Alexandria Real Estate Equities Inc (ARE) Q3 2018 Earnings Conference Call Transcript

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Alexandria Real Estate Equities Inc  (NYSE:ARE)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to Alexandria Real Estate Equities Third Quarter 2018 Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ms. Paula Schwartz with Investor Relations. Ms. Schwartz please go ahead.

Paula SchwartzInvestor Relations

Thank you and good afternoon everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company’s actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s periodic reports filed with the Securities and Exchange Commission.

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

Joel MarcusExecutive Chairman & Founder

Thank you Paula and welcome everybody to the third quarter call for Alexandria. And with me today are Steve Richardson, Peter Moglia, Dean Shigenaga, Dan Ryan. The third quarter was an outstanding quarter by almost every financial and operating metric and particularly core operating metrics that were really stellar and Dean will talk more about that. My congratulations to our entire Alexandria family and for each person’s day-to-day day in and day out operational excellence, which is what really makes it all happen. And also congratulations to the world-class accounting and finance team on their many years of hard work resulting in our recent credit upgrade from Moody’s something very important. And Moody’s does focus on tenant quality and at Alexandria it’s one of our strongest characteristics of the Company.

As you know from the earnings release, 52% of our annual rental revenue is from investment grade or large-cap public companies. We’re very proud that 79%, almost 80% of that revenue is from Class A assets and AAA locations and about 60% of that is focused in Cambridge and San Francisco. Average lease term is about 8.6 years and 12.3 years for top 20 tenants. So really a very strong and stellar core to the tenant base. I want to just make a couple of comments on the industry for the quarter. Venture funding in life science continued a very strong pace over $7 billion in the third quarter marking the fourth consecutive quarter of over $5 billion invested. And this is really a record breaking trend driven by increase in deal size and well-established venture firms raising larger funds and deploying capital at a faster pace.

Something else that I think we’re very fortunate we had our 47th new drug approved on October 24th this year and the FDA has surpassed last year’s 46th — our 46th drug approval count and could be on pace to beat the all-time record of 53 set in 1996. Strong bipartisan support resulted in legislation enacted to increase the National Institutes of Health, overall funding $2 billion to approximately $39.1 billion and we’re very fortunate about that. I think that is one of the critical competitive advantages of the United States in the world of biomedical research. We did have very strong legislation, bipartisan legislation passed to address the opioid crisis signed in the law by the President in the recent past. And it certainly, the opioid crisis has been scourge resulting in the death of over 64,000 people last year greater than those died in the entire Vietnam War, which is actually hard to fathom.

And so, all of us in the industry and particularly ourselves are focused on specific things we can do to advance that project forward and we’ll give you more details on that in coming quarters. Biotech IPO activity has been the strongest since 2014 approaching 50 certainly over the next couple of weeks and raising almost $5 billion during the first nine months. The NASDAQ Biotech Index has been down a bit recently due to the volatility this month with the markets as all of you know and we’ve seen certainly a flight to value and big cap safety.

And I think with that, I’m going to turn it over to Steve to comment on a number of operational aspects, then Peter and then back.

Stephen RichardsonCo-Chief Executive Officer

Great. Thank you Joel. Steve Richardson here. This afternoon I’ll highlight the continued strong demand for Alexandria’s highly differentiated Class A science and technology campuses and the country’s leading innovation clusters. Building on what Joel had mentioned about the life science capital markets, we did have 17 IPOs this quarter. And this is just part of an overall strong demand context really driving stellar leasing and financial results with increases this quarter of 16.9% in cash and 35.4% in GAAP, the highest in 10 years.

Drilling down to Alexandria’s cluster markets, it’s important to know that Alexandria has been a first mover in each of these markets and as such has a dominant position with the highest-quality campuses immediately proximate to the country’s leading life science search institution. The Cambridge market remains extremely strong with a 0.9% vacancy rate and demand spiking up from 2.2 million square feet last quarter to 2.8 million square feet this quarter with five requirements in excess of 200,000 square feet. The San Francisco region has a vacancy rate overall of just 3% and no availability in Mission Bay. Demand remained strong in the region at 2.5 million square feet and as the trend has been for a number of years, life science companies are competing with tech companies for space and increasingly for talent as there are 17 tech requirements in excess of 100,000 square feet in the city of San Francisco alone and a total direct tech demand of 7.2 million square feet from San Francisco down to Palo Alto.

