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Alexandria Real Estate Equities, Inc. (ARE) Management on Q2 2020 Results – Earnings Call Transcript
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Alexandria Real Estate Equities, Inc. (ARE) Management on Q2 2020 Results – Earnings Call Transcript

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Alexandria Real Estate Equities, Inc. (NYSE:ARE) Q2 2020 Earnings Conference Call July 28, 2020 3:00 PM ET

Company Participants

Paula Schwartz – Rx Communications Group

Joel Marcus – Founder & Executive Chairman

Jenna Foger – Senior Principal of Science and Technology

Steve Richardson – Co-CEO

Peter Moglia – Co-CEO & Co-CIO

Dean Shigenaga – Co-President & CFO

Conference Call Participants

Manny Korchman – Citi

Sheila McGrath – Evercore

James Feldman – Bank of America Merrill Lynch

Anthony Paolone – JPMorgan

Tom Catherwood – BTIG

Rich Anderson – SMBC

David Rodgers – Baird

Michael Carroll – RBC Capital Markets

Omotayo Okusanya – Mizuho

Operator

Good day and welcome to the Alexandria Real Estate Equities Second Quarter 2020 Earnings Conference Call. All participants will be 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 would now like to turn the conference over to Paula Schwartz from Investor Relations. Please go ahead.

Paula Schwartz

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 reports filed with the Securities and Exchange Commission.

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

Joel Marcus

Thank you very much Paula, and welcome to everybody to Alexandria’s second quarter earnings call and our first full quarter done virtually. And as I always do, I want to thank the entire Alexandria’s family for an outstandingly executed second quarter, really in all respects and by all metrics, as I said, our first full reporting quarter virtually.

It was once said a couple of notes about change, everything changes but change. And as I’ve quoted before, the award winning visionary author Jim Collins, noted to be built to last and must be built to change. And Stephen Hawking said intelligence is the ability to adopt a change. So Alexandria is, has always been I think resilient and their responses to a changing environment were all blessed compared to many who were struggling during this pandemic and I want to, my heart goes out and I wish everyone both safety and good healthcare.

And Dean will talk about this, but entire huge kudos to the entire accounting and finance team on our win of NAREIT’s best communication gold award once again. In our first quarter call in, or on our first quarter call, I should say we dial back our growth in light of the uncertainties of the COVID onslaught. And all around but now that we’ve gotten through that quarter and through part of gotten through the second quarter, certainly and into the third quarter, we have a much clearer, I think, view of the landscape going forward.

I want to say a couple things about corporate responsibility, it’s a lot in the press. But we’re not new to this and we’ve included in our press release the panoply of corporate responsibility initiatives. We’ve worked on very hard over many, many years. Many long standing and impactful activities and our regional communities are truly positively impactful sustainability initiatives, including our pioneering zero carbon building in South San Francisco.

And more recently in response to the COVID pandemic. We are in fact at the vanguard of the life science industry and advancing the search for solutions to COVID-19. I want to also harken you back to our project 115 with Alphabet, the subsidiary of Alphabet verily, 72,000 Americans died last year hard to imagine half of the number that have died of COVID this year, but an enormous number and more than in the entire Vietnam War of opioid addiction and 2020 deaths are up 13% and one could imagine why that may be.

Last year, we announced our 115 project in Dayton, Ohio to serve as a unique and complete care model, comprehensive care model really to attack the opioid crisis in America. Our hope was, we would build a model that other communities could copy. We pioneered the design and development of the almost 60,000 square foot campus and thank you to the great team that worked on this on about four acres, which opened to outpatients in the fall of 2019. This month, we completed 115 living the residential housing component of the campus.

This facility is the so-called sober living facility for patients suffering from opioid addiction to live while accessing for on campus treatment that will come over time and really the first full treatment care facility from detox to job placement.

Let me shift gears here for a moment talking about the life science industry. And then I’m going to have Jenna speak after I finish and talk specifically about the three most advanced vaccine projects. As we all know, we’re living in truly unprecedented times in history, with the onslaught of a pandemic, the resultant recession and civil strife in many of our cities. We’ve seen a significant uptick, however, in demand this quarter, across all of our markets, both from new and existing tenants. And that’s given us I think, good comfort. There’s been strong bipartisan government support for life science R&D to solve COVID-19. For example, $10 billion has been committed to operation work speed and they brought together some amazingly talented people of that amount or in addition to that there’s a large number over 7 billion for CDC, over 6.5 billion to the so called BARDA group, over 3.6 billion to the NIH, and over 160 million to the NIH all supporting COVID-19 pandemic.

So, far this year, the FDA has approved 25 new drugs last year, they approved 48. So, we’re on our way to maybe a beating of the 2019 number. During the first half of 2020 funds raised by Life Science companies via IPOs, and follow-ons almost match all of 2019 and this is amazing because this happened despite COVID venture capital was strong to the tune of about nine and a half billion dollars and 10% more than 1Q this year. And we’re pleased to say 80% of all venture capital funding in 2020 has been in Alexandria’s region.

So, before I turn it over to Jenna, let me make a comment, life probably won’t return to normal until we have a widely distributed COVID-19 vaccines. And the good news is this may happen sooner than expected thanks to years of private investment and new cooperation between US government and drug companies. This taxpayer — payer money could not have been spent better even if some vaccines may candidates may actually end up failing, the potential return from resuming normal life is far greater than from all the transfer payments Congress has spent so far. And we hope that this combination of private innovations with faster regulatory action truly pays off.

And with that, let me turn it over to Jenna Foger, our Senior Vice President, who co-leads our life finance team.

Jenna Foger

Thank you so much Joel, and good afternoon, everyone. Against the backdrop of this COVID-19 pandemic that has made an indelible mark on our society, the economy and future public health. As Joel noted, likewise, fundamentals remain strong as the biopharma industry represents the beacon of hope and absolutely essential in the fight against COVID-19. We’re currently tracking over 80 tenants across our cluster markets, who are advancing solutions for COVID-19. And we owe a tremendous debt of gratitude to their heroic work.

