And as long as that continues everyone’s being rational. We should continue to see good rent growth, not 2021 rent growth, but not the hockey stick that we experienced that Joel referenced. But good, and usually over time, we’ve exceeded inflation. And I’m not saying we’re going to do that now with the inflation numbers, but as soon as inflation normalizes, I would imagine that we would continue to exceed it.

[Joel Marcus, Executive Chairman and Founder]

Yes. But again, you have to take that supply issue submarket-by-submarket again, what supply might be in Cambridge versus what it might be in Somerville. It’s talking about like night and day out a handful of years. So you have to think about, you can’t generalize even do a market about supply, but it’s pretty clear in addition to I think the important points Peter raised about either capital pausing or operators pausing. I think it’s pretty clear cities are having and other jurisdictions, it’s just tougher to get things approved, they’re requiring more concessions. Residential is becoming a big – a big issue. We know in some jurisdictions if you don’t have a resi as part of your project you’re in a long line. If you have it, you may go to the head of the line. So a lot of dynamics now on a national basis that are I think changing and that will be a good check on supply.

[Tom Catherwood, BTIG]

Got it. Thanks Joel. Thanks Peter.

[Joel Marcus, Executive Chairman and Founder]

Yes.

[Tom Catherwood, BTIG]

And then last one, appreciate the detail and the stuff this quarter on 325 Binney, obviously a lot of color in there. Have there been any changes recently with tenants increasing their sustainability requirements for their facilities and it kind of, what is the cost differential of going LEED Platinum and LEED Zero Energy like 325 Binney versus a more traditional lab design?

[Dean Shigenaga, President & Chief Financial Officer]

It’s Dean here.

[Joel Marcus, Executive Chairman and Founder]

Yes. Go ahead.

[Dean Shigenaga, President & Chief Financial Officer]

Yes, maybe 325 is a good example and I think the, the way to think about this is you do have some advantages when you do sustainability initiatives from the start. It’s a lot more efficient. You can, I think that project incurred something around that 6% to 7% range of cost to really end up being able to describe it as becoming the most sustainable lab building in Cambridge. As you guys know, it’s probably the most important and unique feature is taking advantage of geothermal energy for heating and cooling of the building, which along with other attributes of the design, allows us to eliminate almost all the fossil fuel consumption for the building.

It’s an important attribute for Moderna, the CEO emailed their team as soon as the lease was signed, literally as soon it was assigned and said, let’s get moving and make this one of the coolest, most sustainable green buildings in Cambridge and so they were passionate about it. Most of our large pharma and big bio tenants have already publicly announced sustainability initiatives. So they do find it important. Like LEED was in the early days. LEED had a cost element to it that we all had to get our head around, and we did early on. We had the first core and shell LEED Certified Building and so we were a pioneer there and continuing to be a leader in sustainability here in lab buildings.

[Peter Moglia]

Yes. I also think you have to pay attention to the time we’re in. So I think tenants are given today’s inflationary spiral and kind of what’s going on broadly. I think tenants are maybe somewhat, it depends on the size, the nature and so forth. Bigger tenants are more attuned to this, but I think a little less attuned to sustainability today and more focused on the recruitment, retention and return of their workforce. And then also recognizing that if you just read any number of articles on China’s major ramp up of coal-fired plants and coal use and certainly in India too, it’s pretty clear by scientists almost no matter what we do here in the United States, until that part of the equation is solved for the Planet Earth these, these measures aren’t going to make a difference in global warming.

[Tom Catherwood, BTIG]

Got it. Thanks everyone.

[Peter Moglia]

Yes. Leap on that.

[Dean Shigenaga, President & Chief Financial Officer]

Thanks Tom.

[Operator]

The next question comes from Michael Carroll from RBC Capital Markets. Please go ahead.

[Michael Carroll, RBC Capital Markets]

Yes, thanks. Joel, can you provide an update on the New York cluster? I know there’s a proposed 1.6 billion life science hub that could be built over the next decade. I mean, it sounds like there’s a lot of buildings to build out the science infrastructure here? And should we think about these investments as a way to further build out this cluster and kind of the important step to make this more of a mature cluster over the next decade or so?

[Joel Marcus, Executive Chairman and Founder]

Yes. Well, I would refer you to and a good question to our September 12th press release where we talked about a range of issues in New York. New York is a very complicated market. It still remains a small company market. I’ll come back to that initiative in a moment. Probably 250,000 square foot of lease – actual leasing last year. So that’s a very small market. We started that market. There were literally only two commercial companies in New York doing research when we started, today the number approaches 75, 80 or more, but it’s a slow growth. It’s gestation period is 25 years or more. We’re 12 years into it. So the market is not going to be grown by any supply. It’s going to be grown by capital helping create companies. That’s the only way that market is going to grow.

You’re not going to have big farmers like they’re doing, like we signed these two leases a quarter or two ago with Lilly in Boston and BMS, Bristol Myers and San Diego. You’ll never see that in New York because of the just the nature of the topography and geography there. You’ve got very high tax burden and you’ve got some safety issues going on now that hopefully maybe the Governor and others will wake up to. But it’s – that’s the kind of market it is. It’s a small company market, it’s a great place, but it’s different than every other market. It’s unique compared to all the other clusters.

With respect to the State and City effort in Kips Bay there, it’s a pretty broad and deep effort. Much of it is institutional and governmentally driven. There is a, a thought of building or a plan to build a tower in that area, but probably to get, go through the land use approvals will take two plus years and then go through an RFP process and then the development process it’s maybe a decade away. But I think what’s really needed is company creation there to really continue to foster the demand. And that’s kind of, I mean, we know that market because we literally help create that market so that that’s the state of play there.