San Diego’s core UTC and Torrey Pines sub-markets are also very healthy with a direct vacancy of just 5.3% and steady demand of nearly 900,000 square feet. Moving north, Seattle’s life science cluster in the South Lake Union market remains very tight with just 1.6% vacancy and lab demand at 400,000 square feet. Research Triangle Park has also been a bright spot with a mix of AgTech and life science demand totaling 275,000 square feet. And finally Maryland’s comeback continues with an excess of 500,000 square feet of demand and a 4.6% vacancy rate.

Looking at the continued constrained supply and healthy demand here, market rents continue to remain strong. We continue to have pricing pressure in the market. Cambridge is now at $80 plus triple net. New York City is in the mid $80s triple net, San Francisco, the mid to high $60s triple net, San Diego in excess of $50 triple net, Seattle similarly mid to high $50s triple net, and Maryland and RTP north of $30 triple net. Finally as a key market takeaway, we’d really like to highlight that 68% of the renewals and releasing year-to-date are from early renewals. There is a sense of urgency in the market and that’s enabling Alexandria and our teams to work collaboratively with its industry-leading tenant roster and continue to drive meaningful rental rate growth.

With that, I’ll hand it off to Peter.

Peter MogliaCo-Chief Executive Officer & Co-Chief Investment Officer

Thank you Steve. I’ll spend the next few minutes updating you on our near-term pipeline, touch on cap rates and address construction costs as they remain a major topic of interest. 2018 deliveries at 217,000 square feet in service and another 489,000 square feet with a cost to complete of $76 million will be delivered by the end of the year. The 706,000 square feet total is close to stabilization with 96% of the space leased or under negotiation and is expected to stabilize at a 7% cash yield. Great leasing progress has made this quarter at our five Laboratory Drive project in RTP, which is now 51% leased and has another 47% of the space under negotiation. This is remarkable success considering the project started only 15 months ago and was not expected to stabilize until 2019.

399 Binney in Cambridge will deliver by year-end and has all the space other than the retail under negotiation with a number of high-quality venture capital backed companies who’ll likely anchor a number of Alexandria projects in the year to come — years to come. This 174,000 square feet — square-foot development in the heart of Kendall Square is projected to stabilize at 6.7% cash yield. 9625 Towne Centre Drive in the University Town Center submarket of San Diego remains on target to be delivered to investment grade tenant Takeda in the fourth quarter at a 7% stabilized cash yield. The 1.1 million square feet to be delivered in 2019 with a cost to complete of $319 million is already 85% leased with another 6% under negotiation. Major leasing progress was made at 1818 Fairview renamed 188 East Blaine Street as of this quarter, which went from 24% leased or under negotiation in the second quarter to 62% (inaudible) by leases from high-quality life science companies and institutions seeking a presence in Alexandria’s Eastlake neighbourhood (ph) headquarter of Lake Union.

The initial stabilized cash yield is projected to be 6.7% in a market where institutional assets have been trading in the low to mid $4s. Seattle’s life science ecosystems is rich with high-quality institutions such as the Fred Hutchinson Cancer Research Center, The Infectious Disease Research Institute and The University of Washington. The area is preeminent in the fields of cancer, infectious disease, and immunotherapy, but the pace of commercialization from the areas institutions has historically been slow. However, our deep relationships in ecosystem building are beginning to show results as illustrated by the aforementioned success at 188 East Blaine and at 400 Dexter delivered last year. We are confident that we will continue to capitalize on our long-term investment in the market, which dates back to 1996, which is why we recently added 701 Dexter to our asset base. It will allow us to develop up to 217,000 square feet of life science or tech space in South Lake Union in close proximity to The University of Washington medical school and The Gates Foundation.

Now I’ll touch on cap rates. As at any time during this cycle where we’ve seen the 10 year treasury rise, people’s mind start to wander toward cap rate. We saw the 10-year break 3% barrier for the first time in almost 4.5 years in May. And although it’s toggled above and below that, market is averaged around 3% since then. As of today we have not seen any contraction in cap rates to our product that has traded during this time. In fact it’s been quite the contrary.

