Alexandria Real Estate Equities Inc

NYSE:ARE

Earnings Call Transcript 2022-Q4

[Operator]

Good afternoon, and welcome to the Alexandria Real Estate Equities 2022 Fourth Quarter and Yearend Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. With me today, are Hallie Kuhn, Peter Moglia and Dean Shigenaga. Want to thank you for joining Alexandria's fourth quarter and yearend 2022 earnings call and wishing you a safe and healthy new year. And thank you to our Alexandria family team members for their continued operational excellence across all facets of our unique business platform. A truly mission-driven, one-of-a-kind company. We have truly exceptional fourth quarter and 2022 yearend results and by any and all metrics, we're very proud, thankful, and humbled, while many public recording companies ever really struggled mightily during this past year.

I'd like to take a moment to tick off what I consider to be some of the most notable news for Alexandria. Truly amazing that Alexandria has delivered approximately 8.5% FFO per share earnings growth while continuing to strengthen our fortress balance sheet, the strongest in our history and Dean will give you more details on that. Against the backdrop of a very deleterious macro-market in this 2022 year and really again, nothing short of operational excellence to the team.

With our highly leased development pipeline and continued strong leasing and Peter will comment on that, Alexandria is well positioned to deliver strong earnings growth again in 2023. We have continued to create long-term shareholder value with a total shareholder return from IPO through the end of this -- end of the year, December 31, 2022 of 1673% compared to the MSCI read index of 684%, S&P 500 of 628% and NASDAQ 838%. So a wide margin upbeat.

Alexandria continues to produce stable, increasing, long duration cash flows and an increasing dividend. We're very proud of our approximately 1,000 client tenant base, a one of a kind treasurer that continues to generate remarkable demand for our Alexandria lab space and Peter and Dean will highlight more on this, but again, two million square feet leased in fourth quarter, over eight million for the year and almost 18 million for the last two years with rental rate increases last year of about 22% on a cash basis. Pretty amazing stats and we're very proud of our own tenant base, which is generated by far and away the majority of that lease space.

4Q '22 and yearend 2022 was another strong quarter by all fundamental financial metrics and a few others and Dean will highlight some of this, almost 100% -- almost a 100% on collections from a very strong and durable tenant base and very proud of almost 95% occupancy and we put in I think very strong same-store performance both for the quarter and the year.

Innovation in medicine is but must continue to be a national imperative. One in four of us will develop a neurodegenerative disease. Nearly 40% of adult men and women will be diagnosed with cancer during their lifetimes. One in five in the nation's population suffers from mental illness and we're continuing to see over a 100,000 deaths due to overdose last year, despite all of the efforts that certainly this company has made with our Dayton project, but just a literally a war out there, which does not seem to be in check and governments at the federal, state and local level need to double down with the vast amount of resources that have been appropriated over the last few years and really focus on this mental health issue.

A comment about our successful and continuing value harvesting and recycling of our precious capital, Peter will detail that, but amazingly stellar 2022 with $2.2 billion successfully harvested and then reinvested in a highly disciplined, disciplined manner and Peter and Dean will also comment on the excellent and steady progress we've made year to date, just one month in to our 2023 business plan for value harvesting and capital recycling and we're very optimistic about that.

And then before I pass it over to Hallie, want to particularly call out and thank our particularly call out and thank our finance team and all those who had a hand in the impressive balance sheet accomplishment set forth on Page XB of our supplement. I am very proud that we once again have the strongest balance sheet in the company's history.

So with that, I'm going to turn it over to Hallie for further comments.

[Hallie Kuhn, Vice President, Science & Technology]

Thank you, Joel and good afternoon, everyone. This is Hallie Kuhn, SVP of science and technology and capital markets. Today, I'm going to provide a recap of the life science industry coming out of 2022 and now into 2023 and how our highly unique approximately a 1,000 tenants remain resilient through the volatility of the current macroeconomic environment.

As Joel mentioned, and as we often talk about, the 90% of 10,000 diseases remains an incredible opportunity and unmet need. And the fact is, many of these that do have treatments are far from solved. Take type 1 diabetes. While it was a death sentence before the discovery of insulin over 100 years ago, it still carries an immense burden. A person with type 1 diabetes makes on average 180 health-related decisions a day, some of which have life or death consequences.

Now looking back at 2022, the stats truly speak for themselves regarding the enduring strength of the life science industry, of which I'll highlight 3. First, despite widespread commentary that VC funding hit the pause button in 2022, life science venture deals totaled nearly $58 billion.

Other than 2021's record year, it was the second highest amount of capital ever deployed. Of note, over 70% of VC dollars deployed went into an Alexandria cluster, and with VC funds across tech and life science raising nearly $160 billion in 2022, a record eclipsing 2021 is $150 billion, significant dry powder is on hand to deploy over a multiyear time horizon.

Second, large pharma continues to be 1 of the best performing sectors in the market. In a year where total returns for market indices such as the NASDAQ and Dow ended the year down 10%, the top 20 biopharma ended the year up an average 12%, with 8 of the top 20 pharma ending the year with total returns over 20%. With historic levels of cash on hand, over $300 billion to deploy into R&D and M&A, biopharma has the firepower to continue to innovate and grow.

And last, the pipeline of early innovation to commercialization continues to deliver to patients, with 37 novel FDA small molecule and biologic approvals, three gene therapy approvals and a novel cell therapy approval, of which nearly half were developed by Alexandria tenants.

Moving to Alexandria's unrivaled life science tenant roster; we wanted to provide additional color on our business segments and some examples of Alexandria's tenants at the forefront of life science innovation. Starting with large pharma, $260 billion was reinvested into R&D in 2021, and analysts estimate that, including leverage, pharma has over $600 billion to deploy into M&A and partnerships.

The next several years, indeed decade are going to be framed by large pharma's continued pursuit of innovation as product patents expire and new types of medicines such as mRNA and cell therapies transition from large preclinical and clinical pipelines to commercial stage. Alexandria tenant Pfizer is a great example, with preclinical and clinical -- sorry, with over 110 programs spanning early to late clinical developments, and an estimated 19 products launching in the next 18 months. The company also noted in their 4Q earnings this morning, they are targeting an additional $25 billion in revenue to come from M&A activity by 2030.

