Alexandria Real Estate Equities, Inc. (ARE) Q1 2023 Earnings Call Transcript

Alexandria Real Estate Equities, Inc. (NYSE:ARE) Q1 2023 Results Conference Call April 25, 2023 3:00 PM ET

Company Participants

Paula Schwartz - Investor Relations

Joel Marcus - Executive Chairman and Founder

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

Dean Shigenaga - President & Chief Financial Officer

Hallie Kuhn - Vice President, Science & Technology

Dan Ryan - Co-Chief Investment Officer

Conference Call Participants

Steve Sakwa - Evercore

Anthony Paolone - JPMorgan

Nick Joseph - Citi

Michael Carroll - RBC Capital Markets

Rich Anderson - SMBC

Tom Catherwood - BTIG

Joshua Dennerlein - Bank of America

Dylan Burzinski - Green Street

Georgi Dinkov - Mizuho

Jamie Feldman - Wells Fargo

Operator

Good day, and welcome to the Alexandria Real Estate Equities First Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Paula Swartz with Investor Relations. Please go ahead.

Paula Schwartz

Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company's actual results might differ materially from those projected in 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

Thank you, Paula, and welcome, everybody, to Alexandria's first quarter '23 Earnings Call. With me today are Peter, Dean, Hallie and Dan. And first of all, I want to send a big thank you to our entire, ARE family team for an operationally and financially strong first quarter in a tough -- continuing tough macro environment.

As you know, Alexandria is truly a one-of-a-kind S&P 500 company. And we're very pleased that we just received new -- one of Newsweek's most trusted company awards. We have no peers. We're kind of a pure play. In our field, we first identified and pioneered the lab space niche back in 1994 and then through our disciplined execution of our original vision using the strategic architecture of our cluster model, which we customize to the life science industry.

We have brought the mission-critical real estate infrastructure of the life science industry and integrated it with an unparalleled and world-class 24/7 operational excellence service component aimed to protect the hundreds of billions of dollars of leading-edge science, which is conducted 24/7 within our asset base. And we have brought this to a highly respected and recognized real estate product type today. Alexandria is definitely not a health care service facilities company nor a generic office company.

Our disciplined core focus is our patented and trademark lab space. It's a premium priced, non-commodity product generally characterized by high barrier to entry markets, where we have a dominant franchise and where we exercise pricing power, especially in our highly sought after Alexandria-branded mega campuses, and those markets exhibit deep science base, deep life science talent base, a rich abundance of risk capital and also are ones that are generally safe and have excellent transportation access.

And what we saw in 1994 in the embryonic days of the life science industry is multiplied geometrically today, 30 years later, as Steve Jobs said, the 21st century will be the century of the intersection of biology and technology innovation. We have 10,000 known diseases wreaking havoc on human beings each and every day and the personal and economic cost of sickness, illness and today, the mental health crisis is continuing to skyrocket.

Continued innovation in medicine is an absolute national priority and the transformative work of our tenants in the industry is critical to addressing the massive unmet medical need. Literally every day, we hear of great progress. And today, for example, one of our Greater Boston tenants, Morphic Therapeutic which has an oral drug addressing moderate to severe ulcerative colitis. And if you've ever had it, it is a tough condition, a major GI indication announced that it hit its Phase 2a clinical trial endpoint and their stock has been up 75% this year.

The 10 most prevalent diseases in the U.S., heart disease, cancer, chronic respiratory disease, obesity, Alzheimer's, diabetes, substance abuse, infectious disease, chronic kidney disease and mental illness are not being solved to-date. We have a large mountain decline, and the industry is really in its formative days. Weathering a tough macro environment, ARE posted a very solid first quarter.

Our funds FFO per share is up 7%, as you see in revenues, top line revenue is up almost 14%. And Dean will go into the metrics, but almost 100% collections, which is -- bodes well for our continued strength and stability of the Company. We've maintained strong while lowering uses and sources of capital.

We've had very solid leasing with the highest-ever rental rate increase, and we've had continuing strong operating and EBITDA margins. All stakeholders should recognize and appreciate this management team took a highly disciplined approach over a multiyear period to create a fortress balance sheet to successfully weather what now is the current self-inflected economic storm by the various policies that we implemented over the last many years.

We have taken judicious measure to cut our CapEx, while at the same time, making strong progress on our funding plan for 2023, and you'll hear more about that from Peter. So without any further hesitation, let me turn it over to Hallie, who's going to give you some bird's-eye view of our view on the life science industry.

So, Hallie?

Hallie Kuhn

Thank you, Joel, and good afternoon, everyone. This is Hallie Kuhn, Senior Vice President of Science and Technology and Capital Markets. Today, I'm going to comment on the life science industry following the collapse of Silicon Valley Bank. The health of ARE's best-in-class life science tenant base and innovation is a long-term driver of life science industry growth. Beginning with SVB, there remains some misperceptions on the long-term impact of its collapse on the life science industry.

SVB certainly was a go-to provider for banking needs of many venture-backed companies, particularly in the tech industry. And while SVB has created a niche serving the segment, it was also cultural. Early-stage start-ups work within a very tightened community and many used SVB because that's what everyone else used, not necessarily because there were no other options. And many banks, including G-SIBs have been working for years to carve out their own share of this market.

For our own private biotech tenants in the days following the collapse, we had conversations with over 100 companies. Some of which use SVB, but many of which did not or had multiple banking relationships. Importantly, within approximately 72 hours from the start of the bank run, companies had access to all deposits and the near-term risks such as making payroll were mitigated.

As for long-term risk driven by instability of regional banks, unlike some tech companies that maintain significant cash and deposit accounts, our tenants largely rely on safer third-party custodial and sweep accounts to minimize cash deposits. Biotech is also not reliant on venture debt to the same extent as the tech industry. And for those that do seek venture debt, SVB is by no means the only option.

We expect that the life science sector will be minimally affected going forward as evidenced by venture financing rounds that closed in March is expected and continue to do so in April, which I'll touch on in more detail shortly. Before transitioning to the health of our tenant base, one quick reminder on the differentiation of our life science real estate product from traditional office, importantly, the office component of our life science buildings directly supports researchers in the lab.

A scientist does not spend all day at the bench, but spends time moving back and forth between lab and adjacent office in order to, for example, analyze data, plan the next set of experiments and meet with colleagues. Thus, the office component cannot be broken out or compared to traditional office, but is an adjacent, highly integrated and critical component of laboratory design and workflows.

Of course, this is also not work that can be done from home. Now transitioning to the health of our world-class diverse life science tenant base, perhaps the best way to frame the current environment is the old adage in God we trust all else spring data. Starting with pharma, which makes up 18% of our ARR, this segment continues to operate from a position of strength with strong balance sheet and significant free cash flows, pharma is less sensitive to rising rates.

