Alexandria Real Estate Equities Inc

NYSE:ARE

Earnings Call Analysis

REIT's Steady Growth and Industry Resilience

Amidst an inflationary environment and a de facto recession, the company reported a robust performance with unmatched size and scale, exhibiting dominance in key submarkets and maintaining pricing power for highly desirable mega campuses. With a 'fortress balance sheet' hailed as one of the best in the REIT industry, the company boasts consistent dividend growth and significant cash flow retention for reinvestment. A projected 7% growth in FFO per share for 2023 is underpinned by substantial net operating income increases across the year. The thriving life science sector continues to be a demand driver, evidenced by solid leasing deals with long average lease terms and strong leasing spreads, while leasing costs are declining. This is all supported by a bolstered development pipeline that delivered over 450,000 square feet in Q3, contributing to a total of 1.29 million square feet year-to-date with an attractive yield of 6.5%.

An Expanding Frontier in Life Sciences Real Estate

The life science industry is poised on the frontier of artificial intelligence (AI) in drug development, with demand growing for labs fitted for AI, ML tools, and large datasets. These trends underscore a bullish outlook for lab space demand, as seen with Alexandria's tenant base activities—biopharma invested $278 billion in R&D in 2022, marking a 66% growth over the past decade. Mergers and acquisitions (M&A) also regained momentum, with $112 billion in 2023 acquisitions, hinting at capacity expansions by acquired platform companies. With the pressing need for innovation amongst pharmaceutical companies, especially due to patent expirations, the forecast shows more R&D requirements, potentially increasing demand for Alexandria's lab spaces.

Robust Development and Strategic Tenant Engagements

Alexandria reported delivering 1.29 million square feet through 10 projects year-to-date, with $120 million added to net operating income (NOI). These projects boast high yields, ranging between 7% and 9.5%, reflecting successful leasing activities and strategic tenant exchanges, like in the San Diego mega campus. Such transactions appear to elevate the asset base while maintaining robust pre-leasing rates. Looking forward, the pipeline for 2023 and beyond seems solid with healthy leasing percentages, creating optimism for future NOI growth.

Impacts of Market Dynamics and Competitive Landscape

Amid rising interest rates and economic uncertainty, Alexandria successfully navigates through with resilient demand for its specialized lab spaces. The company capitalized on situations where competitors are unable to finance tenant improvements or decide on the property type, potentially office or lab. This situation fortifies Alexandria's market positioning, especially for tenants demanding state-of-the-art lab campuses that enable growth and attract high-quality operators. Alexandria's market dominance is further demonstrated by significant rent increases and a remarkable average lease term of 11 years, implying a strong and enduring presence in the industry.

Financial Strength and Strategic Dispositions

Financially, the company remains strong with an 8.2% year-over-year increase in total revenue and NOI, and a same-property NOI growth in line with annual projections. Alexandria's robust balance sheet, characterized by ample liquidity and no immediate debt maturities, supports the aggressive development agenda and tenant improvement investments necessary to maintain competitiveness. Strategic asset dispositions are on track, showcasing an effective recycling of capital into more distinguishing mega campuses. Collections remain high, pointing to reliable income streams and the company's resilience in uncertain economic climates.

Outlook and Opportunities Amidst Evolving Market Conditions

Overall, while facing a challenging funding market, Alexandria maintains a favorable outlook due to healthy leasing activity, sustained demand for prime lab space, and strategic leveraging of M&A trends. Opportunities for growth are anticipated, with potential acquisitions on the horizon as biopharma companies look to bolster their pipelines through external technologies. Continued investments in life science real estate, particularly in high-demand mega campuses, reaffirm Alexandria's position as an industry mainstay capable of navigating market fluctuations and capitalizing on emergent industry trends.

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and welcome to the Alexandria Real Estate Equities Third Quarter 2023 Conference Call. [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, executive]

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 now would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

[Joel Marcus, executive]

Thank you, Paula, and welcome, everybody, to our third quarter conference call and the order of speaking today will be -- I'll kick off. Hallie will follow. Peter will follow Hallie and then Marc will do cleanup.

As most of you know, Dean Shigenaga stepped down as Chief Financial Officer on September 15. He will remain a full-time employee and will be on our Q&A call, but Marc is going to -- and Dean's mostly responsible for the quarter, but Marc will handle today's call on the presentation.

I want to start off with 2 quotes. First, by one of the most legendary -- by 2 legendary investors. First one is Warren Buffett. Who has said and many know this quote, "Be fearful when others are greedy, and opportunistic when others are fearful." And so we are. And a quote from one of the most legendary institutional investors on Alexandria.

Alexandria is a life science industry leader, solely publicly traded pure-play REIT, at its current discounted valuation, we believe concerns about competitive supply and distress for some of the company's life science tenants are overblown and sufficiently discounted in the company's valuation. We believe the management team has assembled a desirable real estate portfolio, enjoys a leading market share position in its geographic markets and has solid expectations for long-term demand-driven growth.

So I want to thank each and every member of the Alexandria family team for a strong and operationally outstanding third quarter, for this one of a kind REIT, especially in a very challenging and continuing disruptive macro environment.

Our size, scale and the dominance we've chosen to undertake in our key submarkets, coupled with our irreplaceable brand of importance to our over 800 tenants represents a distinctive impact a few other REITs will ever enjoy. We continue to dominate those of our key submarkets where we have created a leading position and continue to maintain pricing power for a highly desirable mega campuses, which enable life science entities to meet their mission-critical needs and also a path for future growth.

Couple of thoughts on the third quarter. We continue to maintain a fortress balance sheet, one of the best in the entire REIT industry. We continue our consistent, strong and increasing dividend, with a focus on retaining significant cash flows after dividend payment for reinvestment. We're well on track for a 7% FFO per share growth for 2023, fueled by our onboarding of substantial net operating income, the first half approximately $81 million, the third quarter, approximately $39 million, and the fourth quarter approximately $114 million.

A few comments on FDA drug approvals, which is the holy grail of the life science industry and Hallie will have more to say. During the period, which was the bold biotech market 2015 to 2021, almost 3/4 of approvals were biotech and 25% were pharma. So biotech continues to be the mainstay of innovation.

This year is -- Hallie will detail 45 approvals to date, and it could surpass the all-time high of 59 in 2018. Hallie will address the health of the life science industry and the demand generators, but third quarter leasing of approximately 870,000 rentable square feet was very solid and especially with a weighted average lease term of an amazing 13 years, and very strong leasing spreads almost 20% on a cash basis, and almost 29% on a GAAP basis, while leasing costs were decreasing.

Life science tenant health is one of the most frequently asked questions. And again, Hallie will address that in depth. We are in a de facto recession and in the self-inflected inflationary and high interest rate environment. So that is driving caution. But the life science industry is unequivocally healthy, thriving and the key to improved health care outcomes which are desperately needed for all of us.