[Michael Carroll, RBC Capital Markets]

Nice. And does that investment, I guess improves the longer term outlook for that cluster and maybe increase the likelihood of you doing Phase 3? I mean, I don’t know the timeline’s probably too early to say, but does that make you more encouraged that things are coming around there?

[Joel Marcus, Executive Chairman and Founder]

Well, those are I mean, I think it’s good anytime you can continue to build infrastructure for institutions and governmental bodies that are doing research or developing. Part of that is health care delivery services which we’re not involved with. So those are all good things. That’s the East Side Medical Corridor really at its best. We’re anchored between Bellevue and NYU and that’s why we chose that site when we responded to the RFP by Mayor Bloomberg. But I think it’s fair to say what really is needed is capital and company formation because that will be the lifeblood that will really grow that market over time. And what we’ve helped grow it over the last 12 years. That’s what it’s been.

[Michael Carroll, RBC Capital Markets]

Okay. Great. Thanks for that. And then just last one for me. With regards to your investment book, I know the capital markets are a little bit dislocated right now. Is ARE finding better opportunities to deploy capital in that investment book? And when you typically look at new investments, are they more strategic? Or are you taking more opportunistic views just given where maybe some opportunities may lie – give and it might be difficult for some of those companies to attract the capital right now?

[Joel Marcus, Executive Chairman and Founder]

Well, I think as Hallie said, there’s been an all-time high venture fund capital raise this year, and that is kind of invested sprinkled out over a three, four, five maybe even longer time period. And I think it’s fair to say that great companies with great technology, high unmet medical needs, protected IP, good IP, just really smart people at the scientific helm and the business helm will generally always attract capital. I mean, we invested in Alnylam back in 2003 when it was a startup company because we felt that RNAi had great promise, but it took 15 to 20 years to prove, but it was a great investment. That company has gone on to do great things and has a huge footprint in Cambridge.

And then in 2013, which again was before the bull market started to happen, we took an early investment in Moderna and everybody knows the story there. So sometimes down markets as things are, valuations are better, and they give you interesting opportunities that really are focused on totally, I would say, groundbreaking technologies that may create tremendous opportunities for shots on goal on so many of the diseases that we’re all suffering from. So – that’s how we look at it. So yes, good time to invest.

[Michael Carroll, RBC Capital Markets]

Okay, great. Thank you.

[Joel Marcus, Executive Chairman and Founder]

Yep, thank you.

[Operator]

The next question comes from Joshua Dennerlein from Bank of America. Please go ahead.

[Joshua Dennerlein, Bank of America]

Hey guys. I appreciate all the color today. I just had a question on the guidance. What gets you to the high and low end of same-store cash guidance? And then also same for the capitalized interest guide.

[Joel Marcus, Executive Chairman and Founder]

Yes. So Dean?

[Dean Shigenaga, President & Chief Financial Officer]

So if you look at our guidance today, same property, call it the midpoint is 7% GAAP, 7.8% cash. And I think my commentary earlier highlighted we’re at 7% for nine months on GAAP. So we’re right on the midpoint today. And then we’re at 8.9%, we’re on the upper end on a cash basis. So we’re at a good perspective for nine months.

And I kind of highlighted the outlier drivers occupancy growth driving a 2x benefit to NOI. So we had 100 year-to-date for nine months, 110 basis point occupancy growth with a double impact, at least to NOI and then early lease renewals early, early in 2022, which was also driving the strength. So that’s the backdrop. We’ve got a good run rate for the nine months, which will carry us into a comfortable spot with our outlook for the full year.

[Joshua Dennerlein, Bank of America]

Thanks Dean, what about the capitalized interest, the upper and lower ranges?

[Dean Shigenaga, President & Chief Financial Officer]

Look, I think the way to think about cap interest and interest expense; we don’t change those numbers very often. The run rate that you’ve seen for capped interest this year is probably reflective of the volume of construction activities in our business, which continue an upward trend at the moment, meaning capped interest probably on a quarterly basis, doesn’t peak out until probably Q1 of 2023.

So you’re still on an upward trajectory as our – and that’s just a pure function of what you would call construction in progress or the basis that’s under construction, which drives the amount of capped interest. The interest rate drives it a little bit, but so much of our costs are fixed. There’s very little variable cost for interest expense. So it’s really just a function of spend quarter-to-quarter adding to CIP at a pace that’s outpacing the deliveries which, as I mentioned earlier, will start to peak out here in the next quarter or two.

[Joshua Dennerlein, Bank of America]

Thanks.

[Operator]

And for our last question, we have a follow-up from Michael Griffin from Citi. Please go ahead.

[Michael Griffin, Citigroup]

Hey, thanks for stay on. I’m just curious obviously; we saw the news about GE moving out 5 Necco, what are the prospects potentially to backfill this space? And would you attempt to sublease it could it be a potential conversion opportunity? And are there worries that there might be more of this coming down the pipe for your traditional office users, I think it’s about 8% of the portfolio, but any commentary there would be great.

[Joel Marcus, Executive Chairman and Founder]

Yes. So maybe I’ll ask Dean to comment, but one thing to keep in mind, there’s an existing lease with a credit tenant but Dean?

[Dean Shigenaga, President & Chief Financial Officer]

Yes. I think that’s the key concept. And I guess the other thing to keep in mind, Michael, there’s always – it’s interesting in the articles that you on any company. And most companies will choose not to comment specifically about articles in the press. As Joel mentioned, we do have a lease with a credit behind it. It’s somewhere around 80,000 square feet in the Seaport market. But beyond that, we don’t really have much to comment on.

[Michael Griffin, Citigroup]

Okay, thanks.

[Operator]

And 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]

Well, we’ll make it quick. Thank you and stay safe everybody.

[Operator]

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