Good day, and welcome to the Alexandria Real Estate Equities Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I’d now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

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.

Thank you, Paula, and welcome everybody to the Alexandria’s third quarter earnings call. With me today are Peter Moglia, Dean Shigenaga and Hallie Kuhn. First of all, thank you to our Alexandria family team for their continued exceptionalism in the phase of a challenging macro environment, mostly self-inflicted by a really deleterious set of government actions and policies, coupled with the Fed, which has been slow to act. I think I would characterize third quarter is really an exceptional quarter and when you look at earnings in this challenging macro environment delivering 9.2% and 8.3% FFO per share growth for the third quarter and then 2022 year-to-date is really exceptional especially again given the size and scope of the company with almost 75 million square feet in its total asset base. I’d say the health and resilience of the broad and diverse life science sector, the niche, which we pioneered, remains strong and there is a continuing strong R&D investment, Hallie will speak to this. But in general, we’ve seen life science R&D funding in 2021 approaching almost $500 billion. I think the number is actually about $480 billion, which is astounding and $1.8 trillion since 2017, and we expect totals in 2022 to be very strong continuation of that. I think it’s also important to recognize that the strong life science sector employment trends remain positive, and the core strength of the life science industry and our key cluster markets remains resilient and continuing strong. And I think the overwriting macro observation would be the long-term healthcare needs of this country certainly aren’t going away. Innovation in medicine is really a national imperative and just look at the mental health problem across this country as one simple example. And as I’ve said many times before, there are about 10,000…

Thanks, Joel, and good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. As Joel mentioned, today, I’m going to provide an update on the life science fundamentals driving the long-term growth of the industry, tenant health and how Alexandria proactively work with the vanguard of this highly dynamic industry and a challenging macro environment to continue to grow our one-of-a-kind and truly world-class company. First and foremost, while we are in a cyclical downturn, innovative medicines take on average over 10 years to develop, meaning that the life science industry is not cyclical, but is largely event and product driven. And the life science industry is still in its early innings and poised for growth. As the recent expansion of complex modalities such as cell, gene and RNA-based therapies reflect, the pursuit for new and better medicines is truly the growth industry of this century, and there still remains immense challenges to solve. Every day in the U.S., an approximate 1,670 people will pass away from cancer, every four minutes today an individual will die from a stroke and every 37 seconds someone will pass away from heart disease. Not to mention, the 90% of known diseases that have no available treatment. While the macro market conditions are not to be taken lightly, the life science industry is on a steep, long-term growth trajectory. So where do the fundamentals stand to drive and sustain this long-term growth? I’ll start by walking through the multiple sources of life science funding. Notably, through the third quarter of 2022, venture capital funds have raised an all-time high of $149 billion, eclipsing 2021’s historic year with $144 billion raised. Given the average funds investment period is four to five years, the significant amount of dry powder will continue…

Thank you, Hallie. I would like to start by thanking all the teams of the company for your never-ending dedication, high quality work product, and collaborative spirit that made Steve’s transition to retirement seamless as we all expected it would be. Steve continues to be actively involved in certain projects and we consider him an invaluable resource to the executive management team. Since Steve is no longer on the calls, I’ll cover leasing as well as updating you on other key topics of the day, such as the development pipeline, construction costs, and the harvesting of our value creation. As we sit here today, Alexandria has an equity market cap and credit rating in the top 10% among all publicly traded U.S. equity REITs. A North American asset base of 74.5 million square feet, 431 properties in operation, development, or redevelopment, and over a 1,000 innovative tenants to inform our investment and operating strategies. We should note that it has taken over 28 years to reach these milestones. One cannot create such a dominant position in an industry overnight, and it takes far more than great real estate to do it. Our vast network, operational excellence and technical know-how are just a few of the many reasons we are one of a kind company in a class by ourselves. The life science industry has grown significantly in recent years with the success of new modalities such as mRNA and cell therapy, and we have grown along with it by capturing the majority of investment opportunities that have come about from those inventions and others. With the onset of market volatility, we are seeing a normalization of demand, and although in the near term we don’t anticipate seeing the same level of activity we saw in our record breaking year of…