Internal growth remained steady and solid with same-store cash NOI growth for the year at a strong 5.6%, occupancy on course for about 95%-plus as of year-end, and Marc will have much more to say on internal growth. Peter will detail external growth and our strong efforts of onboarding the substantial net operating income, as I just referred to, and he will also update as he does each quarter's supply dynamics. Peter will also give a brief update on the status of our self-funding for the balance of 2023 and year as a whole.

Let me say in summary, we know this is a tough show-me market filled with many skeptics. Many of those skeptics doubting the health of the life science industry despite clear facts to the contrary, overblowing the impact of the elevated levels of new construction no matter the quality, location and/or sponsor or operations, and we know of numerous operating debacles causing substantial damage to tenants by so-called other operators to their science, doubting the ability of Alexandria, the self-funded business despite clear facts to the contrary.

Each and every reporting quarter, we intend to continue our world-class operational excellence with exceptionalism in all we do, and we intend to capture virtually all of the future demand of our over 800 tenants and virtually all of the future demand of non-tenants who meet our underwriting requirements. And we intend to execute a perfect thread the needle self-funding plan for the remainder of 2023, as well as 2024, as our assets continue to remain scarce and still in demand.

And then finally, before I turn it over to Hallie, I would say, remembering the credo of the Navy Seals, the only easy day is yesterday. So Hallie, take it away.

[Hallie Kuhn, executive]

Thank you, Joel, and good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. Alexandria is at the vanguard and heart of the $5 trillion secularly growing life science industry, which translates into numerous demand drivers for Alexandria's mission critical Labspace, and we are the go-to partner for the life science industry.

Today, I am going to review these demand drivers and exciting new areas of life science research and development, all of which translate into a healthy and expanding tenant base and increasing long-term revenue.

So first, what do we mean when we say the life science industry is secularly growing? First, massive unmet medical need, with over 90% of known diseases having no available treatments, drive the life science industry, providing a tremendous opportunity for innovation, new company formation and life science industry growth. This opportunity set does not change at the whims of the market. It is noncyclical and nondiscretionary.

Second, tenant growth and demand are event and milestone-driven. Important milestones include new biological discoveries, successful advancement of experimental therapies into the clinic and ultimately, the demonstration of safety and efficacy of new medicines.

Expansion of new therapeutic modalities such as cell, gene and RNA medicines, better diagnostic tools to accurately identify and diagnose patients and increasingly efficient and predictive clinical trial designs have the potential to increase the number of new medicines over the coming years.

Third, multifaceted and differentiated funding sources ensure that life science companies founded on impactful and differentiated technologies with experienced management teams continue to thrive. Altogether, we estimate over $400 billion will be deployed to support life science companies in 2023 across venture funding, biopharma R&D, philanthropy, government grants, and public equity financings.

Notably, 2023 has already exceeded the previous 10-year average of $360 billion, and the total market capitalization of public life science companies currently exceeds $5 trillion. Together, the massive unmet medical need, event-driven growth and robust and diverse funding sources result in secular growth of the life science industry that drive additional demand for Alexandria Labspace even amid an economic downturn.

The output of this significant investment is longer, healthier lives. As Joel commented, 43 new therapies have been approved this year by the FDA and 6 novel gene cell and RNA-based therapies have been approved. These numbers are on track to meet or exceed the all-time high for annual FDA approvals. That was in 2018 when 59 novel therapies were approved by the FDA.

This is extremely positive, above all for the patients that need these medicines. An example of important new therapies on track for approval include the class of GLP-1 medicines for obesity, a disease which accounts for direct costs of over $170 billion in health care spending in the U.S. per year and afflicts 1 in 3 children and 1 in 5 adults.

A decade ago, obesity was considered a minefield for drug development. And the industry sentiment with that medicine could not address such a complex disease. Fast forward, and pharma has unlocked an entirely new class of anti-obesity medicines and analysts estimate upwards of 10% of the U.S. population will have been treated with a GLP-1 by 2030, with an estimated market size of $40 billion to $50 billion.

Another exciting area is artificial intelligence and machine learning tools. As highlighted in our recent press release, AI is not new to the life science industry. In 2021, there were over 100 drug and biologic submissions to the FDA developed using AI components. Nor do AI tools negate the need for Labspace. In many cases, AI-focused life science companies require significant lab footprints to generate the immense biological and chemical data sets needed to effectively train AI ML models.

To this end, the acceleration of AI may, in fact, increase the need for laboratory footprints, and we already see this manifesting as an exciting emerging segment of demand.

Now moving to the health of our diverse life science tenant base. While some analysts and investors have a misconception that small and mid-cap biotech are a proxy for the entire life science industry and its growth, the reality is broader and far more complex.

Starting with multinational pharma, which accounts for 18% of our ARR, companies are leveraging healthy balance sheets to double down on R&D, and in-license and acquire innovative products. Biopharma alone invested $278 billion in R&D in 2022, representing a 66% increase compared to 10 years prior. Biopharma also has an estimated $500 million in M&A firepower to continue to bring external innovation into their portfolios.

To that end, M&A has regained momentum with $112 billion in acquisitions in 2023, exceeding the 2021 and 2022 levels. Large pharma continues to heavily rely on innovation from smaller biotechs to backfill their pipelines. For example, BMS' top 5 products in 2022 were all derived from acquisitions. For J&J, Merck and Pfizer, 4 out of 5 of the company's top-selling therapies were from licensing or M&A deals.

So how does M&A impact net absorption within our clusters? The specific impact of M&A events needs to be looked at on a case-by-case basis but is broadly positive. Platform companies acquired not just for their clinical assets, but for their R&D, platform and scientific talent, tend to land and expand, so to speak.

A great example is in San Diego, where the significant presence of large pharma tenants, including BMS, Eli Lilly, Takeda and Vertex were all driven by acquisitions of smaller biotech companies. We are also in the process of supporting the significant expansion of a pharma acquired company in Greater Boston, more to come on this at Investor Day.

Companies acquired for specific assets may not lead to additional expansion, but we do benefit from an upgrading credit in all cases as the acquirer will be responsible for each in-place lease. M&A also leads to capital being returned to investors and can drive formation of new companies within our ecosystem as experienced scientists and entrepreneurs start their next new endeavors, which also creates additional demand for Alexandria Labspace.

Critically, for pharma to remain competitive and ensure a steady stream of successful innovative medicines over the next decade, they need to attract the best talent and have the infrastructure and operational support to accelerate and safeguard their mission-critical science. This need is driving several significant requirements in key R&D clusters, and Alexandria is the go-to brand.

Transitioning to public biotechnology companies, 14% ARR is represented by companies with marketed products, and 10% ARR by preclinical and clinical companies. For our commercial stage biotech tenants, they notched $108 billion in revenue through the third quarter of 2023, including the likes of Gilead, Vertex and Amgen.

