Alexandria Real Estate Equities (ARE) Q4 2018 Earnings Conference Call Transcript

Alexandria Real Estate Equities (ARE 0.05%)
Q4 2018 Earnings Conference Call
Feb. 5, 2019 3:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Good day, and welcome to the Alexandria Real Estate Equities fourth-quarter year-end 2018 conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Paula Schwartz, investor relations. Please go ahead.

Paula Schwartz -- Investor Relations

Thank you, and good afternoon. 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.

And now, I'd like to turn the call over to Joel Marcus, executive chairman and founder. Please go ahead, Joel.

Joel Marcus -- Executive Chairman and Founder

Thank you, Paula, and welcome everybody to the fourth-quarter and year-end 2018 conference call, and happy new year and healthy new year to everybody. With me today are Steve Richardson, Peter Moglia and Dean Shigenaga. And as I always do, I want to thank the entire Alexandria family for an operationally outstanding fourth-quarter and year-ended 2018. A quick look at Page 4 of our press release highlights our, I think, and depicts our amazing collective accomplishments as of year-end, including our all-time high-end revenues.

Each of the speakers will get into these -- the quality of our tenants, the quality of our cash flows, our leasing stats, our margins, our credit rating, our exposure to variable rate debt and importantly, very importantly, our leverage is lowest we've ever had in the history of the company. So with that, I'd like to talk a little bit about -- since our founding, we've always been blessed to be an idea-based meritocracy culture. And as a very mission-driven company, we operate at the highest standards and levels of integrity and ethical behavior. And we have among the best disclosure and transparency hard earned over our 22 years as a public company and so recognized by NAREIT.

And when we speak about corporate social responsibility, which is a big buzzword in the industry today, we at Alexandria try to live it every day. In 2018, among many notable accomplishments, our team volunteered over 2,600 collective hours to important nonprofit causes and 49 of our team members ran the New York City Marathon and raised over almost $0.25 million for Memorial Sloan-Kettering's cancer fund research. At investor day on November 28, in addition to giving what we felt was very good guidance for 2019, we also gave investors and analysts our framework for our five-year growth plan where Alexandria has the potential to double rental revenues from 2018 to 2022 on what we own on balance sheet today, assuming a positive macro and industry environment. And I think it's important to understand why we can articulate such a bold and positive framework.

It really is based on three key strategies. No. 1 is our business strategy. And in the 2004, '05 and '06 timeframe, we pivoted from a single-asset strategy to a core cluster campus strategy and began and initiated major campuses in Mission Bay, New York City and Cambridge and beyond, which are now bearing huge cash flow -- high-quality cash flow results.

In addition to our business strategy, our financial strategy was pretty crucial coming out of the financial crisis of '08 and '09. For the years 2010 through 2013, we became critically important an investment-grade company with access to investment-grade debt, and we sold certain key land parcels including a very large site, which really was handled in an exquisite fashion by Steve Richardson, which now sits on where the Warriors Stadium is being built and where we're building two towers for Uber for part of their headquarters at Mission Bay. And that really was critical to substantially lowering our leverage, which led to our significant out-performance in the years 2014 through 2018. And then thirdly, really, you have a business strategy, you have a financial strategy and then you have a management and personnel strategy.

Those are the three kind of anchors of any really great company strategy. And from 2008 onward, we did not layoff our construction development team during and after the market crash. Led by our very talented Vince Ciruzzi, we kept our great team and then continued to build as we came out of the crash to where it is today, where we have a super high level of operational excellence with delivery and cost management. We continue to build our core accounting and financial team with Dean's leadership and the regional operating teams headed by long-tenured Level 5 leaders.

And probably one of the most important things we did was to appoint Peter Moglia as chief investment officer during the crash, which radically professionalized our entire investment philosophy and approach to operations, acquisition, redevelopment and development. And Peter also brought a highly specialized experience base and knowledge base in financing, joint ventures and sales of partial interest. If you look at Page 33 of the supplement, it really depicts the Alexandria management of our development pipeline, something that has become because of the financial strategy, the business strategy and the management strategy really enabled us to grow after and out of the crash. And you can see the stats there on Page 33, which I think are, Dean always is very proud, really, I think, exceptional for an economy.

Let me move very quickly before I hand it over to Steve on a quick summary of the life science industry. Venture capital had another historic year with -- and an all-time high with life science being funded to the tune of over $27 billion. San Francisco Bay was No. 1, with 32% of that, Greater Boston 21% and San Diego 9%.

The FDA and the industry had a record year with 59 novel medicines approved by the FDA, a historic number. I'm not sure if they can match that in future years, but it was truly historic. Also, 2018 was a strong year for biotech IPOs, with 56 companies going public and raising accumulative $6.7 billion. So we're very proud of both our real estate fundamentals and also the life science industry fundamentals.

So let me turn it over to Steve to get more color on the quarter and the year.

Steve Richardson -- Co-Chief Executive Officer

Thank you, Joel. Alexandria as an innovator and leader in creating first-in-class life science clusters is very pleased to report healthy lab real estate fundamentals, featuring strong demand against the backdrop of constrained supply, and important to note, severely constrained supply in a few of our key sub-markets that we'll detail in the following comments. Very quickly, 2018 was an absolutely excellent year. The highlights include a cash rent increase of 14.1%.

Important to note that this is the highest during the past 10 years. 4.7 million square feet of leasing, the second highest during Alexandria's nearly 25-year history. And this stat, I think, is critically important that percentage of early renewals and releasing this past year was 71%. And what's underneath that is a clear indication of a sense of urgency in the market among our client tenants.

The quarter highlights include rental rate increases of 11.4% cash and an increase of $41 million in rental revenue, primarily due to the delivery of 300,000 square feet leased on a long-term basis to Merck in South San Francisco and Takeda in San Diego, both high-quality, investment-grade pharmaceutical companies. Other key leases include Dendreon leasing 76,000 square feet in Seattle. That alone was a 44% GAAP increase, which is really a testament to the value and durability of Alexandria-designed and operated lab improvements. Moving onto the East Coast.

