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Text: With me here today are Jenna Foger, Peter Moglia, Steve Richardson, and Dean Shigenaga.
As Michael Jordan once said, some people want it to happen, some people wish it to happen, others make it happen.
Alexandria makes it happen.
For a moment, keys to the second quarter, historic high demand for Alexandria's lab space and our critical lab operations, which go along with that.
Alexandria is at the vanguard of meeting the historic and high unprecedented demand from many of our more than 750 tenants for growth needs now and a critical path for future growth very importantly.
Fundamental drivers of demand are the strongest we've ever seen.
Rental rate growth continues unabated and no excess supply on the horizon at this time.
We're very proud that we've got almost 7% quarter-to-quarter per share FFO growth, more than 40% rental rate growth, almost 18% NOI growth, almost 8% same-store NOI growth and a $1.3-plus billion annual NOI run rate, not to mention about $545 million in incremental revenue in our development and redevelopment pipeline.
Alexandria truly has a demonstrable pricing power advantage in each of our cluster markets.
And when life science tenants choose, they almost always prefer Alexandria's lab space and our operational excellence based on our critical lab operations.
Nature Biotechnology, a magazine back in April wrote the following: 2020 was a year that smashed many records.
Biotech saved your role and the pandemic attracted a stampede of private and public investors alike.
The pandemic apparently reinforced the requirement for long-term value-based investors of any kind to have exposure to life sciences.
And life science demand has in fact hit an all-time high as the world has recognized the importance of next-generation therapies to solve current and future really difficult healthcare challenges.
And Jenna will talk a bit more about it.
I'm going to highlight just a couple of things for the moment.
The pandemic has underscored the support for the National Institutes of Health and investment in basic science, which are keys to ensuring that the U.S. maintain its leadership position in life science and maximizing national preparedness to address current and future healthcare challenges.
There is a proposal right now to increase the fiscal year '22 NIH budget up to $51 billion, nearly a 20% boost over fiscal year '21.
The FDA Center for Drug Evaluation and Research, better known as CDERS approved 23 new molecular entities in the first half of 2021, putting it on the pace to exceed 2020's near-record approval high of 53.
Following a historic year of 2020, venture capital in Life Science continues at a very strong pace of almost $36 billion already raised in the first half of 2021, on pace to eclipse 2020's all-time high of $46 billion.
This unprecedented level is likely to continue throughout the year due to substantial dry powder available to life science funds and increased investment from institutional, generalists and traditional life science investors.
Following a record 2020 for IPOs and follow-on offerings, the first half of this year have continued to reach new highs, with over $8 billion raised in 52 IPOs and over $17 billion raised in many follow-ons, positioning 2021 for an all-time record year of public market investment in life science.
R&D continues with amazing productivity and resilience through COVID, enabling the industry to expediently deliver novel vaccines and therapies to combat the global pandemic.
New biology, drug discovery platforms and increasing focus on complex medicines as the future therapeutic innovation have all demonstrated the life science industry's ability to effectively drive solutions to current and future healthcare challenges and yield strong returns to investors.
And maybe a final comment would be as Project Warp Speed did in bringing a historic public private partnership together of the government on the one hand and the private industry, biotech and pharma companies on the other hand, at a warp speed rate to bring research and development and commercialization of the COVID vaccines in record time as well as ensure a timely manufacturing supply.
We really do need a 21st infrastructure package, not a 20th century package like the one Congress is now debating.
We need to make the U.S. self-sufficient in semiconductors.
We only produce now about 11% to 13% and self-sufficient in next-gen manufacturing of complex medicines.
As Joel highlighted last quarter and continues to be reaffirmed by the fundamental he just shared is the tremendous paradox of this pandemic moment for the life science industry.
Despite the challenges of these past many months, COVID has illuminated the power of science and the industry's ability to transform the future of human health.
Not only are so many of our tenants in the industry, as Joel mentioned, risen to the challenge of combating global pandemics, but R&D and bioinnovation broadly have persisted with amazing productivity, resilience and experiences throughout this time.