Transitioning to public biotech, our tenant base includes the majority commercial stage companies, which brought in nearly $150 billion in revenue in 2021. Tenants such as Amgen and Vertex have large diversified pipelines, driving long-term growth. As a note, Vertex is also leading the next generation of type 1 diabetes treatment with a novel clinical stage cell therapy that addresses the root cause of diabetes.

For clinical-stage biotechnology companies, data is king. And those that have met and will meet clinical milestones in 2023, continue to see stock recovery and ability to access capital through follow-on financings. While the public markets are still recovering, life science follow-on financings reached nearly $17 billion in 2022, which is right on par with the average life science follow-on financings over the past decade.

With respect to life science products, service and devices, this segment largely consists of commercial stage tenants. While not immune to higher interest rates and supply chain challenges, this is a big business segment that both drives and responds to the needs of researchers across academia, biotech and large pharma, which continue to grow and innovate.

A notable development in the space is the rapid drop in the price of genome sequencing, driven by a healthy increase in competition. Costing $100 million to sequence a genome in 2001 and diving to $1,000 per genome in 2020, we are now looking at the $200 genome, enabling access to critical sequencing data that saves lives.

So where are we headed in 2023? In the face of persistent economic headwinds, all industries are forced to double down on the areas of greatest value. As part of the reset, there are companies that won't make it, and we'd argue that this, in the long run, is healthy as capital is deployed more efficiently.

There will continue to be further separation of haves and have nots, but companies like those on Alexandria's tenant roster with differentiated technologies, a clear road map to key inflection points such as generating clinical data and tenured management teams will continue to raise capital.

As history has shown time and time again, some of the most successful companies are those created in the depths of a financial downturn. Ultimately, the life science industry is not built on technologies looking for a problem, but instead thousands among thousands of devastating problems, i.e. diseases that this incredibly innovative industry is poised to address over decades to come.

To end on a note of hope from former FDA Commissioner, Scott Gotland. Our ingenuity drives our hopeful innovation, but it's our compassion for each other that inspires us to apply these advances to the purpose of reducing human suffering.

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

[Peter Moglia]

Thank you, Hallie. 2022 was quite a volatile year in the macro markets, a reminder that all businesses are subject to cycles, some more than others. The pruning we see in the tech industry today is not a surprise to anyone who's been around since the turn of the century. However, much like a broken bone, it will come back stronger after it heals.

Unlike tech, developing products and services to address disease is hard and takes a lot of time, much harder and more time consuming than creating the next app to book a reservation or share recipes. Because of that, there is more discipline in life science investment, a discipline Alexandria has mirrored in our real estate strategy, which is why through the dot-com bust to the financial crisis, to whatever you want to label today's conditions, our business remains sound, as you can see in our results this quarter and during those historic down cycles.

Despite the macro headlines, we remain optimistic and excited for our business as we are in the early innings of the Golden Age of Biology. We have 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. It's going to be hard, and it's going to take time, but the industry is going to have options for people with Alzheimer's.

It's going to perfect technology to detect pancreatic cancer in time to save lives and much, much more. So let's all remember, it's hard, it takes time and patience, and then you will understand why life science research and development continues through the proverbial thick and thin of economic cycles, making our business resilient and essential.

With that said, I'll briefly touch on our development pipeline progress, update you on construction trends, discuss our leasing and update you on investor demand for life science real estate.

In 2022, our best-in-class development teams continue to deliver high-quality, purpose-built laboratory space to our tenants on time and on budget in a very challenging construction environment, which I'll touch on in a moment. During the fourth quarter, we delivered just shy of 500,000 square feet, with $28 million in annual NOI commencing during the quarter.

For the year, we delivered 1.77 million square feet spread over 15 development and redevelopment projects, with annual NOI of $119.2 million commencing during the year. Initial stabilized yields for recent deliveries averaged 6.8% and 6.3% on a cash basis, reflecting the healthy contractual annual increases embedded into our leases.

As of year-end, projects under construction and near-term projects expected to commence construction over the next four quarters totaled 7.6 million square feet and are 72% leased. Approximately 77% of that leasing has come from our approximately 1,000 existing tenant relationships.

New projects added this quarter include 1450 Owens, which is approximately 213,000 square feet and will be 100% funded by our joint venture partner; and 10075 Barnes Canyon Road in Sorrento Mesa, which will be 50% funded by our joint venture partner. Both projects are under active leasing negotiations.

Deliveries primarily commencing from the first quarter of '23 through the fourth quarter are expected to add $655 million in annual incremental NOI, reflecting a strong pipeline driven by consistent demand even in this volatile time.

Transitioning to leasing, the fourth quarter results continue to demonstrate the strength of our unique one-of-a-kind company, with leasing volume of 2,322 square feet leased in the quarter, the fourth highest total in company history. The 8,405,587 square feet leased for the year is the second highest annual total in company history. And as you can see in the supplemental, the -- our guidance for strong mark-to-market growth remains unchanged from Investor Day with a range of 27% to 32% on a GAAP basis and 11% to 16% on cash.

These results are certainly reflective of Hallie's commentary on the strength of VC funding and the stellar 2022 performance of large pharma. With $300 billion in cash on hand, we anticipate further investment in growth from this high-credit tenant sector in 2023. And the successful conversion of early innovation to commercialization reflected in the 37 FDA approvals in 2022 will incentivize continued investment in new and existing companies that have sound business models and underlying science, a cohort of companies Alexandria has a unique ability to identify.

The highest quality life science tenants always consider occupancy in the best assets as an imperative. Their facility and campus are not only used for research and development, but is a critical tool for them to recruit and retain the best scientific and management talent in the world, which is by far their greatest asset. Therefore, demand for Alexandria facilities and our unrivaled mega campuses remains healthy as the facilities are A+, and our operational excellence is highly sought after.

Moving to construction cost trends. At a high level, it appears the construction industry is on the cusp of slowing down. One of the leading economic indicators of the industry is the AIA Architectural Billings Index that leads nonresidential construction activity by nine to 12 months. Design work is at the front end of projects, so architects are the first consultants to slow down.

Recent numbers show the 3% moving average heading towards no growth in billings, and commentary from the AIA was that fewer clients are expressing interest in starting new projects. For the first time since the postpandemic restart of construction projects, which was the genesis of significant cost inflation and supply chain problems, we're starting to see some signs of materials pricing flattening out and general contractors and subcontractors looking for work.