Alexandria has sold our interest in Longwood Center in Boston for a 4.7% cap rate to our partner Clarion at the end of the quarter. So, a solid lab market given the presence of multiple Harvard affiliated research hospitals along with medical area is inferior to Cambridge, so a mid-4% cap rate really illustrates the appeal of life science assets to institutional buyers. In addition to that trade, the sale of the links (ph) project at 490 Arsenal in Watertown is also an indicator of status quo if not cap rate contraction, as initial pricing guidance for this inner suburbs location was for a mid-6% cap rate and after multiple rounds with multiple bidders, it traded at a 5.4% cap rate in September.

I’ll conclude my comments with an update on construction costs. In the first quarter, we noted that our 2018 and 2019 deliveries were insulated from the effects of tariffs because we have GMP contracts in place. Only a change in scope involving steel or aluminum could expose us and although we don’t anticipate any scope changes, we have adequate contingency to cover any impacts of the tariffs if we incur any. In the first quarter we reported that if we had repriced those projects including the impacts of the tariffs, we would have had an increase in total project costs of approximately 1%. We have updated that estimate and have moved it from 1% to 1.3% of total project cost and are including this impact in all of our exclamation assumptions for new projects.

Likely a bigger threat to our development cost structure is labor shortages caused by the last recession that removed a number of skilled workers from the market. Workers are coming back, but the shortage is going to impact our cost of schedule if you don’t proactively manage them. We’ve been doing just that by leveraging our deep relationships in all of our markets to ensure we always have the contractors A team and employ a number of processes such as bringing contractors into the planning process early, ensuring we have the labor lined up and all cost included in our underwriting.

With that, I’ll pass it to Dean.

Dean ShigenagaCo-President & Chief Financial Officer

Thanks Peter. Dean Shigenaga here. Good afternoon everyone. I’ll briefly cover six topics, our solid third quarter results, continued strong internal growth, our balance sheet and improving credit metrics, non-real estate investments, sustainability, and our updated guidance for 2018. Kicking off with the results. As we enter the fourth quarter of 2018 it’s useful to look back over the past year and reflect on the strength and consistency of our execution by our entire team really quarter-to-quarter. The third quarter of 2018 also reflects continued strong execution.

Total revenues for the nine months of ’18 annualized were $1.3 billion up 19% over the nine months of 2017 annualized. Cash NOI for the third quarter annualized was $867 million up $162 million or 23% over cash NOI for the third quarter of ’17 annualized. We reported FFO per share diluted as adjusted at $1.66 up 9.9% over the third quarter of 2017. We also reported continued and strong internal growth that reflects the strength of our real estate and life science industry fundamentals and our unique and differentiated business strategy. Occupancy remains very strong up 20 basis points to 97.3% as of 3Q and up 50 basis points since the end of 2017.

San Diego occupancy of 94.2% reflects the anticipated lease expiration of 44,000 rentable square feet related to 4110 Campus Point Court that was acquired in the fourth quarter of ’17 with an in-place lease. We are currently reviewing various renovation options for this space. In New York City our occupancy was 97.2% and reflects the temporary vacancy as we transition 29,000 square feet to multiple tenants with 77% of this leased during the negotiation today.

Our rental rate growth continues to remain very strong. Over the past four years, our rental rate growth on annual leasing activity has ranged from 20% to 28% on a GAAP basis and 10% to 15% on a cash basis. Rental rate growth for the third quarter was 35.4% as Steve had mentioned and represented the highest rental rate growth in the past decade and it was 16.9% on a cash basis. And overall reflective of the unique and strong real estate and life science industry fundamentals in our submarkets today. Early lease renewals represented almost 70% of lease renewals and releasing of space for the first three months of 2018 and continue to drive growth in rental rates and cash flows.