Gates Medical leased 52,000 square feet at OKS in Cambridge. An important GSA lab tenant leased 64,000 square feet at 5 Research in Maryland. Regenxbio also leased 132,000 square feet at a new project we have in Maryland. We also have an investment-grade pharmaceutical company that leased 66,000 square feet at a redevelopment project at 681 Gateway in South San Francisco.

And finally, a very exciting early stage company, Insitro, leased 35,000 square feet in South San Francisco as well. Our leadership role in the country's leading life science clusters enable us to capitalize on these very solid lab real estate fundamentals. At the outset, I referenced a severely constrained supply dynamic and the details below include the Cambridge market with just a 1.1% vacancy rate with the lab demand at 2.1 million square feet, paired with another 1.9 million square feet of technology demand. Mission Bay and San Francisco has a 0% vacancy rate and Greater Stanford down on the peninsula has a 1.6% vacancy rate.

Overall, the San Francisco region's life science demand remained strong at 2.5 million square feet, while tech demand has actually increased to 7.8 million square feet in the area from San Francisco to Palo Alto. We are monitoring supply in South San Francisco with a potential for two new projects from new entrants in the market there. Moving north, Seattle's life science cluster in South Lake Union has become even tighter with the vacancy rate of less than 1% and lab demand increasing to 611,000 square feet. And important to note that this is against the backdrop of more than 3 million square feet of tech demand.

On the southern part of the West Coast, San Diego's UTC and Torrey Pines sub-markets have a direct vacancy of 6.8%. And as well, we are seeing an increase of lab demand there to 1.6 million square feet. And finally, Maryland is healthy with nearly 500,000 square feet of demand and just a 4.6% vacancy rate. I think the clear takeaway here is that the solid lab real estate fundamentals continue to be driven by the success of the life science industry, as Joel outlined.

Alexandria as a trusted partner to the entire life science ecosystem is oftentimes collaborating with its clients for many months and even years on new projects. Page 33 of the supplemental details the accomplishments of our fully integrated, underwriting leasing and construction teams during the past 10 years with 4.1 million square feet 100% leased and 3 million square feet 30% -- 36% leased at the start of these Class A projects. As we consider new starts in our core markets that will continue to drive NAV, we will closely monitor these lab real estate fundamentals and continue leveraging our unique and strategic insights. Take it away, Peter.

Peter Moglia -- Executive Vice President

Thanks, Steve. I'm going to spend the next few minutes updating everybody on our fourth-quarter deliveries, our near-term pipeline and our asset sales efforts. In the fourth quarter, we fully delivered 213 East Grand in South San Francisco to investment-grade tenant Merck. The initial stabilized cash yield is 6.5%, which is a healthy spread over what we believe would be a sub-5% cap rate if it was sold today.

9625 Towne Centre Drive in the prime University Town Center sub-market of San Diego was fully delivered to investment-grade tenant Takeda. The initialized cash yield is 7.3%, which is 30 basis points greater than we initially projected and 160 points -- basis points over Green Street's cap rate for the sub-market, so another great example of value creation. Two assets in Maryland: 9900 Medical Center Drive in the prime Shady Grove sub-market of Rockville and 704 Quince Orchard Road in Gaithersburg partially delivered in the fourth quarter. Both assets have pro forma yields approaching or exceeding 8.5%.

The Maryland market is continuing to gain momentum, and we are well-positioned to capture its growth, illustrated by two recent announcements touched on by Steve for build-to-suit, for public gene therapy companies, Regenxbio and Autolus. Those two projects will further diversify the region's tenant base and combined for over 250,000 square feet of lease space that we'll deliver in 2020. A portion of 5 Laboratory Drive was delivered as well in the fourth quarter, bringing nearly 1/3 of that project into operation. Great leasing progress has continued there with 100% of the space either leased or under negotiation, prompting the need to expand this unique campus in RTP by beginning the development of the adjacent 9 Laboratory Drive property, which is also one of our 2020 deliveries.

Finally, one of our partial 2018 deliveries, 399 Binney, slipped into January because of pipe work performed by the city of Cambridge that interfered with our glazing installation and delay caused by the power company who were months late in hooking up permanent power. Both of those events were out of our control. The team did an amazing job mitigating these impacts down to a 1-month delay. And due to achieving economic terms above our initial underwriting, the associated cost impacts will not cause our return to dip below our pro forma yield of 6.7%.

In fact, it will likely be higher once we complete delivery of the remaining 40,000 square feet. This asset resides in the sub-4.5% cap rate Cambridge market and is yet another example of our ability to create tremendous value for our shareholders. 2019 brings more of the same. With the 2.2 million square foot pipeline, including unconsolidated joint ventures, that is already 88% leased with another 2% under negotiation.

We have construction loans in place for the joint ventured assets, reducing the total equity needed to complete these projects to approximately $450 million. 188 East Blaine Street continued its steady absorption, going from 33% leased in the third quarter to 49% leased at the end of the fourth. We have remained on track to achieve an initial stabilized cash yield of 6.7% in a market where institutional assets have been trading in low to mid-4s. 275 Second Avenue in Waltham, sub-market of Greater Boston, has approximately 30,000 square feet left to deliver and is now 90% leased with a proposal out for the remaining 10%.

It remains on track to achieve a 7.1% initial stabilized cash yield. 279 East Grand, which is an extension of our South San Francisco campus anchored by Alphabet subsidiary Verily is approximately 67% leased to Verily and 33% leased to an exciting new company that Steve mentioned Insitro, which is developing new drugs by integrating machine learning techniques with recent groundbreaking discoveries in life science. This project is a testament of the high-quality value creation development team we have in place in the Bay Area as it's expected to deliver with an initial stabilized cash yield of a whopping 8.1%, likely a 300 basis point spread over its market cap rate. The Bay Area team is also executing the redevelopment of 681 East Grand located only a few blocks from the 279 building.

It is also anchored by an investment-grade tenant and is expected to stabilize the cash yield of 7.9%, also likely a 300-basis-point spread above its market cap rate. In addition, they will be delivering the remaining 49,000 square feet at Alexandria Park in Palo Alto by the end of the second quarter. The space is fully leased to an investment-grade tenant and is projected to stabilize at a 6.7% yield in the low 5% cap rate sub-market. Finally, we're excited to be adding the redevelopment of 140,000 square feet of the Alexandria life science factory in Long Island City to our 2019 pipeline.