That said, there are still items such as aluminum, rebar, copper and glass of 16% to 21% over this time last year, and it's still very difficult to obtain electrical switchgear, emergency generators, building controls and smart air handling units because despite an improvement in availability of chips, there are more products using chips than ever before so demand for them is still ahead of supply.

Laboratory buildings are heavy consumers of these hard-to-get items so to keep a laboratory construction project on time and on budget is a difficult task. Alexandria has the Intel and experience needed to make quick decisions and relationships with critical vendors to ensure we have access to the materials and labor needed to meet our schedule and budgets.

Despite the continued construction market pressures, as mentioned, we do believe the industry is on the cusp of slowing down, and we do expect cost escalations to reflect that in 2023, reducing from 9% to 10% -- from the range of 9% to 10% experienced in 2022 to 4% to 6% in 2023.

However, the $2.3 trillion infrastructure spend over the next eight years will continue to put pressure on costs and labor so we will continue to conservatively underwrite and manage our value creation projects. As of the end of the year, 81% of our active development and redevelopment projects, aggregating 5.6 million square feet, are under GMP or other fixed contracts, which is consistent with the run rate we have maintained during these volatile times.

Anticipating year-end volatility in the real estate investment markets, we completed our 2022 value harvesting and asset recycling efforts in the third quarter with impeccable execution as we laid out at Investor Day.

Overall, we completed $2.2 billion of value harvesting, with the improved properties achieving a weighted average cap rate of 4.4%, realizing a total gain of $1.2 billion and a value creation margin of 107%. This is a tremendous achievement considering the volatile interest rate environment in 2022 with many real estate investors on the sidelines. It speaks to the desirability of our assets, which are in the best markets with high-quality tenants and managed with operational excellence.

High-quality life science assets are scarce, and that is reflected in the pricing. We have started working on, and are making good progress on 2023 value harvesting and asset recycling, and we'll update you on that next quarter. But in the meantime, we'd like to report on three notable non-Alexandria sales that illustrate that there is still strong demand for life science real estate product. The first is the sale of 1828 El Camino Real and [indiscernible] in the Bay Area.

Anchored by three non-credit life science tenants, the property is 98% leased, but is extremely low quality, with limited window line, no shipping and receiving, no backup power and venting through the windows to get adequate HVAC.

Despite this, an investor paid $902 per square foot for this asset at a cap rate of 5.8%. The second trade was in the Route 128 submarket of Lexington, where a single non-credit tenant occupied 101,310 square foot manufacturing building at 20 McGuire Road sold in October for $878 per square foot and a 6.2% cap rate.

The third comp, which closed last week, is an R&D campus known as the Gauge and Center Point in the Route 128 submarket of Waltham. It traded for $983 per square foot and a 5% cap rate. It was reported that some of that -- some vacancy existed at that property and that the stabilized return is likely to be in the high 5s.

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 basis 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 it over to Dean.

[Dean Shigenaga, President & Chief Financial Officer]

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We'll jump right in here. Our team is very pleased to have the strongest balance sheet in the company's history as of December 31. And this really is a result of disciplined execution of liability management year-to-year over the past decade. Our key highlights include, we really have earned our corporate credit ratings that rank in the top 10% of the REIT industry today.

We ended the year with tremendous liquidity of $5.3 billion that provides us important flexibility in this macro environment. No debt maturities until 2025, a statement only a small handful of REITs can make today, and a weighted average remaining term of debt at 13.2 years. Net debt to adjusted EBITDA was 5.1 times on a quarter annualized basis, 5.2x on a trailing 12-month basis. The fixed charge coverage ratio was very strong at 5.0x, and 99.4% of outstanding debt is subject to fixed interest rates.

Our team had outstanding execution in 2022 on our strategic capital plan. Key highlights include $1.8 billion of 12-year and 30-year bonds, with a weighted average rate of 3.28%, the term of 22 years completed in February of 2022. Outstanding execution by our team, as Peter had highlighted, on outright dispositions, partial interest sales, aggregating $2.2 billion, with an amazing $1.2 billion in gains or consideration in excess of booked value, a 4.4% cap rate on cash NOI, all exceptional statistics and significant value creation tap for reinvestment.

We had disciplined issuance of common equity with proceeds aggregating $2.5 billion at an average price of $189 per share, including 105 million sold under forward equity sales agreements in December of 2022. On a blended basis for the year, we felt comfortable executing on the modest $105 million under the equity under forward equity sales agreements in December at roughly $150 per share.

Now briefly on the bond market, the beginning of 2023 has been positive for high-quality issuers like Alexandria. Overall pricing for 10-year bonds for Alexandria has significantly improved, and as of yesterday, was in the upper 4% range or just below 5%.

For 2023, we will continue to focus on execution of real estate dispositions and partial interest sales or joint ventures for a significant component of our 2023 capital plan. Two transactions are under executed LOI to bring in a partner on a portion of each asset. These transactions will provide approximately $370 million of equity-type capital in 2023, and there are other transactions that we expect to complete this year.

Turning to operating and financial results, really, congratulations to our entire team for outstanding execution this year or in 2022 during a very challenging macro environment. We reported total revenues of $2.6 billion, up 22.5% over 2021, with FFO per share as adjusted of $8.42, up 8.5% over 2021, and outperforming our initial outlook for 2022 of $8.36 by $0.06, and ahead of consensus, both for the fourth quarter and the full year of 2022.

Now diving into key highlights from our truly amazing operating and financial results for 2022. Strong rental rate growth, leasing volume and occupancy growth drove record same-property NOI growth in 2022 of 6.6% and 9.6% on a cash basis, exceeding our 10-year average same-property NOI growth prior to 2022 of 6% and 2.9% on a cash basis. The last four years of rental rate growth on lease renewals and releasing the space have been the highest in the company's history, including rental rate growth of 31% in 2022.

Over the last two years, cash rental rate growth has been the highest in the company's history, including 22.1% for the full year of 2022. Leasing volume in the fourth quarter was robust relative to the quarterly average volume in recent years in the range of 1.1 to 1.3 rentable square feet per quarter, highlighting the continued demand from our client tenants.

Now the last two years have generated the two highest annual periods of rentable square feet leased, including 8.4 million rentable square feet in 2022. three out of the last four quarters represented the highest quarterly periods of rentable square feet leased, including two million square feet in the fourth quarter.