We’re in excellent shape with 2019 contractual lease expirations representing only 5.4% of annual rental revenue, 25% of which is already leased. Our same-property NOI growth for the third quarter was very strong up 3.4% and 8.9% on a cash basis and overall in line with our guidance for the full year of 2018. Our team has successfully completed several strategic goals this quarter and continue to strengthen our balance sheet in our credit profile. Due to the ongoing strength of the private real estate market, we remained focused on strategic and disciplined execution of important real estate dispositions including as Peter had mentioned, the sale of Longwood generating about $70 million of proceeds net of debt repayment and about a 4.7% cap rate.

We also are advancing a partial sale of a JV interest and a high-value core property located in Cambridge. Importantly we are expecting a lower cap rate than our prior sale in Cambridge, which was down at a 4.5% cap rate. And we are still working through this transaction and we will provide our usual details once we complete the partial sale. Keep in mind that over the past four years including the partial interest sale that’s in process, we anticipate completing $1.5 billion in dispositions averaging a highly attractive cost of capital in the 4% cap rate range. We also raised about $196 million under our ATM program during the quarter at a sale price of $127.66 per share.

As Joel had mentioned we’re very proud that we received our upgrade in our corporate credit rating from Moody’s to Baa1/Stable which really highlighted our diversified portfolio of properties with consistently high occupancy and high-quality tenants, many of which are less sensitive to economics cyclicality. Also it’s important to note that S&P has a positive outlook on our BBB flat rating moving us along to our goal of continued improvement in our credit profile. We also extended a key source of liquidity for our balance sheet with important relationship lenders through the extension of the maturity date under our line of credit to 2024, increased available commitments by $550 million to $2.2 billion and improved pricing by 17.5 basis points to LIBOR plus 82.5 basis points.

We also extended the maturity date under our $350 million unsecured term loan to 2024 and reduced pricing by 20 basis points to LIBOR plus 90 basis points. We repaid two LIBOR-based loans aggregating $350 million, reducing unhedged variable grade debt to 6% of total assets. We remain committed to continued improvement in our credit metrics each year including our fourth quarter annualized net debt-to-adjusted EBITDA as our goal for 2019 and 2020 is to move closer to five times.

As Warren Buffett recently stated in his most recent annual shareholder letter, new accounting rules required us to recognize significant unrealized gains resulting in unusually high net income in the third quarter, which by the way we exclude from FFO per share diluted as adjusted. It’s important to recognize that our cost basis in these investments were approximately 4.4% of total assets as of 9/30. It’s also key to recognize that realized gains of about $25.8 million for the nine months ended September 30th really have been driven primarily by liquidity or M&A related events versus management deciding to sell securities. We are on track for about $35 million in realized gains based upon the run rate for the first nine months and this is higher than prior year’s, but really reflective of the quality of innovation in the life science industry today.

We would like to thank Ari Frankel, our AVP of Sustainability and High Performance Buildings and our entire team for our GRESB Green Star designation and the number one ranking in GRESB’s Health & Well-being Module. We also want to thank our team for hosting GRESB’s North America real estate results event at the Alexandria Center for Life Science in New York City. We continue to execute on our goals making a positive and meaningful impact on the health, safety and well-being of our tenants, stockholders, employees and communities in which we live and work. Our team also remains focused on our environmental impact reduction goals for 2025 as recently highlighted in our inaugural corporate responsibility report.

We updated our 2018 guidance for net income attributable to common stockholders on a diluted basis to a range from $4.34 to $4.36 primarily reflecting unrealized gains on non-real estate investment of $117.2 million and a realized gain on the sale of Longwood of about $35.7 million. We also reaffirm the midpoint of our range for 2018 guidance for FFO per share diluted as adjusted of $6.60 at the midpoint and narrowed the range from $0.06 to $0.02. The midpoint of $6.60 puts us on track for another strong year of execution by our best-in-class team with 9.6% growth over 2017.

As a reminder, we will hold our Annual Investor Day event on Wednesday November 28th at the Alexandria Center for Life Science in New York City where among other key items we will provide an overview of our detailed guidance and assumptions for 2019. We appreciate your continued interest in Alexandria and thank you in advance for waiting until Investor Day regarding detailed guidance assumptions for 2019.

Let me turn it back to Joel.

Joel MarcusExecutive Chairman & Founder

So, if we could go to Q&A operator?