Thanks, Peter. Dean here. Good afternoon, everyone. Our team delivered on truly remarkable results for both the three and nine months ended September 30. Total revenues were up 20.5% and 24.8% for the three and nine months of 2022 in comparison to 2021. FFO per share diluted as adjusted for the three and nine months was $2.13 and $6.28, up 9.2%, 8.3% over 2021 and importantly, beat consensus. The strong financial and operating results reflect the strength of our brand, our scale, high quality and well-located properties and operational excellence, serving the mission-critical needs of some of the most innovative entities in the world. Congratulations to our entire team for truly outstanding executions over many quarters. This really stands out within the REIT industry, especially during this very challenging macro environment. Our strong balance sheet and liquidity management highlights truly awesome execution by our team over many years. Our team is very pleased to have earned our corporate credit ratings that rank in the top 10% of the REIT industry. We are also very pleased to have further improved the strength of our balance sheet in the third quarter with a significant increase in liquidity. We completed an amendment to our line of credit, increasing aggregate commitments to $4 billion, up $1 billion over the prior credit facility. A huge thank you to our important lending relationships for providing significant liquidity for our company. Our total liquidity as of September 30 is now very significant at $6.4 billion. We are one of the very few REITs with no debt maturities until 2025. 96% of our outstanding debt represents long-term fixed rate debt and the percentage of fixed rate debt is expected to be even higher by the end of the year. Net debt to adjusted EBITDA is on track to…

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

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

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

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

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

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

Joel, are you taking that?

Could you repeat the question?

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

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

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

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

Sure. It’s Dean here. So as you know, the disclosures we had about a little bit more than $38 million in impairment charges. It was primarily related to 1 project that which we no longer chose to proceed forward with. It was a development project, about 600,000 rentable square feet. The parcel was located in California. We did not own the land. We had pretty significant cost incurred, but it was really our investment to date, which was significantly related to the entitlement work for the site. And the reason for not moving forward with the project was very specific to the financial outlook for the project. There was no lease, re-lease negotiation related to the project to be clear. And beyond that, I guess, we’re not in a position to comment much further on the project. But as you’ve heard from us on this call and over the last several quarters, it’s really important to keep in perspective that we did lease about 2.7 million rentable square feet of development and redevelopment space just in the first three quarters of 2022. So it’s very specific to the project.

Thank you very much.

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

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

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

Yes. By and large, they’re getting close to being locked up in the sense of – as you go through a lease negotiation and execute a lease, both sides of the relationship landlord and tenant will work through a fairly detailed budget. Once the lease is executed, the tenant moves forward their side to refine their cost estimates as they get into really the details. So big picture, we have a sense of the yields. The exact yields will be refined as the tenant finalizes the extreme details of their build-out. And then on the cost side, as you’ve heard from us for many quarters now, we do build in contingencies to protect us from construction cost escalations. And as we usually do, we’ll make disclosures of those yields as soon as we can. And generally, that time line is consistent with once the tenant finalizes the details of their project design. So it usually lags disclosures of lease-up. But I think the important thing to recognize is we had no changes in cost at completion for any of our projects on an unfavorable – from an unfavorable perspective nor on yields. We did have one project that had an increase in cost at completion, but it corresponded with a pretty significant increase in revenue as well. So we’re generating for solid return on the incremental capital. So our team has done a tremendous job managing costs in a very unusual environment when you have to consider supply chain considerations and just continued escalations in construction costs.

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

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

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

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

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

Okay. Thank you.

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

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

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

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

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

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

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

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

Yes. Thanks, Steve.