In 2022, biopharma deployed an estimated $267 billion into R&D. The result is tenants like Eli Lilly that continue to translate this R&D into transformative medicines. Mounjaro, which aims to treat obesity in type 2 diabetes, is predicted to eclipse $50 billion per year globally in revenue. And to put this in perspective, nearly one out of every $4 of U.S. health care spend is deployed to care for people with diabetes. And obesity is estimated to account for over $480 billion in direct health care costs in the U.S. with an additional $1.2 trillion in indirect costs due to lost economic productivity.

To that end, therapies such as Mounjaro, save and extend lives and have the potential to significantly drive down the cost of health care more broadly. Transitioning to private venture-backed biotech which makes up 8% of our total ARR, we continue to see a reset of venture deployment to pre-2020, 2021 levels, which while down from peak remains strong by historic standards.

Venture capitalists are more discriminate, disciplined and demanding of current and future investments. And the companies with tenured management teams and strong differentiated technologies and near-term value inflection milestones are the ones that rise above the fray. We continue to underwrite and monitor all tenants closely, and our private biotech tenants remain compared to the broader market.

In fact, across this tenant base, they have raised over $1.9 billion from BC and pharma partnerships since the beginning of the year, of which $800 million has closed following the collapse of SVB. As a testament to this point, with the week remaining in April, private biotech tenant rent collection is at 99.7%.

Next to public biotech, our tenants with marketed products make up 14% of our ARR generated $150 billion in revenue in 2022 and include names such as Amgen, Gilead, Vertex and Moderna. Moderna continues to highlight the potential of novel platforms to deliver innovative new medicines to patients. This month, the Company's personalized mRNA cancer vaccine in combination with an immunotherapy drug from tenant Merck, demonstrated promising clinical trial results in aggressive forms of skin cancer.

Companies also continue to set high bars for continued innovation and product launches. For example, Alexandria tenant Gilead has laid out an ambitious plan to achieve 20 new drug approvals by 2030, which will entail advancement of their current pipeline, particularly in oncology, supplemented by additional M&A.

For our preclinical and clinical stage public biotechs comprising 10% of our ARR, compelling clinical data remains king. Tenants such as [indiscernible] and Biomea Fusion, for example, have recently raised additional capital of promising clinical data. Prometheus Biosciences, while not a tenant exemplify how data drives the lifeblood of the industry. The Company announced stellar data in December, driving their stock up over 600% in the past 12 months and culminating in a $10.8 billion acquisition by Merck.

To be clear, in the process of developing novel medicines, there will always be some that fail no matter what the market conditions. But this is baked into our mall. With the deep tenant base, relationships across every facet of the industry, and the highest quality space in operations, we can get ahead of potential tenant challenges to backfill and further optimize our tenant base. Reflecting this, in April, we've collected 100% rent from our preclinical and clinical stage public biotech tenants.

Next, transitioning to academic and institutional tenants, which constitute 12% of our ARR, it's an opportunity to remember that the life science industry's cornerstone is innovation, which is not slowing. Bipartisan support for life science research remains strong. At $47.5 billion, the NIH's 2023 budget is a 21% increase over 2019. The Academic and medical institutions continue to be highly productive, a key metric being the pace of new intellectual property. In 2021, U.S. academic institutions accounted for 20,000 invention disclosures and nearly 1,000 new startups. And this activity in return is an important long-term funding mechanism for these institutions.

For example, for Prometheus Bio was originally spun out of Cedars-Sinai, which is set to receive nearly $800 million from the recently announced M&A. In sum, with the majority of our academic and institutional ARR from investment-grade tenants and funding cycles that are based on multiyear grant funding time lines, this segment continues to be sheltered from larger macroeconomic conditions.

Staying on the topic of innovation, a few final data points to orient the growth of the life science industry beyond the next few quarters but to the decades to come. According to the American Society of Cell and Gene Therapy, there are over 3,700 gene cell and RNA therapies in preclinical and clinical development. For chronic diseases, which drives the bulk of health care spend in the United States, there are over 800 medicines in clinical development.

The culmination is continued FDA approvals and 2023 has started at a fast clip. Year-to-date, 14 novel therapies have been approved including a novel therapy for ALS developed by Tenant Biogen just announced this morning. And altogether for the year, nearly 60 novel medicines have been scheduled for FDA approval review which mirrors 2018's record year of 59 novel FDA approvals.

To end, I want to reiterate that we are acutely aware of the years of abundance and easy capital that have passed and that the separation of haves and have-nots will continue to widen as the industry drills down on the technologies and medicines that bring the most value to patients and investors.

But as Winston Churchill once said, "Never let a good crisis go to waste." While this market is and will continue to warrant extreme prudence, it is an opportunity for the best companies to hone in on their long-term fundamentals and thrive. And that's what our tenants and Alexandria exemplify.

With that, I'll pass it off to Peter.

Peter Moglia

Thanks, Hallie. I just had my 25th anniversary with the Company, In addition to that milestone reminding me of how fast time moves by brought about a nostalgic look back at my time at Alexandria. I recall my interview with Joel, where I learned about this novel idea of forming a real estate company to serve the life science industry, which made me both nervous as nobody had ever done it before and equally inspired to help enable an industry that was hell bent on changing the world.

After serious contemplation, I decided that if I was going to make it different in the world, this was a heck of an opportunity to do it. Plus after having been in real estate for about eight years at that point, I could see a tremendous value in offering mission-critical facilities over commodity product. I could not have made a better decision as it all proved out.

Alexandria has played a critical role in the evolution of the life science industry over the last three decades by creating and growing the ecosystems and clusters that ignite and accelerate the world's leading innovators in their pursuit to advanced human health, which is our solid mission. In addition, we've built an irreplaceable world-class asset base of robust and highly differentiated properties and campuses that attract a diversified best-in-class tenant base who values our expertise and operational excellence by providing 75% to 85% of our leasing quarter-to-quarter.

The result of all this is we have built a brand without here that puts us in a position where we don't rely on third parties to bring us tenants. They come to us directly as we are a trusted partner with a long successful track record of developing and operating mission-critical facilities. This is an important distinction in any part of the cycle, but perhaps even more when things have slowed down.

Our results prove it out. Thank you for indulging me on that retrospective. I'm going to go and briefly touch on our development pipeline, construction costs, leasing and asset sales and then hand it over to Dean. In the first quarter, we delivered 453,511 square feet in five projects into our high barrier to entry submarkets. Annual NOI for these deliveries totals $23 million, and the initial stabilized yield is strong at 7.3%.

At quarter end, projects under construction and near-term projects expected to commence construction over the next four quarters totaled 7.6 million square feet and are 74% leased or under negotiation. This is very similar to last quarter, but in response to the uncertainty and volatility in the markets, we have made a strategic decision to reduce 2023 construction spend by $250 million by pausing or delaying projects that had been classified as under construction, so we can focus our capital on the most strategic projects that have the most attractive terms, enabling our highly bedded and vast tenant base.