Questions and Answers:

Operator

(Operator Instructions) The first question today comes from Manny Korchman with Citi. Please go ahead.

Manny KorchmanCiti — Analyst

Hey everyone. Just — I don’t remember this was Dean or Joel who mentioned this, but the JV in Cambridge, can you give us some details as to — at all as to what that building is or most specific geography and also just your thoughts behind (inaudible) JV at this point?

Joel MarcusExecutive Chairman & Founder

Yeah, I think the answer to that is, no. We’ll do it when we complete the transaction. And I think Dean can talk about the capital raising. We’ve always tried to think about multiple sources. And so, this is one key source that we’re drawing up on at this point.

Dean ShigenagaCo-President & Chief Financial Officer

Yeah Manny, I would reiterate what Joel said, as I mentioned in my commentary over the last four years about $1.5 billion in real estate dispositions heavily weighted to high-value low cap rate assets, which when you blend in, so attractive, very attractive cost of capital, and when you blend that in with the disciplined issuance of common equity as well as tapping long-term debt from the bond market, I think we’re actually hitting an attractive cost of fund projects that are yielding about 7% on a cash basis. So pretty consistent executions there.

Manny KorchmanCiti — Analyst

And then maybe if you could give us updated thoughts on the New York market specifically in Long Island City with your entrance into that market and whether you see yourselves building a larger cluster there, if this is one-off opportunity?

Joel MarcusExecutive Chairman & Founder

Well, I think if you look at our press release of October 18th, we really tried to give a picture of our strategy in New York City, which is continuing to expand the current campus at the Alexandria Center by the North Tower looking at upsizing that a bit. Our acquisition of one of the Pfizer buildings on East 42nd and the acquisition in Long Island City really fits well with that. There is a ferry from Long Island City right to the East Side Medical Corridor. So I would view these as almost all of the same overall East Side Medical Corridor effort. And I think as I said, many quarters ago, we do view New York in a positive fashion, although it’s fundamentally different than other markets, it doesn’t have an established — there are no waiting line of tenants, it isn’t an established market where large companies are likely to move, you have to recruit individual units of larger companies and it’s a much earlier stage effort. So I think our footprint and our pipeline that we’ve announced really recognize those underlying factors. Each market is truly vastly different than the other and you can’t treat them at all alike.

Manny KorchmanCiti — Analyst

And one quick one for Dean. I appreciate that you’ll be giving the full 2019 guidance at the Investor Day, but just in terms of impact from lease accounting that will impact your numbers, do you have early estimates on that literature (ph)?

Dean ShigenagaCo-President & Chief Financial Officer

Yeah Manny, I would say there is two things that I think probably have come up for most REITs, one is, what you’re referring to as the initial indirect leasing cost that under the new rules would be required to be expensed. And it looks like it’s fairly insignificant to Alexandria right about in that 1% of FFO per share. And I think the other thing to consider is that, we do have certain ground leases, which as you probably know under the rules would be put on balance sheet. So we have roughly a $200 million gross up on our balance sheet for that. But I would say from a P&L perspective on net income or FFO per share, there is really no impact from changes under the new lease rules on for ground leases.

Manny KorchmanCiti — Analyst

Thanks everyone.

Operator

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

Sheila McGrathEvercore ISI — Analyst

Yes, the gap in cash leasing spreads were significant this quarter. I was just wondering if that was across the board or if there was one lease in a particular market that was driving that?

Joel MarcusExecutive Chairman & Founder

Yeah, Sheila, I’d say, we had good strength across our markets and it’s pretty consistent with what we’ve observed over the year. It’s a full nine months as well as prior year as we’ve always had really good strength on contractual expirations. And I think the early renewals have always been a pleasant surprise to cash flow growth.

Sheila McGrathEvercore ISI — Analyst

Yeah, I think Peter mentioned that, much of the leasing this year was early renewals. Can you give us a little bit more details there, like do you expect this trend to continue?