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

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

Yes, so maybe I’ll comment generally and ask Hallie to also comment. I think Rich I don’t think we’re going to see any blockbuster M&A deals big company to big company or even big company to moderate size companies that impact what is perceived to be some competitive situation in a therapeutic class. The FTC I think under this administration has been fairly hostile to almost every kind in every industry get together because they claim it’s always not competitive or it diminishes competition, somehow increased prices. So I think that’s – I mean, we’ve seen this play out a little bit with Illumina and GRAIL, and GRAIL was spun out of Illumina, so none of that makes particular sense. But I think it’s fair to say we will see and I think Hallie mentioned this and continue to see, we just saw recently Lilly just bought a bolt-on acquisition of a hearing loss company. I think you’re going to continue to see a range of bolt-on acquisitions for product opportunities. And I think sometimes it’s going to be a positive, sometimes it may not be. But overall, historically, if we look back at our 25 years of public company, it’s been generally pretty positive for us. But Hallie, any other thoughts you have?

Yes, I agree with everything you mentioned, Joel. And maybe just to say that depending on the company and the outcome, it’s positive for the ecosystem whether or not there’s a real estate outcome. Thinking about some of the bolt-on acquisitions where it really is product driven, we see those executives go off to start new companies. We have deep existing relationships with them. They often go on to establish and grow their next large biotech. So in the long run, these events are positive for the ecosystem. There are a number of examples where M&A over the years has led to really sizable footprints. BMS in San Diego is a great example of that over time with their acquisition of Signal about two decades ago, and then Celgene. And then as you saw in the first quarter this year, we announced their 420,000 square foot in development with us in San Diego. So over time, the acquisitions definitely can lead to additional space needs, but it’s very dependent on the type of acquisition. And again, the overall net positive for the ecosystem is really great as investors go to put their returns to work in terms of new companies and founders go off to start new endeavors as well.

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

Thanks, Rich.

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

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

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

Yes. Can you hear me now?

Oh, perfect.

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

Well, that’s a complicated question. I’m not sure we have the time or ability on this call to go in market-by-market, not sure we want to do it. But I mean, I think if you look at New York as a great example. We’ve pioneered the first commercial life science center and campus in New York City. There’s millions and millions, tens of millions, hundreds of millions of square feet, and there are a number of projects that are being worked on there. The demand has been fairly modest. It’s early stage. And it’s pretty clear that literally almost most buildings in New York can’t be converted from office to laboratory and probably wouldn’t want to be given the market. So, I think you have to look at that on a submarket-by-submarket basis. I don’t even think you could look at it as an overall market-by-market basis. And we know from Boston, there have been a handful of conversions. We know, in particular, a recent case downtown, where somebody kind of jury-rigged an office building, brought in some smaller tenants, and we know the smaller tenants have experience both for the developer who’s never done it before and the tenant massive cost overruns on that conversion. So – but as I say, just look at, again, 87% of our leases come from our existing tenants, we feel very good about our ability to continue to generate steady demand in these markets. And we’ve been through the cycles. We are through the cycle in 2000, 2001, the big tech up bus bubble, if you will, and 2008 and 2009 with a big financial crisis. So, we’re fully prepared and I think our portfolio or asset base really is in great shape.

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

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

Yes, absolutely. So, I direct you to look at Page 17 of our supplemental, which has a breakdown by ARR of our business types across the life science industry. And as we’d like to stress on other calls, small and mid-cap is a very small percentage of our overall tenant base. And what we’ve done as well in the past two quarters has broken down our public biotech segment by marketed products versus preclinical and clinical products. And as you can see, the majority are marketed. And these are, as mentioned on the call, there’s companies like Vertex, Moderna folks with incredibly large balance sheets and cash to deploy. It’s important to know that our team and our diligence process is truly unique. We have a number of folks, including myself, with PhD backgrounds across the biotechnology space that significantly underwrite these companies, understand what their risk profile is, what their opportunity and growth profile are and then monitor them extensively as they progress. So all things put together, we have a really strong set of companies across all of our different business types, which collectively reflect the strength of our asset base.

