Alexandria Real Estate Equities, Inc. (ARE) Q2 2023 Earnings Call Transcript

Alexandria Real Estate Equities, Inc. (NYSE:ARE) Q2 2023 Results Conference Call July 25, 2023 3:00 PM ET

Company Participants

Paula Schwartz – Investor Relations

Jenna Foger – Senior Vice President and Co-Lead, Science and Technology

Joel Marcus – Executive Chairman and Founder

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

Dean Shigenaga – President & Chief Financial Officer

Dan Ryan – Co-Chief Investment Officer

Conference Call Participants

Steve Sakwa – Evercore

Joshua Dennerlein – BoA

Anthony Paolone – JPMorgan

Nick Joseph – Citi

Michael Griffin – Citi

Michael Carroll – RBC Capital Markets

Vikram Malhotra – Mizuho

Tom Catherwood – BTIG

Dylan Burzinski – Green Street

Operator

Good day, and welcome to the Alexandria Real Estate Equities Second 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 Schwartz 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 the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company’s periodic reports filed with the Securities and Exchange Commission.

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

Joel Marcus

Thank you, Paula, and welcome, everybody, to our second quarter earnings call. Our one-of-a-kind company, which pioneered the lab space niche, continues to perform well in both good times and tough times, demonstrating the resiliency of our unique business model in our now post-pandemic world. In fact, COVID-19 really reaffirmed the sustained strength of our life science industry fundamentals and the need for our essential lab space infrastructure.

This favorable backdrop for this nation’s — one of the nation’s most mission-critical industries, which we serve, continues to underpin our business, driving demand for our world-class brand and highly differentiated assets and operations. I want to thank each and every member of the Alexandria family team for an operationally and financially excellent second quarter.

A big shout out to the finance and accounting team for winning the 2023 NAREIT Gold Award awarded by NAREIT in June for the best REIT reporting and transparency, and amazingly, an unprecedented eighth award and most ever by any REIT. Alexandria is truly a best-in-class REIT, which pioneered the lab space niche and which I believe has made a metamorphic and innovative and transformational impact on our life science industry for the last 29 years.

We’re very proud of the stellar balance sheet we built since the days of the great financial crisis when we were a small and unrated REIT. Upon the closing of our $1 billion line of credit accordion add-on, one of the banks said of Alexandria “Congratulations on the successful expansion of your credit facility to $5 billion.” This is a significant accomplishment in any environment where many real estate owners are struggling to source debt capital.

It is a testament to the strength, quality and endurance of the Alexandria platform. So let me turn to some highlights of the quarter. Dean will cover in detail, but I want to just give a little bit of perspective. The second quarter was a very strong reporting quarter, generally in line with our 5- and 10-year historical run rates, REIT financial metrics and certainly outside of the rocket ship performance during COVID.

We had strong FFO per share growth in both the second quarter and the first half approximating 7%, especially in a continuing challenging macro and nicely beating consensus. Strong leasing quarter at 1.3 million rentable square feet ahead of the historical run rate of about 1.1 million square feet and NOI was up nicely, almost $200 million for the quarter. Positive rental growth, stable occupancy and solid same-store NOI increases also hosted.

The continuing strength and I think overall solidity of our fortress balance sheet continues. Our ability to reiterate and maintain strong guidance, way, all the metrics should demonstrate our continuing confidence and our tenants demand for essential lab space, coupled with our ability to operate successfully in a moderately elevated supply dynamic environment.

And then let me make a couple of comments on the life science industry, which Jenna will detail in just a moment, a couple of high-level observations. M&A, a critical part of the capital recycling, continues to increase mostly with bolt-on product deals, which is a good and positive sign. Series A rounds in 2023 so far have averaged about $60 million, an all-time high, and biologics, not surprisingly, have attracted the majority of early-stage investments.

And with that kind of brief intro, let me turn it over to Jenna Foger.

Jenna Foger

Thank you so much, Joel, and good afternoon, everyone. This is Jenna Foger, Senior Vice President and Co-Lead of our Science and Technology team here at Alexandria. Today, I’m going to comment on the solid fundamentals of the secularly growing life science industry, how these fundamentals contribute to the continued vitality and health of Alexandria’s best-in-class life science tenant base and innovation as a long-term driver of life science industry growth.

The secularly growing life science industry, which has an estimated market value of over $5 trillion and approximately $450 billion in estimated 2023 R&D funding, fuel is continuing demand for Alexandria’s essential 24/7 lab space infrastructure across our cluster markets. This industry is driven by the achievement of scientific, clinical and commercial milestones and is not significantly impacted by market cyclicality nor by some of the macro trends impacting commodity REITs today.

With over 10,000 diseases known to humankind and less than 10% addressable with current therapies, the incredible innovation taking place within our lab-based facilities is and will remain a national imperative. Taking a closer look at the health of our tenant base, beginning with multinational pharma, which makes up 17% of our ARR, this segment continues to operate from a position of strength.

In 2022, biopharma deployed an estimated $267 billion into R&D, representing a 57% increase in biopharma R&D spend over the past 10 years, which is expected to continue to increase. Given the immense capital firepower on the balance sheets of large-cap pharma in excess of $300 billion and the healthy pressure on pharma to continue to pad its late-stage pipelines with sources of new revenue, there’s been a significant uptick in M&A, as Joel mentioned.

The first half of 2023 M&A deal value has already totaled $97 billion, surpassing total M&A transaction values for full years ’21 and ’22, pumping additional liquidity into the sector. We also see increased pharma partnering activity across our regional ecosystems as well. Transitioning to private venture-backed biotech, which makes up 10% of our total ARR, we continue to see healthy life science center activity with a significant $17.7 billion invested in the first half of 2023, which while down from the record pandemic period peak, life science venture activity remains quite strong by historic standards and in line with 2018 and 2019 levels.