Now turning to occupancy, occupancy was up 80 basis points since the beginning of 2021 to 94.8% as of December 31. Now looking forward into 2023, we expect a slight decline in occupancy in the first half of the year, with recovery expected in the second half of the year. We had a similar dip in occupancy in 2022, specifically overall strong occupancy in the year, but we did have a 40-basis-point decline from the first quarter of '22 to the third quarter of '22.

For 2023, we expect temporary vacancy beginning in the first quarter related to spaces that, on average, are expected to generate significant rental rate growth, greater than 60% on a cash basis. Now these spaces are forecasted for occupancy over the next five quarters. This includes a mix of small redevelopment space, i.e., the first time conversion to lab space, normal lease expirations and a few early tenant departures.

Importantly, consistent with our general quarter-to-quarter growth in FFO per share for many years, we expect quarter-to-quarter growth in FFO per share in 2023.

Now a few other key highlights. 90% of our annual rental revenue is from investment-grade or large-cap publicly traded companies within our top 20 tenants, highlighting the high-quality list of client tenants that our team has curated over the years. 99.4% of collections of January rent through January 27, just highlighting the continued strength of rent collections. And we had a very strong adjusted EBITDA margin of 69%, highlighting execution of operational excellence by our team.

Cash flows from operating activities after dividends for 2023 is expected to be very strong at $375 million at the midpoint of our guidance, and will continue to support growth in our annual common stock dividends per share. Our FFO payout ratio was very solid at 58% for the fourth quarter. And at this pace, cash flows from operating activities after dividends, over the next three years, should generate over $1 billion and that's an amazing statistic and very efficient capital for reinvestment.

Now turning to a couple of important real estate highlights. Construction in progress, otherwise known as CIP is forecasted to peak in the first quarter, then declined slightly through 2023 as the dollar amount of deliveries are expected to exceed additions to CIP quarter-to-quarter, highlighting the significant volume of deliveries over the next couple of years.

As Peter had highlighted, we have 7.6 million rentable square feet of projects that are 72% leased and projected to generate $655 million of incremental net operating income over the next three years. In the fourth quarter, we recognized impairments aggregating $26.2 million on real estate, primarily related to a few assets we plan to sell in 2023.

Each asset is small and represents noncore assets no longer strategic for Alexandria to own. And to put this into perspective, the book value of assets held for sale was approximately $120 million as of December 31. The key takeaway is that from time to time, we review our asset base and proceed with selective sales that continue to enhance the quality of the remaining asset base.

Briefly on venture investments. FFO per share as adjusted over the last 2 years has included an average of $103 million of realized gains each year from venture investments, or approximately $26 million per quarter. Now quarterly gains from venture investments in 2023 are expected to be up slightly in comparison to this recent quarterly run rate. As of December 31, 2022, we had gross unrealized gains of $506 million on a cost basis of $1.15 billion, highlighting significant value in our venture investment portfolio.

Now investments in our venture portfolio have been very modest, at less than $70 million in aggregate over the last five years, including $20.5 million that we recognized in the fourth quarter.

Turning to guidance. We reaffirm guidance for 2023 that was initially provided in connection with our Annual Investor Day on November 30 with 1 minor update. We updated excess cash held from bond proceeds to $300 million, representing a $50 million increase from the midpoint of our prior guidance. Our 2023 guidance for EPS diluted is a range from $3.41 to $3.61, and FFO per share as adjusted diluted is a range from $8.86 to $9.06 with no change in the midpoint of $8.96.

Now under the current common stock distribution agreement we have in place, otherwise known as our ATM program, we have approximately 142 remaining available. We expect to file a new program in the first quarter of '23. Please refer to Page 6 of our supplemental package for detailed underlying assumptions included in our strong outlook for the full year of 2023.

With that, let me turn it back to Joel.

[Joel Marcus, Executive Chairman and Founder]

Thank you. Operator, you can open it up for questions, please.

[Operator]

[Operator Instructions] And our first question will come from Steve Sakwa of Evercore ISI. Please go ahead.

[Steve Sakwa, Evercore ISI]

I guess I wanted to just circle back to some comments, Dean, you made about some of the pending sales and joint venture interest. I'm just wondering if either you or Peter could provide a little bit more color on what the institutional market is sort of looking for? Maybe how pricing has changed over the past six months? And can you give us any sort of flavor on the timing of when some of these transactions make it over the finish line?

[Joel Marcus, Executive Chairman and Founder]

Yes. This is Joel. I think we'll try to be general in that given that we have -- we're at the letter of intent stage on a number of transactions. But maybe, Peter, you could give kind of a topside view.

[PeterMoglia]

Sure. Obviously, there's only a few product types out there that people are comfortable in investing in right now. And obviously, life science real estate is 1 of them. So we are -- I mean, been receiving calls on a fairly regular basis from some existing partners that are excited to see what we have going this year.

As I mentioned during my comments, cap rates are expected to rise from the peak. But as I've also said in the past, we don't anticipate, on a relative basis, to be very high. And I'm not going to speculate right now on where they'll be. We'll start reporting once we have more data, but they will be sticky given the scarcity of opportunities for life science real estate.

[Steve Sakwa, Evercore ISI]

Okay. And then just a second question, Joel. I know acquisitions are not a huge part of the plan right now, it's mostly development. But maybe could you just comment on the 2 deals that you did announce in the quarter and kind of the strategic rationale for both of those projects, and how you think about pricing on those versus your development opportunities?

[Joel Marcus, Executive Chairman and Founder]

Yes. So each one of those was unique in and of itself. I don't want to get too granular, but I think the one in the Route 128 corridor really enables us to piece together three different projects into a more than 1-million-square-foot mega campus, and we have some great activity from our 1,000 tenants to help fill that. So we're very optimistic on that and feel like that was very strategic. It's also under lease back for a number of years, so it will be continuing to cash flow.

The other acquisition was a unique acquisition in downtown Austin. We felt that it was a superb location. It's also under a lease back for a period of time. So we'll continue to generate good revenue, and I won't comment on what our future business plan is for that, but we think there's a really great opportunity to do something unique in that spot, if that's helpful.

[Operator]

The next question comes from Georgi Dinkov of Mizuho Securities. Please go ahead.

[Georgi Dinkov, Mizuho Securities]

So I was wondering what are your thoughts on the sublet market in the sector? And have you seen an uptick with more companies subleasing space across the board and specifically in your markets? And could you please remind us what percentage, if any, of your portfolio is currently subleased?

[Joel Marcus, Executive Chairman and Founder]

So, Peter, do you want to maybe comment generally on that?