And we cannot stress not how critical it is for us a halt to preserve and prioritize and continue to catalyze this groundbreaking innovation that has and will continue to save so many lives.
So turning to COVID-specific update for a few moments.
A total of 3.7 billion vaccine doses have been administered worldwide with nearly 10% of these doses in the U.S. alone.
Roughly 57.5% of the vaccine-eligible population in our country, that's 12 and over have been fully vaccinated by either tenant Pfizer or Moderna's 2-shot mRNA-based vaccine or tenant Johnson & Johnson's single shot.
This is just over 49% of the total U.S. population, and we hope this number of fully vaccinated individuals will continue to steadily rise.
These numbers are astounding.
And before we get into the where are we now, I want to emphasize that despite the COVID fatigue, we all continue to fuel even despite some relief from the easing of restrictions over the past few months, albeit with the likely return of some new ones, none of where we are in the recovery process can be taken for granted.
The fact that the biopharma industry spearheaded by many of our tenants was equipped with the know-how, resources and technology to create safe and effective vaccines to combat a novel viral pathogen would have been unimaginable just a few decades ago.
The fact that our tenants Pfizer, Moderna and Johnson & Johnson were able to develop, run robust clinical trials, manufacture and distribute billions of vaccines at scale in less than 12 months is absolutely unprecedented.
These vaccines achieved such astounding safety and efficacy in the 90-plus percent range when the FDA has set the original bar at 50%, with an amazingly low incidence of side effects reported from the millions of people who have now received that is truly astounding.
The fact that the biopharma industry, government and many other public and private agencies came together to ensure all of the above transpired at a pace and level sufficient to provide adequate vaccine supply to inoculate the entire U.S. population as we now have, unlike most nations around the world, is not to be undervalued.
And the fact that we have a regulatory agency in the FDA that has worked around the clock to review thousands of COVID-19-related applications to maximize the availability of high-quality testing and safe and effective vaccines and therapies against COVID-19 cannot go unrecognized.
So where are we now?
It's been just over 18 months since the first U.S. COVID case was reported on January 21, 2020.
Yet despite all of the progress with vaccines, etc.
, countries around the world are still very much combating new COVID-19 surges, driven most recently in part to the increasing prevalence of the so-called Delta variant.
In the U.S., this highly continuous Delta variant, approximately 50% more transmissible with 1,000 times higher viral load account for at least 83% of COVID cases.
Average daily confirmed COVID case count now exceed 50,000, which is guide x that of the mid-June lows with hospitalization and deaths rising as well.
However, as worrying is this trend may seem breakthrough infections, those are infections that occur in vaccinated people are still relatively uncommon.
And the vast majority of these breakthrough cases have not caused serious illness, hospitalization or death.
More than 95% of people hospitalized for COVID-19 are unvaccinated, and the vaccine still remain effective even against the Delta variant.
So while they may not entirely prevent transmission, they do seem almost entirely able to prevent severe disease and death.
With regards to vaccine safety.
There have been very few adverse events, less than seven per million reported overall with nearly all cases resolving and without long-term side effects reported.
As such, the strong safety and efficacy profile will likely garner full FDA approval for mRNA-based vaccines for Pfizer and Moderna this fall.
With regards to pregnancy and women of childbearing age, though data is more limited, based on the safety data generated to date and how we know vaccines work in the body, the CDC does encourage pregnant women to get vaccinated, especially given that pregnant and recently pregnant women are at increased risk for severe illness from COVID-19.
With regards to children, Pfizer has an emergency use authorization for children over 12, and the FDA is urging Pfizer and Moderna to expand their studies in children aged five to 11.
So what's next and where are we headed?
The evolving data and the duration of immunity and COVID-19 variants of concern suggests that COVID-19 and the need for vaccines and boosters will likely persist long term.
However, the faster we can vaccinate the population in this country and increase access to vaccines in the rest of the world, the more effectively we can slow the emergence of new variants and the sooner we can turn this virus into a less deadly pathogen even if still contagious.
And given that COVID will likely remain on the planet for the foreseeable future, therapies are going to continue to be important in mitigating the severity of COVID-19, such as recently authorized to our tenant Bayer and GSK for their new antibody.