For our precommercial companies, the public market for small and mid-cap biotechs certainly remains challenging. However, companies that meet expected milestones have executed significant follow-on financings and stock prices have responded positively.

Through 3Q, $14 billion has been raised in follow-on offerings which is on track to beat total 2022 follow-ons of $14.5 billion. This includes tenant backside, which earlier this year netted $545 million in total proceeds to fund their potentially best-in-class pneumonia vaccine and others, including Editas and Natera.

There are also some green shoots in the IPO market for companies with the right pedigree, namely deep clinical pipelines with line of sight to important inflection points. In September, San Diego tenant raised Bio raised an oversubscribed $358 million IPO and driven by near-term clinical trial data readouts, testing their first-in-class radiopharmaceutical therapies for rare forms of cancer.

On to private biotech, which makes up 9% ARR. While life science funding has largely reverted to pre-pandemic levels, it remains robust. Annualized projections of life science venture funding for 2023 are trending towards an estimated $27 billion which exceeds 2019 levels of nearly $24 billion.

Further, while a frequent assumption is that many financings are being propped up by current insiders, the data highlights that this is just not true. In a detailed analysis by Oppenheimer of Series A and B financing year-to-date, nearly 80% of all financings were led or co-led by outside investors, speaking to a healthy appetite from investors to fund new deals.

Our new lease with [indiscernible] Labs on our One Alexandria Square mega campus in San Diego is one example of a stellar private company, having raised a historic $3 billion to deploy towards cell reprogramming to treat diseases associated with aging.

Last, life science products, service and devices, which represent 22% of our ARR continue to be the workhorse of the industry, providing the hardware and software, so to speak, that fuel experiments in the lab. There are challenges that exist post-COVID, as some companies ramped up products and services either directly or indirectly driven by COVID-19 and are now resetting strategic priorities. But novel areas of science and successful products are emerging and generating new forms of demand, such as the new obesity drugs, which will require significant CDMO capacity to manufacture and new forms of drug discoveries such as proteomics, highlighted by the recent acquisition of Olink for a $3.1 billion by Thermo Fisher.

Altogether, the results of the current market conditions is that companies are highly conscious of every dollar spent. They do not have the luxury of risking their science and unreliable Labspace or in locations where they can't recruit the right talent. We continue to see increasing demand by companies for looking for just-in-time availability of high-quality lab space and amenitized campuses in the best locations. With the infrastructure and operations that ensure their mission-critical work is supported 24/7 and that there is a path for future growth needs.

And this is what Alexandria's one-of-a-kind Labspace within our world-class mega campuses is uniquely positioned to deliver. To end, I want to share some insight from Dr. Robert Langer, an MIT Professor, Moderna Co-Founder and luminary in the field of drug development. When recently asked what scientific innovation he is most excited about, his answer was simple but profound, the science and medicines that have not yet been discovered. So as we traverse challenging times, remember that the resilience of this industry is rooted in a truly vast opportunity for new discoveries that will improve the lives of everyone on this call today, the most impactful of which is yet to come.

With that, I will pass it to Peter.

[Peter M. Moglia, executive]

Thanks, Hallie. Before I launch into my commentary, I'd like to acknowledge the great contributions we've received from Dean Shigenaga. Dean is one of the smartest and hardest working people I've come across in my 33-year career. He's played a huge part in the building of Alexandria into what it is today. And wanted to thank him very much for everything he's done for this company. Thanks, Dean.

On our fourth quarter 2022 call, I spoke about our optimism for the future of the life science industry, referencing that we are in the early innings of the golden age of biology. And I pointed out that we've only had the blueprint of the human genome for 20 years, and in that time, we've developed more new modalities to attack disease than in the previous 100.

On Friday, October 13, buried on the third page of Section A in the Wall Street Journal, another scientific revelation was reported, one that scientists likened to the human genome project and that could yield similar results in neuroscience.

An international team of scientists unveiled the most comprehensive map of the human brain ever completed, a map that the article stated will set a critical foundation for the understanding and eventually treating brain-related diseases such as Alzheimer's, epilepsy, schizophrenia, autism and depression.

As I watch my own mother declined daily due to Alzheimer's and experienced the enormous emotional monetary and time burden it inflicts on our family. I have a full appreciation of what this map may do for mankind. It's yet another example of how important the life science industry is to improving our lives and how it's only going to grow and influence. And that, ladies and gentlemen, is why this $5 trillion secular growth industry is poised to drive our business for decades to come.

I'm going to discuss our development pipeline, leasing, supply and asset sales and then hand it over to our very capable new CFO, Marc Binda.

In the third quarter, we delivered 450,134 square feet in 7 projects into our high buried entry into submarkets, bringing total deliveries year-to-date to 1,290,721 square feet, covering 10 projects. Annual NOI for this quarter's deliveries totaled $39 million, bringing the year-to-date total incremental additions to NOI to $120 million.

The initial weighted average stabilized yield is 6.5%. 6 of the 10 projects delivering space this year have initial stabilized yields ranging from 7% to 9.5%. 2 are at 6.3% and 2 are in the mid-5s. One of those developments in the mid-5s is located in Cambridge and is 99% leased. And the other is in our Shady Grove mega campus and successfully leased 23% of its space in the third quarter.

The Cambridge asset is in a prime location and its yield reflects the cost to acquire it, which was justified because we had commitments to fill 100% of it before closing, making it a build-to-suit core investment that expanded our ACKS mega campus. The Maryland assets yield has been driven down by complex site conditions, but it has been very well received by the market, and we are bullish on its long-term performance as part of our Shady Grove mega campus.

Development and redevelopment leasing activity at approximately 205,000 square feet was higher quarter-over-quarter for the second quarter in a row, which we are pleased to see in an environment where tight financing markets have focused tenant demand on turnkey space.

In addition to the increase in development, redevelopment, leasing during the quarter, we signed LOIs covering nearly 230,000 square feet of space in our pipeline, including one for 185,000 square feet with a high-quality tenant -- high-quality credit tenant that may materially expand into the mega campus as they refine their programming, indicating a continuation of positive momentum.

During the quarter, we executed a lease termination with a tenant at our 10935 and 10945 Alexandria way mega campus development in Torrey Pines and leased approximately 89% of the space to a stronger credit tenant. This is a win for Alexandria as we were able to substitute a higher credit tenant into the new development, increase the term for that space by 3 years and receive higher rents. We did increase the TI allowance for the new tenant, but the incremental rent, we are receiving yields at 14% return over that incremental TI allowance. All in all, a great outcome.

At quarter end, our pipeline of current and near-term projects is 63% leased and 66% leased and negotiating, which includes executed LOIs and is expected to generate $580 million of annual incremental NOI through the end -- or through the third quarter of 2026.