The reduction in spend results in NOI from deliveries primarily commencing from the second quarter of '23 through the first quarter of '26 to be approximately $610 million. After commenting on construction costs for the past two years, I can still say they remain volatile but are on their way to stabilizing. The availability and price of commodities such as steel, copper, aluminum and concrete, continue to fluctuate due to shortages of raw materials, low yields for mines, high demand from electrification or low capability utilization rates in the mills and fabrication shops due to labor shortages.

Cost of materials and supply chain volatility were the initial drivers of construction inflation, but now the primary driver is labor with a triple whammy of wage increases, shortage of workers and the inefficiency of the remaining labor force due to the retirement of older, more skilled labor. There are 330,000 open construction jobs today and the time it takes to train the new entrants to be highly skilled as measured in years. So these inefficiencies will be with us for a while.

Specific to life science buildings, the availability of switchgear and equipment such as HVAC units and generators are -- has slightly improved but their lead times are still extraordinarily long with custom air handlers taking 27 weeks longer to get than before COVID and switch gear and generators and astounding 64 weeks longer. Even worse is the availability of large transformers provided by the utility companies, which can take as long as three years now to get.

What's driving these delays are chip shortages and demand from electrification projects happening all over the world as investors, governments and end users demand improvement in carbon emissions. As you can imagine, the cost of this equipment is reflective of these shortages and paired with high labor cost is making new laboratory office projects more expensive to build than ever before.

The upside for us is that 84% of our costs for our active development and redevelopment projects are under GMP or other fixed contracts with contingencies behind that. So, we are largely locked in. Anyone contemplating a speculative development these days will have to contend with these delays and associated high costs, which will put the feasibility of building and financing the project at considerable risk.

One reason, we will likely not see the supply many are expecting beyond what is under construction today. Transitioning to leasing, our strong brand loyalty, mega campus offerings and operational excellence continue to drive strong leasing numbers in a challenging market. The 1.2 million square feet leased in the first quarter is above our five-year pre-2021 average and is the 12th consecutive quarter with leasing volume above 1 million square feet.

We achieved attractive economics primarily from our vast tenant base, accounting for 85% of the leasing this quarter, resulting in a rental rate increase of 48.3%, which was the highest in company history and a strong cash rate of 24.2%. As we have noted previously, demand has normalized from the record year of 2021. Depending on who you ask, demand is at slightly below or slightly above pre-COVID levels. There are less tenants actively seeking space in the market today, which we believe is being significantly driven by uncertainty in the economy.

As Hallie put it, this market is and will continue to warrant extreme prudence. However, we're not dependent at all on broker deal flow. There are pending opportunities from our tenant base that the broader market likely does not see due to our direct relationships with company management teams. Such relationships are a huge differentiator for us and will continue to drive solid leasing even in tough environments. Some private and preclinical clinical stage companies are making do with the space they have today until they can better understand their ability to raise capital on its cost. Capital is available.

But as Hallie mentioned, BCs are more discriminate disciplined in demanding of future investments and companies with tenured management teams, strong differentiated technologies and near-term value inflection milestones are the ones that will rise above the fray. Those are the halves who by and large are Alexandria's tenants, which we have underwritten and placed into our world-class asset base, differentiated from the have nots tenant base of others who take on any tenant that can fill space with hope as their underwriting strategy.

On the supply side, we track high-quality projects, we believe, are competitive to ours in the high barrier-to-entry submarkets. Accordingly, we're tracking direct vacancy in Greater Boston to be 2.8%. On lease sublease space is at 3.9% and unleased directly competitive with our AAA locations and building quality to be 1.5% to be delivered in 2023 and 5.1% to be delivered in 2024, a 1.3% total increase in availability from last quarter.

In San Francisco, direct vacancy is 3.5% and sublease space is at 5.8% and unleased supply directly competitive with our assets continues to be the highest in all of our markets at 6.6% and 8.9% to be delivered in '23 and '24, respectively. This is an increase of 3.4% in total availability over last quarter, largely driven by spec building in South San Francisco.

In San Diego, direct vacancy is at 4.1%, sublease space is at 2.3% and unleased competitive supply is 3.2% in 2023 and 5.4% in 2024, a slight increase of 0.2% over last quarter. Supply in all submarkets is very likely to be muted beyond what is under construction today due to high construction costs that I referenced, higher cost of capital and the lessening of generic tenant demand. We focus primarily on high barrier-to-entry markets where supply is inherently limited.

We focus primarily on high barrier to entry markets and brand mega-campus offerings in those AAA high barrier to entry market locations and operational excellence enables us to continually mine our vast and deep tenant base to drive our leasing activity, which will likely lessen the impact of generic supply. I'll end with some commentary on our value harvesting and recycling progress. As we all know, the rapid rise in interest rates have not only increased investors' cost of capital but created a lot of uncertainty causing a number of investors to remain on the sidelines.

Adding to the difficulty to execute in this environment is the increasing desperation of a number of office building owners trying to raise cash to stay afloat by offering quality long-term leased assets with credit tenants at 6.5% to 7.5% cap rates. Despite these challenges, the demand for high-quality life science assets which is vastly different from office assets continued in the quarter.

As noted in our press release, we were pleased to transfer an 18% interest in our current JV at 15 Necco which we control and owned 90% prior to the sale. The asset is under construction and will not be delivered until the end of this year with cash flow commencing in mid-2024. The buyer will fund the remaining construction costs to deliver the property to our tenant until they reach a 37% ownership, which is expected to be the remainder of the cost to deliver the project.

Given that the receipt of cash flow is over a year away, it's difficult to translate the valuation to an operating cap rate. But to give you some color, the parties agreed to evaluation at closing to be $576 million or $1,665 per square foot, which is an initial yield of 5.25% on their investment based on in-place NOI at closing. But we also agreed to credit our partner $5.5 million in fees payable.

Because we sold 33% of the total 37% our partner purchased those fees equate to approximately $15 million in value. Stripping that $15 million from the purchase price gets you to a total valuation of $561 million increasing the cap rate to 5.4%. If you want to tie that to the supplemental, the $66 million price for the 18%. And the other -- if you add the other $119 million to be funded to completion and divide it by the 33% we sold, you get $561 million.

This was a great outcome for Alexandria as we were able to partner with a world-class investor to monetize the value creation and secure the capital for the remaining spend in an accretive manner while retaining control of the asset and all management fees. We have not yet closed on the other transaction we signed an LOI on in the fourth quarter, but we expect to do so in the second quarter.

In addition to this transaction, we have signed letters of intent or purchase and sale agreements for a number of assets, including the office campus referenced in the press release, aggregating to a total sales price of $799.3 million. These future transactions and 15 Necco account for approximately 57% of the progress needed to meet the midpoint of our disposition guidance.

With that, I'm going to hand it over to Dean.

Dean Shigenaga

Thanks Peter. Dean Shigenaga here. Good afternoon, everyone. We reported excellent operating and financial results that exceeded consensus with strong core results, and our team is off to a strong start towards a solid growth for 2023. Our client tenants continued very timely payment of rent year-to-date through April.