Peter MogliaCo-Chief Executive Officer & Co-Chief Investment Officer

Well fortunately, real estate fundamentals and the life science industry fundamentals are strong. So we’re operating in a very solid environment. Our expirations are fairly modest going out year-to-year. But I would say, what is happening, which is a real positive, tenants are very nervous about space, they continue to come forward to early renew sometimes three-plus years prior to their expiration. So we are reaching far out. I think from our perspective, Sheila, we’re just trying to be balanced because there is some upside in rental rate growth. So being patient while taking some off the table is kind of the approach we’ve been taking.

Sheila McGrathEvercore ISI — Analyst

And last question on investment gains, unrealized investment gains for the quarter were significant. And I know those don’t impact FFO or anything, but I was just curious, was that driven by an IPO or just appreciation of existing holdings?

Dean ShigenagaCo-President & Chief Financial Officer

That was really across a broad set of investments Sheila. So it’s a good reflection of the appreciation of the (technical difficulty) that portfolio.

Joel MarcusExecutive Chairman & Founder

And certainly — hey, Sheila, Joel, there has been a strong IPO market this year, so some of that’s reflected in there. And I think Dean mentioned in his prepared remarks that 2019 lease expirations of about 1.3 million square feet, our annual rental revenue on that is about $41. So — and we’ve got as Dean said, 25% pre-leased and another 12% in negotiation. So that gives you some idea of kind of how people are thinking about here we are in third quarter of ’18 thinking about 2019 already. So I think that bodes well, generally well.

Dean ShigenagaCo-President & Chief Financial Officer

Yeah, Sheila, to expand on the question on investment I’d say, roughly spread across private and public. So you actually had good appreciation in the quarter across the portfolio.

Sheila McGrathEvercore ISI — Analyst

Okay, great. Thank you.

Joel MarcusExecutive Chairman & Founder

Thanks Sheila.

Operator

Next question comes from Tom Catherwood with BTIG. Please go ahead.

Tom CatherwoodBTIG — Analyst

Thank you and good afternoon. Just wanted to follow-up on Manny’s question about New York City. I know there is a number of groups that are involved in trying to us kind of push the New York City life science cluster including the city and state with a variety of incentives and proposals. So I guess, Joel, how do you view Alexandria’s role in shaping the ecosystem in New York and do the incentives that are being provided play any part in your capital allocation decisions?

Joel MarcusExecutive Chairman & Founder

Yeah, that’s a really good question, maybe let me take them in somewhat reverse order. So there are a number of people in New York, some of whom are credible and some of whom are totally incredible. And then lacking in credibility as well as being incredible, that are trying to push the life science industry as if it was Cambridge. And it is not. It doesn’t bear any resemblance to Cambridge. New York grew up as a strong clinical market, it’s very hospital-based, it’s got good, very good basic research, but commercial activity before we started back when we won the RFP from Mayor Bloomberg was. Back in ’05 there was a single incubator up at Columbia that did, you know, bunch of companies doing research. Other than that, it was all office.

So you’re starting from ground zero, it takes 25 years to build a legitimate cluster. The cluster will be different than San Francisco, different than Cambridge. It’s an early stage cluster. There will be some large companies who put units in, but it is — it’s one of, you know, it’s step-wise growth, it’s not a hockey part growth like some people are touting.

How we have really worked and then I’ll get to incentives, how we’ve worked with the city and the state and the components of the ecosystem is, there are four elements to build a cluster. You got to have a location, the Alexandria Center was chosen as really the key location. And when we complete the North Tower we’ll have 1.3 million square feet. You’ve got to have great science, they do have excellent science, they — you got to have great management teams for companies. That’s a challenge, you have to import a lot of management. Certainly at the management level and at the development level, there are good researchers there. But that’s an area that has to work on.

And in venture capital it’s taken eight years to date to try to build a decent venture capital base, which is now realizing, you know, coming to fruition. So it’s a big effort and we’ve been clearly at the vanguard of that in all ways. When it comes to incentives, we have not relied on city and state incentives in the future. The city does own the land we’re on, and that was their contribution to the joint venture, but we’ve put up all the capital. And I think the city and state incentives are helpful, but really not — they’re not going to make the difference of bringing and growing the industry frankly. Sorry for the long-winded answer.

Tom CatherwoodBTIG — Analyst

No, quite all right. So just to loop back, so the LIC investments, so there was no incentives tied. You (inaudible) incentives can make that work?