Clearly as Joel mentioned the safe and effective vaccine should help bring about the effective end of the COVID-19 pandemic as a prerequisite to fully reopen society and restore the global economy. As a reminder, given the global demand for a vaccine, multiple vaccines by multiple companies are absolutely required. As such researchers around the world are working with unprecedented speed and collaboration on at least 165 distinct coronavirus vaccine programs, of which nearly 30 vaccine candidates are already in human trials as a cornerstone of the US government’s efforts expedite the development, manufacturing and distribution of COVID-19 vaccines. And so mentioned the administration has allocated $10 billion to the operation work this initiative, and is awarded grants to a handful of company partners almost all of which are Alexandria tenants including AstraZeneca, Emergent BioSolutions, Johnson & Johnson, Moderna, Novavax and Pfizer.

Among these efforts, I want to call to your attention, your attention to the three most advanced vaccine programs from Moderna, Pfizer and AstraZeneca each of top 10 it’s Alexandria in their respective regions. Each of these companies has reported early clinical data that points to initial safety and efficacy, and all three companies’ vaccine programs have now officially enrolled in major late stage pivotal studies and tens of thousands of patients around the world.

Moderna in partnership with NIAID and Pfizer, partnered with driven biotech, bio and tech, are both developing messenger RNA based vaccines. These vaccines contain instructions that tell ourselves to effectively build the same type protein at the sound of the Coronavirus which helps the virus and basing themselves, our immune system and make antibodies to last on to neutralize the vaccine induced by proteins, such that when a vaccinated person encounters the virus in the future, those vaccines stimulated antibodies should prevent the virus from infecting healthy cells.

Moderna was of course the first USC company to enter its vaccine into trials, marking an extraordinary and historic fast tracking of the vaccine construct into a clinic. To date, Moderna has received just shy of a billion dollars from BARDA to expedite the clinical development and manufacturing of this lead vaccine candidate. After reporting positive initial safety and efficacy data from their Phase I and II studies earlier this month, demonstrating the healthy volunteers receiving their vaccines should be significant neutralizing antibodies against the coronavirus as well as downstream T cells and find some degree of lasting immunity.

Both Moderna and Pfizer began to enroll 30,000 plus patients. late stage Phase II, III studies just this past week. Pfizer stated that they should have efficacy data to report as soon as October and they’ve also received a $1.95 billion contract from the US government to help deliver over a billion dollars of their vaccine by the end of 2021.

And finally, AstraZeneca, in partnership with the University of Oxford, Oxford, uses a slightly different approach to their vaccine development efforts. Using a genetically engineered viral vector to deliver coronavirus genes into cells system literally encodes a Corona viruses signatures like protein or provoke an immune response. Based on results announced last week. AstraZeneca also shows a relatively safe vaccine with only mild moderate side effects, like success that successfully engages the human system effectively that is successfully needed the immune system to fight the coronavirus.

AstraZeneca has received up to $1.2 billion from the US government to deliver up to 2 billion doses of their vaccine in 2021. So where are we now? So it is challenging to predict exactly when the vaccine will become widely available. We do expect in term data readout from each of these three pivotal programs and potentially others over the coming few months, which should directly inform us about the broad safety profiles.

Each vaccine candidates and or whether it shows continued signs of ecstasy, if results are positive. There is of course a potential for emergencies authorization by the FDA for any of these vaccine candidates by year end 2021 and into early, excuse me, by year end 2020 and into early 2021. Given that each of these companies is already scaling its manufacturing capabilities. To be able to deliver at least a billion doses of each vaccine next year, there is a clear path towards the widespread availability of a safe and effective vaccine in the first half of 2021.

However, just as it remains unclear how long natural immunity last after a person becomes infected with COVID-19 the durability of a COVID-19 vaccine also remains an open question. Also yet to be determined are the anticipated frequency and cadence at which we will need to get vaccinated which segments of the population may respond better or worse to the vaccine, and what proportion of the population needs to get vaccinated to ultimately drive for immunity and eradicate COVID-19 altogether. But in the meantime, antibody therapies by companies such as tenants Eli Lilly and Bayer Biotechnology and others and could serve as a bridge to a vaccine and help reduce the severity of COVID-19 and infected patients. In additional 300 plus new and repurposed therapy and clinical, and parallel with increased widespread testing and social responsible we’re hopeful that this virus will become more manageable and less fatal overall.

We look forward to continuing to support the mission critical work of our tenants to overcome this global pandemic in the coming year.

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

Steve Richardson

Thank you, Jenna. Steve Richardson here everybody good afternoon. As we stated during the Q1 earnings call, Alexandria has role as the proven leader in providing mission critical and indispensable strategic national health infrastructure is only becoming more important as the COVID-19 pandemic continues to challenge our country. I’d like to acknowledge with a loud shout out to our full operations team. The stellar work they’re undertaking as they’ve been on the job, 24/7 providing exceptional and high quality service to our tenants at Alexandria’s essential services facilities, which have been open and fully operational every day throughout this difficult time. The increase in complexity of construction, delivery and ongoing operations of this mission, critical infrastructure is formidable and not an easy task and requires the highly skilled and talented team that Alexandra has carefully built since its inception.

We are pleased to report a healthy, dynamic and positive operations and market reality for the company. And I’ll take through a number of pieces of that. Brand loyalty is evident as Alexandria has tenants garner great value in our delivery of excellence in all operational matters and as such, the company has collected 99.5% of accounts receivable during the second quarter and 99.3% during July so far. Truly a testament to both the quality of the companies we serve and the great work by our operations team.

Outperformance. During Q2, we outperformed our Q1 leasing activity with a total of 1,77,000 square feet leased. And as we noted now, the past several quarters, this contribution is coming from all regions with this quarter significant leasing statistics highlighted by San Diego’s activity. Great kudos to the team their. Strong core. The run rate increases continue to be strong with 15% cash and 37.2% gaps during Q2, early renewals year-to-date are consistent at our historic levels of 69% and during Q2 we exceeded that with a figure of 78%. Mark-to-market is that 15.6% cash in 16.1% gap, which is pretty amazing when you consider the large number of new class A facilities we’ve delivered during the past few years in core markets.