Given the record high years of venture fundraising by life science venture funds in ’21 and ’22, there is still plenty of dry powder to deploy of course, given the broader capital market context and a very narrow IPO window, venture capitalists are more discriminate, disciplined and demanding of new and future investments with the expectation that companies may need to stay private for longer.

Private biotechs with tenured management teams, strong differentiated technologies and clear line of sight to value inflection milestones consistent with our own tenant underwriting selection criteria are the ones that continue to rise above the fray. As for public biotech, our public biotech tenants with marketed products make up 14% of our ARR and include companies such as Amgen, Gilead, Vertex and Moderna. This is also a very healthy segment of our tenant base with substantial revenues and continues to be a critical contributor to innovation and partnerships across our ecosystem.

For our preclinical and clinical stage public biotech comprising 10% of our ARR, compelling clinical data remains king, and this segment of our tenant base continues to perform. Tenants such as Black Diamond, Medicine and Biomass Fusion to name a few have recently raised substantial follow-on public equity financing on the heels of promising clinical data. As we always have, our science and technology team continues to meticulously underwrite and monitor all of our tenants very closely.

Notwithstanding in the process of developing novel medicines, there will always be some that fail in every type of macro market environment. And this is, of course, baked into our model. With a deep tenant base relationships across every facet of the industry and in each of our regional ecosystems and of course, the highest quality infrastructure and operations, we get ahead of potential tenant challenges to backfill and further enhance our tenant roster.

Reflecting the health of our current tenant base in 2Q ’23, tenant rent collections were at 99.9%, and we’ve already collected over 99.7% of July rent. Now a word on innovation, catalyzed by groundbreaking technologies, new modalities, massive unmet medical need and strong fundamentals, the life science industry remains uniquely positioned to tackle and solve our most persistent and major health care challenges.

The emergence of a new golden age of biology only bolsters the strength and growth potential of this vital industry. In this new historic age, the FDA has approved over 450 new drugs over the past decade, and 2023 is on track to be a near all-time record high year of new drug approvals, starting the year off with over 60 PDUFA dates set on the FDA calendar to review new drug applications. Collectively reflecting the productivity and impact of the life science industry to bringing new medicines to patients, many of our tenants are at the forefront of this innovation.

To name a few, Pfizer and GSK, each received new approvals this year for their respective RSV vaccines, an incredible feat given a long history of failed vaccine development in RSV. And Biogen’s tofersen also received a Vanguard approval for ALS, a debilitating neurodegenerative treatment lacking current — debilitating neurodegenerative disorder lacking current treatments.

These trends reaffirm the fundamental truth Alexandria recognized nearly three decades ago. Our fully integrated mission-critical lab space infrastructure centered in core hubs of innovation is essential for our tenants to advance scientific discoveries and improve human health.

Through every market cycle, Alexandria’s tenants rely on a central lab-based infrastructure for the intended purpose to provide 24/7 compliant fully integrated and workflow optimized facilities to house, operate, advance and help safeguard in aggregate billions of dollars of scientific research, specialized equipment, pipeline programs and commercial assets.

It is the advancement of this science and related intellectual property in Alexandria’s lab space building that drives the utilization of and demand for space. Much like a data center that is constantly and consistently capturing and storing data throughput, the volume, velocity and value of the scientific throughput occurring in our spaces at any point in time is not correlated with the volume of people flowing in and out of our buildings and campuses.

As such, a more relevant metric for measuring the utilization of Alexandria’s lab space assets by our tenants is energy consumption. And we have seen consistent same-store electricity energy consumption — same-store electricity consumption across Alexandria’s lab space asset base today as we did in pre-pandemic years.

Equally as important to note, within Alexandria’s lab space assets, the laboratories and adjacent non-technical space cannot be decoupled. Each tenant base floor and building plan is fully integrated and intentionally designed to enable seamless workflows between laboratory and nontechnical spaces within the leased premises.

Remember, the majority of tenant employees in our lab space assets interact with the science in the lab in some ways, including to conduct experiments, analyze and interpret data, plan new experiments, make business decisions about the data or engage in other related activities. This is the nature of life science companies research workflows, critical aspects of which clearly cannot be performed from home.

And lastly, collaboration, collaboration is also fundamental to innovation and overall life science industry productivity and really critical for translating discoveries from academia into treatments, diagnostics and cures by biotech and pharma companies.

It is also a key reason why 17 of the top 20 multinational biopharma’s lease space from Alexandria across our regional markets to access this early innovation. And I point to the recent example from Verve and Lilly collaboration in Greater Boston, Pipeline Therapeutics and J&J collaboration in San Diego as two recent examples of collaboration across our campuses.

Now given the proprietary and regulatory considerations, these collaborations are, of course, intentionally and tightly managed by executive teams and employees from one company are not wandering back and forth between discrete tenant spaces to collaborate ad hoc. Clearly, more or less people in a building or on a campus is really not correlated with more or less collaboration.

So to wrap my comments, while today’s broader macro environment will continue to warrant extreme prudence, it is an opportunity for the best life science companies reflected across Alexandria tenant base to benefit from the secularly growing life science industry solid fundamentals and to continue to advance the technologies and medicines that will bring the most value to patients.

And with that, I pass it off to Peter.

Peter Moglia

Thanks, Jenna. A few days ago, when reading a capital markets report, I came upon the line, uncertainty is arguably the harshest enemy of investing. It was a very concise way of describing what we have all been seeing in the broad economy over the past couple of years. It has even hit the somewhat insulated life science industry over the past few quarters, manifested by slower decision-making and the tightening of budgets by executive teams and boards.