We have a very strong balance sheet. We have meaningfully reduced uses of capital for 2023, made excellent progress on dispositions and sales of partial interest, have a conservative FFO payout ratio and a growing dividend and are the go-to brand for life science real estate. We have a very strong balance sheet with $5.3 billion in liquidity, no debt maturities until 2025. Our team made excellent progress on our dispositions and sales of partial interest only four months into 2023.

As Peter highlighted, we've advanced transactions aggregating $865 million. They're either completed or subject to executed LOIs or purchase and sales agreements, including the new JV partner for our build-to-suit project for UI Lilly. Many of the in-process transactions are targeted to close on or about June 30. Now we have also identified other dispositions and sales of partial interest to bring our total for the year to $1.5 billion. While the macro environment remains challenging, we are reasonably optimistic that we can execute on our disposition plan in 2023 at attractive values and cap rates.

We will provide values and cap rates quarter-to-quarter as we close transactions since we're unable to do so sooner while transactions are in process. In addition to the $1.5 billion in dispositions and sales of partial interest, New JV capital forecasted for the full year of 2023 will contribute over $300 million towards construction spend this year, including most of the $119 million of contributions from the new partner we just added to our build-to-suit project for Eli Lilly. Now JV contributions to construction spend, including forecasted joint ventures were added to our detailed disclosures on Page 48 of our supplemental package.

Now turning to outstanding financial and operating results, we had really strong growth of $342.9 million or up 13.9% in total revenues for the first quarter annualized in comparison to the first quarter of 2022. Adjusted EBITDA on a trailing 12-month basis was up $246.2 million or 15.4% really strong growth of 6.8% in FFO per share for the quarter in comparison to the first quarter of 2022, again, off to a very strong start and on track for 6.4% growth in FFO per share for 2023.

Now key highlights of our continued strong operating and financial performance Strong growth in revenues, adjusted EBITDA and FFO per share was driven by the continued strength across key areas of our unique and differentiated business. We had continued strength and timely payment of rent from our client tenants, 99.9% and for the first quarter and 99.7% for April that was through April 21, only three weeks into this month, pretty amazing. Continued strength in same-property NOI growth of 3.7%, 9% on a cash basis and really reflects the benefit of strong rental rate growth on leasing in recent quarters, contractual annual escalations in rent and the burn-off of some free rent.

Our outlook -- our strong outlook for 2023 same-property NOI growth is 3% on a GAAP basis, 5% on a cash basis and generally consistent with our strong 10-year average for same property growth. Now turning to record rental rate growth and strong leasing volume, strong rental rate growth continued into 2023 at 48.3% on a GAAP basis, 24.2% on a cash basis from lease renewals and re-leasing the space in the first quarter.

Now this was an exceptional rental rate growth, GAAP at the highest in the Company's history, both GAAP and cash rental rate growth higher than the strong rental rate growth for the full year of 2022 and 2021. Now leasing volume for the first quarter was strong at 1.2 million rentable square feet, slightly ahead of the strong quarterly average of leasing volume prior to the exceptional record-level leasing volume in both 2021 and 2022.

Now the key takeaway is that the scale of our high-quality tenant roster combined with operational excellence from our team, puts us in an excellent position to benefit from the unique pool of demand from our client tenants even in this unusual macro environment. Now our strong occupancy was in line with our expectations. Occupancy was 96 -- 93.6% as of March 31 and really in line with expectations and the comments I provided on our year-end earnings call.

There are three key takeaways here. First, occupancy is expected to improve in the back half of the year. Second, 371,000 rentable square feet of the recent vacancy has significant rental rate growth of 110% on a GAAP basis and 115% on a cash basis; and third, 29% of this 371,000 rentable square feet has already been leased with occupancy of some of the space beginning in the third quarter of '23.

Please refer to Footnote 1 on Page 26 of our supplemental package for more information. We also absorbed $71,000 of vacancy from a building located in Texas. This is one of two buildings that were undergoing redevelopment last quarter, one building, aggregating 131,000 rentable square feet is currently 36% pre-leased and undergoing redevelopment. We decided to hold on further redevelopment of the second building, aggregating 71,000 rentable square feet until we lease up the remainder of the 131,000 rentable square foot building.

The 71,000 rentable square foot building is vacant and is classified in operating properties. We continued with very strong adjusted EBITDA margin of 69%. Briefly on a high-quality tenant roster, Alexander really is the brand for life science real estate, has built long-term trusted relationships and is a true partner to the life science industry. 90% of our top 20 tenants are investment-grade rated or large-cap publicly traded companies.

And we highlighted continued strength of timely payments of rent from client tenants at 99.9% of rent that was due in the first quarter really reflects the strength of our high-quality client tenants, important tenant relationships and the high-quality underwriting from our research team. Briefly on venture investments, realized gains from the venture investments included in FFO averaged about $25.8 million per quarter for the last eight quarters through the end of 2022 in comparison to $20.7 million for the first quarter of 2023.

Now we do expect realized gains each quarter from our venture investments for the remainder of '23 to be more consistent to slightly up from the historical quarterly average of $25.8 million that I just highlighted. Gross unrealized gains in our venture investments as of March 31 were $459 million on a cost basis of $1.2 billion. Now we've got continued consistency and growth in dividends from really high-quality cash flows we generate in our business.

We've got a very low and conservative FFO payout ratio, 55% for the first quarter annualized with 5.3% increases in common stock dividends over the last 12 months. We're projecting $375 million in net cash flows from operating activities after dividends for reinvestment. At this rate, this represents over $1.1 billion of capital for reinvestment over the next three years.

Briefly on external growth, we have $610 million of incremental net operating income from our pipeline of 6.7 million square feet that is 74% leased. Approximately 30% of this NOI will commence in the remaining three quarters of 2023, about 40% will commence in 2024, about 26% in 2025 and the remaining 4% thereafter.

Now turning to guidance. We updated our underlying guidance assumptions for 2023. These assumptions are disclosed on Page 4 of our supplemental package. Our per share outlook for 2023 was updated to plus or minus $0.05 of a range from the midpoint of guidance, down from the plus or minus $0.10 range last quarter. Our range of guidance for EPS is $2.21 and to $2.31 and a range for FFO per share diluted as adjusted is $8.91 to $9.01 with no change at the midpoint of $8.96.

Now this represents a strong 6.4% growth in FFO per share for 2023 following excellent growth last year of 8.5%. Now key updates on the underlying detailed assumptions included the following: a significant reduction of $325 million in both sources and uses of capital, including a $75 million reduction in the midpoint of acquisitions to $225 million and a $250 million reduction in construction spend at $2.725 billion. We also gave updates on significant dispositions and partial interest sales aggregating $865 million including significant transactions that are under executed LOIs and purchase and sale agreements.