This property will serve to accommodate the expansion of our growing base of early stage companies in New York City and is expected to be a platform, from which to cede our development of the North Tower, which is anticipated deliver in the 2021-2022 timeframe. I'll just touch on asset sales. We are pleased to update you that we have signed purchase and sale joint venture and ancillary documents effectuating the partial interest sale of 60% of the 388,000 square foot 75/125 Binney project in Cambridge to a highly regarded U.S.-based institutional investor. The agreed-upon value of $1,880 per square foot represents a 4.3% cap rate on fourth-quarter annualized net income and is a testament to the significant value that resides in our urban innovation campuses and our brand.

In addition, we have identified a number of assets that can be recycled into higher returns or joint ventured to provide an advantageous cost of capital relative to common equity. We are currently working with consultants to confirm our valuations and we will be iterating our disposition strategy based on these efforts and market conditions throughout the year. To sum it up, our value creation machine continues to run. And when we need to monetize it, we've been able to execute that flawlessly.

So I'll go ahead and pass it over to Dean.

Dean Shigenaga -- Chief Financial Officer, and Co-President

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. Let me just touch on an important topic before I jump into key highlights for the quarter and the full year.

As Peter highlighted, we announced the execution of this P&S for the sale of the 60% interest core Class A property that was developed at 75/125 Binney Street in Cambridge. The sale price is $1,880 per rentable square foot that represents a 4.3% cap rate on fourth-quarter cash NOI annualized. If you look back over the last five years, including this transaction, our dispositions aggregate $1.5 billion at an average cap rate in the mid-4% range. The key takeaways that our team has built a very high-quality asset base of Class A properties in some of the best real estate sub-markets in the country, and we have built an industry-leading high-quality tenant roster.

And both of these translate into one of the best portfolios of high-quality cash flows in the REIT industry today. We clearly have a very attractive high-value asset base and this P&S announcement today further supports this. Our office lab properties should be valued at a premium to Class A office due to the quality of the real estate, high-quality tenant roster, lower long-term CAPEX requirement, and importantly, our unique and differentiated business strategy, our platform, brand and highly experienced team. So let me get back to our comments on operating and financial results.

I briefly want to cover our fourth-quarter and 2018 results, balance sheet and improving credit metrics, growth and cash flows from operating activities and dividends, brief comment on sustainability and philanthropy efforts and our updated guidance for 2019. From a real estate perspective, 2018 was truly an outstanding year with our entire team executing on our strategic goals. Real estate and life science industry fundamentals were strong in 2018, and 2019 will benefit from continued strength of fundamentals. 2018 was a year of record leasing, as you heard from Steve.

$4.7 million rent-able square feet executed with the highest cash rental rate growth in the past 10 years at 14.1%. Our outlook for 2019 leasing is strong as well. Contractual expirations are very manageable at only 5.2% of total annual rental revenue, and we're projecting 2019 cash rental rate increases in a range from 11% to 14%. Strong occupancy was supported by our high-quality tenant roster and was up 50 basis points since January 1 to 97.3% at year-end.

In 2019, we expect continued growth in occupancy to 98% at the midpoint of the range of our guidance, reflecting continued strong demand from some of the most innovative entities in the world. Our unique and differentiated business strategy focuses on high-quality cash flows from our collaborative life science and technology campuses in key urban innovation clusters. Class A properties in AAA locations generate 77% of our annual rental revenue today. Additionally, we have an industry-leading, high-quality tenant roster with 52% of our annual rental revenue from investment-grade rated or publicly traded large cap companies.

Fundamentals, record leasing, strong occupancy, collaborative campuses and Class A properties, our favorable lease structure with, one, annual rent escalations and, two, operating expense and CAPEX recoveries and our high-quality tenant roster collectively contribute to our consistently strong same property performance. We've reported strong same property growth and NOI at 3.7% and 9.2% on a cash basis for 2018 and both exceeded our strong 10-year average performance. Our outlook for 2019 reflects continued strength with cash same-property NOI growth in the range of 6% to 8%. Adjusted EBITDA margins were strong at 69% and represents another top statistic in the REIT industry.

Operating expenses were up 17% during 2018 and includes the increase of 7.5% within the same property portfolio. This increase in same-property operating expenses was really higher in 2018 than a typical annual increase in OPEX in any given year was really driven to increases in property taxes related to recently completed construction and annual reassessments in certain markets. Keep in mind that our favorable lease structure includes the triple net provision in 97% of our leases and result in a recovery of operating expenses from our tenants. Our team's strong leasing philosophy in 2018 also included outstanding execution of lease-up of value creation projects.

We executed 1.7 million rent-able square feet of leases related to development and redevelopment of Class A properties, 90% of which related to 2019 deliveries. These leases provide significant initial contractual annual rents, aggregating $96 million and contain annual escalations to drive continued growth and cash rents. Our venture investment and support company is focused on transforming the lives of people throughout the world. Since the beginning of 2018, new GAAP rules require that we recognize changes in the fair value of certain investments in earnings.

As of December 31, our cost basis was $652 million or 4.5% of total assets, and we had unrealized gains of $240 million. Our net loss for the fourth quarter of $0.30 per share and earnings per share of $3.52 for the full year of '18 included unrealized losses of $83.5 million and unrealized gains of $136.8 million, respectively, due to changes in the fair value of certain nonreal estate investments. Now turning to balance sheet and our improving credit metrics. We closed out 2018 with the strongest balance sheet in the history of the company in both -- in 2018 both Moody's and S&P highlighted improvement in our credit profile with Moody's increasing their rating to Baa1 stable and S&P increasing their outlook to BBB positive, really ranking ARE's ratings near the top of the office sector today.

Our balance sheet leverage was solid at 5.4 timesbased upon net debt-to-adjusted EBITDA, and we remain very committed to strong and improving credit metrics. Briefly on cash flows and common stock dividend. We have a very high-quality growth in cash flows from operating activities after dividends and also hit an all-time high in 2018 at over $150 million, really due to strong execution of internal and external growth initiatives. During the year, our board of directors approved two increases in our quarterly common stock dividends, resulting in an 8.1% growth in full-year 2018 dividends over 2017.