Solid occupancy. We were at 94.8% across 28.8 million square feet on the operating portfolio and taking into account lease up opportunities that two recent key projects in San Diego and Telstra and Cisco would otherwise be at 97.1%. Finally, market health. Alexandria is core clusters have experienced no significant labs subleases coming to market during the pandemic and important harbinger for Alexandria is the ability to continue solid occupancy levels and consistent cash and get rental rate increases for the balance of a year. As an additional data point, the lab demand has remained steady in the San Francisco Bay Area, with 2.3 million square feet today versus 2.2 million square feet during Q2 2019. A few requirements were in fact on pause during Q2, but we were actively turning prospects again. Tech demand, however, is weaker fallen by approximately 50%, compared with one year ago, and we will be closely monitoring this segment over the coming months.

In conclusion, the Alexandria team is fully engaged providing operational excellence and importantly Alexandria’s long-term and historic commitment to the life science industry as evidenced by the fact that the vast majority of leasing this quarter is with executive management teams we have worked with as a trusted partner for many years, and in some instances, decades. This is a truly unique and irreplaceable competitive advantage. And when we literally pursue an honorable fashion each and every day.

With that, I’ll hand it off to Peter.

Peter Moglia

Thanks, Steve. This is Peter Moglia. I’m going to briefly update you on all of our development pipeline activity. Acquisitions closed in the second quarter and touch on some capital markets activity. So coming into 2020, we had 11 development redevelopment projects, and we added to this quarter, including the second phase of our five laboratory drive project and research triangle, and 9877 Waples in the San Diego sub market Sorrento Mesa, which is 100% free least.

These development projects are spread among a number of regions, and give us a great mix of Alexandria branded projects to meet the growing demand in all of our regions. Whenever possible, tenants want to locate their mission critical operations in our high quality and expertly managed assets. Although, we achieved 196,000 square feet of leasing in our development pipeline during the COVID impacted in quarter, the leasing percentage remains 61% as the new leasing was offset by the additional project we added in the triangle and a positive development and our Arsenal on the Charles project, where we were able to take back a poor performing leased retail space that will be converted to high value lab office space.

Our redevelopment of Arsenal on the Charles of that project has met our high expectations for it today. We have signed three LOIs were approximately 144,000 square feet. Remember, we only closed on this asset in mid-December. We have a number of prospects for more. And it’s really like this location our development plans for it.

Despite the continuing overhang of COVID-19, we had an uptick in activity at many of our development redevelopment projects. In Long Island City, we’re in serious negotiations with groups representing 86,000 square feet of demand. At the Alexandria district in San Carlos, we have solid interest from a number of companies aggregating in excess of 200,000 square feet of demand, and up to one on one and two on one Haskins. We’re working with six companies for space ranging from 20,000 square feet to 100,000 square feet. But COVID-19 is causing some companies to move deliberately.

Last quarter, we mentioned that of our seven of our project are experienced temporary pause in construction, and we’re pleased to report that all of them are going forward with no current delays. We reported that we expected about a one quarter delay on average for those projects and did not anticipate any material movement in yields. That assessment has been confirmed in our 2Q numbers. And it’s due to the remarkable job of our highly experienced real estate development teams that have done an amazing job managing the impact of delays and other COVID-19 related costs which include the impact of social distancing, which has reduced our construction efficiency added costs for safety measures such as the procurement of PPE, a dedicated COVID-19 safety officer required in many locations and added security.

In addition to the contribution by our highly skilled season team, the minor impact of our yields can also be credited to our highly disciplined underwriting starting at the acquisition of these opportunities through the development and leasing phases.

In the second quarter, we closed on 97 and 1075 commercial street project we discussed last quarter, and we added a prime parcel in the UTC submarket of San Diego across from our 9363 and 9393 Chancellor dry project that will developed into a Class A 200,000 square foot lab office project with the potential of making it larger soon upselling process.

As far as sales activity goes, last quarter we discussed the strong interest in lab office assets from a diverse set of investors mentioning health peaks purchase of the post and wall fam at a 5.1% cap rate and a healthy price per square foot for a suburban asset of $751. We have since learned that helped peak has also paid a significant price for the 224,000 square foot 35 Cambridge Park Drive asset in Alewife for reported $1,484 per square foot at a 4.8% cap rate.

We also mentioned last quarter that a reliable source had disclosed that a transaction in the Boston area had gone under contract oil and shut down and we can confirm that sale occurred. 27 dry docks 286,000 square foot lab office projects in the seaport area of Boston was acquired by beacon Capital Partners at an estimated cap rate of 4.8% and a price per foot of $916. This pricing was somewhat surprising as the asset it subject to a very onerous, less sore favorite families.

It’s really a good time to be in the market with assets in life science submarkets. We will continue to maintain our highly disciplined approach to underwriting and we’re going to keep you informed of our opportunistic acquisitions and dispositions over the coming quarters.

So before I pass the call, we would like to encourage everyone to read Chip Cutters article that appeared in Friday’s Wall Street Journal titled companies start to rethink remote work isn’t so great after all. As an alternative to all the press speculating that the office market is headed for the crypt.

Libratory office is not part of the work from home trend. But nonetheless, we believe traditional office product is not going anywhere. There will likely be some shifts and use us as workers not coming in every day and reverse of the densification trend that permeated over the last decade. But there are a lot of reasons to have people physically together and this article goes into some of them.

So with that, I’ll pass it over to Dean.

Dean Shigenaga

Hey, thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. Our national essential real estate platform really combined with our trusted partnerships with some of the most innovative entities in the world continues to generate high quality growth and cash flows. 51% of our annual rental revenue is generated from investment grade rated or large cap publicly traded companies really highlighting that our team has curated one of the best tenant rosters in the reed industry. Just high quality tenant base continues to support growth and our common stock dividends that is currently $1.6 per common share or $4.12 per share on an on an annual basis, and was that 6% over the previous 12 month periods, we remain in a great position and continue to benefit from a very strong and flexible balance sheet, the best in the history of the company really to support our strategic growth initiatives and more on this in a moment.

In June, we published our annual corporate responsibility report, which along with our supplemental package, highlights our long standing commitment to ESG. Our focus on making some positive and meaningful impact on society in Alexandria’s critical role at the forefront of life’s ecosystem advancing solutions for COVID-19. Thank you to our ESG team for an outstanding job over the last year. Before jumping into the second quarter. I also want to share a shout out with a huge thank you to our entire team for their five time recognition as Navy’s Gold Award winner for communication and reporting excellence. So congratulations team.