Now rental rate growth on lease renewals, re-lease in this space was increased 1% for both GAAP and cash to a range of 28% to 33% for GAAP and 12% to 17% on cash and occupancy was adjusted 20 basis points to reflect vacancy from 170,000 rentable square foot building located in Texas that is on hold while we lease up the adjacent building under redevelopment that is currently 36% leased. Importantly, occupancy is expected to recover in the second half of 2023.

With that, let me turn it back to Joel Marcus. Thank you.

Joel Marcus

So operator, can we go to questions, please?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Steve Sakwa with Evercore. Please go ahead.

Steve Sakwa

Joe, look, I can appreciate that you still haven't closed a lot of these deals, but I think the market would certainly appreciate just any range of commentary you could provide on sort of how to think about cap rates? I realize not singling out individual deals, but is there a way to sort of bracket them or bucket them kind of against maybe where your implied cap rate is today or maybe against the deal that Peter discussed?

Joel Marcus

Well, I think the way -- and I'll have Peter certainly and Dan may want to comment as well. I think it's fair to think about we were posting low 4% cap rates, again, on Class A facilities over the last couple of years, and Peter just went through, I thought, a pretty clear explanation of the transaction in Greater Boston, which is essentially a 5.4%. So you might think about an adjustment of cap rates maybe over this transition transitioning economic time of maybe 100 basis points. So that's maybe a way to frame it, but I think you'll be pretty impressed. And I think people would be impressed when we do our second quarter call. But Peter, any comments?

Peter Moglia

Yes, I agree with that assessment. I would say that we will see things that are still lower than 5% potentially when there's a good mark-to-market opportunity that can be monetized. But if it's stable, high-quality assets going to have a five handle on it just like this one did.

Joel Marcus

Dan, any other comment you would throw out?

Dan Ryan

Yes. No, I think not Peter did perfectly.

Joel Marcus

Okay. Steve, hopefully, that's helpful.

Steve Sakwa

Yes. No, that's great. And then, Joel, and maybe you and Hallie could just comment. I saw that I guess in the last supplemental, you talked about sort of dealing with 1,000 tenants. This time, you've kind of mentioned $850. My sense is half of that is retail tenants that maybe are leaving for an asset. But I suspect that maybe some of them are not retail. And I guess that really just speaks to how are you changing maybe your underwriting in the tenants that you're sort of willing to do business with today versus maybe tenants who were willing to do business with either post SVB or a couple of years ago?

Joel Marcus

Yes. We didn't have 150 failures. But Dean, do you want to highlight that for a moment?

Dean Shigenaga

Yes. So Steve, -- so the huge majority of the change was really due to a simple future mega campus development project that we acquired. It's a retail project known as the shops at 10 Fran. That was almost all of the change in the tenancy from roughly 1,000 to 850.

You're right. Beyond that, like we highlighted, not just during this call, but over the last couple of quarters, we've had, as you would always expect some normal lease expirations that occur at the end where the tenant doesn't choose to extend. And that's fairly normal activity. And then we've also had a few tenants that have come back, as you guys are well aware and have come back to and their lease a little bit early.

But that was really a handful of leases over the last couple of quarters. I think the big takeaway though is, look, you know that we do a really good job at selecting really high-quality locations in the core of the life science cluster markets. So, great locations, great facilities, and I think our operational excellence and our brand puts us in a great position to capture mark-to-market on most of these spaces that have come back.

I mean the comments I provided on the vacancies that came up just in the first quarter alone with mark-to-market, both GAAP and cash north of 100%. And 29% of that space has already been leased. If you go back to my comments in the fourth quarter, I believe I gave similar comments of pre-leasing on space that had just rolled as well. So, we've got good activity. And again, going back to the crux of your question, Steve, almost all that change in the tenancy was retail related at that shopping mall.

Joel Marcus

Yes. And let me maybe put a footnote on that, Steve. You asked about the nature of underwriting. I think kind of Hallie said it all that when we look at private companies or we look at preclinical public companies or even companies in the clinic that are public. So that group of tenants, you're always looking now even much more so for much nearer-term value inflection milestones and really good data and importantly, large unmet medical needs. I mean we've always done that, but I think now it just goes to show that they're going to be the haves and the others that have not. So that's really, I think, where the mindset is.

Steve Sakwa

Great. And just one last question, Dean, do you have like an overall mark-to-market on kind of what you think the portfolio kind of lost the leases on the overall assets today?

Dean Shigenaga

Meaning if we were to mark-to-market the rental rate, Steve, on the whole portfolio?

Steve Sakwa

Yes.

Dean Shigenaga

Yes, it's somewhere around -- I think last quarter, it was somewhere around 27%. This quarter, it's closer to 22% overall in the whole portfolio.

Operator

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

Anthony Paolone

You guys talked about driving a lot of your leasing from just internal relationships in your existing tenant base. And so I was wondering -- if I don't know if there's an Alexandria dashboard, so to speak, or what, but can you maybe give us a sense as to what either like leasing traffic, rate or just the aggregate amount of demand that's coming out of your portfolio today looks like versus, say, now two, three, four quarters ago?

Joel Marcus

Yes. That is almost -- that's hard to do generally, and it's so submarket and building specific, Tony. Clearly, demand is overall down from the peak of '20 and '21. You see that just everywhere and you certainly see it on more of a normalization of our historical leasing, which has bounced around over the last either five-year benchmark or 10-year.

But maybe the thing to say is companies that are active are pharma, and I think Peter alluded to this, bigger biotech product and service companies that aren't so much focused on the manufacturing side or the supply side. And then clearly, biotechs that whether they be public or private that have got good data coming. I think that's where you see it, but I'm not sure we could give you a numerical characterization of that.

Anthony Paolone

I guess maybe a different way to ask it is if you think about the next couple of years, you see where the growth is within your portfolio, and you also know space that's coming due in your development pipeline, do you see enough demand today to absorb the space that's coming online in the next couple of years? Or do you think we should expect some moderation in occupancy levels as the demand is lower.

Joel Marcus

Well, yes, I'll let maybe Peter comment on that as well. But I think it's fair to say if you look at our pipeline, which is pretty highly leased, I think we have a reasonably high level of confidence that we can fully lease those projects. And there are demand that doesn't even show up today on projects that may be on the future drawing board that we're also comfortable with. I don't think we see demand dropping off a cliff here at all. But Peter, you want to comment and Dan, you could comment as well.

Peter Moglia

Yes. There's been a slowdown in activity due to the fact that boards and companies are really just trying to figure out where the economy is heading. There's definitely expansion needs. They're just not going forward with some of them, which is contributing to the reduction in demand. So, I would say that there's a nice amount of pent-up demand building. And I would say a couple of years from now that, that's definitely going to be in the market if not sooner.