Our board's policy continues to reflect our strategy of sharing growth in cash flows with our common stockholders, while retaining significant capital for reinvestment into new Class A properties. Briefly on sustainability and philanthropy efforts. We're clearly focused on creating sustainable and vibrant environments to support the development of breakthrough therapies and technologies to help cure disease, enhance nutrition and improve the way we live and work. We also focus on having a very positive and meaningful impact on the health, safety and well-being of our tenants, employees and communities in which we work and live.

We're very proud of our Green Star designation from GRESB and our team's pursuit of important 2025 goals to reduce the impact we have on the environment. 2018 was also a great year for our team's philanthropy and volunteerism efforts. Our team volunteered over 2,600 hours at more than 250 nonprofit organizations and provided mission-critical support to organizations, doing impactful work in the areas of medical research, STEM education, military support services and local communities. Closing here on guidance.

We updated our guidance for 2019 that was initially provided on November 28 at our annual investor day event. Our team's usual review of construction projects over the last 60 days identified opportunities to reduce projected construction in 2019 without -- or with no changes to projected delivery dates in 2019. Our updated guidance for 2019 assumes $100 million less in construction, representing a 7% reduction in overall spend. About half of this or 3.5% of our overall budget was reduced as a result of identifying usual conservative assumptions in our annual estimates.

The other half of the reduction or another 3.5% of our budget was due to certain aspects of a particular construction project that were no longer a component of the final project. The key point here is that cost reductions did not impact the timing of project deliveries for 2019. The reduction in spend also resulted in reduction in our forecasted common equity needs by $100 million and a reduction of capitalization of interest, which is really a reduction of construction spend for the year. I should also point out that capitalization of interest in the fourth quarter of '18 peaked at $19.9 million, up $2.5 million over the third quarter due to the buildup of CIP for the significant delivery of almost 650,000 rent-able square feet of new Class A properties from our development and redevelopment activities really in the fourth quarter and into January of 2019.

These deliveries will result in a reduction of capitalization of interest as we look into the first quarter of '19 in comparison to the fourth quarter of 2018. Our 2019 guidance for EPS was updated to a range from $1.95 to $2.15, and there was no change in the strong outlook of our 2019 FFO per share as adjusted at the midpoint of $6.95. In closing, we truly had an outstanding year in 2018, and our team is off to a great start into 2019. Let me turn it back over to Joel.

Joel Marcus -- Executive Chairman and Founder

So operator, if we could go to Q&A, kindly. 

Questions and Answers:

Operator

Yes, sir. [Operator instructions] The first question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Great. Thank you. I was hoping you could talk more about the pre-lease percentage of the 2020 development delivery pipeline? Can you provide more color on that?

Steve Richardson -- Co-Chief Executive Officer

Jamie, it's Steve here. Yes, sure. As we look at the 2020 deliveries, we've got five different buildings that total about 560,000 square feet. In those projects right now, we're 81% leased, another 2% negotiating, so very substantially resolved in the 83% range there.

We do have a number of other projects totaling about 1.3 million square feet slated for deliveries later in 2020. We're in active discussions with groups at a number of those projects, and we look forward to updating everybody as the year progresses.

Dean Shigenaga -- Chief Financial Officer, and Co-President

And Jamie, if I could add, I would just remind you in my prepared comments that during the year of 2018, we executed 1.7 million rent-able square feet related to the value creation pipeline. 90% of that related to deliveries that are occurring in 2019. So our team is hitting on all cylinders on lease-up of the value creation pipeline, and we're working hard to really get the remainder of the pipeline addressed, but we're excited about what we have already resolved.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. Did I miss it somewhere that you actually say, which five are the leased?

Steve Richardson -- Co-Chief Executive Officer

We haven't broken those out yet, Jamie. We'll be doing that in the future.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Can you say, which ones are leased?

Steve Richardson -- Co-Chief Executive Officer

Yes. We've got couple down in San Diego and then the two projects at Medical Center Drive in Maryland.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Those are -- those one -- those are leased?

Steve Richardson -- Co-Chief Executive Officer

Yes.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. All right. And then, Dean, so your comment on the $100 million of less spend, does that -- is that getting pushed out into '20 or how do we think about it? Or is it just shrinking the total pipeline?

Dean Shigenaga -- Chief Financial Officer, and Co-President

It is not pushing out much of the spend into '20. Most of it related to conservative two buckets, Jamie. One bucket was conservative assumptions that we were able to address over the last two months, which is pretty typical in a given year to be able to knock out 3%, 4%, 5% of the budget just by carefully challenging the forecasting. And then, we had 1 unique project that had a little bit of an element in it that as we looked harder at it, it wasn't something that we could accomplish in the final design and -- or ended up being a reduction to the overall cost of that project.

So neither of them, Jamie, had anything to do with pushing the cost out to '20 or any delays on any of the projects.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

OK. And then, finally, I mean, as you think about the potential of doing more JV sales based on the great pricing in Cambridge, I mean, is there a scenario where you actually don't need any more common equity this year?

Dean Shigenaga -- Chief Financial Officer, and Co-President

We have a modest number that remains, Jamie. I would say that dispositions are always a key component of our capital plan. We also have pretty unique opportunities to invest capital at great returns. So I don't know that it will fully eliminate it, but it's an important component.

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

All right. Thank you.

Dean Shigenaga -- Chief Financial Officer, and Co-President

Thanks, Jamie.

Operator

The next question comes from Manny Korchman of Citi. Please go ahead.

Manny Korchman -- Citi -- Analyst

Hey, good afternoon everyone. Your markets have certainly had some massive rent growth, which is from -- given sort of those very low vacancy rates you discussed. Is there an elasticity curve to rent? Or could you push rent harder? And if so, why aren't we seeing even bigger mark-to-market or rent markups on rollovers?

Steve Richardson -- Co-Chief Executive Officer

Manny, hey, it's Steve here. Look, there's always a balance and I think we've been pretty consistent with that. These are repeat clients, multi-market clients. I think you've seen very significant statistics.