The second quarter results were solid and in line with our expectations. Rental revenue was up almost 20% over the first half of 2019, and NOI was up approximately 19% over the first half of ’19 and adjusted EBITDA margin was very strong at 69% and continues to be one of the top within the REIT industry. Rent collections are net — over 99.5% and our outstanding AR balance as of June 30th represents the lowest balance in the last 12 years. Occupancy trends have been positive this year. However, this is hidden by the 2.3% of vacancies from recently acquires leases, please refer to Page 23 of our supplemental package for details of this acquired vacancy. Occupancy as of June 30th, was reported at 94.8% and included 2.3% of recently acquired vacancy, so, occupancy before this vacancy was 97.1% actually up 30 basis points since December 31st. In addition to this key takeaway, it’s important to highlight that recently acquired vacancy will provide growth and cash flows as our team executes on these leasing opportunities.

Now on internal growth, our operating results continue to benefit from contractual annual rent escalations averaging almost 3% today, continued strong same property NOI growth remains on track with our 2020 midpoint guidance of 5.5% on a cash basis. We also reported continued strong rental rate growth on lease renewals and release in a space of 37.2% and 15% on a cash basis for the second quarter. Our rental rate growth has been amazing since 2015, as has averaged 29% and 15% on a cash basis.

Now, while our outlook for 2020 same property NOI growth remains strong. The second quarter same property performance was slightly impacted by two items. First, the second quarter results was impacted slightly by temporary vacancy of about 152,000 rentable square feet from leases primarily located in Cambridge in South San Francisco. About two thirds of his square footage or 100,000 rentable square feet has been pleased with occupancy commencing in the third quarter. If we normalize for this temporary vacancy, the second quarter, same property and ally growth would have been 1.6% and 4.2% on a cash basis, and closer in line with our outlook for the full year.

Now Additionally, we also have other contractual rent increases that will begin in the second half of 2020 for leases at properties located in Greater Boston, San Francisco and Seattle that will bring same property NOI growth on track with our 2020 midpoint guidance of 2% on a GAAP basis and 5.5% on a cash basis. Notice section second item to highlight that impacted same property NOI growth for the second quarter and was retail and transit and parking. Now as a reminder, retail represents only 0.7% of annual rental revenue. Approximately half of our retails paying rent monthly. About half is not paying rent at the moment and this drives a slight reduction to both GAAP and cash same-property NOI income growth.

Now as I wrap up my comments on same-property, I just want to reiterate that we are on track for solid same-property and net income, net operating income growth for 2020. Switching briefly to our venture investments over the past year or so, we have been taking advantage of the strength of the capital markets. Our cost basis has remained about the same over the past year, really highlighting that we have been strategically monetizing certain holdings.

Additionally, over the past year or so, unrealized gains had grown significantly to 556 million as of June 30. Now realized gains have averaged about 15.3 million per quarter over the last four quarters and was 17.7 million in the second quarter of 2020.

Now moving on to external growth, our team completed approximately 200,000 square feet of leasing related to current and future development and redevelopment projects located in our San Diego market. Our active pipeline of development and redevelopment projects consists of 2.3 million rentable square feet, and is 65% leased and negotiating today.

We also have important near term and intermediate term development and redevelopment projects arrogating, an additional 7.6 million rentable square feet. Now congratulations again to our team for transforming our balance sheet over the past decade. Our overall corporate credit rating ranks in the top 10% among all publicly traded degrees. We have one of the highest quality tenant rosters that is driving growth and cash flows. We remain committed to a strong and improving credit profile.

Liquidity was about 3.7 billion as of June 30, and even higher after consideration of our $1.1 billion forward equity offering that we completed in early July. Now our debt maturities are well lettered with no maturities until 2023. The bond market today is extremely attractive. Long term fixed rate debt for Alexandria is in the 32% range for 10 year bonds. And this is really amazing when you compare it to cash yields on our development projects in the 6% to 7% range, or higher.

Concurrent with our common stock offering on July 6th, we provide a key updates on our sources and uses of capital for 2020. This update reflected continued demand for our well positioned development and redevelopment projects and our solid outlook for 2020. Our construction span outlook moved closer to our initial guidance for 2020 and is now 1.35 billion at mid point.

Additionally, our updated guidance on July 6th, that was also reaffirm yesterday, reflects a strong outlook for acquisition opportunities and build upon our strong initial outlook that we gave for 2020. Now the midpoint of the range of our acquisition guidance is 1.8 billion. On July 6th, we also announced our target for real estate dispositions, including partial interest sales at an aggregated point guidance of $1.25 billion.

Now more details on this will be provided over the next quarter or so, we updated our 2020 guidance to arrange for EPS dilutive from $3 to $3.08 and for FFO per share diluted as adjusted from $7.26 to $7.34. Now, as usual, please refer to our detailed underlying assumptions included in our 2020 guidance beginning on page nine of our supplemental package.

With that, let me turn it back over to Joel.

Joel Marcus

Okay. We’re ready for questions from the group, operator we are now ready for questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. [Operator Instruction] And our first question today will come from Manny Korchman with Citi. Please go ahead.

Manny Korchman

Good afternoon, everyone. Dean, if we think about the accelerated disposition program, a couple of questions there. Maybe just, if you could help us figure out how you’re weighing? Or we’re thinking about doing dispositions versus even more equity than you’ve already done? And maybe helpful and that would be the top of what types of assets or maybe what markets are thinking about selling those in and also timing of those sales.

Dean Shigenaga

So Manny, let me kick off with a little color. If you look back over probably five to seven years now, we’ve pretty much been consistent with our sources of capital being from a range of opportunities to blend our long-term cost of capital. And dispositions have been a component going back to 2014, 2015 now. A lot of them have ranged from a partial interest sale and these are high value core assets that we want to retain ownership in. And so I would say without getting into a whole lot of details, because the deal flow is in process right now. We’re looking at opportunities from an outright sale to partial interest sales. These are high value assets in order to generate some equity capital that we invested in the business. And then, Manny just touching on the difference between dispositions and equity capital, there obviously are considerations to be taken when you consider both I think for us, it’s always been a blend of capital and our cost of equity has been a fairly attractive over the time period that I was — about since 2014, ‘15 looking forward. And our multiple has only improved, which has improved our cost of equity capital.