Joel MarcusExecutive Chairman & Founder

None, whatsoever.

Tom CatherwoodBTIG — Analyst

Got it. And then kind of I guess for Steve and Peter, you mentioned some strength down in North Carolina. Obviously some pickup and development leasing, the last quarter you also picked up roughly 100,000 square feet of development rights. This quarter you moved 130 square feet — 130,000 square feet into intermediate-term developments. What are you seeing in terms of demand that’s making you kind of more comfortable doing developments down there?

Peter MogliaCo-Chief Executive Officer & Co-Chief Investment Officer

Yeah, so let me take that for a moment. So North Carolina has seen a downturn substantially in the life science industry over the last decade with Glaxo really kind of I wouldn’t say closing, but substantially reducing its footprint. The market there is kind of spread out. There is a little bit in Durham, a little bit in other places, but we’ve chosen to focus on the research triangle region and we’ve also chosen to focus on what we call agricultural technology because we think that’s going to be the next big wave. Human health is really two components, one is, fighting disease and the other is good nutrition. So at the next call, year end and fourth quarter call, I’ll get into more detail on our strategy there, but it’s been primarily the result of our AgTech strategy down in North Carolina.

Tom CatherwoodBTIG — Analyst

All right. I’ll hop aside. Thanks guys.

Peter MogliaCo-Chief Executive Officer & Co-Chief Investment Officer

Thank you.

Operator

The next question comes from Rich Anderson with Mizuho Securities. Please go ahead.

Richard AndersonMizuho Securities — Analyst

Thanks, good afternoon. So when you talk about early lease renewal activity, how would you compare the role that you get in the current year negotiations versus what you’re doing for those tenants that are approaching you early? Are they — is it a similar kind of role up versus where you were at or is it something less or more?

Dean ShigenagaCo-President & Chief Financial Officer

Rich, it’s Dean here. It’s actually a little mix of everything as you would expect. I would say that, early renewals that have a large benefit to cash flows, it’s very specific to the lease. We have a handful of those that have been occurring every year for the last four years or five years now. But we’re still getting really nice mark-to-markets on average across the markets. And so, there’s a blend of what I call normal, healthy mark-to-markets occurring today and then some half a dozen or more larger, really large steps in early renewals.

Joel MarcusExecutive Chairman & Founder

And I think —

Richard AndersonMizuho Securities — Analyst

What do you define as (multiple speakers) what do you define as normal?

Dean ShigenagaCo-President & Chief Financial Officer

All right, normal, I’d say call it right down the fairway of our guidance, so 10% on a cash basis.

Richard AndersonMizuho Securities — Analyst

Okay. What did you say, Joel?

Joel MarcusExecutive Chairman & Founder

No, go ahead.

Richard AndersonMizuho Securities — Analyst

Okay. Following on to the mark-to-market sort of question, you had a nice lift versus where your guidance was last quarter, yet no change in the same-store. Is it just that it’s just not big enough part of the same-store pool or you’re running at the high end of the range now or how would you describe that issue?

Dean ShigenagaCo-President & Chief Financial Officer

It’s a little bit of both, Rich. Just to put it into perspective, it takes quite a bit in steps to actually move or in a GAAP pick up because those were GAAP numbers or the cash numbers for that matter on the cash side, to really drive same-property results because 80% to 85% of our cash flows or operations actually go through the same property pool. But we are getting an overall benefit, it’s just not reflected in the strong results.

Richard AndersonMizuho Securities — Analyst

Yeah, OK. And then last —

Joel MarcusExecutive Chairman & Founder

Yeah, so, Rich, I was going to say, just the footnote to what Dean said, so, in a place like Cambridge, again the reason there is so much demand like that and companies are not looking to go out to Route 128 or to the (inaudible) for much cheaper spaces. The cost of RAM (ph) as a percentage of their overall operation is not significant. And the need to keep these companies in the mainstream on transit in good recruiting locations et cetera really outweighs cheaper rent in a more a remote location. So I think that’s the other reason you’re seeing this kind of confluence of early renewal activity in something, you know, Cambridge being maybe the best example.