With the outset, we referenced the highest cash increase this past year. So I don't think we've been shy at all about pushing rents. So we continue to engage on a long-term basis with these tenants, and I think we are hitting the mark and capturing the full value there. So stay tuned as the development pipeline continues to get leased up.

Peter Moglia -- Executive Vice President

Manny, it's Peter Moglia. I also would like to remind everybody that one of the things that we really do well is incorporate annual increases into our leases and add a 3% per year clip by the time those leases roll, and we're still making some pretty great cash and GAAP increases over and above what happened during the lease, certainly, I think, speaks to our great execution on the leasing side.

Manny Korchman -- Citi -- Analyst

Maybe on a similar topic. Again, given those low vacancy rates, what's the release-out for those multiples of demand that want to be in this market and just can't find the space?

Peter Moglia -- Executive Vice President

Our 2019 and 2020 deliveries, to start.

Steve Richardson -- Co-Chief Executive Officer

Yes. And to add to that, Manny, I think you see the early renewals and that one of the all-time highs at 71%. Clearly, the sense of urgency there, locking down space, figuring out how to expand when it's a high-class problem, but that is a challenge we have in a number of our markets.

Manny Korchman -- Citi -- Analyst

And one final one for Peter, if I could. Just what are your criteria when thinking about these JVs? So maybe more specifically, why was it 75/125 that got JV-ed rather than one of your other Cambridge properties? And then as you look at expanding either the JV or the sales program, how do you think about what you're JV-ing?

Peter Moglia -- Executive Vice President

I'm sorry. What's the last part of that? How do I think about what?

Manny Korchman -- Citi -- Analyst

Peter, just how do you think about what goes into a JV versus something you want to own -- wholly own going forward?

Peter Moglia -- Executive Vice President

Yes, I think one of the key elements is, have we provided as much value as we possibly can up to this time, and is the ability to create more value later on. In the case of 75/125 Binney, it's fully leased to great tenancy, but it goes for another, I believe, 12 years before you can actually get to the mark-to-market. So our partner is patient capital, and it will do well in 12 years when that lease rolls, but it's a great opportunity for us to monetize that and then put that money to work into our highly leased -- highly returned pipeline. So that is one of the things we certainly look at.

And then as far as JV partners go, we've definitely looked for those that are -- understand our business and are easy to work with and trust in our judgment and our brand to deliver great results. And this particular partner recognize that, and I wouldn't be surprised if we do more business with them down the road.

Manny Korchman -- Citi -- Analyst

Thanks, guys.

Operator

The next question comes from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath -- Evercore-Analyst

Yes. I wanted to ask Peter a few more questions on the JV. Did you speak to one partner exclusively? Or were there many potential partners discussed? And what was the level of interest? And if you could just give us a little insight on where the rents in that asset mark versus current market rent?

Peter Moglia -- Executive Vice President

OK, the first one, the current rents, I believe, are in the mid-70s and the market rent there is conservatively in the low to mid-80s. So that -- the answer is that piece. As far as marketing, we had a strategy to message to investors that we wanted to work with because that is a very important thing as far as who we partner with. It's not all about the cost or the purchase price.

It has a lot to do with the culture of who we're dealing with because we want to make sure we're very aligned. So we had a small, targeted audience that we approached. We had a valuation in mind that was very close to what we ended up with, and our buyers stepped up early and we were able to get it done. There were a number of other people contacted before we settled on the final choice, and we did receive an enormous amount of interest given that this product was in Cambridge and that there are a number of parties out there that want to JV with Alexandria and get into this life science real estate niche.

Sheila McGrath -- Evercore-Analyst

OK. that's helpful. Do you think that the people that you're in discussion with are starting to give the life science the lease structure and EBITDA margins more -- any consideration versus more traditional office?

Peter Moglia -- Executive Vice President

I think that people definitely recognize on the CAPEX side that we're very efficient in our operation versus office. I think they also look at our tenant roster and understand that they're not only investing in great real estate but they're getting credit behind it relative to office. So I think that's really what's driving it. Plus the industry is one of the driving forces of the economics of the United States.

It's an industry that's very difficult to take offshore due to intellectual property issues. And obviously, it's a well-paying industry and our tenant base is very -- has very large balance sheets and is constantly looking to expand its pipeline for the future, and they have been looking to us to be a provider of that space.

Sheila McGrath -- Evercore-Analyst

OK, great, and just one more. You've allocated more capital to the Stanford kind of cluster via acquisitions. Can you just talk about that market and your vision there? Is demand kind of equally driven by tech and life science in that cluster?

Steve Richardson -- Co-Chief Executive Officer

Sheila, it's Steve here. Having been in that market for 35 years, it was historically very well balanced between life science and technology. I mean, you had some very strong brand names down there with -- Merck, historically, has been a tenant in Stanford Research Park, Syntex, Alza and others. And what we've seen over time is tech has become larger and larger with Google, in particular, Facebook, even Apple begin crowding out to life science industry there.

There is still strong demand for serial entrepreneurs, the venture capital on Sand Hill Road for people to be in that Greater Stanford cluster. So as we look at this very strategically, certainly with the acquisition in the Research Park, building out as we will the first new Class A lab facilities in San Carlos in over 20, 25 years, we think this is critically important to the industry and we've heard that directly from clients that we've worked with for a long, long time.

Sheila McGrath -- Evercore-Analyst

OK. Thank you.

Operator

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

Tom Catherwood -- Cowen and Company -- Analyst

Thank you. Good afternoon guys. So we've seen a good deal of M&A activity in the life science sector. Obviously, some impacts your tenants, Bristol-Myers and Celgene and Takeda.

How do -- kind of multi-part question here, but, a, how do you evaluate your exposure to any one tenant when these large companies are merging? And then the second part of it is, when companies merge, what has -- historically, what has been the impact on the real estate needs? And has it depended if it's a large-cap pharma or small-cap biotech? What's kind of been the impact on the need?