Nonetheless, progress continues in the labs, milestones are being achieved and success is being rewarded. The golden age of biology will not be stopped. The flywheel is starting to turn again, and we’re excited to see the like changing innovations that inertia will bring, and Alexandria is perfectly positioned to capitalize on it.

I’m going to briefly touch on our development pipeline, leasing, supply, and asset sales and then hand it over to Dean. In the first quarter, we delivered 387,076 square feet in four projects into our high barrier to entry submarkets, bringing total deliveries year-to-date to 840,587 square feet covering seven projects.

Annual NOI for this quarter’s deliveries totaled $58 million, bringing the year-to-date total incremental additions to NOI to $81 million. The initial weighted average stabilized yield is 6.4%, influenced by a build-to-core project in East Cambridge housing the next generation of companies from the investors who brought the world Moderna.

Development and redevelopment projects saw an uptick in activity for the quarter with approximately 142,000 square feet of leases signed, covering six multi-tenant projects. As of quarter end, we have another 42,000 square feet under negotiation. During the quarter, we placed a lab conversion opportunity at 401 Park Drive and the ground-up development of neighboring 421 Park Drive, both located in the Greater Boston submarket of the Fenway into near-term projects expected to commence construction in the next three quarters, stabilizing in 2025 and beyond.

A portion of the 421 Park Drive project is in process of being presold to a research institute, which will be a highly complementary to the development of the mega campus and the proceeds will help fund the remaining 392,000 square feet of the development. This transaction, along with a joint venture that will fund the remainder of 15 Necco, which closed in April, are great examples of the optionality Alexandria has to fund its value creation pipeline.

At quarter end, our pipeline of current and near-term projects is 70% leased and is expected to generate greater than $605 million of annual incremental NOI, primarily through the second quarter of 2026. The decline from 72% leased last quarter was due to the addition of the new Fenway projects. Excluding those additions, the pipeline would have been 74% leased.

Transitioning to leasing and supply. Once again, our strong brand loyalty, mega campus offerings and operational excellence continue to drive strong leasing numbers in a challenging market. We are pleased to report leasing volume of 1.3 million square feet achieved in the second quarter, which again exceeded our five-year pre-2021 average and is the 13th consecutive quarter where we have achieved a leasing volume above 1 million square feet.

Rental rate increases were 16.6% and 8.3% on a cash basis reflective of leasing volume heavily weighted towards Seattle, Research Triangle and Maryland. Despite spreads coming down from the COVID rocket ship numbers, net effective rents remained strong in our operating assets due to their generic build-out, which enables renewals in the re-leasing of vacant space with minimum CapEx.

Another positive realized this quarter was a notable increase in demand, ranging from 15% to 20% in our top three markets, a sign that perhaps investors are seeing the light at the end of the tunnel when it comes to economic uncertainty, but also likely driven by significant dry powder they need to put to work.

There have also been an increase in 100,000 square foot plus requirements in a few regions driven by large pharma and biotech anticipated venture creation investments. Alexandria is well positioned to capture this demand because many of these opportunities are coming from existing relationships, which typically account for a significant amount of our leasing.

In the first half of the year, we have leased 2.55 million square feet, of which 82% was generated from existing tenants. In addition, our mega campus offerings providing the ability to scale in a wide variety of amenities are the clear choice of high-quality companies. We spent considerable time during our G&A REIT meetings discussing supply and recently covered it in our white paper.

The data presented in those meetings and the white paper was from the first quarter of ’23, and we’ll update it for you here. As a reminder, we perform robust on the ground, building-by-building analysis to identify and track new supply from high-quality projects we believe are competitive to ours in our high barrier to entry submarkets.

We focus primarily on high barrier to entry markets and our brand mega campus offerings in AAA locations and operational excellence enables us to continually mine our vast, deep and loyal tenant base to drive our leasing activity, which will likely lessen the impact of generic supply.

In Greater Boston, unleased competitive supply remaining to be delivered in 2023 is estimated to be 1.6% of market inventory, a slight increase of 0.01% over last quarter. In 2024, the unleased competitive supply will increase market inventory by 5%, a 0.3% reduction due to the lease-up of that inventory during the quarter. In San Francisco, unleased competitive supply remaining to be delivered in 2023 is estimated to be 6.6% of market inventory, which is unchanged.

In 2024, the unleased competitive supply will increase market inventory by 8.8%, a 0.3% reduction due to a downward revision of estimated square footage to be delivered during the year. In San Diego, unleased competitive supply remaining to be delivered in 2023 is estimated to be 3.5% of market inventory, which is a decrease of 0.8%, due mainly to projects being delivered with unleased space now reflected in direct vacancy.

In 2024, the unleased competitive supply will increase market inventory by 4.9%, a 0.4% reduction due in part to a pause conversion project and a decrease in scope of another one. Direct and sublease market vacancy for our core submarkets is updated as follows. Greater Boston direct vacancy stayed stable at 2.8%, but sublease vacancy increased by 1.5% to 5.4% for a net increase in available space and operation of 1.5%.

San Francisco direct vacancy stayed stable at 2.3%, but sublease vacancy increased by 2.7% to a total of 6.2% for a net increase in available space and operation of 2.7%. San Diego direct vacancy increased from 4.1% to 4.8%, largely due to delivered unleased new supply, and sublease vacancy increased by 1.8% for a net increase in available space in operation of 2.5%.

We are tracking new supply to be delivered in 2025, and we’ll update you on those statistics next quarter. For our current read is that volume will be below 2024 deliveries, likely due to high construction costs, higher cost of capital, a lack of available debt financing and adequate supply currently under construction. I’ll conclude with an update on our value harvesting asset recycling program.