I do think though it’s still prudent to consider dispositions from time to time and as a result our program for 2020 given the needs for our business this year. We felt it was prudent to balance the equity needs with some dispositions. I think as we give some color to that program over the coming quarter or so it’ll help bring a little more clarity to what we’re focused on here. So I think you’ll have to stay tuned for marked information and details for at least a quarter.

Manny Korchman

Right. Thanks. And maybe just thinking about how tenants, especially the ones that are so involved in searching for the treatment, the cure, the vaccine, whatever, if they, how are they thinking about their growth and real estate needs? Is that on the back burner? Or is it just that there’s separate teams that are doing one versus the other? And so those are the same entities that are looking to lease more space from you or others.

Peter Moglia

So Steve, you want to maybe feel that?

Steve Richardson

Sure. Hi, Manny it’s Steve. I’d say it’s a combination of both. You have existing platforms that the capital markets are very liquid, as — was mentioning in Jenna, this strength of the venture and IPO markets, we know the company that did a virtual roadshow, when public during this time. So they’re using that capital both for their existing platforms, and for any COVID initiatives.

In addition to that, we’re also seeing manufacturing become a real and viable dimension as well, which is further driving demand. So you’ve really got two elements, the COVID R&D and then the COVID very early manufacturing as well continuing to drive demand, and that is broad days across a number of markets.

Peter Moglia

You could also know many that there was an announcement yesterday that the U.S. government would loan Eastman Kodak a company that fail to adopt Jim Collins, his notion of change. $165 million as part of a wider attempt to bring pharmaceutical ingredients manufacturing back to the United States, I think you’re going to see a lot of activity in the entire supply chain issue, when it comes to biopharma.

Operator

Our next question will come from Sheila McGrath with Evercore.

Sheila McGrath

I was wondering, if you could give us more insight on the Sorrento Mesa leasing that you mentioned, did you have a tenant in the hand before you purchase 9877 Waples?

Peter Moglia

And it was a COVID related requirement. So the answer is, yes.

Sheila McGrath

Okay. And then on the quarter, I was surprised that you had over a million square feet of leasing activity. Was that just other activity that’s built into the quarter? Or were there any new requirements trying 2Q?

Peter Moglia

Steve, you could give color, but I hope you weren’t surprised that we had a million square feet. We weren’t. We thought it would even be bigger. But anyway, Steve?

Steve Richardson

Sheila. a couple of things there. Again, as we’ve talked about for a number of quarters in broad based across nearly all markets. And as they did highlight, San Diego in particular was kind of a stand out there. But nevertheless, all markets we’re contributing. No, not necessarily surprising. And the impetus first phase, the sense of urgency is still there, literally 78% were early renewals during this Q2 time period. So, we have very, very close to long standing relationships with these tenants. So this was to be expected during this quarter.

Sheila McGrath

And our last question you didn’t just mention I think Steve or Joel on the manufacturing As a reminder, this conference is being recorded being a new source of demand. Would Alexandria be interested in owning any of the pharma or vaccine manufacturing facilities?

Peter Moglia

Well, we already do and some of them are embedded in assets we own some are dedicated manufacturing. Others are pilot manufacturing or other clinical trial of scale manufacturing. It kind of spans the gamut. But yes, we’re finding that there is a need. I think, hopefully that we can bring a bunch of the critical manufacturing and other supply chain needs of biopharma products back from overseas, including China for our own protection and yes, we are very interested. Now we wouldn’t be interested in a random manufacturing in the middle of nowhere. But if they’re in, strong sub markets that are tied to core markets, that’s a good thing.

Operator

And our next question will come from James Feldman with Bank of America Merrill Lynch.

James Feldman

I wanted to just get your thoughts on the election and even with Prop 13 coming up before we know it. What are you concerned about most specific wins and how do you think about the risks?

Peter Moglia

Yeah, I’m not sure I want to comment out about 100 days, I think on the third quarter call, it’ll be better, we’ll have a more triangulated view, who binding the vice president is, we don’t know that yet is very important, who may be in the cabinet. But, to me, it’s a worry for everybody because to elect somebody who may not be in the best of health would be a worry there and that’s unfortunate, it’s too bad. We don’t have you know, 245 or 50 year olds running. But that’s the way it worked. So I think I’ll reserve comment until the third quarter. And we’ll have a better view on things.

The other part of your question, I’m sorry, I forgot.

James Feldman

You guys are sitting in California and just your thoughts on Prop 13.

Dean Shigenaga

Yeah. So I don’t know. Peter or Steve, you guys want to talk about Prop 13?

Peter Moglia

This is Peter. I’ve sat in on some calls with a committee that is running the campaign against that they feel like there’s a better than 50% chance it does not pass. But as I’m sure it’s tight enough to make everybody a little bit nervous. I think we’re in good shape because a number of our assets in California are developed by us in the last few years, I don’t think from that and plus we have a triple net lease structure. So we would serve better than others. But, given the current economy, I don’t think it would be good news to help California out of its troubles by making it harder to do business.

James Feldman

And then Peter, you mentioned the Wall Street Journal article. I just want to get your thoughts. I know that tech is a smaller part of your business, but you do have Facebook, Uber and stripe on your top tenants list. Do you think about the Bay Area specifically from your vantage point on the ground there, what do you think changes in terms of how people use office space and especially more among the tech companies? Do you think they’ll they will be doing more work from home or more flexible work arrangements, which will have a longer term impact? Or even satellite offices? I’m just curious what you guys are hearing on the ground?

Peter Moglia

I think Steve can talk to the San Francisco specifics, but you know, I think there’s, there’s been a lot of talk over whether or not offices going away or not. I think the consensus is that things are going to work differently. That the majority of people 75% to 90% depending where you work out want to go to work, they want to separate their home life from work I know I personally do because it just becomes very odd to live your life in a in a constant state of work, but the advantages are becoming more and more apparent. It’s very difficult to train people when they work from home so you’re on-boarding people on zoom. Very difficult to transfer your culture. How do you celebrate a win, how do you commiserate a loss. You’re not going to just get on zoom and say hey, let’s celebrate you’re in the office something great happens. You high five your colleagues, everybody goes and gets a cup of coffee or whatever and talks about it and just develop a bond. That does not work on zoom. Same thing when you lose a deal, the debrief commiseration, what did we do wrong, how can we do better next time? Ideas, strategies in front of a whiteboard. One of the one of my rare trips into the office recently was to meet somebody so we can get on away for as I needed a storyboard, presentation and just couldn’t do it on zoom.