Joel Marcus -- Executive Chairman and Founder

Yes. So Tom, this is Joel. So I think if you look at Page 26 of the supp, as we kind of think about -- we have really an all-star, highly diversified cast of top 20 tenants that make up more -- almost 45% of the rent. We always think about not trying to be overly concentrated.

And I think if you look at the numbers, the percentage of aggregate rental revenues, we really don't have great exposure to any single company in a way that we think would be catastrophic or highly damaging to the company from Takeda at No.1 at 3.6% down to FibroGen, which has a potential blockbuster product to oral erythropoietin to replace the injectable, at 1.4%. So I think we're pretty mindful of that. I think when you think about the Celgene/Bristol-Myers -- Bristol-Myers' acquisition of Celgene, so you have our No. 7 acquiring our No.

5, but I think one thing to keep in mind is Bristol is leading some facilities in Seattle that we've released at the Fred Hutch Cancer Research Center. And we believe on Celgene, as we luckily don't have any of Celgene's home campus in Summit, New Jersey, which I think where most of the cost synergies will come out of, but they have two important locations -- several with us but two of the most important are Juno in Seattle and the...

Steve Richardson -- Co-Chief Executive Officer

Receptos.

Joel Marcus -- Executive Chairman and Founder

Receptos, yes, in San Diego. Both of those, we believe, have mission-critical therapies that are critical to the acquisition and the value of the acquisition. So I think we feel pretty good overall about that combination.

Tom Catherwood -- Cowen and Company -- Analyst

Got you. And then in general, in the past, in your experience, do kind of waves of mergers cause a large footprint reduction? Or does it totally depend on kind of the mission of the companies and what their drug pipeline looks like?

Joel Marcus -- Executive Chairman and Founder

Yes, I think where you have large companies merging to large companies, I think you have a lot of cost synergies that shake out and you have a lot of home campuses, many of those are owned by the pharma companies themselves where things get reduced in size. But I think where you have pharma buying biotech, it isn't always true but I think more than -- more likely than not, those acquisitions are for the pipeline and the talent that you have. There are occasions where select biotechs are bought that have a single product opportunity, and those are pretty easy to spot. So when we lease to tenants, there are no tenants in our top 20 that have -- that are single product, onetime shots on goal.

So we're really careful in our underwriting about that. That would be a bad outcome.

Tom Catherwood -- Cowen and Company -- Analyst

Got it, got it. And then a quick question for Peter. You mentioned that the Maryland market continues to gain momentum, as well as the lease-up then an RTP driving the start of the next development down there. Is this the case in those two markets where demand is relatively onetime in nature, as in the growth is related to a specific resource topic or one specific funding source? Or are those markets developing more sustainable ecosystems similar to your larger clusters?

Joel Marcus -- Executive Chairman and Founder

Yes. So maybe let me talk -- I'll ask Peter to talk about real estate, but for a second, in Maryland, I think you have a resurgence over the last couple of years of tremendous amounts of dollars that have come into the National Institutes of Health. And overall, the government funding of biomedical research in that area has been stronger. You've also seen -- as Peter and Steve said, you've got certain new gene therapy or cell therapy companies that have emerged.

There's a stronger base of venture capital NEAs located there and they raised funds that are in the $2 billion to $3 billion range. So that ecosystem actually has come back from a very nascent system. It was super vibrant in the early 2000s with the genetic revolution and sequencing, but then it kind of fell into a long kind of tenure, kind of non-growth situation but it's really coming out and we expect it to be not a onetime shot. North Carolina, I think what we've done is we've tried to move to where we think -- and we'll have a lot more to talk about this on the first-quarter call, where we think the intersection of human health is both in fighting disease and then enhancing nutrition.

And so we've made a stake in the ground and really created the first ever in the U.S. that we know of -- that we know about multi-tenant ag tech campus, and that's the one that I think Steve referred to that we've got about 100% lease or committed. Peter, you might comment.

Peter Moglia -- Executive Vice President

Yes, I mean, I'll echo the comments on RTP. We certainly saw a trend few years ago of North Carolina being an optimal place for ag tech research, and we started making incremental investments over time. And as Joel said, we'll provide some more detail on that next quarter. In Maryland, I wanted to say that -- I think one of the things we're really happy about is that it used to be very dependent on government funding, and so you could basically chart the market based on the NIH budget.

And of course, around 2008, 2009, we started to see that dip, and of course, the Maryland market went down. What has happened over the last few years is that we're seeing a lot of commercial companies coming into the areas because they want to be adjacent to the NIH and other institute -- government institutions because they're having the government cosponsor different programs. Kite, for example, has moved there because they're working with the NIH and the National Cancer Institute on projects, and then we saw a follow-up with Autolus, one of the tenants that is anchoring our new development at 9950 Medical Center. They're also a CAR-T company.

So that diversity is going to really dissipate the reliance on government, and that was really a key for us to gain the confidence to start investing more in there. And it's paid off because demand has just really been strong, and any thing that has come available has released fairly quickly. And of course, now we've announced to build to suit, which will be the first new product developed in Maryland in well over a decade. So there's been a constrained supply for good reasons because there was very little growth over the last decade but that is now turning.

And because we're well-positioned with landholdings and redevelopment opportunities, we're able to capitalize on it and we're hoping that there'll be more good news in the future.

Tom Catherwood -- Cowen and Company -- Analyst

Understood. Thanks, everyone.

Peter Moglia -- Executive Vice President

Thank you.

Operator

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

Michael Carroll -- RBC Capital Markets -- Analyst

Thanks. Can you provide some color on the major near-term development starts the company is pursuing today? I know the North Tower is on that list, but are there any other major projects that we should be looking out for here over the next few quarters?

Steve Richardson -- Co-Chief Executive Officer

Michael, it's Steve Richardson. Sure, I think as we've listed in the supplemental there, we've got a project in South San Francisco on Haskins Way. So we're beginning to do the pre-development work and horizontal infrastructure. As I had talked about earlier down in the Greater Stanford cluster, the 825, 835 Industrial Road project as well, we're doing pre-development work there down in San Diego at 3115 Merryfield, again, pre-development work there; 1165 Eastlake.