We are quite proud and fortunate to own assets in a scarce asset class. As you all know, the past few months have had little transactional activity in the broad markets. But because of the attractiveness of our product type, Alexandria has been able to make great progress towards reaching our value harvesting goals. At quarter end, we had closed $701 million of sales, including the 15 Necco sale announced last quarter and have another $175 million pending for a total of $876 million, which is a little over halfway to our midpoint guidance.

We have a number of other efforts in progress or soon to be launched that would exceed our guidance if we choose to execute on all of the opportunities. The vast majority of those identified assets are noncore non-campus assets we plan to fully dispose of and reinvest the proceeds into our value-add pipeline.

Notable sales closed in the first quarter include the sale of 100% interest in 11119 North Torrey Pines Road for $86 million or $1,186 per square foot at a strong 4.6% cap rate. There is a significant mark-to-market on the asset when the lease expires in approximately 4.5 years, but a fair amount of capital will be needed to execute on that opportunity. This asset was a one-off for us, and there was no opportunity for us to aggregate a campus around it.

We sold 20.1% of our joint venture interest in 9625 Towne Centre Drive, an asset jointly owned with an institutional partner who wanted to exit their position and initiated the sales process for their interest only. Given the strong demand for this University Towne Centre asset, we decided to participate in the sale, which captured $32 million in proceeds at a strong 4.5% cap rate, reflective of the high-quality building, tenant credit and the future mark-to-market opportunity we will participate in with our continued ownership.

A portfolio of non-core assets inclusive of our Second Avenue assets in Waltham and our legacy non-mega campus affiliated 780 & 790 Memorial Drive asset located in Mid-Cambridge sold for $365.2 million or $852 per square foot at a combined cash cap rate of 5.2%, reflective of a mix of credit quality, some vacancy and term.

We also completed the sale of pure office asset 275 Grocery in Newton, Massachusetts. Originally planned for conversion to lab as part of an assemblage of adjacent assets into a mega campus with green line access, the opportunity did not come to fruition. So, we made the prudent decision to sell this noncore office asset. The $214 per square foot price reflects its 70% occupancy.

The negative sentiment of office buildings outside of cluster locations and a significant amount of capital needed to reposition the asset. Overall, we are very pleased with the results achieved thus far in our value harvesting asset recycling program. As mentioned, we have identified more than enough noncore opportunities to achieve our goals to fund our 2023 growth, primarily through dispositions.

With that, I’ll pass it over to Dean.

Dean Shigenaga

All right. Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. We reported very solid operating and financial results for the second quarter and six months ended June 30, 2023. Total revenues for the second quarter were $713.9 million, up 10.9% over the second quarter of 2022. NOI was up 12.2% over the second quarter of 2022, driven primarily by the commencement of $58 million of annual net operating income related to the 387,000 rentable square feet of development and redevelopment projects that were placed in service in the second quarter.

The significant NOI growth from completion of pipeline projects was the key driver of our outperformance this quarter in comparison to consensus. Additionally, we slightly beat other key line items relative to consensus. FFO per share diluted as adjusted was $2.24, up 6.7% over the second quarter of 2022, and we’re on track to generate another solid year of growth in FFO per share growth of 6.4% at the midpoint of our guidance for the year.

Now high-quality life science entities continue to appreciate our brand mega-campus strategy and operational excellence by our team. 49% of our annual rental revenue is generated from investment-grade or large-cap publicly traded tenants, and this statistic represents one of the highest quality client rosters in the REIT industry today.

Our collections remain very high at 99.9%. Our adjusted EBITDA margin remains very strong at 70%. Same-property NOI growth was very solid and in line with guidance for the full year. Same property results for the second quarter were 3%, up 3% and up 4.9% on a cash basis, and for the first half of the year, up 3.4% and up 6.5% on a cash basis. As a reminder, our outlook for 2023 same-property NOI growth remains very solid at a midpoint of 3% and 5% on a cash basis.

Now turning to leasing. Quarterly leasing results are driven by a relatively small volume of and mix of transactions that drive the overall rental rate growth related to lease renewals and re-leasing the space. Now for the second quarter, leasing volume was 1.3 million rentable square feet, and rental rate growth on lease renewals and re-lease in the space was up 16.6% and 8.3% on a cash basis.

Now rental rate growth for the second quarter was driven by transactions based out of the Seattle region, Maryland and Research Triangle in comparison to record rental rate growth in the first quarter of 48.3% and 24.2% on a cash basis, which was driven by transactions out of Greater Boston, San Francisco Bay Area and Seattle.

Our outlook for rental rate growth on lease renewals and re-leasing space remained solid at the midpoint of 30.5% and 14.5% on a cash basis. The overall mark-to-market for cash rental rates related to in-place leases for the entire asset base remains very strong at 19%. Now capital expenditures generally fall into two key categories. The first category is focused on development and redevelopment. And redevelopment specifically is the first time conversion of non-lab space to lab space through redevelopment.

Now the second category is nonrevenue-enhancing capital expenditures. And our nonrevenue-enhancing capital expenditures over the last five years have averaged 15% of net operating income and has been trending lower for 2022 at 13%. For 2023, this is closer to 10% based upon the second quarter ’23 net operating income on an annualized basis.

Tenant improvement allowances related to lease renewals and re-leasing the space have been very modest at about $16 per square foot for the first half of the year, and these costs are included in the nonrevenue-enhancing capital expenditures that I mentioned earlier.