Anthony Paolone

Okay. And then just one -- second question, maybe a bit of detail. In the supplemental package on Page 34, you break out the portfolio between the operating assets and the various buckets of future opportunities. I guess what I'm trying to just make sure if I'm putting a cap rate on ARE's NOI and getting a value what from that slide do I need to add to that to kind of capture the totality? So I'm just trying to understand if in some of these future opportunities buckets, if there's some operating assets in those? Or I'm just trying to piece that all together, so either we're capturing everything or not double-counting something?

Dean Shigenaga

Tony, it's Dean here. So you're referring to the Page 34 for others on the call, which is in the bottom right-hand corner. This page highlights square footage of our operating, but most importantly, the different categories of our pipeline, everything from construction to the future.

There's no significant cash flows from assets that are sitting in the pipeline. I just want to make clear that there's a line item that adjusts the future pipeline for square footage that's sitting in operations, but those cash flows are in the operating portfolio of, Tony, as you pick up that NOI to value the Company.

We just don't want you to double count the square footage as you go towards the future pipeline. But from an NOI perspective, if that's your fundamental question, the future pipeline doesn't have any significant NOI being generated at the moment.

Anthony Paolone

So like that 4.2 million square feet, there's not an appreciable amount of NOI from that that we would be picking up.

Dean Shigenaga

We'll wait a second, the $4.2 million is in rental properties today. It's in operations, Tony. I thought you were asking about the $38 million right above it. $37.889 million

Anthony Paolone

Right. So, the $4.2 million does have some meaningful NOI associated with it. That's that we'd be out...

Dean Shigenaga

Correct. So you don't want to double count the square footage there. That's why we net down the square footage in that disclosure to 30 -- roughly $34 million.

Peter Moglia

Right, right. But the book value has that $4.2 million in there.

Dean Shigenaga

The book value would only have it to the extent it's not related to the operating component, Tony? It's in operations, the book value would be sitting in the operating component if a larger campus had two operating buildings and a pad to support two buildings, the pad to support the future buildings would be in the future pipeline, the book basis, but the cost base is related to the operating buildings would be in operations, not in the pipeline.

Operator

The next question comes from Nick Joseph with Citi. Please go ahead.

Nick Joseph

Maybe just on the sourcing uses. Obviously, there's dispositions and partial interest sales that are continuing to come at different points in the cycle right now. But as you think about the ability to flex that going forward, if the transaction market stalls even more, how are you thinking about the flexibility on your end? And where could equity play into that?

Joel Marcus

Yes. So Dean?

Dean Shigenaga

Well, I don't know that -- I mean, it's interesting the way you posed the question. Maybe I'll start from the back end of your question. Flexing capital plan and turning to equity as a solution is not really something we are contemplating. I think the way to look at our capital point is what we are doing internally, like we did in the current quarter for earnings as well as over the last several quarters and prep for initial guidance for Investor Day this year was to really challenge the uses of capital.

I think one thing to keep in mind is that -- our pipeline is $610 million of incremental net operating income from projects that are highly leased today. There's so much equity type capital that's invested in CIP today, there's very little incremental equity needed to fund that pipeline. And so, we're looking at spend across other projects as we look forward over into '24 and beyond to be sure we're prioritizing things that we should be investing into and maybe holding on things that we shouldn't be just given the macro environment.

So, hopefully, that gives you just some color on how we're thinking more broadly about it. I think, as I mentioned on the call earlier, we're mindful of the macro environment. We're also in a position where we know where we are here at the end of April with a lot of good activity on the pipeline. And so, we're reasonably comfortable with our outlook into 2023 and we'll obviously provide an update as we go quarter-to-quarter, but a bulk of what we have under executed LOI or PSA agreements today is sliding to close here fairly soon, plus or minus mid-year. So we feel good about it, and we'll keep an eye on things as we go through the next two quarters.

Nick Joseph

Absolutely, that's helpful. And then maybe just on that kind of reduction in development spend. How does that play into capitalized interest and interest expense in 2023?

Dean Shigenaga

Yes. Well, it's all reflected in our guidance. We just gave -- so you saw there was no changes in capped interest down in the details, obviously, if you -- we did on a number of projects review strategically what we wanted to do and a number of them were put on temporary hold.

If you want to look at it from that perspective, redevelopments were placed into operations as vacant assets, development projects for the future for -- they have been paused on a few circumstances, which basically were left in the future development pipeline.

From a capitalization perspective, that operating building that went in -- I'm sorry, the redevelopment building that's vacant that went into operations capitalization ceased immediately. The other projects have activities that are winding down as we speak, meaning capitalization will cease over the next month to a number of months going forward.

But they're all basically shutting down in the near term in the scheme of things, they're relatively small. So, we've been able to absorb that. It sits within our range of guidance. It sits within our range of FFO with other assumptions offsetting those changes.

So, we are able to pick up some improvement to offset those. So hopefully, that gives you a sense. I mean we look at qualifying activities carefully across all of our projects that are undergoing construction activities and capped interest and shut them down accordingly. So you will see some of that, but they're fairly small in the scheme of this.

Nick Joseph

That's helpful. And then just on the transaction market, I know you touched on cap rates, maybe up about 100 basis points in each asset, very different, though. Is there anything you're seeing from a buyer or kind of bidder pool buyer pools kind of change relative to what you've seen really over the last 12 months, just given kind of where financing costs have moved different institutions either fallen out? Or have you seen kind of any institutional interest that you hadn't seen before?

Peter Moglia

Yes. It's Peter. I'll take that. We actually have a number of choices still in the market. But there are definitely some folks that are on the sidelines that are facing redemptions. And so, they're interested in accumulating more life science product, but they can't necessarily play right now. But that's been filled in by some other new folks coming in that want exposure that are also high-quality institutional investors. And yes, we have liquidity, and I'm not too concerned about that at this point. I think it will get better once there's more certainty in where the terminal rate is going to land and where cost of capital is so people get comfortable in spending their allocations for '23.

Operator

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

Michael Carroll

Peter, can you talk a little bit about the supply comments that you're making in your remarks. I mean are you seeing developers being more cautious pursuing new projects? I know there's a few data sources out there saying that developers are still pursuing life science projects specifically in Boston, I mean, would you agree with that statement?

Peter Moglia

Yes. Certainly, there are -- there have been -- there has been spec building, especially in Boston. What we are seeing is in areas outside of our core submarkets where we don't own product, there are vacant buildings sitting there. And it's -- we're hearing that there's no tours, there's no activity. So, we don't necessarily think that those buildings are competitive to ours. There are a few projects, obviously, that we do believe, and that's where those percentages are coming in.

So obviously, '23, a lot of stuff has already been delivered. There's some more coming in '24, there's more coming. We are seeing very little that is starting new today. I think there was one project in South San Francisco that has started recently, which is just beyond comprehension. But outside of that, we believe that anything that would compete in -- of our quality is in our numbers and that we don't think many, if any, people will start new projects from here on out, at least not in a material manner, but who knows?