And these are all in markets where we don't have significant availabilities, and these are the result of ongoing conversations that we have with our client tenant base. So I just want to be clear on how these decisions are being made and how we're informing our plans to move forward, and I think 1165 Eastlake is a perfect case in point. The 1818 project has done extremely well. And then finally, down in North Carolina, as Joel and Peter were just commenting, the great success at 5 Lab Drive is leading us to start doing pre-development work, getting 9 Lab Drive.

And then 6 Davis Drive is also getting build-to-suit interest, very early discussions down there. So that kind of rounds out the 2020 deliveries, as we've been detailing them in the supplemental.

Michael Carroll -- RBC Capital Markets -- Analyst

So when you think about breaking ground on these projects too, do you need to have some type of pre-lease percentage to break ground? Are you just happy if there's interest and there's no availability and you think that's going to be leased up over the two years it takes to complete and stabilize?

Steve Richardson -- Co-Chief Executive Officer

Yes, I think what we've done historically, Michael, is we've looked at the pre-development work and the horizontal work as necessary from a speed-to-market perspective, but then we monitor these very closely before we actually make the big capital investment and going vertically. And at that point, that's when we really look at having some type of kickoff tenant or anchor tenant in these projects. And as I detailed in my prepared remarks, 4 million square feet at the time of kickoff were fully leased at 100%, and the other 3.1 million square feet were roughly 1/3 leased, so very significant and on both accounts, whether we were multi-tenant or single tenant.

Michael Carroll -- RBC Capital Markets -- Analyst

Great. And then Steve, I know you mentioned in your prepared remarks the increased competition that you're seeing in South San Francisco. I mean, how do you think about that market today? And is that something that you still want to heavily invest in given the planned projects that are on top over the next few years?

Steve Richardson -- Co-Chief Executive Officer

Yes, maybe stepping back at the Bay Area, we just had a strategic planning meeting, and I think what was highlighted is we are very, very well balanced in kind of the four key clusters, the SoMa market, the Mission Bay market, South San Francisco and Greater Stanford market, so not really overweight in any one market. We've been 100% leased in the region now for a number of years. South San Francisco continues to be a critically important market to us, and we think the Haskins project will provide a great platform for a number of different types of companies. Peter had highlighted it, 681 Gateway.

We fully resolved that in very short order. We just started the redevelopment activities there. We're already 100% leased. So we monitor the competition very closely.

I think we're significantly differentiated on a number of fronts, and we think our tenants respond to that very favorably as well.

Michael Carroll -- RBC Capital Markets -- Analyst

Thank you.

Operator

The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Hey, guys. Maybe to follow on that question, are you noticing any other pockets of new supply in any of your markets that is a cause for concern?

Steve Richardson -- Co-Chief Executive Officer

Daniel, it's Steve again. No, not in particular. Again, Seattle's very tight. I would say Cambridge is severely constrained.

We've talked about the Bay Area, really no significant ground-up development projects down in San Diego. So really, South San Francisco is the only sub-cluster that we're monitoring.

Daniel Ismail -- Green Street Advisors -- Analyst

OK. And maybe just a bigger picture question for Joel. So prescription drug pricing is likely to come up in tonight's State of the Union address. Are there any expectations for drug price regulation in the next 12 to 18 months? And the -- and is there any potential impact on the pricing power for your tenants?

Joel Marcus -- Executive Chairman and Founder

Well, I guess I'd say one thing. Could you imagine Congress agreeing on anything? But we did actually meet with Medicare recently and had some very good discussions with them. The President's desire is to try to eliminate the rebates and the middlemen fees, which make up -- so if you're an ethical drug company selling branded products, about 40% of the price of that goes off to third parties. And then in the discussion we had in Washington, it's clear that there are a lot of end user vendors, not the patient but the vendors who dispense these.

So there are hospitals and other third parties that then mark the drugs up, some as much as 10x. And when it's buried, if you go in for surgery and it's $100,000 -- actually, I just had this happen personally to a family member, and they get a bill back that shows everything's paid for by insurance or reimbursed by insurance except drugs and the drug is $1,000 or $2,000. Oftentimes, that's marked up 2, 3, many times by the group that's dispensing it. So there's a real effort to go after the probably unreasonable markups and the middlemen who are taking 40% off of the list price before it ever gets to the consumer.

Those are the two big areas that I think people are focused on but it's pretty clear. Remember, go back to basics. Drugs only make up about 10% to 15% of overall healthcare cost, and 90% of all drugs that are sold are generic. So there's a lot of fire and talk about drug prices, but it doesn't fall wholly on the manufacture standpoint.

I think what you may see is Medicare forcing out that middlemen rebate pricing whether that can be extended to a private pay. Remember, in U.S. insurance or U.S. healthcare, about 2/3 are covered privately; about 1/3 is covered through Medicare and government plans; and then there's about 8% to 10% which still are uncovered.

So if Congress is going to act, they have to act on the 2/3 and it would take both parties and I don't think that's going to happen, but it would go after the middlemen pricing and the unreasonable markups of the dispensary element of the system, if that's helpful.

Daniel Ismail -- Green Street Advisors -- Analyst

No, that's helpful. Maybe just a last one for Dean. On the sources of equity in 2019, should we be expecting that to be done in the form of a forward equity raise or of ATM throughout the year?

Dean Shigenaga -- Chief Financial Officer, and Co-President

Manny, I think all of our -- whether it's debt or equity capital and dispositions for that matter...

Joel Marcus -- Executive Chairman and Founder

Daniel.

Dean Shigenaga -- Chief Financial Officer, and Co-President

I'm sorry, Dan, really dependent on market conditions. And when we hit that point in time or assess those, the environment, and execute, the capital needs on the equity front are fairly modest this year given the disposition program we have in place. So either option is available to us when we're ready for it.

Daniel Ismail -- Green Street Advisors -- Analyst

Thanks, guys.

Dean Shigenaga -- Chief Financial Officer, and Co-President

Thank you.

Operator

And we have a follow-up from Manny Korchman of Citi. Please go ahead.