Equally as important, is continued COVID testing, of course, for active virus in symptomatic individuals as well as surveillance testing across the population to detect new outbreaks, sequence emerging variants and track overall transmission.
The last point I want to make is regarding the FDA, which has received somewhat unyielding flack over the past several months despite the herculean COVID efforts while maintaining a near all-time record high pace of new drug approvals, as Joel highlighted.
This criticism has been mounting on account of several factors, including the lack of a fully appointed FDA commissioner, the growing backlog of review requirements for new investigational drug applications given the strong pace of innovation of our industry, the lack of fully approved vaccines despite their being authorized under the emergency use authorization pathway and most recently, the historic and highly controversial approval of Biogen's Aduhelm to treat Alzheimer's disease.
This was the first approval in nearly two decades for this chronic neurodegenetive disease affecting over six million people in the U.S. alone.
I will save commentary on all of this for another time, but it needs to be said that without the FDA's steadfast and tireless work throughout COVID to maximize the review of the immense COVID-relating testing, therapeutic and vaccine applications will try to keep up pace with the record numbers of submissions from the industry, we as a nation would fall way behind.
It is nothing short of astounding and worthy of the utmost recognition.
The FDA is critical for ensuring the safety of all drug products that are available in the U.S. while balancing efficacy and expediency.
The future productivity and leadership of the agency, which will be announced by November of this year is of the utmost importance to all of us.
As the FDA is instrumental in ensuring the continued pace and vitality of biomedical innovation in our country.
Biopharma is emerging from COVID as a dawn of historic new era for biotech and scientific innovation.
The world recognizes the value of this industry and the potential for next-generation medicines as evidenced by Moderna and Pfizer's next-generation vaccines to address current and future healthcare challenges.
And clearly, the paradox of this pandemic moment has only reaffirmed why Alexandria has dedicated our business, our passion and our purpose to help drive this mission-critical industry forward.
I'd like to take a step back at the start of my comments and provide some historical context for the accelerating demand which really translates into leasing at warp speed for Alexandria's mega campuses.
At Alexandria's Annual Investor Day during December 2017, we presented a bold framework to nearly double the company's annual rental revenues from a little more than $800 million to $1.5 billion by the end of 2022.
We are pleased to share those annualized revenues for Q2 2021 are, in fact, in excess of $1.5 billion.
And so the Alexandria team has accomplished this lofty goal in an accelerated time frame more than one year sooner than anticipated.
The company has also grown from a mission-critical operating asset base and development pipeline of 29 million square feet at the end of 2017, to a total of 62 million square feet at the end of Q2 2021.
Truly exceptional growth, more than doubling the footprint of the company, and importantly, concentrated in our core clusters with disciplined execution, enabling the continuation of high-quality cash flows.
And as we fielded questions during the 2020 as to whether the healthy leasing activity for Alexandria's mega campus platform was perhaps a short-term blip driven by COVID-19, the second quarter of this year's leasing volume of more than 1.9 million square feet, the highest quarterly leasing volume in the history of the company is again evidence of the company's unique position as a trusted partner to the growing life science industry, providing a durable and sustainable competitive advantage in the market.
I'll go ahead and review a few of the exceptional highlights, including the following: leasing outperformance.
As we just stated, the 1.9 million square feet lease represents the highest quarterly leasing activity during the 27-year history of the company.
Truly leasing at warp speed.
I'll direct you to page two of the supplemental, where it indicates the 3.4 million square feet under construction is 80% leased and the additional 3.6 million square feet anticipated to commence construction during 2021, 2022 is 89% leased and negotiating.
So robust leasing and our growth pipeline provides exceptional clarity, and these projects in total will drive incremental revenues in excess of $545 million.
We also have exceptional core results.
Cash increases this quarter of 25.4% and GAAP increases of 42.4%.
Occupancy remained very solid at 94.3% and the operating portfolio, which would have been 98.1% if were not for the 1.4 million square feet of vacancy in recently acquired properties, which provide for near-term incremental annual rental revenues in excess of $55 million.