The decline from 70% leased last quarter despite leasing approximately 205,000 square feet, was mainly due to the delivery of fully leased projects at 141st Street and 751 Gateway and the addition of 10075 Barnes Canyon Road in Sorrento Mesa, which has 17% of its future space under LOI and significant additional activity underway.

Transitioning to leasing and supply, Alexandria's pioneering establishment of highly curated mega campuses featuring Class A, A+ facilities at Main & Main, in the world's most desirable high barrier to entry life science clusters provides an enduring foundation for our existing asset base to perform in even the most challenging times.

We are executing and winning nearly every high-quality leasing opportunity when we have available product, a testament to the daily operational excellence demanded and required by our mission-critical tenants. We leased 867,582 square feet in the third quarter of '23, with Maryland significantly supporting the leasing activity led by San Diego and Greater Boston.

Leasing activity has come from a broad base of our regions, both this quarter and year-to-date in which we have leased a total of 3.41 million square feet with Seattle, San Francisco, San Diego, Greater Boston and Maryland, all materially contributing to our overall leasing activity. These quarterly and year-to-date leasing volumes are consistent with our pre-COVID levels. As you can see in the company highlights section of the Q3 supplemental on Pages little roman numeral 19 and 20.

Although below our historic average of 1 million square feet, this leasing volume is strong, considering the amount of expiring leases available for lease for the rest of the year is relatively low at approximately 623,000 square feet. Very strong cash rent increases of 19.7% and GAAP rent increases of 28.8% during the third quarter provide clear evidence of the long-term enduring value of Alexandria's brand and platform and are consistent with our year-to-date stats of 18.1% and 33.9% for cash and GAAP increases, respectively.

We'd like to call your attention to the year-to-date weighted average lease term of 11 years, which you can find on Page little roman numeral 22, of the supplemental that significantly exceeds our weighted average lease term from -- since 2014 of 8.7 years.

In our first quarter earnings call, we noted that demand had slowed from the rocket ship COVID period of 2020 and 2021. And last quarter, we reported that we were seeing demand increase, especially in our Greater Boston, San Francisco and San Diego markets. We see demand holding steady today and believe it will trend upward but are fully aware that the volatile geopolitical environment we are in can create the uncertainty that sometimes slows decision-making.

As we've discussed in a number of investor meetings since our last earnings call, the demand profile is best described as a barbell. We're seeing most of the requirements in the 5,000 to 30,000 square foot range coming from either emerging stage companies that have achieved milestones and need growth space, or large requirements of 100,000 square feet or more from large pharma and biotech looking to grow or establish a footprint in our clusters, driven by specific new modalities prevalent in those clusters coupled with the talent available on those locations.

Alexandria is well positioned to capture this demand because many of these opportunities are coming from existing relationships which typically account for a significant amount of our leasing. Over the past year, 80% of our leasing has been generated from existing tenants. In addition, our mega campus offerings provide the ability to scale in a wide variety of amenities, making them the clear choice for high-quality companies.

I'm sure you're all interested to hear our analysis of supply. So I'll conclude this section with an update on these statistics, which will include our projected competitive supply additions delivering in 2025.

As a reminder, we perform a robust, on the ground, building-by-building analysis to identify and track new supply from high-quality projects, we believe, are competitive to ours in our high barrier-to-entry submarkets. We focus primarily on high barrier-to-entry markets and our brand, mega campus offerings in AAA locations and operational excellence enables us to continually mine our vast, deep and loyal tenant base to drive our leasing activity, which will likely lessen the impact of generic supply.

The slides we provided on pages -- roman numeral 8 through roman numeral 13 of the supplemental, illustrate this and are hopefully helpful. In Greater Boston, unleased competitive supply remaining to be delivered in 2023, is estimated to be 1.1% of market inventory, a 0.5% decrease over last quarter.

In 2024, the unleased competitive supply will increase market inventory by 6.1%, a 1.1% increase, driven by the addition of a new competitive project. In 2025, the unleased competitive supply will increase market inventory by 3.7%, an expected slowdown from 2024 levels.

In San Francisco Bay, unleased competitive supply remaining to be delivered in the second quarter of '23 is estimated to be 5% of market inventory, which is a reduction of 1.6% over last quarter due mainly from deliveries.

In 2024, the unleased competitive supply will increase market inventory by 8%, a 0.8% reduction, unfortunately, not driven by leasing, but due to a downward revision of estimated square footage to be delivered during the year.

In 2025, the unleased competitive supply will increase market inventory by only 1.2%, which is a good indication that developers in this market are beginning to act rationally.

In San Diego, unleased competitive supply remaining to be delivered in the third quarter of '23 is estimated to be 1.9% of market inventory, which is a decrease of 1.6%, due mainly to projects being delayed into 2024 or delivered with unleased space now reflected in direct vacancy and one project developer deciding not to pursue a laboratory use.

In 2024, the unleased competitive supply will increase market inventory by 6.9%, a 1.9% increase driven primarily by the aforementioned projects delivering in 2024 instead of 2023.

In 2025, the unleased competitive supply will increase market inventory by 3.3%, driven primarily by our 75% pre-leased 10935, 10945 and 10955 Alexandria Way project.

Direct and sublease market vacancy for our core submarkets is updated as follows: Greater Boston direct vacancy increased 1.7% to 4.5%, and sublease vacancy increased slightly to 5.6% and for a net increase in available space and operation quarter-over-quarter of 1.9%; San Francisco direct vacancy increased by 7.4% to 9.7% driven mainly by the inclusion of the Mission Rock projects into laboratory inventory when it was previously thought to be leasing as an office project.

Move-outs and delivery of new inventory are also drivers. Sublease vacancy remained stable at 6.2% for a net increase in available space and operation of 7.4%. San Diego direct vacancy increased from 4.8% to 6.8%, largely due to delivered unleased new supply and move-outs. And sublease vacancy remained stable at 4.1% for a net increase in available space and operation of 2% quarter-over-quarter.

I'll conclude with an update on our value harvesting asset recycling program. We continue to be fortunate that there is a considerable demand for Alexandria's assets and life science assets broadly.

As you can see on Page 7 of the supplemental, we are approximately 95% through completing dispositions needed to hit the midpoint of our guidance when totaling completed sales and those under LOI, or executed purchase and sale agreements not yet closed.

Our overall strategy for the full year of 2023 has been to execute on a combination of partial interest sales and sales in whole of noncore workhorse assets. These sales will provide the capital needed to recycle our high-quality development, redevelopment mega campus pipeline, which will widen our moat by expanding our highly differentiated mega campuses offering unmatched scale and amenities highly sought after by the full spectrum of tenants we serve. And the identified supply I just mentioned can't compete with.