Richard AndersonMizuho Securities — Analyst

Okay. And then when you look ahead, I know, you’re not going to give guidance right now and I’m not asking for that, unless of course if you want to you know (inaudible). But the mark-to-mark number has been a pretty brilliant part of the story for quite a while now. As you look ahead and you see which markets are expected to show some of the disproportionate amount of the expiration activity, do you see sort of this type of growth continuing, perhaps not at this level, but I mean, is there — or is there some sort of shelf life to this that we should be aware of?

Joel MarcusExecutive Chairman & Founder

Well, just looking, if you go to Page 24 of the 2019 lease expirations, they’re really well distributed in Greater Boston, San Francisco, San Diego, Seattle, a little bit in Maryland. So there’s no overly burdensome concentration in one location. Then if you look at the annual rental revenues of those leases in place, relatively speaking, they’re pretty low.

Richard AndersonMizuho Securities — Analyst

Yeah. Okay that’s good. That’s for pointing out. And then lastly, just a modeling question for you, Dean. With the moving parts in the unconsolidated JV line, do you have an idea of where that should shake out on a sort of an annualized run-rate basis, putting aside anything that might happen in Cambridge in the near term?

Dean ShigenagaCo-President & Chief Financial Officer

You know what Rich, I don’t have that in front of me right now. So why don’t I — why don’t we think about giving the market an update at Investor Day on that.

Richard AndersonMizuho Securities — Analyst

Okay, no problem. Thank you very much.

Joel MarcusExecutive Chairman & Founder

Thanks Rich.

Operator

Next question comes from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Jamie FeldmanBank of America Merrill Lynch — Analyst

Great. Thank you. I know at the outset of the call, you talked about a very strong VC funding market, very strong tech IPO or biotech IPO market. We’ve seen some volatility in the capital markets recently. I mean, how do we think about your business in a market where those two factors are not quite so strong? And how do you make decisions for the future based on that?

Joel MarcusExecutive Chairman & Founder

Well, I think if you go to my opening comment Jamie, 52% of our annual rental revenue is investment grade or large-cap public, that’s actually where the money is flowed these days. So I think we feel pretty good. It would be I think not a good thing if venture dried up and not a good thing if the IPO market shutdown. But if you think about venture capital and you go behind the numbers, there are a handful of funds that or handful of funds that have and are raising large, large amounts of money that some have closed and some will close over the next couple of quarters, that will probably restock and this is on the life science side, not the tech side, that will probably fund those entities to the tune of north of $2 billion.

So even if things became rougher in 2019, the amount of venture that will be available for investment over the coming years will be strong. And I think actually evaluations fall, that will even be better in a sense for investors in the private markets because it will be more attractive. But I don’t think we’re going to see any wholesale radical change over the next year or so.

Dean ShigenagaCo-President & Chief Financial Officer

Yeah, and I would add, if you think back to pre-2013, the biotech IPO window was pretty much shut for about a decade and they were doing fine with liquidity events. And then today biopharma has got a tremendous with 75% or something in the top line revenue actually coming from products that have been sourced outside of pharma, which means biopharma is going to field capital into the biotech industry to continue to grow their platform.

Joel MarcusExecutive Chairman & Founder

Yeah, I think that’s right. If valuations fall, pharma is going to get very acquisitive.

Jamie FeldmanBank of America Merrill Lynch — Analyst

Okay. All right. That’s helpful. Thank you.

Joel MarcusExecutive Chairman & Founder

Yeah, thank you.

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 MarcusExecutive Chairman & Founder

Thank you very much everybody. And we’ll look forward to talking to you on fourth quarter and year-end call. Take care.

Operator

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Duration: 44 minutes

Call participants:

Paula SchwartzInvestor Relations

Joel MarcusExecutive Chairman & Founder

Stephen RichardsonCo-Chief Executive Officer

Peter MogliaCo-Chief Executive Officer & Co-Chief Investment Officer

Dean ShigenagaCo-President & Chief Financial Officer

Manny KorchmanCiti — Analyst

Sheila McGrathEvercore ISI — Analyst

Tom CatherwoodBTIG — Analyst

Richard AndersonMizuho Securities — Analyst

Jamie FeldmanBank of America Merrill Lynch — Analyst

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