In market health, demand, as we've outlined, continues to accelerate, and Alexandria's branded and highly desirable mega campuses and supply does continue to be restrained during 2021 across all of our markets, and we do not see any disruptive large-scale projects delivering 2022, '23.
We're closely evaluating Greater Boston's ground-up pipeline, which is 56% leased.
And in the San Francisco area, we are monitoring leasing activity at two or three ground-up lab projects.
And as we've stated before, there have been no significant lab sublease spaces put in the market for several quarters now.
So in conclusion, the first half of 2021 continues the very strong outperformance by Alexandria and our intent focus on operational excellence has positioned the company very well to enhance its industry-leading brand.
With that, I'll hand it off to Peter.
I'm going to update you all on our development pipeline and construction cost trends, comment on our recent asset sales and report on a couple of comps that reflect that the private market appetite for life science assets is still very healthy.
As Steve and Joel both noted, we're experiencing historic demand and have responded by executing our differentiated life science strategy at an accelerated pace through expanding our collaborative campuses and asset base in each of our cluster markets.
A significant sign of the health of the underlying life science industry is that we're expanding significantly in almost all of our markets.
In many of our submarkets, the supply and demand imbalance has been exacerbated by a lack of near-term opportunities to expand, leading Alexandria to push the boundaries of those markets.
Examples of this are successful forays into Watertown and Seaport in Greater Boston, new mega campuses in Sorrento Mesa, and expansion of San Diego Science sector to the north and east, and a highly successful mega campus underway in San Carlos.
This high demand paired with our highly experienced development teams resulted in another very productive quarter for Alexandria.
In the second quarter, we delivered 755,565 square feet, spread over five assets located in South San Francisco, San Carlos, Long Island City, San Diego and the Research Triangle.
This is double what we delivered in the first quarter, and these deliveries will provide more than $31 million in annual rental revenue over the next year.
In addition, this historic demand has led to improved quarter-over-quarter leasing and leases under negotiation numbers despite adding two new assets that have had little marketing time.
Assets contributing notably to this outcome include 840 Winter Street and Waltham Mass, which is a testament to our ability to capture demand from companies needing facilities for next-gen manufacturing.
3160 Porter Drive in Palo Alto, a joint effort with Stanford to commercialize the University's most innovative science.
And 5505 Morehouse in Sorrento Mesa, which is benefiting from Alexandria's place-making expertise and strong demand drivers in San Diego.
In addition, we expect to have another 3.6 million square feet in 19 properties commenced construction this year, and next that are already 89% leased or under negotiation.
As Steve also mentioned, these properties will cumulatively add approximately $545 million of annual rental revenue once fully delivered.
I felt it necessary to remind everybody of that.
Construction costs remain elevated from trade -- from some trades and commodities holding study and others continuing to be unexplainable and unprecedented levels.
Lumber is a positive story and could be a microcosm for what will happen with other commodities.
A year ago, lumber was $500 per thousand board feet, which was about $100 above its historical norm.
It climbed to $1,700 per thousand board feet in early May, but has since dropped back down to $600 per thousand board feet, and is still dropping.
The reason for the drop was a large number of residential projects were put on hold due to the price of lumber.
With this pullback in demand, the mills have been able to catch up, leading to stabilization in pricing.
A correction due to a decrease in demand is essentially what's going to eventually normalize all construction commodities.
Copper has shown signs of dropping, but it's still two times above historical norms.
Alternatives such as aluminum are being considered to alleviate the pricing pressures.
And if there's enough adoption, it could lead to a stabilization in pricing.
Despite the promising news with lumber and copper, rolled steel remains very volatile and is not showing any signs of stabilizing.
Rolled steel is used for things such as metal decks, metal studs and ductwork.
So it's very impactful on multilevel buildings with large HVAC needs such as lab buildings.
So we have to keep our cost escalation assumptions on the high end despite the noted drop in some commodities.
The reason being reported is both a commodity and labor issue at the shops that create the products from raw materials.
COVID caused many to shut down.
And then when demand exploded, the shops had a hard time getting the labor to come back.