We only closed on 1 asset this quarter we can report on, but to give some color on dispositions that are pending, they are all noncore, solid workhorse assets. Obviously, it's a challenging interest rate environment and economic volatility has reduced overall transactional activity, but demand for our assets has remained resilient. As mentioned, we are on track to meet our goals.

In September, we closed on the previously announced sale of a vertical ownership unit comprising approximately 268,000 rentable square feet, or approximately 44% of Alexandria's 660,034 square foot 421 Park Drive, purpose-built, ground-up life science development in the Fenway submarket of Greater Boston to Boston Children's Hospital.

The units sold will house Boston Children's Hospital future medical research facilities. The sale serves the dual purpose of providing substantial funding for the significant development project and brings in a key bedrock anchor to the project and our Fenway campus in whole.

Boston Children's is a long-term strategic partner of Alexandria, who invests heavily in basic clinical and translational research to accelerate the discovery of new treatments for devastating diseases, to improve the health of both children and adults. They ranked #1 in NIH funding among all U.S. children's hospitals in fiscal year 2023. Their presence will help attract tenant companies looking to collaborate with world-class research institutions, much like our campuses in Cambridge benefit from those looking to collaborate with MIT. Alexandria will receive development fees as well as the significant capital to fund the project.

With that long update, I'm going to go ahead and pass it over to Marc.

[Marc Binda, executive]

Thank you, Peter. Hello, and good afternoon. This is Marc Binda, CFO, and I'm going to cover some of the key financial metrics for the quarter.

We reported very solid operating and financial results for the third quarter and 9 months ended 3Q '23, which was driven by strong core results and reflects the strength of our brand, scale, high-quality and well-located campuses and operational excellence.

Total revenues for 3Q were up 8.2% over the prior year. NOI was also up, 8.2% over the prior quarter in the prior year, driven primarily by the commencement of $120 million of annual NOI related to 1.3 million rentable square feet of development, redevelopment projects placed into service year-to-date through 3Q '23, coupled with strong same property performance.

FFO per share diluted as adjusted was $2.26, up 6.1% over 3Q '22 and we are on track to generate another solid year of growth in FFO per share of 6.7% at the midpoint of our guidance for 2023. Our tenants continue to appreciate our brand, mega campus strategy and operational excellence by our team. 49% of our ARR is from investment grade and publicly traded large-cap tenants. And we have one of the highest quality client rosters in the REIT industry.

Collections remained very high at 99.9%. Adjusted EBITDA margins remained very strong at 69%. The weighted average lease terms for leases completed in 2023 have far outpaced our historical averages at 11 years on average. And 96% of our leases contain annual rent escalations approximating 3%.

Same property NOI growth was solid and in line with guidance for 2023. 3Q '23 was up 3.1% and 4.6% on a cash basis. And for the year-to-date period, up 3.7% and 5.6% on a cash basis. Our outlook for 2023 same-property NOI growth remained solid at a midpoint of 3% and 5% on a cash basis.

We do expect our fourth quarter same property results to be somewhat impacted by the timing of free rent and some temporary vacancy, including 100,000 square foot lease termination in the fourth quarter by our tenant Atreca at our San Carlos mega campus. Important to note that we don't expect any income to be recognized on this space for same property purposes in the fourth quarter, since termination fees are excluded from our same-property results. The good news is that we have a signed LOI with a new tenant to potentially take that space as early as December.

Turning to leasing. Quarterly leasing volume was 867,000 square feet for the quarter and $3.4 million for the first 9 months, which on an annualized basis is in line with our historical annual average from 2013 to 2020.

Also, after stripping out spaces already leased and projects going into redevelopment, the 2023 expirations at the beginning of the quarter were relatively low at only 623,000 square feet. 3Q '23 rental rate growth for lease renewals and re-leasing of space was very strong at 28.8% and 19.7% on a cash basis.

Rental rate growth in 3Q was driven by transactions in Seattle, Maryland and Greater Boston. And these results were driven by a mix of transactions in markets which can vary from quarter-to-quarter. Our outlook for rental rate growth on lease renewals and re-leasing of space remained solid at a midpoint of 30.5% and 14.5% on a cash basis. The overall mark-to-market for cash run rates related to in-place leases for the entire asset base remains very strong at up 18%.

Turning next to capital expenditures. They generally fall into 2 buckets. The first category being focused on development and redevelopment, which includes the first time conversion of non-Labspace to Labspace through redevelopment. The second category is nonrevenue-enhancing capital expenditures.

Our nonrevenue-enhancing capital expenditures over the last 5 years have averaged 15% of NOI, and that rate has been trending lower with 13% last year and 12% for 2023. Tenant improvement allowances and leasing commissions related to lease renewals and releasing of space which is included in nonrevenue-enhancing expenditures were very low for the quarter at $19 per square foot.

Turning to occupancy. 3Q occupancy was in line with our expectation at 93.7%, up 10 basis points from the prior quarter. This included vacancy of 2.1% or approximately 870,000 square feet from properties acquired in 2021 and '22. 30% of that recently acquired vacancy is leased and will be ready for occupancy in the next number of quarters.

Our outlook for 2023 reflects occupancy growth by the end of 4Q '23. The midpoint of our occupancy guidance is 95.1%, which implies a 140 basis point increase by the end of the year. The bridge to our range for year-end occupancy breaks down as follows. About 50% is related to spaces already leased and expected to deliver by year-end. Another 20% relates to assets that were designated as held for sale in October that contained some vacancy.

This leaves about 30% left to resolve, which includes the 100,000 square feet space at our San Carlos mega campus, which I mentioned earlier, which is under negotiation. I'd also like to highlight that it's often difficult to reconcile leasing activity to changes in occupancy, given that leasing activity doesn't always result in immediate occupancy. The main driver of the expected ramp-up in occupancy related to previously leased space delivering in 4Q 2023, I just mentioned, is a perfect example.

Turning to the balance sheet. We have a very strong balance sheet with $5.9 billion of liquidity, no debt maturities until 2025, 99% of our debt subject to fixed interest rates and we remain on track to achieve our net debt-to-adjusted EBITDA goal of 5.1x on a quarterly annualized basis by 4Q '23.

We continue to focus on our self-funding strategy through the execution of dispositions and partial interest sales, with no common equity expected for 2023, other than the $100 million of forward equity sales agreements from 2022, which are still outstanding. Our strategy for dispositions and sales of partial interest for 2023 reflects our focus on the enhancement of the overall asset base through outright dispositions of properties no longer integral to our mega campus strategy, with fewer sales of partial interest.

For the year, we expect about 90% of the proceeds from our program to be focused on outright dispositions. Our team has made excellent progress with $875 million completed and another $699 million under LOI or purchase and sale contract, which are expected to be closed in the fourth quarter, which is primarily comprised of outright dispositions.