So, I think companies are going to realize that for, retaining employees, they’re going to have to establish a culture with those employees because otherwise it just becomes a battle of salary and benefits. If people don’t really feel connected to the company, why should they stay there somebody else’s offering a few more showings. So, I think you’re going to hear more and more about that is I think we’ve done really well as a business community in the United States in managing productivity and keeping it going. But I think cracks are starting to appear. And that’s what that article kind of goes into is Steve talked about the tech.

Steve Richardson

Yes, thanks, Peter. Jamie, Steve here. Yes, if you look at tech demand from services go down to the Peninsula, say, Palo Alto as a reference that has fallen by about half, we had a little over 7 million square feet of demand this time last year. Now it’s about 3.5 million. I think a lot of that is a result of exactly what Peter is saying people are navigating this in the scheme of things, it’s still kind of early innings as to the outcome. So, we’re certainly monitoring it closely. Having said that, the context is summer for instance, now has a 4% vacancy rate versus 1.3% vacancy rate, when you’ve got big four plays, kind of lower mid rise construction in those areas, which is probably more desirable COVID wise.

The Peninsula has gone from 7% to 9.9%, still in a relative context. It’s still healthy there. And then, I talked with somebody this morning who had a little bit of insight into Google’s, stay at home till summer ’21. And, their understanding chatting with people at Google was, it’s really primarily driven by the school year. They were trying to provide certainty to families, as the next school year is still highly uncertain. And ultimately, it’s, it’s voluntary at this point. So, we’re monitoring it closely, we are getting direct Intel, I think it’s still kind of early innings and we’ll, we’ll keep everybody updated as it unfolds.

Operator

And our next question will come from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone

Okay. Thank you and nice quarter. On the tech demand side, you mentioned down 50%. Can you talk about whether that has any impact on how you’re looking at any of the developments in your pipeline? Was anything dual-track or does it make you change directions on anything that you were you’re planning if that piece of the demand picture pulls back?

Peter Moglia

I think in general, no.

Anthony Paolone

Okay. And then, in terms of, you all increasing your net investment activity as you look to the back half of the year but you also talked about just the amount of capital out there that is, paid some big numbers for deals and just seems anecdotally that there’s a lot of folks that certainly like your business right now. I mean, how did you think about just increasing the capital deployment returns? And what have you been seeing in terms of competing to buy product? Whether it’s land or existing assets in this environment?

Peter Moglia

It’s a pretty broad question. I don’t know. Maybe try to be more specific if you could, because I’m not sure we want to get into, acquisition pipeline discussions or things like that until, we can actually disclose something.

Anthony Paolone

Yeah, just trying to bridge sort of what seems to be more capital being pointed towards your markets, and your space, at the same time, from driving up activity?

Peter Moglia

But I mean I think. Yeah I think, the three sectors generally people are seeing today that have been fairly COVID resistant or resilient is obviously logistics, data centers, life science, there are others, but those have been the primary ones. And so it’s natural for people to think about how do I do this. But it’s a lot more difficult in a sense because it’s not like a company is moving into a generic office.

These are fairly mission critical facilities for companies and entities. And they really don’t, they’re pretty picky about locations, they’re pretty picky about the details of the improvements and the deliveries and the certifications and things like that and how they’re going to operate. So, there may be, there may be money and so forth. But if people mess up, they won’t be given a second chance by tenants, that’s for sure, because when you have millions of dollars of experiments at stake, it’s different if you’re, JPMorgan in an office versus a COVID therapeutics company and something goes wrong. So that’s kind of a perspective.

Anthony Paolone

Okay. Thank you.

Operator

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

Tom Catherwood

Thank you. Good afternoon, everybody. Following up on Tony’s question, on acquisitions, Joel, last quarter, you had been a little caught a little cagey on the potential for acquisitions to ramp back up, especially with maybe more products coming to market. So my question then is given that, obviously, you’ve acquired a bunch this quarter, and there’s more to come and you raised guidance.

The additional acquisitions were those primarily ones that you were already looking at prior to COVID or were those acquisitions that have come up kind of since COVID. And the second part to that is kind of, what do you think the opportunity set looks like moving forward? Is there a chance for kind of more assets coming on? Is there any chance for distress out there on the acquisition field?

Peter Moglia

So first let me correct the characterization. I don’t think, I was being cagey. I think, honestly, when we reported the end of April, I think in the first quarter, think about, we had only been shelter in place for 45 days. And so when the executive management team looked at our balance sheet, which is in great shape and looked at our prospects or pipeline we wanted to be really careful having lived through 99, 2000 having lived through 08, 09. We wanted to be very careful about really reigning back our commitments. And so we did do that in a very, very, I thoughtful and careful way. So I don’t think it was caginess at all. It was really one out of concern that we don’t know what this thing is. I mean, we know what it is, but we don’t know what damage it can do COVID-19 we don’t know, we had no real information from China as to what went on there in places that were hard hit and so forth. It just was a very a non-transparent situation. So none of us had any idea of what to do — what it was going to happen. So we had to be very conservative about our go forward game plans, but I think as time wore on into the second quarter, and it was clear that the industry was really being marshaled to relate, come up, as Jenna talked about, whether it’s testing the diagnostic side, therapeutic side, and importantly the all important vaccine side, the government’s real ramp up especially on this a warp speed project on the backseat or work speed project. I think it gave us better confidence that we could ease our concerns, and go back to a more growth plan. That’s still, I think, carefully guarded.

Now some of the acquisitions, I mean, acquisitions don’t hang on for months and months. So I’m not sure there were a lot that were before that we may be still looking at, and there are processes that go on. But I think, from time to time people see a pretty buoyant real estate market, Peter sighted pretty low cap rates on secondary location assets that are pretty strong. So people are thinking of maybe trying to maybe exit or other people are trying to come in. And I think we’ve just tried to super thoughtful and super smart and disciplined. Most importantly, we learned that from the teachings of Jim Collins about what we do and how we do it. I think the arsenal that I think Peter, Steve alluded to campus that we bought last quarter in Watertown is a great example. So I think that’s how we have journeyed through this last couple of months.