[PeterMoglia]

Yes. I've got some sublease statistics so I will -- for our larger markets. I will say that the amount of sublease space overall has come down in the -- over the last couple of quarters. One of the reasons for that is built out lab space is very attractive, especially for companies today that want to try to limit their out-of-pocket investment in the space.

So Boston is at about 4.7% right now sublease. And again, anything of quality and that's built out is moving fairly quickly. San Francisco has been reduced to 2.3% and San Diego only has 2.1%. So these are all very normalized numbers for any cycle.

[Georgi Dinkov, Mizuho Securities]

Great. And could you comment on your specific portfolio?

[Peter Moglia]

It's less than that.

[Georgi Dinkov, Mizuho Securities]

Okay. And just my second question on Sanofi. We noticed that the square footage day rent dropped by about 30,000 square feet quarter-over-quarter. I was wondering if you could provide some more color on that.

[Joel Marcus, Executive Chairman and Founder]

SP1 I don't know, Dean, if you know that, what asset that was or you want to...

[Dean Shigenaga, President & Chief Financial Officer]

No, it's such a small number. I'm sorry, guys. We don't -- I don't have that at my fingertips.

[Joel Marcus, Executive Chairman and Founder]

I don't either.

[Joel Marcus, Executive Chairman and Founder]

It's 30,000 square feet on our 40 million square foot portfolio is artwork.

[Operator]

The next question comes from Michael Griffin of Citigroup Global Markets. Please go ahead.

[Michael Griffin, Citigroup Global Markets]

Maybe going back to the Route 128 acquisition. Peter, you touched on some pretty favorable pricing it seemed like with transaction comps. I feel like that's probably 1 submarket that maybe there's been more worries around supply with.

So maybe you can expand on sort of what you're seeing out there, has sentiment changed for that suburban market? I mean, obviously, when we think Boston, we think Cambridge being the highest quality market there, but maybe has a sentiment shifted in more of those suburban product?

[Joel Marcus, Executive Chairman and Founder]

Yes, this is Joel. Let me make a topside comment, and then I'll turn it over to Peter. I think you have to -- if you're asking about general sentiment, Peter will comment if you're asking about our sentiment it's different because we generally have a certain targeted demand from our existing client base, and therefore, by making, say, the acquisition we did or doing things that we do to create an environment where companies want to go, it really is focused on our kind of game plan.

But if you're looking at a topside view, I don't know, Peter, you could share topside view on Waltham generally.

[Peter Moglia]

Well, Waltham, the other surrounding areas, I think the sentiment is still positive. The group, that last comp, I talked about the campus that sold for a five cap, it was reported -- I think it was [indiscernible] that had the article that the group that sold it made $200 million on it. They only owned it for two years.

So pretty good outcome. And obviously, if somebody is paying $200 million more than somewhat bought it for two years ago, maybe it was three years ago now, that -- they're a believer in the rent growth in the market.

So the other reason that the comps are weighted towards the suburbs is very likely because there's just not a lot of available product to buy in Cambridge or the Seaport or Watertown. So the opportunities were just there. And I don't know if it says anything about the sentiment and probably just more about the availability.

[Joel Marcus, Executive Chairman and Founder]

And keep in mind, there will always be demand among more R&D-light companies for Route 128 in Waltham than in the heart of Cambridge. That's just how it's been for decades now.

[Michael Griffin, Citigroup Global Markets]

Great. That's helpful. And then on the $1.4 billion of commitment costs from joint venture partners, I'm curious, are there any kind of restrictions around how that can be drawn down, how much these partners can fund? I think you've got some portion of that in your capital plan for this year. But anything you can expand on that would be helpful as well.

[Joel Marcus, Executive Chairman and Founder]

Yes. I'll ask Dean to do that, but obviously, each and every situation is different, but Dean, upside view?

[Dean Shigenaga, President & Chief Financial Officer]

Yes. I think the high-level concept on the $1.4 billion of commitments for funding from our JV partners, generally speaking, these are funding requirements related to our value creation pipeline, so construction funding commitments. And these commitments do extend out over multiple years out, two to three years depending on the joint venture.

But given the recent increase in projects with joint ventures over the last, call it, four to six quarters, we just wanted to be sure that the investment community understood the significance of the commitments coming from our partners on just a handful of construction projects. So we'll continue that disclosure going forward.

[Operator]

Next question comes from Josh Dennerlein of Bank of America Merrill Lynch. Please go ahead.

[Josh Dennerlein, Bank of America Merrill Lynch]

I saw in your top 20 tenants page in the sub. It looks like there's a footnote on 270 Bio saying the in-place cash rents are 20% to 25% below current market. Looks like that last quarter was 5 just 10% below current market. Just curious on what's driving that update?

[Joel Marcus, Executive Chairman and Founder]

Dean, do you have any information on that?

[Dean Shigenaga, President & Chief Financial Officer]

Yes. So it's Dean here, guys. So what we did was we looked more carefully at the actual space. I believe the prior quarter was slightly lower or showing a modest mark-to-market opportunity and it was reflective of looking at that specific property overall, but we realized we had to dive into the details a little bit further because it didn't make sense as we were looking at it for the current quarter.

And as we looked at the space specifically, so a portion of the building and the specific space that they're occupying, there's a bigger mark-to-market opportunity. So we wanted to be sure we updated that number in the current quarter. So nothing changed from a real mark-to-market, but previously, it was the overall building. And today, it's just specifically, or this quarter it's specific to that space that they occupy.

[Josh Dennerlein, Bank of America Merrill Lynch]

Okay. And then just -- since I'm newer to the story, just kind of curious why the disclosure on that type company. It looks like it has a small market cap.

[Dean Shigenaga, President & Chief Financial Officer]

It's really due to that. Some -- occasionally, there's a tenant in the top 20 list of tenants that we did not curate ourselves or has a modest market cap, and we just want to provide some incremental color to some investors who don't need to research the details on their own.

[Operator]

The next question comes from Richard Anderson of SMBC Nikko Securities. Please go ahead.

[Joel Marcus, Executive Chairman and Founder]

You may be on mute, Rich.

[Richard Anderson, SMBC Nikko Securities]

I totally was, sorry about, Joel. So Peter, you talked about cap rates in your opening comments, and I think, Dean, you mentioned some partial interests that are far along and may be announced shortly. How would you characterize the quality spectrum of what you're looking at for partial interest?