Michael Carroll

Okay. Great. And then just last, on 15 Necco, what's the reason for selling that specific, I guess, development stake? Is there any something about that building that didn't like or that was more particularly attractive to certain investors, I guess, why that property?

Peter Moglia

Well, it was a fairly low yield. So we're giving away not too much upside by selling part of it, right? And are the investors that we attracted really like the building, and it was an opportunity to fund something that was near-term dollars. So it made a lot of sense.

Joel Marcus

Yes. And I mean it's a world-class building with a world-class tenant. So it certainly is one of those opportunities that would attract a variety of capital sources. And we continue to be the dominant owner as well. So it kind of meets all the requirements that we have for monetization.

Operator

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

Rich Anderson

So, on the $7.6 million square foot pipeline, how much -- what does that imply in terms of development spend in 2024? And how much of that is potentially some place where you can sort of tap the brakes like you kind of did this quarter in deference to the current capital raising market, please?

Dean Shigenaga

Rich, it's Dean Shigenaga here. So you said $7.6 million...

Rich Anderson

You use any pipeline place you want. I'm curious as to what you've committed to in terms of development spending.

Dean Shigenaga

I see what number you're referring to. So you were referring to the pipeline that's under construction, 5.5 million square feet, plus another $1.2 million near term. Those are all 100% pre-leased projects. So that ties to the $610 million for others of incremental net operating income. We haven't broken out that number for '24 to spend just related to that, but that's not -- within that bucket now we've slimmed down the focus of what is continuing to generate the $610 million of NOI.

And for the most part, Rich, for the most part, those are either 100% leased projects or multi-tenant projects, most of which have some level of pre-leasing. Some that don't have pre-leasing today are multi-tenant projects anywhere from a building to multiple buildings. So rightsized for delivery to requirements in the market, they're not lumpy, large build-to-suit opportunities that could be more specific to larger requirements.

So I guess, a long way of saying, Rich, I think we feel comfortable with what we've rightsized for the pipeline of activity. The construction spend, plus or minus will play out like a normal curve for spend over that pipeline, roughly two years from the start of new projects, the active pipelines part way through that already.

So -- what you're really focused on, though, in your question is a spend outside of that, which goes to quite a bit of activity, site work, advancing site work as well as entitlements. Entitlements are important. They add a lot of value. Site work shrinks the time to deliver buildings to a tenant, which if you looked at us two years ago, we said, let's move that along. If you look at us today, we'd say, well, let's think carefully about site work given cost of capital considerations with the macro environment today, and let's just hold on that until the right time.

And so, I think we're going to look hard, as I mentioned earlier, over the next couple of quarters. We continue to refine our plan for 2024 because as I mentioned earlier, the $610 million of pipe, that pipeline does not require much more equity capital at stabilization because we have so much already in CIP which the incremental EBITDA will allow us to debt fund leverage neutral, the wide majority of the incremental capital for that pipeline such more general TIs kind of renovation costs that aren't part of development and redevelopment that we need to scrutinize in our business.

Joel Marcus

Yes. And that's kind of the critical message.

Rich Anderson

Yes, got it. And then the second question for me is on the success that you're having from asset sales and partial interest. It's obviously the best way to one of the best ways to raise equity capital right now for you guys today. But at what point does it become too much? Where you're parting ways with your preeminent assets, you only want to do that to a certain degree before you're giving away stuff you'd rather own 100%. So is there a sort of a number you can point to that this is how much we can raise from a disposition standpoint, still be in a range where we're comfortable with our ownership position in these fantastic assets longer term.

Dean Shigenaga

Rich, it's here. I think the way to think about at a high level is that we just close the conversation about the pipeline 6.7 million square feet under construction or including 1.2 million to start in the near term here. That's a lot of product. And we just completed a lot of product over the last two or three years. So, we have added a lot of high-quality assets to our portfolio in recent years as well as coming online here over the next two to three years. So put off a piece of the portfolio makes sense. And we're mindful of your question, but we have so much coming online and that we have completed in recent years. I think we feel we're in pretty good shape.

Operator

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

Tom Catherwood

Just following up on Michael's previous question about Boston. Can you provide some more insight on the decision not to redevelop 275 Grove Street? And is there any read-through to other recent acquisitions, Greater Boston like Gatehouse Drive or presidential way?

Joel Marcus

Yes. I think Peter can comment as well. I think the way we're trying to think about it is to -- I mean, we have a very significant position in the Greater Boston market, 14 million, 15 million square feet.

And I think in a tougher macro environment, it's kind of thought to prune and rightsize you see what we've done last year would be a good example of -- we sold a set of really good high-quality workhorse assets, but we felt in locations that were not necessarily high barrier to entry markets, but good economics for buyers as well and good economics for us.

And I think as we think about different assets, we're trying to make sure that we're more focused on the highest barrier to entry markets rather than less. And I think that's probably the best example I could maybe share Peter, but you could give you color.

Peter Moglia

Yes. I mean there was one nuance to kind of focus us on 275 Grove, which was when we acquired that, there was a thought an opportunity to expand our holdings in that neighborhood and in fact, adjacent to it. So we in addition to high-barrier to enter, we also really are focused on aggregating into mega emphasis and the opportunity to do that wasn't attractive enough for us to move forward. And so we ended up with this kind of stand-alone asset, which is a really good office asset. But you have to start prioritizing and that one just kind of lost some of it shine when the opportunity to expand kind of went away.

Tom Catherwood

Got it. And then Peter, sticking with you, appreciated your comments on availability rates when including 2023 and '24 deliveries. When it comes to upcoming lease expirations, you're typically in conversations with tenants a year or multiple years in advance. Are you getting any sense that tenants are engaging less on their '24 expirations or space needs given the large amount of expected deliveries between now and the end?

Peter Moglia

That's a hard question to answer because it's pretty -- would be pretty granular for me to understand when I'm looking at leasing reports remembering what is expiring today versus in the future. But I believe our early renewal statistics have been fairly strong recently. So, I guess the short answer is, I don't -- I haven't noticed anything. We are constantly in communication with the regions about their upcoming renewals in a year to two years, even three years ahead at times, our -- what's the status of the Company and are they expanding? And do we want in the portfolio or not. And so, we're pretty aware. And if I think -- if there was some weakness there, I think I would have probably noticed it by now.

Operator

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

Joshua Dennerlein

I just wanted to follow up on some of those supply comments, particularly the San Francisco supply. It sounds like that's where the biggest incremental change was when you're looking at 2023 and '24 on lease unleased new supply. What in particular kind of changed on that front, new supply coming online? Or was it projects that were previously signed and then kind of the lease went away?

Peter Moglia

Just some new recent starts and one, large one in particular in South San Francisco, you made up most of that change. It is just uncanny that people are still trying to put new products into the queue in a market that has a lot of vacancy. We're fortunate we have one project moving that is kind of a good niche for earlier-stage companies, mid-stage companies, so we don't have to go on an elephant hunt to lease some really large project, but there's a lot of folks out there that are going to be in a lot of trouble because of what I would think is fairly reckless investing.