Tom Catherwood

That’s completely fair. And I think here is the conservative classification as much better than the one that I gave. And then you’re absolutely right with that. Along those lines, Joel, Seattle has obviously been a key area of growth for you guys over the last few years. Most of your portfolio has been focused in the South Lake Union submarket. But this quarter year disclosed some previous acquisitions in the pioneer square sub market. And it looks like you’ve added a substantial development site outside of your core markets in Seattle as well. So can you kind of speak to the your investment strategy in Seattle? And maybe what’s driving you or what you’re seeing in other sub markets that increasing your interest?

Joel Marcus

Well, let me say overall in Seattle. We’re, we have an important presence there we started back in 1996. So we’ve been in that market for a long time and it’s an important market for us. It is one of the markets that, thankfully has taken advantage of the confluence of life science and information technology. We just talked about adaptive building on the link and East Lake Union 1165 and we’re building part or big joint venture with Microsoft focus on COVID-19 issues. We have a very small presence in Pioneer Square where that we kind of put our toe in the water a couple of years ago. I think the most recent acquisitions are south of that.

So they’re really not in Pioneer Square, they’re more really in the stadium area. And those are more long-term kind of thinking. But we just want to be careful because, Seattle has been one of those hotspots for civil unrest. And some people have attacked, I think, without any real fair balance on, they’ve gone after Amazon and Starbucks. Starbucks certainly is one of the most heralded and great companies Amazon certainly is but Starbucks in particular has done a great job for I think people.

So you see some of that stuff is pretty disconcerting. But we hope that comes under control and that the city and the state really try to really go forward with a very positive game plan. So I think, it’s a little bit of a wait and see on some of those things. But that was a little bit forward thinking. I’m not sure we would, those wouldn’t be coming to the into development in the near-term for sure.

Operator

And our next question will come from Rich Anderson with SMBC.

Rich Anderson

So, I just want to make sure I kind of understand this when we talk about a vaccine and the duration by which you would be thinking on antibodies and thereby protect people from the disease. I’ve heard in spots that it could be maybe six months, where you’d have to go twice a year to get another kind of booster. Correct me if I’m wrong on that, number one. Number two, with that be a good thing from your tenants perspective or a bad thing. I’m trying to sort of triangulate how permanent conditions COVID-19 will be for the underlying workings of your tenants. If the vaccine happens, and it’s like a measles vaccine, it’s good for life. Maybe things go back to normal in that regard. I’m just curious if you can sort of, kind of explain that logic to me?

Joel Marcus

So I’ll have Jenna answer that in a second. But let me just say that each of the three most advanced candidate cases that she talked about each have varying antibody immunity. I think Moderna is probably is shown among the best. But no one really knows at this point, the duration. But remember, much like everything in life, there will be certainly in the biotech and pharma area. There will be dramatic improvements. I mean, they’ll be vaccine 2.0, 3.0, 4.0, so I wouldn’t get too hung up about 1.0, but Jen you want to maybe come in on Rich’s question?

Jenna Foger

Sure. Hi, Rich. So yeah, on the booster question, I think the idea is there likely will need to be booster for some of these vaccine programs. I don’t think that that is necessarily a bad thing. I think Joel try to hit the nail on the head that we really just don’t know. And viruses only been known to us for six months, seven months, eight months. So we really need to learn more, but I think as far as these vaccines in general, I do think that this will be if approved, they will be a revenue stream for, these are tenants for the foreseeable future. But I also think that the knowledge that has been gained and the approach to vaccine development in general that has been gleaned from this experience will be absolutely lasting until we’ll poised a lot of these companies to develop additional products thereafter.

Rich Anderson

I kind of asked a version of this last time, but let me ask it again, I’ve seen a change in how your tenants are sort of tracking the situation, reallocation of IT or hiring more people. Is there more demand for space because COVID-19? Just suppose to their core research business that was, near and dear to them before COVID. I’m just curious if this is all creative, more manpower within your buildings?

Peter Moglia

Yeah, I think the answer is simple. Yes. I think it’s an add on it’s a bolt on some companies, it’s dramatic other companies, it may not be existent in other companies that may be more minor, but the answer is, yes. And the amount of money going into this because think about there’s testing, all kinds of diagnostics then you’ve got the holy grail of therapeutics and vaccines. So and then

remember, COVID-19 isn’t likely to be the last infectious disease agent that we see. I mean, I think people worry about, I mean, the big worry would be with somebody try to recognized these things. So you get into a hole government need to prevent your to stockpile, anti biological agents. So this is a big, big thing that’s going to go on for quite a while here.

Rich Anderson

And then your last question mentioned some of the investment activity happening around your portfolios. Are you seeing any different money come in capital wise looking at these like clients assets? Or is it pretty much the same players just being more perhaps a little bit more aggressive in space?

Peter Moglia

There has been a pretty large cohort of investors that we’ve been tracking ever since you reserves on assets in 13. I don’t think the mix of them has changed much. It’s just they’re probably a little bit more aggressive today.

Operator

Our next question comes from David Rodgers with Baird.

David Rodgers

Hey, Peter, you mentioned earlier that construction timing was really not having a big impact on your yield returns expectations cost et cetera which was great. Maybe take it a step further, is there anywhere where this kind of work at home environment for cities is causing zoning or entitlement issues and then how you look at construction costs and the impact on kind of zoning entitlements construction costs on that next wave of development? Any thoughts on that?

Peter Moglia

Yeah, it’s funny, it’s like two things is just offset each other. On the one hand, there’s less staff and we are submitting plans for permits and things and are going to people that are working from home. So, that would say cheese inefficiency, timing delays, but on the other hand, nobody else is developing really much anymore. So, the activities down, so, I think that in that network going to be fine as far as getting our permits, and things like that, to the extent that something needed to be done and I hear public hearing or something that can get a little tricky, but so far we’ve been able to get through those hurdles.

David Rodgers

And the construction costs, any early reason where that might be as you’re buying kind of a future job?