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

Great. Thank you. That’s all for me.

Yes. Thank you.

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

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

Hey Dave, it’s Dean here. So, I guess as you acknowledge, we’re going to get into the details of our plan for 2023 in about four weeks at Investor Day. Maybe some high-level thoughts on the capital plan that you’re looking at on our active projects with a handful of projects that we’ve committed in the near term that are leased. So, we have about 7.6 million square feet. It’s 78% leased and this pipeline can generate $645 million of incremental net operating income, which is just spectacular. If you look at the most recent starts or the stuff that’s pending to start near term, just call it some projects could take up to three years to finish. NOI will commence quarter-to-quarter, as you would expect, even starting next quarter on this pipeline. I highlighted earlier that if you look out over about a three-year period at our current run rate for cash flows from operating activities after dividends over three years, you’ve got $1 billion to reinvest. Equity capital – equity type capital for our pipeline includes this – we probably are sitting on about $6.8 billion of equity type capital and it’s this $1 billion of cash flows that I just mentioned, we had about 1.5 billion of outstanding forward equity contracts. And then obviously, our CIT [ph] related to just the $645 million of incremental NOI is all that stuff’s broad equity type capital. Some of it’s incurred, some of it’s future cash flows. But if you look at that, some number approaching almost $7 billion that are typical leverage profile, assuming a five one year end target for net debt to adjusted EBITDA. This pipeline will generate probably 3.3 billion or something in that range of debt funding. That’s roughly one third debt, two-thirds equity on…

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

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

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

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

Well, I appreciate the color.

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

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

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

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

Yes, and we have been receiving some anecdotes of projects that were on the radar that are not going to happen. Even a couple that started construction that paused, I mean, I talked about cost escalations in my prepared remarks, and they continue to wreak havoc and go into a lot of percentages because I didn’t want to talk for 20 minutes. But just year-over-year from Q2 2021, I’m sorry, Q3 2021 to Q3 2022, they were about 13.5%. So it has just become very expensive and I think that’s giving a lot of sobering up a lot of people that were ready to jump in and try to get involved. So we don’t expect there to be a huge supply problem in any of our markets. From what we see under construction it looks to be a fairly normal rate in a normal environment at this point. And as long as that continues everyone’s being rational. We should continue to see good rent growth, not 2021 rent growth, but not the hockey stick that we experienced that Joel referenced. But good, and usually over time, we’ve exceeded inflation. And I’m not saying we’re going to do that now with the inflation numbers, but as soon as inflation normalizes, I would imagine that we would continue to exceed it.

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

Got it. Thanks Joel. Thanks Peter.

Yes.

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

It’s Dean here.

Yes. Go ahead.

Yes, maybe 325 is a good example and I think the, the way to think about this is you do have some advantages when you do sustainability initiatives from the start. It’s a lot more efficient. You can, I think that project incurred something around that 6% to 7% range of cost to really end up being able to describe it as becoming the most sustainable lab building in Cambridge. As you guys know, it’s probably the most important and unique feature is taking advantage of geothermal energy for heating and cooling of the building, which along with other attributes of the design, allows us to eliminate almost all the fossil fuel consumption for the building. It’s an important attribute for Moderna, the CEO emailed their team as soon as the lease was signed, literally as soon it was assigned and said, let’s get moving and make this one of the coolest, most sustainable green buildings in Cambridge and so they were passionate about it. Most of our large pharma and big bio tenants have already publicly announced sustainability initiatives. So they do find it important. Like LEED was in the early days. LEED had a cost element to it that we all had to get our head around, and we did early on. We had the first core and shell LEED Certified Building and so we were a pioneer there and continuing to be a leader in sustainability here in lab buildings.

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

Got it. Thanks everyone.

Yes. Leap on that.

Thanks Tom.