The shops try to solve this by scheduling longer shifts, but the amount of rolled steel showing up was not enough to support those shops.
Thus, prices remained very high with metal studs up 75% since January.
We want to assure you that we're keeping a very close eye on commodities and have been developing strategies to counter these increases.
And together with our prudent underwriting, we will continue to deliver our projects on time and on budget as we always have.
I'll conclude by commenting on our recent sales and provide a couple of comps that were announced recently.
I discussed our record 4% cap rate at 213 East last quarter, but I want to add that in addition to achieving that cap rate, we also achieved an unlevered IRR of 9.6%.
And a value creation margin, which is calculated by dividing our gain by gross book value of 56%.
We achieved a 12% unlevered IRR on this sale and a value creation margin of 61%, a truly remarkable outcome, and it's very reflective of the high-quality assets we've developed and continue to develop in the Seattle region and elsewhere.
Outside of those Alexandria transactions, there are a couple of transactions of note in our submarkets that reflect the high value that private investors are putting on life science assets today.
In Sorrento Mesa, an asset known as The Canyons, which contains a little over 1/3 of lab and manufacturing space with the balance being office, sold at a 4.48% cap rate and a value of $575 per square foot.
The cash flow is from a credit tenant and there is no near-term upside, so the cap rate really reflects the yield a private investor was willing to pay in a submarket that a couple of years ago would have commanded a cap rate with a six handle.
In a similar vein, the other comp we're reporting comes from Rockville, Maryland, which was received to be a seven cap rate submarket by some analysts not too long ago.
9615 Medical Center Drive, located in the Shady Grove submarket and adjacent to a number of Alexandria properties was sold to a U.S. insurance company for a 5.18% cap rate and a valuation of $610 per square foot.
The asset is a leasehold interest subject to a long-term ground lease that happens to be owned by Alexandria.
And with that, I'll pass it over to Dean.
We reported exceptional operating and financial results for the first half of '21 and provided a very strong outlook for the remainder of the year.
Revenue and net operating income for the second quarter was up 16.6% and 16.8% over the second quarter of 2020, respectively.
And NOI for the second quarter was up 6.9% over the first quarter of '21.
Now venture investment gains included in FFO per share were $25.5 million for the second quarter and was consistent with the first quarter of '21.
Now looking back over the last two quarters, we raised our outlook for FFO per share, $0.03 when we reported first quarter results.
And during the second quarter, we raised our outlook for FFO per share again by another $0.02.
Now this $0.02 increase was announced in connection with our Form 8-K filing date at June 14, when we were substantially through the second quarter and had solid visibility into the strength of core results for the quarter.
Same-property NOI growth for the first half of '21 continue to benefit from our high-quality tenant roster, with 53% of our annual rental revenue from investment-grade rated or large-cap publicly traded companies.
Same-property NOI growth for the first half of '21 was very strong at 4.4% and 7.4% on a cash basis.
High rental rate growth on lease renewals and releasing the space was the key driver for the improvement in our outlook for 2021 same-property net operating growth to 2% to 4% and 4.7% to 6.7%, an increase of 30 basis points and 40 basis points, respectively.
Now while the primary focus of our acquisitions for 2021 has been driven by strong demand from our tenant relationships for both current and future development and redevelopment projects, certain acquisitions have also included operating properties with opportunities to drive growth and cash flows through lease-up of vacancy.
Now these operating properties have contributed to NOI growth in the first half of '21.
It's important to highlight that the lease-up of 1.4 million rental square feet of vacancy at these properties will provide further growth in annual rental revenue in excess of $55 million.
Now occupancy that we reported for June 30 was 94.3% and 98.1% on a pro forma basis, excluding vacancy from recently acquired properties.
And it's also important to highlight that if we set aside recently acquired properties, our occupancy is on track to improve by 100 basis points in 2021.
Now we believe it's important to highlight the strategic benefits of having the team with tremendous experience and expertise with designing, building and operating sophisticated laboratory office buildings and the team with decades of trusted partnerships with our highly innovative tenants.
As mentioned earlier, we have one of the highest credit tenant rosters in the REIT industry.