Peter Moglia

We actually have been analyzing that in detail. Dean and I both from looking at it, it’s all theoretical right now that the pace at work could slow down, taking pressure off material and labor costs. I will say we haven’t, but it was — it’s pretty unreasonable to think that at least cost a flat now.

David Rodgers

Fair enough. I think in your release there was a comment about maybe a project that you guys have written out the requiring that you decided not to acquire. I read it as maybe being incremental. So, the one you just got from last fall as the same and it doesn’t matter but if it was incremental, any details that have to be more of an office component or more retail to it that just you couldn’t get comfortable with?

Peter Moglia

I think it was the same thing we do with that one. Right.

David Rodgers

You got okay. I wanted to double check. Thank you for that. Dean moving on to you. I think 29 million of free rent burn off you mentioned coming from leases that has started but not too burned off that free rent yet is that in the second half of this year. We get that next year?

Dean Shigenaga

I think for the most part is being absorbed over about four quarters. Generally those numbers we update every quarter and on average, almost all of its rolling in over four quarters. The number is updated the next quarter for some has come in and some deliveries may have occurred over time. It’s a different mix. But historically, it’s generally been burning off over four quarters.

David Rodgers

Great. And then lastly, the Dean maybe with you again on any guidance around the realized gains for the second half. I know it’s really what you guys choose to sell is how you get there. You’ve made a lot of money in the business, you get really good at disclosure about it in the supplement. It’s not about you, annualized the second quarter is about 55%. This year earnings, but any thoughts on how that would kind of play out in the second half with a strong market that we’ve seen so far? Do you anticipate continuing to sell?

Dean Shigenaga

Yes, I think pretty consistent Dave with what I’ve mentioned over the last few quarters. The portfolio’s done well, I think you pointed that out, but the run rate I touch down, specifically, it’s averaging 15.3 million per quarter, maybe a little bit upward. This quarter, it’s 17, approaching 18 million. So, that run rate historically, I think it’s a good view for how you should think about the run rate over the next number of quarters. We — I think it’s prudent for us to monetize some of these investments. At this point, we’ve made money, some of them might we believe strongly and we’ll make more money so we’re going to hold a number of them, but I think it’s prudent so you should have a decent friend rate looking forward.

David Rodgers

Okay, thanks for that. And then I don’t know if this last maybe for Steve. I’ll just throw one more and I think you have about I might have something similar last quarter, but 420,000 square feet of leases still expiring this year that are negotiating and looks like or that may have an unclear resolution, you have an unfavorable resolution yet another million one next year, I realized that you have a lot of small leases in there. And it’s kind of hard to get visibility far out on those. But in terms of what yet to be committed, is there anything known to be moving out besides those redevelopment assets, or you feeling really good about the remaining renewals?

Steve Richardson

Yeah hey, David, Steve. Yeah, we’ve just got about 3% to resolve back in the second half of the year. Here, we started at 6.7% so we are already 60%, 70% through that, we’ve really just got three different suites, San Francisco, Boston, San Diego, that are in excess of 70,000 feet, so nothing overly challenging and I think we’re making good progress on one of them another one, I think we’ll be able to reposition successfully.

So yeah, nothing, nothing to be concerned about there in 2020 for sure. And then ‘21. Again, when you look at yearly renewals, we’ve only got 5.7% of rollovers happening in ‘21. So we expect, kind of consistent with what we’ve seen historically with early renewal. And just a handful of any size, where we’re 70,000 feet, just a couple there.

David Rodgers

Thanks for the detail. I appreciate the answers, everyone.

Peter Moglia

Yes, thank you.

Operator

And our next question comes from Michael Carroll with RBC Capital Markets. Please go ahead.

Michael Carroll

Yeah, thanks. Peter, can you provide some color on the recent in the pending acquisition, I guess specifically, there’s a fairly large pending bucket I think totaling about $780 million. How far along is company on these negotiations? So these deals already been awarded to areas just a timing issue right now?

Peter Moglia

Yeah. So let me jump in and say I think we prefer not to comment on those. But just I think been mentioned stay tuned for third quarter. It just can’t do it at the moment.

Michael Carroll

Okay. And then I guess, on some of the answers that you’ve acquired, obviously the recent acquisitions, there’s a lot of futures develop able sites, I guess. What’s the timing typically on these types of properties? And when do you expect to start breaking ground on this aeroplane there?

Peter Moglia

Yeah, everyone is totally different. So if you looked at, I mean, two examples. I mentioned a question on Seattle. That’s more A into the future development site. And if you compare that to say the Watertown that would be maybe more in the near to medium term, so each one is different based on the campus, the location, what’s going on, demand was going on in that market. So there’s no general way to generalize each one is highly specific and kind of cultivated.

Peter Moglia

And I can confirm that we, we know that going into it. So we put out a lot of carry costs into our future basis as we integrate these.

Michael Carroll

Okay. And I think that you did a pretty good job I think in the supplements that you talked about the percent of I guess, covered land plays that you have, a lot of these deals that you’re looking at now to this, you’re willing to have maybe a little bit of a longer development time to have the couple land plays?

Peter Moglia

Yeah, again, each one is different. So let us not characterize anything at the moment. Sorry about that.

Michael Carroll

Okay. Great, thanks.

Peter Moglia

Yes. Thank you.

Operator

And our last question say will come from Omotayo Okusanya with Mizuho. Please go ahead.

Omotayo Okusanya

Hi, yes, good afternoon. Congrats on a great quarter. I just want to kind of talk a little bit about acquisitions going forward. In the past year or two, a lot of acquisitions it’s kind of focused very heavily on — purchasing assets that have a lot of future development potential. Is that we should still be thinking about acquisitions going forward or, do we kind of stock a few acquisitions of operating assets going forward.

Peter Moglia

Yeah, I think Mike Carroll just asked that question maybe in a different way. I think every, every situation is different. So I don’t think there’s — we don’t want to characterize anything at this point. So I’m not sure it’s good to think about one way or another. They’ll be what they’ll be and they’ll stand on their own. Let’s just wait for each one to unfold as appropriate.

Operator

And this concludes our question and answer session. I’d like to turn the conference back over to Joel Marcus for any closing remarks.

Joel Marcus

Just thank you, everybody. Please stay safe and be well. And we’ll talk to you on the third quarter call. Thank you again very much.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.

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