Are we talking very high-quality assets like the Binney Street transaction a while back or more middle of the road is a mechanism to minimize the cap rate, but also keep hold of your best assets and not relinquish too much of that opportunity going forward?

[PeterMoglia]

I'll start, Rich. The profile of what going on is good quality. We don't have much of anything outside, I think, of high quality. I mean, certainly some workhorse assets that we still hold, we've sold a lot of those. So the partial interest sales just because of the profile of our portfolio are typically going to be higher quality assets, and that's what we're working on now.

[Richard Anderson, SMBC Nikko Securities]

Are we sub-five, you're not talking about pricing just yet? Or can you give any...

[Peter Moglia]

I mean I don't think it does any good really to talk about pricing because we're still negotiating with people. And so better strategy to keep that to ourselves at this point.

[Richard Anderson, SMBC Nikko Securities]

Fair enough. And then second question for me is for Dean. You have an average debt exploration, I think, of 13 years, you said, I think your average lease term expires in 7 or 8 years. I'm wondering if that provides you any opportunity in the future in the interest of matching liabilities with assets, your way conservative in that comparison as it stands today.

Do you ever see that, that gap shrinking whereas maybe the opportunity to raise shorter-term debt or lengthen lease term would make sense for the company? I'm just curious if that spread that you have in place now is something that could wiggle around a little bit in the future?

[Dean Shigenaga, President & Chief Financial Officer]

Rich, I guess the way to answer the question is I think we find significant value in the longer maturity profile given the size of our company and -- we have a meaningful maturity profile for a big company, right, or that matches a big company is maybe a better way of describing it.

So the longer average debt term gives us a lot more flexibility to manage the overall maturity profile, right? Because if that was more like five years, with that much debt outstanding, it will be a lot to manage year-to-year on top of any growth capital. So I think strategically, the longer term of remaining maturity is a real positive for us.

[Operator]

Our next question comes from Tom Catherwood of BTIG. Please go ahead.

[Tom Catherwood, BTIG]

Appreciated Hallie's comments at the outset about tenant health and funding and commentary around Pfizer M&A really jumped out. Maybe, Peter or Joel, during prior M&A cycles in the biopharma industry, what was the read-through for real estate usage? Did acquirers tend to consolidate the footprint of their portfolio companies or were there further expansions?

[Joel Marcus, Executive Chairman and Founder]

Yes. I can give you my thoughts, and Peter can share his. I think it's hard to compare past cycles because the level of technological development in biotech was so different. Today, it's much more sophisticated new modalities.

So when you have M&A today, it used to be oftentimes you're buying a company for maybe a pipeline and you like to hold on to the people, but maybe space is less valuable going back maybe a decade or two. Today, that space is pretty critical, especially if it's located in a top-tier cluster market like Cambridge.

Not only do you want the people for recruitment, retention and just working on the projects, but you've also got probably built into the space some pretty sophisticated new modality technologies, both at the lab side and in the R&D manufacturing, which is kind of integrated so closely. So I think it's harder to tell. I think, again, there's going to be a whole series of different types of uses of capital.

A lot of it will be partnering, which has historically been probably the favorite approach of pharma. There will be some acquisitions. You've got a Federal Trade Commission that's pretty hostile to any acquisition in any industry these days.

So you'll probably see bolt-on acquisitions where people will want to keep that group and that technology in tow. But I don't think it's is easy to look at, say, big mega mergers in the past and think that, that has any relevance to today.

And I think the key buy line for life science in 2023, in addition to what Hallie kind of framed out is what will be the velocity, the depth and the focus of this large cash hoard $300 billion. And if you leverage it, you could be as much as $500 billion to $600 billion. But Peter, you could comment just historically and what you've seen.

[Peter Moglia]

It used to be if you were like a one-trick pony, it was an acquisition and then you shut it down. I mean, a good example is company called ICOS in the Seattle area was bought by -- they developed Cialis, they were bought by Lilly, and they completely shut down. But with the rise of platform technologies, a lot of the M&A, were super beneficial to the growth of our clusters.

Companies realized that these teams that they were buying -- or these companies were much more valuable than just the pipeline, but the teams were extremely important. So there were a number of companies. I mean I remember when I was in Seattle, a company got bought by Gilead

It was a -- it was called Corus Pharma. They were a 5000-square-foot tenant. And right after that, the Gilead approached us, and we ended up doing a huge over 100000-square-foot deal with them so that they could expand the capabilities of the team. So as Joel said, it ebbs and flows.

But I think if you look at the fact that, I think about 75 -- or in certain years, about 75% of products that have hit the market have started from external innovation that end up on -- in pharma's hands, it's pretty telling that, that is a long-lasting strategy to cone the biotech world, to buy the companies and to keep the teams in place because they generally have platforms and other products behind their initial ones. So I think the general trend in recent years has been to keep them in place and to expand. That would be my...

[Joel Marcus, Executive Chairman and Founder]

Yes. Hallie, any final comments on that question?

[Hallie Kuhn, Vice President, Science & Technology]

Just to say that every acquisition is going to be very unique in terms of the types of products being acquired, the talent base that comes along with it, the market that it's in. And so we very much are acutely aware of kind of the one-off nature of every acquisition. And ultimately, for acquisitions where they may tuck it into the company, we see a net positive in the ecosystem.

If it's a small company that does get folded in, those executives go on to create 1 more or multiple companies after that. So we've had some great examples in the past of a company gets acquired and then that CEO goes on to build a bigger and even larger company. So altogether, it's a net positive for the ecosystem, I would say no matter what the outcome is.

And a great example in Seattle, as Peter mentioned, another great 1 is Celgene's acquisition of Juno and then the acquisition by Bristol-Myers, that's really one of their most critical advanced cell therapy outpost. So again, it's almost case by case, Rich.

[Tom Catherwood, BTIG]

Great. I really appreciate the thoughts there. Maybe sticking with Pfizer, we did notice that in New York, 219 East 42nd Street moved from future developments to intermediate developments. If memory serves me, I think there was a 6-year sale leaseback on that asset. What are your current plans, if any, on that building in a potential project?

[Joel Marcus, Executive Chairman and Founder]

Yes. So that building, which we acquired had a leaseback to Pfizer. Remember, it's an office building for Pfizer, but it unique in New York, very few buildings have the bones to be converted to lab. They are moving to Hudson Yards, as you know, and their lease is up, I think, out about 2 years or so. But we do have some internally generated demand for that from our current client base, and so we're moving that along.