Second quarter occupancy was in line with expectations at 93.6%, consistent with first quarter occupancy. Our outlook for 2023 reflects flat occupancy from the second quarter to the third quarter and occupancy growth in the fourth quarter. The midpoint of occupancy guidance is 95.1%, and occupancy as of June 30 of 93.6% included vacancy of 2.2% or approximately 900,000 rentable square feet from properties that were recently acquired in 2021 and 2022.

Now 23% of the recently acquired vacancy is already — has already been leased and will be ready for occupancy over the next number of quarters and an additional 14% is under negotiation. Now a huge thank you to Marc Binda and his entire team and our important relationship lenders under our $5 billion line of credit. During the quarter, we increased aggregate commitments available under our line of credit to $5 billion, up from $4 billion.

Now this has allowed us to increase liquidity on our balance sheet to over $6.3 billion as of June 30. Now during the first half of ’23, we had remained very flexible with our strategy and pivoted toward outright dispositions versus sales of partial interest. Our team has made excellent progress on dispositions and sales of partial interest for the first half of the year and are working on a number of transactions for the second half focused primarily on outright dispositions. There are more details on Page 7 of our supplemental package for your reference.

Now turning to consistent growth in dividends from our high-quality cash flows. We have a low and conservative FFO payout ratio of 55% for the second quarter annualized with 5.2% increase in common stock dividends over the last 12 months. We’re projecting $375 million, representing a three-year run rate of over $1.1 billion in net cash flows from operating activities after dividends for reinvestment.

Turning to venture investments. Realized gains from our venture investments included in FFO for the second quarter was $22.5 million and has averaged about $25 million per quarter for the last eight quarters. Gross unrealized gains on our venture investments as of June 30 were $373 million on a cost basis of just under $1.2 billion.

Now on external growth, we have $605 million of incremental net operating income from our pipeline of 6.7 million rentable square feet. Now projects aggregating 3.7 million rentable square feet is expected to reach stabilization in 2020 — in the remainder of 2023 and 2024. And these projects are 94% leased and will generate $277 million of incremental net operating income.

Additionally, we have another 3.7 million rentable square feet that is expected to reach stabilization after 2024 and will generate another $328 million of incremental net operating income.

Turning to guidance, our detailed updated underlying guidance assumptions are disclosed beginning on Page 4 of our supplemental package. Our per share outlook for 2023 was updated to a range plus or minus $0.03 from the midpoint of guidance down from a range plus or minus $0.05 last quarter.

Now our range of guidance for EPS is from $2.72 to $2.78 and our range for FFO per share diluted as adjusted is $8.93 to $8.99 with no change in the midpoint of $8.96. Now this represents a strong 6.4% growth in FFO per share following excellent growth last year of 8.5%. Our strategy for dispositions and sales of partial interest for 2023 reflects our focus on enhancement of our overall asset base through outright disposition of properties no longer integral to our mega-campus strategy with fewer sales of partial interest.

Now this is reflected in the transactions we have completed to date in 2023 and our target transactions for the second half of the year. This strategy did result in an update to sources and uses of capital due to the replacement of a potential sale of a partial interest with an outright sale of properties.

Now while this change did not result in a change in gross construction spend, it did reduce funding for construction spend by a potential JV partner that was replaced with funding from an additional $225 million in dispositions of real estate.

Let me stop there and turn it back over to Joel to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Steve Sakwa with Evercore. Please go ahead.

Steve Sakwa

Dean, I was wondering if you could just provide a little bit more color on that occupancy build that you talked about. It sounds like things are flat Q2 to Q3. But to get to the midpoint, there’s a pretty big uplift, I guess, from 93.6% to 95.1%. So are there a bunch of signed leases that are just not commenced yet? Or is that based on kind of incremental leasing you think you’re going to do? Just kind of help us walk through that bridge, please.

Dean Shigenaga

Sure, Steve. So the growth in occupancy anticipated in the fourth quarter, some of it is from signed leases. We have about 400,000 square feet of executed leases that will commence in time for the occupancy growth by the end of the year. That includes some of the spaces that I mentioned in the recently acquired vacancy. We also anticipate some leasing activity that we need to complete in order to drive that occupancy growth. And then we also have some key spaces being delivered out of our development pipeline, which by the time they’re delivered should be pretty much close to 100% leased. And that doesn’t have quite the same impact of delivering space to tenants out of the operating portfolio, but there is a slight benefit from that as well.

Steve Sakwa

So just as a quick follow-up, could you just help frame maybe the spec leasing that you think you need to get done maybe as a range that the team needs to complete over the next five months to hit that target?

Dean Shigenaga

I don’t have that figure right at my fingertips, Steve. But look, if you look at our volume of leasing activity that we’ve averaged pre — the record period of leasing in ’21 and 2022, we’re back to that run rate of leasing activity on a quarterly basis, which is 1.2 million, 1.3 million rentable square feet. A portion of that, as you know, comes out of the value creation pipeline development and redevelopment and previously vacant stuff.

So, our run rate on renewals and re-leasing the space is probably, on average, about 1 million square feet per quarter; and only a portion of that is stuff that we need to complete related to fourth quarter deliveries. As you can imagine, most space, probably for any real estate company, sometimes it’s ready for delivery immediately, but only a portion of that — of that 1 million square feet can actually be delivered that quickly. So, it’s not a big number, Steve. But to be fair, we do have to get some leasing done. And so we’ve got to work through that opportunity.

Steve Sakwa

Okay. And just a second question. I know that you had talked about the Toast termination. But I think there’s just maybe some confusion or uncertainty over kind of the dollar amount. Maybe when it hits, how it might have been in guidance or not in guidance. So could you just maybe walk through the space take back, maybe some offsets to the termination fee and maybe what flowed through in Q2 and what we should expect in Q3 from that transaction?