We have one of the highest adjusted EBITDA margins in the REIT industry at 69%.
We reported our lowest AR balance since 2012 at $6.7 million, truly amazing when you consider that our total market capitalization was over $26 billion as of June 30.
And we continue to consistently report high collections at 99.4% for July.
We reported record leasing velocity at over 3.6 million rentable square feet executed in the first half of this year.
And this run rate is significantly exceeding the strong leasing volume for 2020 and on track for exceptional rental rate growth in the range of 31% to 34% and 18% to 21% on lease renewals and releasing the space the last figures on a cash basis, by the way.
Now as a trusted partner with access to over 750 tenants in our portfolio, we are well positioned to capture the tremendous demand from our tenant roster and life science industry relationships.
We have a super exciting pipeline of projects under construction, aggregating 3.4 million rentable square feet, 80% lease negotiating.
Near-term projects starts 89% leased were under negotiations, aggregating 3.7 million square feet.
Now this aggregates about 6.9 million square feet, 90% of which is related to space requirements from our existing relationships.
These projects will generate an amazing amount of incremental annual rental revenue exceeding $545 million or a 34% increase above the second quarter rental revenues annualized of $1.6 billion.
Now importantly, we also expect to start additional projects between now and December of 2022.
Our venture investments portfolio continue to highlight the exceptional talent of our science and technology team for underwriting high-quality innovative entities.
As of June 30, unrealized gains were $962 million on an adjusted cost basis of $990 million.
Realized gains on our venture investments for the second quarter were $60.2 million, including $34.8 million of realized gains excluded from FFO per share.
Now for the first half of '21, we realized gains aggregating about $57.7 million that related to significant gains in three investments that were excluded from FFO per share as adjusted.
Now we're pleased that the venture investment program is generating capital exceeding our initial forecast for 2021, and we hope this will be in the range of about $100-plus million for the entire year.
Now continuing on to our very strong and flexible balance sheet to support our strategic growth initiatives.
We continue to be very pleased to have one of the best balance sheets in the REIT industry, providing us access to attractive long-term cost of capital.
We remain on track for net debt to adjusted EBITDA of 5.2 times by year-end.
Our fixed charge coverage ratio for the fourth quarter has increased to greater than five times.
We continue to maintain significant liquidity of $4.5 billion as of June 30.
We're in a solid position with debt maturities with our next maturity representing only $184 million comes due in 2024.
And while it's challenging to predict when owners of real estate will decide to sell, two to three transactions drove most of the amount of acquisitions and accounted for about half of our target for 2021.
For the remainder of the year, our goal is to remain very selective with acquisitions.
Our team is advancing a number of important dispositions primarily focused on partial interest sales in high-value, low cap rate properties for reinvestment into our strategic value creation development and redevelopment projects.
Now to date, in 2021, we have completed $580 million at cap rates in the 4% to 4.2% range.
And we have about $1.4 billion in process at various stages and expect to move along other dispositions that will push us well above the top end of our range for dispositions, which are currently at $2.2 billion.
Now we are targeting about $1 billion in dispositions to close in the third quarter and the remainder in the fourth quarter.
Importantly, each of these key pending transactions will continue to highlight the tremendous value we have and continue to create for our stakeholders.
This guidance is an update to our guidance for the year that was disclosed on our Form 8-K dated June 14.
We narrowed the range of guidance from $0.10 to $0.08 for both earnings per share and FFO per share.
EPS was updated to a range from $3.46 to $3.54 and FFO per share as adjusted was updated to a range from $7.71 to $7.79 with no change in the midpoint of FFO per share diluted as adjusted of $7.75.
Now as a reminder, since our initial FFO per share guidance for 2021, we have increased the midpoint of our guidance by $0.05 for growth in 2021, representing an increase of 6.1% over 2020.
I also wanted to express our team's appreciation for continued recognition by an independent panel of judges for a six NAREIT Gold Award for Communication and Reporting Excellence to the investment community.
Operator, we can go to questions, please.

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sees 2021 funds from operations per share, as adjusted $7.71 to $7.79.

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