Our targeted fourth quarter dispositions include land, noncore assets and some properties which require significant capital to lease and are expected to have a higher FFO cap rate compared to the transactions we closed in the first half of the year. We have a low and conservative FFO payout ratio of 55% for 3Q '23, annualized with a 5.2% increase in common stock dividends over the last 12 months. We're projecting $375 million in net cash flows from operating activities after dividends for reinvestment for this year, which represents a 3-year run rate of over $1.1 billion.

Turning to venture gains. Realized gains from venture investments included in FFO for 3Q '23 was $25 million, which is the same as our 8 prior quarter average. Gross unrealized gains in our venture investments as of 3Q '23 were of $311 million on a cost basis of just under $1.2 billion.

On external growth, we have $580 million of incremental annual NOI coming online from our pipeline of 6.4 million square feet. In the fourth quarter, we expect to deliver 2 key projects at 325 Binney and 15 Necco, which will generate a whopping $114 million of incremental annual NOI. We expect to place these projects into service in mid- to late November on average which will drive significant NOI growth in the fourth quarter, as well as the first quarter of 2024.

For 2024, we expect another 1.8 million square feet, which is 94% leased, to stabilize around mid- to late summer on average and generate another $127 million of incremental annual NOI. Additionally, we have another 3.8 million square feet that's expected to reach stabilization after 2024, and will generate another $339 million of incremental annual NOI.

With the expected, significant deliveries at 325 Binney and 15 Necco in 4Q '23, we expect a slight decline in capitalized interest in 4Q 2023. Capitalized interest for 3Q was up about $4 million over the prior quarter, which resulted from some shifts in timing on the delivery of our 141st Street redevelopment project and the sale of a portion of our 421 Park project. It's important to note that these changes were slightly dilutive to FFO per share results for the quarter but were offset by strong core operations during the quarter.

Turning to guidance. Our detailed updated underlying guidance assumptions are disclosed beginning on Page 4 of our supplemental package. Our per share outlook for 2023 was updated to a range of plus or minus $0.01 from the midpoint of guidance. Our range of guidance for EPS is $1.36 to $1.38, and our range for FFO per share diluted as adjusted is $8.97 to $8.99, which represents a $0.02 increase in the midpoint of $8.98. This represents a very strong 6.7% growth in FFO per share, following excellent growth last year of 8.5%.

As a reminder, we're about a month away from the issuance of our detailed guidance for 2024 and therefore, we're unable to comment on details for 2024. Lastly, I just want to extend a special thank you to Dean Shigenaga for all his years of leadership and service to the company, as well as his tremendous mentorship.

Next, I'll turn it over to Joel to open it up for questions.

[Joel Marcus, executive]

Yes. Let's go to Q&A and sorry for the long presentation, but important to get all the facts out there.

[Operator]

[Operator Instructions] Our first question today will come from Joshua Dennerlein of Bank of America.

[Joshua Dennerlein, analyst]

I appreciate all the color on the new slides on the supply dynamics across our submarkets. Just kind of curious how we should think about that supply that's coming online and the vacancy you mentioned and just -- how that will impact market rents and GIs across maybe -- in particular, Cambridge and South San Francisco?

[Joel Marcus, executive]

Yes. So Peter, thoughts, comments?

[Peter M. Moglia, executive]

Yes, certainly, it's going to be part of the negotiation with tenants. What we believe is that our mega campus platform and our reliability and brand will give confidence to the tenants that they're going to be well taken care of. And so there is a premium to that will help us overcome the competitive supply dynamic when it comes to that.

[Joel Marcus, executive]

Yes. I would say also, important to distinguish, we think in Cambridge, the impact would be far less than South San Francisco. South San Francisco, as you can see from the slide, just has too much stupid supply. The good news is, a lot of that supply is in an area that people don't want to be in.

[Joshua Dennerlein, analyst]

And then one more question for me. On the occupancy front, going from your 3Q 93.7% to just the occupancy guide range of, I think, 94.6% to 95.6%. Just -- what are the kind of moving pieces in there? Is there anything you still have to accomplish? Or is that kind of -- all baked in at this point?

[Joel Marcus, executive]

Okay. I think Marc just answered that question. But Marc, do you want to repeat that?

[Marc Binda, executive]

Yes, sure. It's Marc. Yes. So about going from that 140 basis point increase, about half of it was from leases that we've leased either in the current quarter or prior quarters, that's delivering next quarter. So a big chunk of it is in the bag. And then about another 20% was for some assets that were designated as held for sale at the end -- after the end of the quarter in October that we expect to sell.

And then that leaves about 30%. And then of that, a big chunk of it relates to that space in San Carlos, that was the former Atreca space, which we do have a signed LOI there and hope to execute on.

[Operator]

Our next question will come from Georgi Dinkov of Mizuho. .

[Georgi Dinkov, analyst]

This is Georgi on for Vikram. Can you square your views on not losing more occupancy than the GFC, given we have seen several tenant issues and lease terminations in the past 2 quarters? And even though you have limited expirations, could create issues, depress occupancy?

[Joel Marcus, executive]

Well, I think, number one, Marc just went through the details of occupancy and guidance and giving -- and he just answered the question from the [ BofA ] analyst on what we're thinking about occupancy. And we said, for example, on Atreca, we have a signed LOI or negotiating a lease for all that space. I'm not sure what else you're referring to.

[Georgi Dinkov, analyst]

Okay. And can you just give, I guess, more color on 2seventy bio. I believe they are backed by Bluebird. But how would it work if their cash position get your rates going forward?

[Joel Marcus, executive]

Well, at the moment, they have over $300 million in cash. It gives them a runway out through 2026 as I recall, you have to remember, both 2seventy bio and Bluebird are both joint and severally liable on the lease. We expect that's a great location. It will be subleased and we don't see any challenge to York's successful collection of rent over the coming few years.

[Operator]

Our next question will come from Michael Griffin of Citi. .

[Michael Griffin, analyst]

Maybe just a question on development that are -- kind of how you're thinking about that over the next couple of years, the funding needs for and potential impact on capitalized interest would be helpful.

[Joel Marcus, executive]

Yes. So I think, as Marc said, let's wait for Investor Day to do that.

[Michael Griffin, analyst]

All right. And then just on the pending asset sales, I know Marc kind of talked about a higher cap rate than expected. I was wondering if there is any numbers you can maybe associate with that. And any color you could give around the buyer pools or interest there would be helpful.

[Joel Marcus, executive]

Yes. We're under confidentiality so we can't. So stay tuned for Investor Day or year-end, and we'll give as much detail as we're able to.

[Operator]

Our next question will come from Rich Anderson of Wedbush. .

[Richard Anderson, analyst]

So I was kind of doing some back reading, and I looked at the second quarter of 2022, where -- it was -- the comment was, beyond -- 2024 and beyond, we don't see large disruptive projects well underway in our core markets that are preparing to go vertical.