Dean Shigenaga

Sure, Steve. So this is a pretty good example of space that we opportunistically took back in the second quarter. The background for this tenant, there was an in-place lease related to an acquisition that we completed in January of 2021. Toast was at 401 Park in the Fenway submarket for reference.

And during our due diligence for the acquisition, our team had identified multiple floors of this office building that will be suited for conversion to lab space through redevelopment. These floors were targeted for redevelopment. Obviously, after our successful lease-up of 201 Brookline, now if you remember, 201 Brookline that was a development site at the Fenway campus that the seller had commenced construction on, and it was only 20% pre-leased at the time we acquired it.

Our team quickly leased the remainder of that project — the construction development project at rental rates that were well exceeded our initial underwriting. And so when we had the opportunity to take back space from Toast, I think it was about 133,000 rentable square feet in total. We’re going to get about 111,000 rental square feet back in 3Q here to commence our redevelopment. And the remaining 22,000 rentable square feet we get back at the end of 2024.

The bottom line, the way to think about this arrangement we entered into with Toast is that net of the write-off of deferred rent, we’ll earn the remaining of the revenue from Toast overtime. And this really covers the quarterly rent that was due to rent Toast about 1.59 a quarter. And so, this arrangement allows us to earn our revenue through the end of 2024.

And the way to think about this is the net benefit we’re going to earn is a slight pickup relative to the prior run rate rent. So for 2023, we might pick up about $2 million in FFO. And then in 2024, there’s a similar expected benefit of a couple of million bucks or so. The key takeaway is that we were able to move up the timing of new lab space at 401 Park after our successful lease up of 201 Brookline. And so, we were excited to be able to get access to that earlier to start the redevelopment sooner than later.

Operator

Thank you. And our next question today comes from Joshua Dennerlein with BOA. Please go ahead.

Joshua Dennerlein

I appreciate all the color. Maybe a follow-on based on the occupancy earlier, but focused on the lease rate growth. It looks like your guidance is still assuming an acceleration in the second half of the year off of 2Q growth rates. What gives you the confidence that you’ll see that reacceleration?

Dean Shigenaga

Can you clarify, were you asking about occupancy or rental rate growth?

Joshua Dennerlein

Rental rate growth.

Dean Shigenaga

So, our outlook — just to remind everybody, our outlook for rental rate growth for 2023 is a range of 28% to 30%, call it, a midpoint of 28.5%, 12% to 17% with a midpoint of 14.5% on a cash basis. Our rental rate growth for the first quarter, just to remind everybody, was pretty record at 48% and 24% on a cash basis. And most of that was driven by Greater Boston, San Francisco, Bay Area and Seattle. It’s important to recognize that the second quarter was a very different subset geographically, which consisted primarily of Seattle, Maryland and Research Triangle.

When you think about rental rate growth of 16% — 16.6% on a GAAP basis, 8.3% on a cash basis, that’s pretty outstanding in this type of market and when you think across the REIT sector today. So we’re very pleased with the rental rate growth that we actually delivered on the quarter and feel comfortable as we look out that we’re on track to hit the range of guidance that we gave.

What gives us that comfort? I think you’ve heard us talk about we have a unique brand our mega-campus strategy and our operational excellence, I think, puts us at an advantage to capture opportunities in the marketplace.

Joshua Dennerlein

Okay. It’s not based on stuff that’s already signed. It’s kind of just what you’re seeing in the pipeline are signed? Just kind of…

Dean Shigenaga

Well, we’re only 3 weeks or 3.5 weeks after quarter end. So, there’s very little activity relative to what we’re going to sign for the full six months as we look forward. So you’ll have to stay tuned.

Joshua Dennerlein

Okay. Okay. And then Peter, I heard you mentioned potential sales above your disposition guidance range. Just what would give you the go ahead to make those additional sales?

Peter Moglia

We’re going to market in a very targeted way so that we don’t overdo it, if we don’t need to. But if we end up with values that are highly attractive, we’ll definitely consider selling that amount over what we need and apply that towards next year’s program.

Joel Marcus

Any other question there?

Joshua Dennerlein

I’m good.

Operator

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

Anthony Paolone

First question, I think — Dean, I think you mentioned 19% mark-to-market across the portfolio. And I think that number was about 27% coming into the year. So just wondering, can you talk to how much of that’s just from moving rents higher and the bumps closing some of that gap versus maybe what’s happened in the market thus far?

Dean Shigenaga

Tony, it’s Dean here. Yes, so 19% is our current outlook for where we are today on the mark-to-market. Last quarter, you’re correct, it was 22%. The quarter before that was 24% and the quarter before that was 27%. So, we have made our way through some of the mark-to-market with leases that we’ve executed over the last number of quarters. So, it’s primarily driven by that, maybe a slight adjustment here and there on our outlook on specific spaces. But most of the move is related to actual leases we’ve executed.

Anthony Paolone

Okay. And then, I guess, you talked a bit about 401 and 421 Park Drive and the reason for kind of moving forward with that. But just in general, just think about incremental development and redevelopment, so for instance, in 2024, it looks like you got another 1.5 million or so teed up coming out of expirations for that. But just what’s the hurdle to start new projects, whether it’s pre-leasing, returns? Just how should we think about just what’s coming out in the next 12, 18 months, whether it’s the stuff expiring that will go into redevelopment or just new ground up?

Dean Shigenaga

So Tony, let me start with your first part of your question on the exploration front. What we’re really looking at is if you look at 2024 as an example, we do have a number of spaces that are coming up for contractual exploration. And keep in mind, these are all related for the most part to recently acquired opportunities where we saw. In this case, these projects have in-place leases and from acquisition that are burning off here.