Joel Marcus

Well, and also, historically, if you go back to my comments, I said we have tried to shape the Company and allocate our capital as much as possible the high barrier to entry markets and mega campuses. South San Francisco, we've never had a dominant position. We chose not to win the Britannia assets came for sale quite a number of years ago and in those days, HCP bought that, I think, almost $3 billion, we valued at about $1.7 billion. So we decided to pass on that.

But what's changed in South San Francisco is transportation is now a bit of an issue. Genentech transitioned to Roche, which is a great company, a world-class company, but they're not company creating in that market like Genentech was like a factory for spin-outs much like MIT is. And some of those aspects of what would otherwise be a high barrier to entry market don't exist there.

So you saw some of the moves we made last year in South San Francisco, exiting a number of assets, passing on -- we passed on an option we had to do a development. And so we're being pretty darn cautious there, and you'll see that continue.

Joshua Dennerlein

And then one other question. I saw you revised upward the leasing spread guidance. What was that a function of just market rent growth or just leases you actually signed in 1Q?

Dean Shigenaga

It's reflective of where we usually start at the beginning of the year. If you look back over time, I think we've enjoyed the opportunity to move rental rate growth and same-property performance northward as we make our way through the year. And so, a combination of settling in on activity this quarter, as well as our continued outlook for the remainder of the year, so slight improvement overall.

Operator

Next question comes from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski

And I appreciate the color that you guys have provided thus far on sort of demand and the normalization on that front. But just curious, from a geographic perspective, are there certain markets or submarkets where the normalization is a little bit more onerous?

Joel Marcus

Well, I think maybe South San Francisco might be not so much for us but maybe others. Yes, that's a good example. And we've tried to minimize limit our exposure there and transaction that we build to suit was really a bit -- it's in the South San Francisco submarket, but it's a little bit out of there. But directly on transportation, we felt was a huge competitive advantage in landed a world-class tenant to 100% occupy that development. So, I think that's one example, yes.

Dylan Burzinski

And I guess just on that line of thought, like our markets like in the non-cluster markets, like RTP, suburban Maryland, are those sort of seeing similar kind of normalization demand trends as San Francisco versus maybe like your core mark submarkets like Cambridge, BTC, Torrey Pines in San Diego

Joel Marcus

Yes. I think we're still seeing decent activity maybe RTP or RT, I should say, has slowed maybe a bit more than we would have guessed, but part of that's due to my guess is the mix of tenants down there in the -- not so much our tenants per se, but the mix of life science, the components of life science tenants in that market.

And I think we see in Maryland, it's still pretty good. It's slower than it has been because obviously, '20 and '21 were peak times and obviously COVID dollars we're heavily focused on that market, but we're still seeing pretty decent activity that I would say, matches our historical numbers. So that's just two examples.

Operator

The next question comes from Georgi Dinkov with Mizuho. Please go ahead.

Georgi Dinkov

Could you please provide more color on the internal leasing pipeline that comes from your existing tenants? And how that demand compares to the broader industry?

Joel Marcus

I don't think you can compare that because no one has the scale and depth of the tenant base that we do, and we know pretty instantaneously about the needs of those tenants versus if you're just in the market using brokers and you're kind of hearing here, say, your secondhand. So, the two are pretty fundamentally different.

Georgi Dinkov

Understood. And apologies if I missed it, but do you have any lease termination since this quarter? And if so, how much?

Joel Marcus

Dean?

Dean Shigenaga

Yes, nothing significant in the quarter.

Operator

Great. Appreciate it.

Joel Marcus

Next question comes from Jamie Feldman with Wells Fargo. Please go ahead.

Jamie Feldman

Can you talk about the credit watch list today and just what that looks like as a percentage of your revenue versus, say, six months ago, how that number has changed?

Joel Marcus

Yes. I don't know that -- I mean, we don't call it a credit watch list. I think Hallie indicated, we have a pretty methodical deep and judicious approach that has always been there. And I mean, if you looked at, say, the Rubius situation, we would say that if there's a management change that then you look at -- or you put that scrutiny at a higher level when it happens.

And then as technology developments or take hold that you are informed about. And rumor sometimes when you're dealing with public companies, you have to -- sometimes we have confidentiality agreements, sometimes we don't. So information comes in different ways in different fashions. We just have a more -- much more hands-on work approach with clients.

But I think the bottom line is the simple bottom line. If you look at Hallie indicated, if you look at the tenant collections by segment, they're 99% to 100%. So we've, I think, done an extraordinary job of managing rent collections and monitoring all of our tenants in a way that I don't think anyone else could even imagine. So I don't know if that's a helpful way to characterize it, Jamie.

Jamie Feldman

No, that is helpful. I mean, I guess the big picture is like everyone kind of sees the headlines on what's going on in life science. Clearly, you are flying above the clouds or just have a better portfolio, a better tenant base, but it's so hard to handicap just how bad this cycle could get for you I think if you look.

Joel Marcus

Yes, I mean if you look at the tenant base and where we, again, how they went through each of the segment or a number of the segments, and I think you could always say to me, the privates are in pretty good shape because they're not exposed to the public markets, and they generally assuming we've underwritten them well, and we have. They generally have good and deep backers, whether it's venture or institutional.

And then you look at public, which are preclinical or in the clinic, but don't have near-term milestones. I think that's the area that everybody is really focused on, and we have very limited exposure there. I mean, for example, we turned down a lease with Sorrento Therapeutics down in San Diego some years ago because we -- it was kind of like Elizabeth well, Theranos, forget her last name, but Elizabeth Holmes.

I know people who did diligence and they said they could never look at the Edison machine. Well, if you can't look at the Edison how it works and so forth, you can't underwrite the tenant. Well, that's kind of how we looked at Sorrento.

We couldn't understand the science, not that we had some ability to say, hey, this is going to fail or not fail, but we simply could not understand the science that we passed on the tenancy. And that's just how we do things.

Jamie Feldman

Okay. No, that's helpful. And then I guess, Dean, just back to your comment on the $25.8 million of gains you might show. I mean what's the maximum you think you could do on that number on that line item?

Dean Shigenaga

Well, I mean, a couple of years back now, I think it was two years ago, Jamie, we took -- the market was able to deliver on some unique liquidity events within the portfolio, and we had something just north of $200 million in realized gains. Now, our policy has been these large significant unusual items. They're one-off. There aren't events that we control. And those, as you go back about $100 million of that was excluded from FFO per share.

These were individually very significant gains. But that's just one example as a historical data point, Jamie, is -- but if you look back for now, I think this would be the third year that we're into this run rate right at about $100 million, $105 million on average, I think, for the last couple of years. And that's kind of the general outlook other than having a slightly lower number for the first quarter.

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

Just simply thank you very much, and we look forward to talking to you on second quarter call.

Operator

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