Does that comment, I mean, I guess the question is, what changed between that comment a little bit more than a year ago and today, because the market for developing only has gotten worse with that macro environment and all that. Or do you still -- would you still agree that this is not disruptive relative to that comment that was made about a year and change ago?

[Joel Marcus, executive]

Yes. Peter, do you want to maybe address that?

[Peter M. Moglia, executive]

Yes, Rich. I mean, the comment -- the intent of the comment was to express that 2024 was going to be a peak of supply deliveries. And that's the numbers that I just went through. I think, illustrated that. There will be some things that we thought would deliver in '24 that might get pushed into '25. But we're not seeing more than less -- probably in total in all of our markets, like a handful of things that have started in recent times, meaning like the last few months.

It does appear -- and the numbers in San Francisco, I think were really telling. It, thus, appear that developers are finally understanding that the market has plenty of supply underway and not -- there's not more needed on a speculative basis. And so that's good news for the coming years.

[Richard Anderson, analyst]

Okay. Fair enough. And then a real quick second question because I know we're running long here. Joel, you said the word self-funding for this year and for 2024. And anticipating your response, wait till Investor Day, but let me just ask anyway. Is the disposition program kind of not infinite, but I mean if you're always selling assets and funding something that's probably a better and newer asset through your development pipeline, is that something that can go on in perpetuity? Or is there a ceiling to which you have to sort of cut off the disposition program and reassess?

[Joel Marcus, executive]

Yes, I think that's a really good question, and that will be a cornerstone of the Investor Day presentation. But I think it's fair to say, Rich, that the way to think about it is, we continue to have -- the company owns and operates 40 million square feet and has the capability to double our size on what we own beyond that. So there's a pretty deep pool for partial interest and sales of outright noncore assets. But we do have an approach to self-funding for next year in addition to that, which I think will be pretty exciting. So let us wait to announce that at Investor Day.

[Operator]

And our next question today will come from Tom Catherwood of BTIG.

[William Catherwood, analyst]

Maybe Joel or Peter, we always think of your team doing such a great job partnering with tenants, understanding their business, helping them solve real estate problems. Peter, I think the examples you talked about in San Diego with the developments really speak to that this quarter.

When we think of that partnership, how have you seen the needs and maybe the pain points of your tenants changed over the past 6 to 12 months?

[Joel Marcus, executive]

Well, I think that the obvious one is -- one that a number of people mentioned throughout the commentary and that is, certainly in the small and medium-sized companies that are emerging, that are dependent upon whether it be private financing or public market financing or cash on hand.

The fact that we're in this de facto recession, inflation and high interest rate environment just makes the management of cash, the management of burn, the management of decisions just more methodical and -- yes maybe just more methodical. So our job is to understand those needs and work intimately with the clients to make sure that we're doing the best job that we can to meet their needs. And I think we've done a great job of that. And we have very, very close relationships. These are not ones that you sign a lease and that's it. These are ongoing very deep relationships. So we're generally pretty imminently involved in a lot of the decision-making.

[Peter M. Moglia, executive]

And remember, I mean, this isn't the first time we've hit hard times as a company, we've been around for close to 30 years. And we've worked with our tenant base during all of these times and the goodwill that accumulates and how we're able to help them is why 80% of our leasing comes from these existing tenants. I mean, we have the size, the ability to work with folks that need assistance. And it provides great goodwill for future endeavors for those of -- those management teams that are in the buildings that we're helping them out with.

[William Catherwood, analyst]

Got it. And then kind of following up on that, maybe if I switch over to Hallie. I appreciate the...

[Joel Marcus, executive]

Hallie.

[William Catherwood, analyst]

Hallie, I apologize. I appreciate the detailed market update. I was kind of really interested in the comment you made around AI adoption potentially leading to the need for incremental Labspace and that you are potentially seeing the early signs of that. Can you provide more -- kind of color on that comment and maybe what you're seeing in the market in that regard?

[Hallie Kuhn, executive]

Sure. Happy to. A great example, and we had a quote from the CEO, Roger Perlmutter, the former CSO of Merck in our press release, is iCON, which we have a signed lease with a property under development in San Francisco.

With AI, you have to have data to train the models. And so when folks kind of -- there's been commentary thrown out that AI is going to make it so that you don't have to run experiments as extensively in labs. What we see is actually the opposite, because you need such vast data sets to train the AI ML models in order to optimize and drive towards results that we see really large footprints, whether it's robotic, high throughput, both chemical and biological data that these companies are generating in order to be able to actually apply AI and ML.

It would be like applying generative AI to the Internet in 1995, right? You have to have a really vast starting data set in order to get something that's meaningful on the back end. So we're continuing to see that evolve. I think across all of our clusters. There's some really interesting ways that companies are integrating this tool into their toolkit for developing new medicines. And the end results 10, 20 years from now is hopefully a lot more medicines for patients and additional Labspace demand.

[Operator]

Our next question will come from Connor Siversky of Wells Fargo.

[Connor Siversky, analyst]

I got a question on 2025 deliveries. So correct me if I'm wrong here, but the pre-leasing rate of the 2025 delivery should have a significant impact on how we're looking at capitalized interests in this context. So assuming the pre-lease rate remains stable as it was reported in the supplemental release last night, can you give us an idea of how this would impact the interest expense on the P&L?

[Joel Marcus, executive]

So Marc, you might want to comment on that. But that's kind of used in isolation because that's just one piece of the business. But Marc, go ahead and comment.

[Marc Binda, executive]

Yes. Connor, yes, so capitalized interest is really determined based upon the size and magnitude of the assets under construction activities are under, broadly, all types of activities to get that asset ready for its intended use. So to the extent that deliveries outpace construction spending in assets that are going through either redevelopment or development, then capitalized interest would go down. And the opposite is true if construction costs exceed the pace of deliveries.

What I'd say on 2025, if you're looking at the leasing percentages is, we've got some time on some of those, and we've seen that pre-leasing percentage tick up. Definitely, if those assets -- we get to '25 and those assets cease activities and yes, then capitalized interest would turn off. But we're -- we got a long headway there. We've got a long time, and we've definitely done studies to look at the timing of pre-leasing, and we're not quite in that sweet spot for some of these assets that are out in '25 and beyond in terms of when tenants are ready to make decisions. So I guess stay tuned.

[Connor Siversky, analyst]

I appreciate the color there. Is there any way -- I mean, let's just say we took most simplistic form of deliveries in that context, what kind of breakeven pre-leased rate would look like, as those projects come online?

[Marc Binda, executive]

I'm not sure I understand your question, Connor.