Only a portion of that overall number is something that we expect to actually tackle in the near term. It’s roughly — it’s about 684,000 square feet of that is actually development opportunities for the future. So 1.1 — 1.2 million is expiring in ’24 that’s been targeted for future development and redevelopment, but 684,000 of that is future development. And that’s not going to start immediately on vertical construction because it needs to go through entitlements, design, possibly some site work, and these are really associated with mega campus opportunities.

The remainder of that, so roughly 400,000 square feet or so, 400,000 to 500,000 square feet is redevelopment opportunities. Those are more near-term speed to market, less time to build out the projects, and we’ll look at those. But our current view as we sit here today would be there’s potential to start those because of opportunities we can tackle. So, the number is much smaller.

As far as your other question, Tony, how do we look at it? I think you’re going to find that we need to remain very disciplined with our approach to new redevelopment and development projects given the macro environment. We’re going to focus primarily on projects that are concentrated in our mega campuses, and we really have well-located land for future development.

It’s important to keep in mind we have the flexibility and not the requirement to address these expansions — expansion needs from our clients. And maybe as you think about development opportunities on our future pipeline, it’s important to recognize that we are going to continue to advance preconstruction activities on the future pipeline projects.

Entitlements for large campuses — mega campuses, it require years to fully entitled. They require design. And oftentimes, the sites are so large, they do require infrastructure before we can actually commence vertical construction. And these preconstruction activities add value to the sites ultimately reduce the time from commencement of vertical construction to delivery a Class A space to our clients.

So again, just getting back to where we started with your question, Tony, we’ll have to remain very disciplined in our approach, given the macro environment.

Joel Marcus

Yes. Maybe just a little more color, Tony. We have one new mega campus that we’re entitling on the West Coast and one on the East Coast. And in both cases, we have, in one case, a current tenant, in the other case, a former tenant, have approached us to take a significant portion of those campuses.

So, we’re actively pushing entitlements and thinking about site design and all those things. But before we would kick something off, as Dean said, and as Peter said many times, we want to make sure that our spread to our cost of capital is sufficient and long-term IRRs to be certainly positive.

Anthony Paolone

Okay. And if I could just ask one last one. Just can you remind us just in the discussion around perhaps scientists working from home as well, just what’s the split between lab and I guess, like workstation, office type space in your buildings today? And do you think that changes over time?

Jenna Foger

Tony, it’s Jenna Foger over here. So, I guess a comment on that. So again, as I mentioned in my earlier comments, in our lab space assets, of course, the lab training on technical space cannot be decoupled. It — historically, we’ve seen about a 50-50 split between the lab and the nontechnical space.

In some cases, we’re seeing it kind of go up a bit to 55% or 60% lab that’s mostly attributable to platform companies kind of prosecuting multiple platforms and pipeline programs at once. But yes, I guess that’s probably a high level thing.

Joel Marcus

Yes. And remember, Tony, too, and as we’ve pointed out before, COVID certainly enabled and caused a lot of companies to repatriate certain overseas processes back into the kind of the home lab and also with the much more sophisticated new modalities, cell therapy, gene therapy, et cetera. The enhancements and the complication of work environments have been expanded as well. So those are two kind of big macro forces that have made a big difference, say, over the last three to five years.

Operator

Thank you. And our next question today comes from Michael Griffin with Citi. Please go ahead.

Nick Joseph

It’s Nick Joseph here with Griff. Maybe just starting up a follow-up, I guess, on the lease termination with Toast. Just want to clarify, was the $16 million in guidance initially or is that new and incremental?

Dean Shigenaga

So Nick, the way to think about the arrangement with Toast is that what was — the total consideration was something in that $15 million range. The deferred rent number was written down to take that down. I don’t have it right in front of me, but $5 million to $6 million or something in that range. The net number is earned out over time effectively replaces rent or cash flows that were in place prior to that arrangement with Toast.

And so net-net, at least through 2024, there’s very little upside. Like I mentioned, it’s a couple million bucks in each year. So, it’s not really changing net FFO in any big way. So, in response to your specific question, was the revenue that we’re going to generate from the lease with Toast in guidance? It was because it was already a lease in our business. Remember this building was acquired with the lease in place back in 2021. What did change for 2023, a couple of million dollar pickup to FFO.

Nick Joseph

Got it. And then just on the capital plan. Obviously, the pivot, I guess, from selling more JVs to wholly-owned asset sales, can you just expand on that? Is that more of a pricing decision? Was it more strategic in terms of improving the portfolio by maybe selling some that’s noncore? But how do you think about that broadly?

Joel Marcus

Yes. I’m going to have — this is Joel. I’ll have Peter kind of respond to that. But I think about — the Company has — was a garage startup back in ’94. So over many years as it kind of grew, grew its regions, we’ve had a variety of assets. We did not start a mega-campus strategy. We didn’t start even a campus strategy. We couldn’t even afford to go into Cambridge in those days.

So the nature of a set of our assets really very, very solid workhorse assets in solid locations with solid tenants and with solid cash flows. Now as we move to this or as we’ve been moving over the last couple of years to this mega-campus strategy in core really high barrier to entry markets has enabled us to let go of those noncore assets. So that’s kind of the fundamental frame. But Peter?

Peter Moglia

Yes. Nick, it was very tempting to bring somebody in to complete the funding of that JV development just like we did at Necco. But at the end of the day, it is part of a mega campus. It is one of the best assets in likely in the world as far as long duration of value. And then reexamining our portfolio and seeing that we still had a number of assets that we could substitute and do just as well as far as getting the proceeds needed to fund our pipeline and just made it, much better story for us to keep 100% of that other development asset, sell the non-cores and really continue to improve our overall asset base towards concentrating it into mega campuses and lessening the one-off assets.