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

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

Yes. Well, I would refer you to and a good question to our September 12th press release where we talked about a range of issues in New York. New York is a very complicated market. It still remains a small company market. I’ll come back to that initiative in a moment. Probably 250,000 square foot of lease – actual leasing last year. So that’s a very small market. We started that market. There were literally only two commercial companies in New York doing research when we started, today the number approaches 75, 80 or more, but it’s a slow growth. It’s gestation period is 25 years or more. We’re 12 years into it. So the market is not going to be grown by any supply. It’s going to be grown by capital helping create companies. That’s the only way that market is going to grow. You’re not going to have big farmers like they’re doing, like we signed these two leases a quarter or two ago with Lilly in Boston and BMS, Bristol Myers and San Diego. You’ll never see that in New York because of the just the nature of the topography and geography there. You’ve got very high tax burden and you’ve got some safety issues going on now that hopefully maybe the Governor and others will wake up to. But it’s – that’s the kind of market it is. It’s a small company market, it’s a great place, but it’s different than every other market. It’s unique compared to all the other clusters. With respect to the State and City effort in Kips Bay there, it’s a pretty broad and deep effort. Much of it is institutional and governmentally driven. There is a, a thought of building or a plan to build a tower in that area, but probably to get, go through the land use approvals will take two plus years and then go through an RFP process and then the development process it’s maybe a decade away. But I think what’s really needed is company creation there to really continue to foster the demand. And that’s kind of, I mean, we know that market because we literally help create that market so that that’s the state of play there.

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

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

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

Well, I think as Hallie said, there’s been an all-time high venture fund capital raise this year, and that is kind of invested sprinkled out over a three, four, five maybe even longer time period. And I think it’s fair to say that great companies with great technology, high unmet medical needs, protected IP, good IP, just really smart people at the scientific helm and the business helm will generally always attract capital. I mean, we invested in Alnylam back in 2003 when it was a startup company because we felt that RNAi had great promise, but it took 15 to 20 years to prove, but it was a great investment. That company has gone on to do great things and has a huge footprint in Cambridge. And then in 2013, which again was before the bull market started to happen, we took an early investment in Moderna and everybody knows the story there. So sometimes down markets as things are, valuations are better, and they give you interesting opportunities that really are focused on totally, I would say, groundbreaking technologies that may create tremendous opportunities for shots on goal on so many of the diseases that we’re all suffering from. So – that’s how we look at it. So yes, good time to invest.

Okay, great. Thank you.

Yep, thank you.

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

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

Yes. So Dean?

So if you look at our guidance today, same property, call it the midpoint is 7% GAAP, 7.8% cash. And I think my commentary earlier highlighted we’re at 7% for nine months on GAAP. So we’re right on the midpoint today. And then we’re at 8.9%, we’re on the upper end on a cash basis. So we’re at a good perspective for nine months. And I kind of highlighted the outlier drivers occupancy growth driving a 2x benefit to NOI. So we had 100 year-to-date for nine months, 110 basis point occupancy growth with a double impact, at least to NOI and then early lease renewals early, early in 2022, which was also driving the strength. So that’s the backdrop. We’ve got a good run rate for the nine months, which will carry us into a comfortable spot with our outlook for the full year.

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

Look, I think the way to think about cap interest and interest expense; we don’t change those numbers very often. The run rate that you’ve seen for capped interest this year is probably reflective of the volume of construction activities in our business, which continue an upward trend at the moment, meaning capped interest probably on a quarterly basis, doesn’t peak out until probably Q1 of 2023. So you’re still on an upward trajectory as our – and that’s just a pure function of what you would call construction in progress or the basis that’s under construction, which drives the amount of capped interest. The interest rate drives it a little bit, but so much of our costs are fixed. There’s very little variable cost for interest expense. So it’s really just a function of spend quarter-to-quarter adding to CIP at a pace that’s outpacing the deliveries which, as I mentioned earlier, will start to peak out here in the next quarter or two.

Thanks.

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

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

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

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

Okay, thanks.

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

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

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