[Connor Siversky, analyst]

Well, I mean we can take it offline. What I mean to say is if we use the schedule of deliveries and when those projects are supposed to roll online is, what would be the breakeven rate between, say, the NOI contribution and the interest expense that would be absorbed on the P&L as that -- as those projects roll online and they're moved from capitalized to the P&L on the interest expense?

[Marc Binda, executive]

Yes. I guess the way to look at that, Connor, is if you're looking at projects that have -- just to make the math easy, a 7% yield and capitalization is in the high 3% range, that would kind of tell you that if half the building turn -- got delivered and half the building got turned off, you'd be neutral. But it's really not typically the case. I mean the pre-leasing on all the assets that we have for '23 and '24 is extremely high. So we'll have to wait and see.

But like as I said before, we've seen the pre-leasing on '25 tick up as we get closer and closer to delivery, which is pretty typical for tenants that a smaller size that make decisions much closer to the point at which they can see the building coming out of the ground and can visualize it.

[Operator]

Next question will come from Steve Sakwa of Evercore ISI.

[Steve Sakwa, analyst]

A lot of my questions have been asked. But I guess, Joel, I'm just curious, given the challenging funding market for maybe many of your private competitors. I'm just wondering to what extent are you gaining any kind of market share, to the extent that you can do fit outs and build-outs of smaller Labspace. And to what extent have your peers maybe not been able to do that? And is that maybe delaying some of the new supply coming to market?

[Joel Marcus, executive]

Well, yes, Steve. So I think the way to think about that is, other landlords who may have laboratory assets, if they're in -- if you're in Cambridge or you're in other key markets that are directly competitive of ours. It always depends on their financial capability and also the needs of the tenant. I mean it's really hard to say.

I think at the moment, we feel very good about our positioning because if you're a tenant and you need, especially now -- just in time, space, and you need a path for future growth. You hit a valuation milestone, value inflection milestone, which is very typical today, a one-off building, no matter whether it's fitted out or not fitted out, doesn't really offer you that opportunity.

You need a campus, you need a campus. And generally, you want one run by Alexandria because you want the best operator, because a one-off building may get you some space, but oftentimes, there's no path to future growth or expansion. And so that's how we kind of see things. So we think we have an enormous competitive advantage and moat against one-off buildings by -- whether they be landlords who know what they're doing or landlords who have no idea what they're doing.

[Peter M. Moglia, executive]

And to dive a little -- this is Peter. To dive a little bit deeper into that. You'll notice the big increase in vacancy in San Francisco. Buildings essentially that delivered -- and they delivered in shell condition. I took a deep dive with the team. I was like, "Guys, what does this product look like?"

And a lot of it is just are buildings that are basically waiting to see whether they should be office or lab. They were built with an ability to be lab, and so we're counting them in our supply numbers. But they could very well go office because nobody is super committed. But you're also right in that -- those developers are not able to go ahead and just build out TIs because their financing isn't there for that.

But I wanted to bring attention to that because you reminded me of it. You're seeing vacancy numbers, you're seeing supply numbers. A lot of these projects are agnostic about whether or not they're going to be office or lab, especially in the larger markets. But we're counting them in our competitive supply because they could be, but they may very well not be and they very well may fail if they don't have financing to provide TIs.

[Operator]

Your next question will come from Dylan Burzinski of Green Street.

[Dylan Burzinski, analyst]

Just curious, I know you guys touched a little bit on the development pipeline, but just wondering if there's any -- sort of interesting opportunities that are -- you guys are witnessing or seeing on the acquisitions front. And if not, today, do you expect to sort of see any interesting opportunities come to fruition over the next, call it, 12 to 18 months?

[Joel Marcus, executive]

Yes. So first of all, I think you noted we had a slow quarter. I don't think any quarter is slow, so you might rethink about that commentary. Second, yes, just remember the quote that I gave regarding Warren Buffett. So we think there may be some opportunities, but we certainly won't comment on them.

[Operator]

And our final question today will come from Aditi Balachandran of RBC Capital Markets.

[Aditi Balachandran, analyst]

Just a quick one for me. I know Hallie mentioned that M&A is an overall positive. So -- do you have an idea of how much incremental demand could possibly drive. And I guess, how much of that would be for pure Labspace versus the product or drug manufacturing space?

[Joel Marcus, executive]

Most of it, Hallie, can comment. We see as a big, big opportunity as if you look at the schedules of drugs coming off patent for the balance of the decade, it's pretty large. And virtually, the only way to fill pipeline in that short of time is to acquire technologies and pipelines that are available. And so we see it as a big opportunity, number one.

And by and large, most of that is R&D related. We're not so focused. Sometimes you have the new modalities that are -- you've got intimate manufacturing with the new modalities as part of the R&D center, but kind of classic manufacturing. We don't really deal with that, and we don't see that as an opportunity for us.

But Hallie, I don't know if you have any other comments.

[Hallie Kuhn, executive]

Yes. With M&A, as I mentioned, you really have to look at it on a case-by-case basis for specific M&A. I think the better way to look at it is holistically and as Joel mentioned, M&A and licensing is a huge component of large pharma strategy for the next decade, and that will likely continue beyond that. They're looking to recoup something on the order of over $130 billion in revenue that will be lost due to patent expirations.

And so when you look at that acquisition activity on a whole, the net positive is certainly going to lead to additional R&D needs. And it's also a benefit from the perspective of upgrades in credit, given that -- when an acquirer comes in and buys a smaller company, we get the upgrade on the credit from the in-place lease.

[Operator]

And we did have an additional question coming from Wes Golladay of Baird.

[Wesley Golladay, analyst]

I just had a quick question on the development pipeline. It looks like the '23 and the '24 pipeline is well leased. Do you have any, I guess, plans to change any more of those tenants out like you did this quarter? Or is it pretty much locked in at this point?

[Joel Marcus, executive]

Yes. That's kind of an unusual circumstance where we felt we had a robust client that needed space even a little more quickly than we anticipated. We had another client we saw that maybe had taken on too much space. So it was actually an ideal mix and marriage of putting the 2 together. They come up from time to time. I'm not sure I'd read anything into that, that that's kind of normal, but that's how it happened.

[Wesley Golladay, analyst]

Fantastic. And a quick follow-up. Are you seeing any, I guess, pent-up demand to get into some of these mega campuses where they've been fully occupied for years and you do have a little bit of tenant churn. Do you have any situations where multiple tenants are going through the space?

[Joel Marcus, executive]

The answer to that is yes and -- but that tends to be more like Cambridge centric, maybe our San Carlos campus, not quite a mega campus yet. It's about 600,000 feet, but to grow much larger.

So Alexandria Center for Life Science in New York City is another example. So yes, some places we see that there are multiple tenants we're having to kind of juggle.

[Operator]

This will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Marcus for any closing remarks.

[Joel Marcus, executive]

Okay. Thank you very much for taking time to listen and God bless everybody.

[Operator]

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