[Operator]

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

[Michael Carroll, RBC Capital Markets]

I know demand for fully built-out lab product is pretty high. But have you noticed any difference in the level of demand you're tracking in your development pipeline where tenants do need to invest a significant amount of cash outlays to build out that space? I mean has that dropped off noticeably over the past 6 to 12 months given the disruption in the capital markets?

[Joel Marcus, Executive Chairman and Founder]

Yes. Peter, you could comment generally to upside.

[Peter Moglia]

Yes. one of the reasons the sublease market has stayed in check even when there's been some disruptions to companies is the fact that -- and as we've talked about for now almost 2 years, the high cost of construction has just created a much more expensive proposition when you have to build out lab space. The news, though, is that there's just not a lot of sublease space to satisfy all the demand.

So deals where the tenants have to invest space, such as our development and redevelopment deals do continue to go. But I mean, there -- if you're a Board and your company wants to expand and they can go into 25,000 to 35,000 square feet of existing space, even though it might be in a different building and even the different neighborhood, they're going to consider that today just given the costs. We're still doing fine in our leasing of our development and redevelopment portfolio. But there is a sentiment that if there's an existing available space just try to grab it.

[Michael Carroll, RBC Capital Markets]

Okay. Dean, do you know if you're like competitors on the development pipeline? I mean, is that where the drop-off in demand is coming from is that first-generation type space?

[Dean Shigenaga, President & Chief Financial Officer]

Well, I think that the reason that others aren't as successful just because they don't have our brand. I mean it's -- we've talked about it for years and years. And there's a lot to be said about the operational excellence we bring, the management of the facilities to the design of the facilities. I think -- to the extent that there's projects out there that are pausing even after they've gone vertical or remain vacant, it's a number of things.

One is that the location isn't comparable to ours; two, they've underwritten very high rents because they need to, their basis isn't very good; and three, they don't have a reputation to manage these critical infrastructure building. So I would say that, that's really the reason behind a lot of the competitive buildings not...

[Joel Marcus, Executive Chairman and Founder]

And major overruns on budgets, I can think of 1 project in Boston where a client went there because we didn't have exactly the space that they needed, and then they came back to us when the developer had a huge overrun on costs. So that goes on all the time.

[Michael Carroll, RBC Capital Markets]

Okay. And then just last 1 for me. I was looking at your current tenant roster versus the prior quarter, and it looks like Maxar Technologies dropped off the list. I mean is that a fair read? Am I looking at that correctly? And can you give us a sense of what happens there?

[Joel Marcus, Executive Chairman and Founder]

Yes. That is a project that we own where they're rotating out of that, and that will be a future development project -- redevelopment and development.

[Operator]

Yes. Our next question comes from David Rogers of Robert W. Baird. Please go ahead.

[Dave Rogers, Robert W. Baird]

Maybe this is for Dean. But I wanted to talk about the leasing spread. When you excluded the 2 leases in the quarter, obviously, very strong performance for the company overall. Curious about the guide for this year, which you gave in December, reaffirmed last night. But at the 11% to 16%, I think you had said that there was some incremental component of that that was non-life science maybe. But can you give us a sense of kind of that 11% to 16%. Is that more a function of kind of market rents may be slowing down? Or is that just a function of kind of more different leases that have been added to that pool?

[Dean Shigenaga, President & Chief Financial Officer]

Dave, its Dean here. Lab rents remain healthy as you can tell from leasing statistics in the fourth quarter. Hard to really look out well as you go out into the future, and lab rents are trending well, as we noted from our results. There is a slight mix at play in '23 with certain expirations coming up and certain leasing activity we expect to accomplish, call it, non-lab product. But that product is a small percentage of the portfolio. Rental rates overall, even when you blend it all together, will remain very strong.

[Dave Rogers, Robert W. Baird]

That's fair. And then maybe to follow up, Peter, in your last question in terms of kind of market rent growth, it sounds like it's bifurcating even further, probably between kind of the higher-quality and lower-quality assets. What does that spread look like today maybe across the portfolio or maybe pick the top three clusters in terms of kind of where replacement rents might be going versus where maybe a more traditional kind of A- asset might be performing today at a market rent level?

[Peter Moglia]

I can really only speak to our rents. I just don't have a lot of visibility to outside of the asking rents that we are hearing from competitive buildings. Our newer product and our -- in our older product, there's not much of a spread between it. Typically, you might see even a 10% to 15% premium for new buildings over older buildings.

I think probably the availability of existing space makes the existing space more valuable today. But it also, I think, speaks to just the quality of our overall portfolio. We don't have a lot of B assets that you would -- that you could say that out in the suburbs, the single-story stuff that's not amenitized.

Still, the rents, I can -- in the greater Boston, I mean, the rents out there for that type of product or are in the $60 to $70 range. Compare that to the $100 to $120 in Cambridge and maybe the $85 to $100 in Seaport. It's still fairly close, but you do the math and that will give you the premium.

I think overall, though, I would say that rents for lab space have not regressed at all and are still fairly strong, and the has not been a big movement in concessions like you might be seeing in the office market. I know I read a lot about the office market, and I know that rents for high-quality buildings have held there, but concessions have gotten really, really high. And that's not the case with us. Our rents have held well and concessions have remained constant.

[Operator]

The next question comes from Dylan Burzinski at Green Street Advisors. Please go ahead.

[Dylan Burzinski, Green Street Advisors]

And I appreciate the color on some of the transactions that have happened lately. But just curious, when we look at cap rates for purpose-built lab product versus converted product, have you guys seen any cap rate differential between the 2?

[Peter Moglia]

I don't have any specific examples other than maybe what I just talked about and the comp in is a really just terrible conversion. Burlingame is on the Peninsula. It is very close to South San Francisco. So to get a fully leased comp at an almost 6% cap rate, I think, probably illustrates that conversions aren't that appealing. I would expect good quality, purpose-built lab in Berlingame to be at least 100 to 150 basis points lower than that.

[Joel Marcus, Executive Chairman and Founder]

And most conversions, not all, but almost all don't work.

[Dylan Burzinski, Green Street Advisors]

Okay. That's helpful. And then, I guess, just looking at the supply picture, are there certain markets or submarkets where you're starting to see supply pick up and maybe become more of a risk here?