Michael Bilerman -- Citi -- Analyst

Hey, it's Michael Bilerman. Maybe Dean or Steve or Peter, whoever wants to take this, but just sort of following whole sort of capital discussion. And I recognize that if you're trading at a big premium to NAV, issuing equities at great use of capital, but when I think back to last three years, one of the things that you guys did was over-equitize a lot of your external growth via -- whether it was acquisitions or redevelopment or new development opportunities in order to de-lever the balance sheet, but the balance sheet now in the best position, better it ever has been, which is a great thing. But you think about the equity size of the company, and the company has gone from about 70 million shares outstanding to over -- well over 100 million shares outstanding.

So the equity base has grown pretty dramatically. As you think about the capital commitments that are going to be coming down the road in 2020, 2021, 2022, just given the vast amount of opportunities that you already have within the company, do you think about more of a merchant build to take advantage of the significant value creation that you have in the development pipeline and maybe pre-selling more assets, like you just did at 75/125 Binney, to raise that capital today when the market is hot and when you've put these commitments out there where you are getting great returns on the development?

Dean Shigenaga -- Chief Financial Officer, and Co-President

Michael, good comments all around. You're right that we did raise more equity over the last few years to drive down improvement and leverage in our credit profile. 70 million to 100 million shares directionally sounds correct, but keep in mind we also grew bottom line FFO per share 60% if you include our growth through the end of 2019 here, so outstanding, top of the market REIT sector growth. I think the key to continuing to drive results as strong as that is to be disciplined with our value creation pipeline, both development, redevelopment and being disciplined on funding, which we will continue to do and utilize sources that makes sense.

Over the years, I'd say 10-plus years, we've always thought about different alternatives, including what you just mentioned but we haven't pulled the trigger on it as far as some fund-type approach because it didn't just make sense for the business. So we do evaluate alternatives as the short answer your question, Michael, and we'll continue to be very prudent in how we execute the business.

Michael Bilerman -- Citi -- Analyst

And I don't know necessarily it has to be a merchant bill fund or have a fund, but it just sounds like there is substantial institutional interest in your asset class, as evidenced by the sales that you've done and other sales in the marketplace that try to harvest some of that value today when you know that your commitment is going out or there could be a good arbitrage knowing it would be short-term dilutive but long-term NAV-accretive in doing that.

Dean Shigenaga -- Chief Financial Officer, and Co-President

Yes, it's interesting as we step back over the last -- looking at this question today but we've thought differently about it, a variety of scenarios to fund the business over the last 1.5 decades, Michael, and we'll continue to brainstorm about different alternatives. But I think, again, the key here is to be focused and balanced on how we grow the business and how we fund it, and so we'll continue to brainstorm on the best solutions. And if something changes, we'll share it with the investor community as it develops.

Joel Marcus -- Executive Chairman and Founder

Yes, on a number of assets, I think, Michael, we clearly would not joint venture, things like our center in New York or a number of assets in Cambridge. But the 75/125, for the reasons Peter articulated, turned out to be a great opportunity both time, value and it's on the -- actually the same side of the street that 225 Binney is that we joint-ventured back a couple of years ago. So it's on the north side. It also is going through an interesting transition in tenant base.

And as Peter said, we had wrung all the value out of it that we could be. We remember the times when we we're dealing with ARIAD. So that building has a long history, as you know well. So we're pretty careful about what we do, but I think Peter's deep expertise in this area and, I think, world-class relationship together with Tom and those on the ground in Cambridge, I think, give us a real set of opportunities to selectively mix a variety of forms of equity for our future growth.

And also, on the future growth, we don't know what's going to happen come 2021, 2020 even. So we're pretty careful about the growth in the future.

Michael Bilerman -- Citi -- Analyst

Right. Joel, since I have you -- I can't be the only one that's receiving emails from [email protected]. Can you comment a little bit about what's happening with your eldest son and the lawsuits going back and forth regarding him starting a run labs thing in Europe and counter-suing for the use of your logo and name and where this is headed?

Joel Marcus -- Executive Chairman and Founder

Yes. So I think if you go back to what I said at the beginning, think of Alexandria as a company that has been around for 25 years. I think this year is actually our 25th anniversary. We've built a very special business.

We were the first ones to really identify this business and really build this business. We've developed, I think, a unique business strategy, as I said in my prepared remarks. We've developed, I think, a great financial strategy that's been reflective of the market changes over the years. And I think most importantly, we've built an employee base and a management base that I would say is really second to none, very long-tenured people in all aspects of the company.

We've had Jim Collins come in and help our people, and I think it's fair to say that if you look at anyone who is trying to bring any discredit or any cloud to the company, I think you can assume that that is a meaningless approach. And I think that I'll let Jennifer Banks, who's our general counsel, comment on the litigation. But I think just remember, you have a highly ethical, highly motivated company here made up of long-tenured people, and I think the kinds of things that are going on are clearly illegal and they're immoral and they will be dealt with in a very severe fashion.

Jennifer Banks -- General Counsel

Michael, this is Jennifer Banks. I'm the general counsel here, and so I'll just jump in quickly. I mean, as I'm sure you can imagine, we don't comment on litigation matters. For litigation matters, like all company matters, we'll continue to always make all appropriate and required disclosures, but we don't have comment beyond that.

Operator

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

Joel Marcus -- Executive Chairman and Founder

Yes. Thank you, everybody. We appreciate your taking time to listen, appreciate the Q&A, and we look forward to talking to you at the first-quarter results end of April or early May, and we'll bring you more detail on the -- on some of the ag tech strategies that we have in mind and appreciate it very much. Thanks, guys.

Operator

[Operator signoff]

Duration: 76 minutes

Call Participants:

Paula Schwartz -- Investor Relations

Joel Marcus -- Executive Chairman and Founder

Steve Richardson -- Co-Chief Executive Officer

Peter Moglia -- Executive Vice President

Dean Shigenaga -- Chief Financial Officer, and Co-President

Jamie Feldman -- Bank of America Merrill Lynch -- Analyst

Manny Korchman -- Citi -- Analyst

Sheila McGrath -- Evercore-Analyst

Tom Catherwood -- Cowen and Company -- Analyst

Michael Carroll -- RBC Capital Markets -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Michael Bilerman -- Citi -- Analyst

Jennifer Banks -- General Counsel

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