[Peter Moglia]

From a supply standpoint?

[Dylan Burzinski, Green Street Advisors]

Yes.

[Peter Moglia]

The numbers are -- the numbers for availability are still kind of where they've been over the last few quarters. I mean, the biggest supply overhang in any of our markets is in South San Francisco, and it remains that way. That is -- that has not really changed. We -- there's a lot of talk about supply in Greater Boston. Majority of what's talked about hasn't broken ground, some assets have.

A lot of them are in the Summerville area, which is not competitive to where our product is. So we're not too concerned about it. But yes, I think that the supply story is always 1 that we have to talk about. People are trying to get involved in the business. But the best locations are very difficult to get. And some people have tried to fan out in other areas such as Summerville with limited to no success, I think, at this point.

[Dylan Burzinski, Green Street Advisors]

Okay. Thanks. That's it for me.

[Operator]

The next question comes from Jamie Feldman of Wells Fargo. Please go ahead.

[Jamie Feldman, Wells Fargo]

Thanks for taking my question. So I know you spoke a lot about how differentiated AllexInterest portfolio is and leasing demand is. But if you look at the market that it does kind of show in some of these markets, you're seeing flattish rents and concessions rising and net effective rents been declining month-over-month or maybe quarter-over-quarter.

Are you seeing that at all in your portfolio? I mean, are you still pushing rents? And I know you said the concessions haven't grown a lot, but can you just provide some more color on how that really looks for your business versus maybe what we're seeing overall in the market?

[Dean Shigenaga, President & Chief Financial Officer]

Jamie, it's Dean here. Net effective rents have been positive over time for our business. So it's not declining, it's increasing.

[Jamie Feldman, Wells Fargo]

Can you say maybe by how much like quarter-over-quarter? Do that like a same-store basis, how much you're pushing net effective rents?

[Dean Shigenaga, President & Chief Financial Officer]

I don't have it right in front of me, Jamie, but I don't have the exact statistic, but we recall reviewing it over the last month and it was a very solid positive trend. I mean it's -- look, our rents, cash and GAAP rents are up. Those are significant increases period-over-period. Net effective is just trailing out a little bit, but still directionally very substantial, right? Because their base net effective is based off your GAAP rents, right? Very strong.

[Peter Moglia]

Yes. I wouldn't doubt, Jamie, that other developers are offering concessions to try to bridge the gap between the quality and reputation that we have and what they offer. Our numbers are still stable at this point.

[Jamie Feldman, Wells Fargo]

Okay. That's great news. And then I saw -- I noticed you did the $105 million forward equity agreement in the fourth quarter. Typically, this time of the year, sometimes you'll do a much larger one. Can you just decide -- can you just discuss the decision to do equity at all this quarter? And just how you think about why you didn't do something bigger?

[Dean Shigenaga, President & Chief Financial Officer]

Jamie, it's Dean. As we looked at our wrapping up the year, there was an opportunity to raise a very modest amount, as you've mentioned, $105 million. And as we looked at our overall capital that we raised during the year, which I commented on, it blended in very attractively.

While, it was done at $150, I think the overall blended common equity proceeds were about $189 per share. So just keeping things in perspective, there's a modest amount that we raised. And Jamie, going back to your other question, I just needed a second to pull it, but 1 second, I just lost the page.

But on rental rate growth, we were at -- so 31% GAAP, '22 cash for the year. Net effective for the year was something around 37%.

[Jamie Feldman, Wells Fargo]

I guess I was thinking more in terms of just in the market today. I mean, you have a nice baked-in mark-to-market that's going to show up in leasing spreads. But are you able to still, versus last month, keep pushing rents? It sounds like you think you are on a net effective basis, but I was just hoping to get color on that.

[Dean Shigenaga, President & Chief Financial Officer]

It sounds like you're asking what the first quarter is going to look like. Look, Jamie, in the fourth quarter and the year for 2022, we are very strong. So I don't have an outlook going into the first quarter for net effective, but again, 2022 is up 37% on a net effective basis.

[Joel Marcus, Executive Chairman and Founder]

And directionally, just look at our guidance for GAAP and cash, too so...

[Jamie Feldman, Wells Fargo]

Okay. That's great. And I guess just going back to the equity raise. So it sounds like you kind of think about it on a 12-month view, like that kind of cleaned things up for '22 and then '23 kind of is a fresh start in your -- how you would raise equity?

[Peter Moglia]

Well, maybe I think probably what's more important, Jamie, on the broad bucket of solving for equity-type capital, as I mentioned, we remain focused on dispositions and partial inter sales JV capital for a significant component of our capital plan for 2023. And we've got a couple of transactions that are fairly advanced right now executed LOI and moving through.

So it's only January 31, and we feel like we're in a good spot moving on our capital plan there. And so we got to keep in mind that, that's an important component as well, Jamie, as it has been for many years now.

[Operator]

The next question comes from Omotayo Okusanya of Credit Suisse. Please go ahead.

[Omotayo Okusanya, Credit Suisse]

Just a quick question on capitalized interest. I think there was a comment made earlier on that CIP would peak in first quarter and then slowly start to decline as you have deliveries. But I believe the CIP guidance is meaningfully above last year. Can you just help us kind of reconcile the difference? Just higher cost of capital being used to capitalize the CIP? Or how do we think about that?

[Peter Moglia]

Is your question just the growth year-over-year?

[Omotayo Okusanya, Credit Suisse]

Yes.

[Peter Moglia]

The year-over-year growth is more just a function of the size of activities undergoing construction today. As you know from our disclosures we have 7.6 million either under construction or near-term starts on average, 72% leased.

If you look at the fourth quarter capped interest, which is reflective of the average basis under construction, it was $79.5 million of cap interest for the quarter. it was $73 million in the third quarter, so I'll call it up about $6 million. It was $68 million in the prior quarter, so up about $5 million quarter-over-quarter.

If you were just to continue to project out that $4 million or $5 million increase quarter-to-quarter, you can kind of project out what half of the year would look like. And just double that from that point forward, you're now at the bottom end of the range of our guidance. So directionally, it should make sense if you look at it from a run rate perspective.

Again, year-over-year, it's up significantly because the amount of construction activities were actually up year-over-year.

[Operator]

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

[Joel Marcus, Executive Chairman and Founder]

Thank you, everybody, and we look forward to talking to you on the first quarter call. Be safe, feel well.

[Operator]

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