Michael Griffin

This is Michael Griffin on here with Nick. Just one question around VC funding, I saw there was a report recently that showed some incremental positivity in VC funding in Boston. Is Joel’s expectation for this to translate to your other markets? And kind of where do you need to see VC capital pick up in order to see incremental demand?

Joel Marcus

Well, I think I’ll have Jenna kind of give you her take on venture capital. But remember, we’ve returned to kind of the high run rates pre-COVID. So it still is healthy. What you’ve seen is a slower allocation and greater reserves just given the macro market. But Jenna, maybe some numbers.

Jenna Foger

Yes, that’s absolutely true. So as I mentioned in my comments, we’ve seen in 1H ’23 so far about $17.7 billion. So this is right on — in line, if not slightly above 2018, 2019 levels, and this is really across our market, obviously, with Greater Boston being kind of the center of life science activity. So kind of leading the chart, but we are kind of seeing this across our ecosystem.

And again, as Joel mentioned, I mean, there’s been a disciplined allocation of capital as we see a potential opening maybe a little bit towards the end of the year but into next year in the IPO window and then kind of a rationalization of follow-on financings on the public side. We’re seeing also that kind of trickle down to a venture in terms of the pace increasing, but certainly no dearth of investment opportunities to be had.

And like I mentioned in my comments, with ’21, ’22 and even kind of early ’23 life science center fundraising, really being at all-time highs, there continues to be dry powder to deploy.

Joel Marcus

Yes. And remember the comment that I made, Series A, $60 million this year, all-time high, that’s pretty astounding when you think about it.

Operator

Thank you. And our next question today comes from Michael Carroll of RBC Capital Markets. Please go ahead.

Michael Carroll

I wanted to jump on, I guess, Peter, in your prepared remarks, you did mention that the biotech flywheel is starting to turn again. Can you provide some additional color on that? Did the flywheel slow down in the past year or so and now it’s improving? Or were you mentioning that like tenants were just delaying decisions and now are just being more active? I mean, what — can you provide some color around that comment?

Joel Marcus

Yes. So Mike, I’ll ask Peter to answer that in fact. But just keep in mind, the central thesis is the industry has been on a bull market tariff since maybe 2013, 2014 through early 2021. It was the longest biotech bull market that I’ve seen in — since the days of Amgen and Genentech and Biogen when they were started late ’70s, early ’80s. So that says something.

And then remember, the rocket ship years with the huge amount of funding and just activity of ’21 and — 2021 and into ’22, and remember kind of the first quarter of ’21, you saw the biotech index start to move. Now remember, biotech is a sub-segment of all of the life science, but it started to move as a leading indicator of the macro. But Peter?

Peter Moglia

Yes. So Michael, last quarter, in my prepared remarks, I had mentioned that we had seen a weakening in demand. And one of the positives that I pointed out in this quarter’s comments is that we actually have had, I would call, a significant uptick, 15% to 20% in demand in our top three markets. That, coupled with some knowing financings that are happening, as companies have been getting good news, to me, it just feels like the wheel starting to turn again momentum is building, and I’m confident it’s going to continue.

Joel Marcus

Yes. And I would say as a footnote, I know personally that there are a number of companies preparing for an IPO in 2024 and that just has not been possible over the last, say, except for extraordinarily rare exceptions on the public markets for the sector. That’s a really good sign. I think people are looking at the Fed action maybe today or tomorrow. I forgot what day that is where they think it’s kind of going to peak and obviously, the strength of activity, M&A and partnering has all had significant upticks.

So that means pretty darn good activity. And I think Peter said or Jenna said, there’s always clinical failures in all — across all modalities and therapeutic classifications. But there’s been some awfully good news these days in the diabetes and obesity area and the neurodegenerative area, ALS, which is one of our former directors had a young daughter who died of that disease. We’re seeing some remarkable advancements here.

Michael Carroll

Okay. Great. And then like what is driving, I guess, that uptick in tenant activity, I guess, today? Is it just people are more comfortable with the overall market and are willing to make decisions? Are they more comfortable and are actually trying to execute and get financing, allowing them to kind of expand their research process? I guess what is driving that right now? And do you think that will cause incremental demand growth over the next few quarters? I mean can we read that into your comments?

Peter Moglia

Yes. I mean what’s happening is — and I touched on the theme of my comments, I think that uncertainty has really held back the entire economy. It has held back the life science industry, and that uncertainty is starting to go away and people are starting to realize that there’s a lot of dry powder they need to put to work.

So that — we think that the investing of things that were not investing before, new company formation is going to occur, the science continues to move forward. When clinical milestones are met, we’re seeing companies be able to raise a lot of money. And on top of that, we’re seeing big pharma and biotech position themselves in our markets to grow. So that is what is giving us the positive outlook.

Michael Carroll

Okay. Great. And then last question for me. On the supply front, have you seen a slowdown of some of those non-dedicated life science developers stop-breaking around the new projects? Has that occurred over the past quarter or so?

Peter Moglia

With a couple of exceptions that are inexplicable, yes. We’re not seeing much of anything new breaking ground, but there are some folks that have decided to move forward, which will be in the numbers for next quarter’s update on ’25.

Operator

Thank you. And our next question today comes from Vikram Malhotra with Mizuho. Please go ahead.

Vikram Malhotra

I just want to go back and get some more color. You talked about the 15% to 20% increase in the top markets. But in your comments, you also mentioned specifically 100,000 square foot deals, I guess, are back in the market and smaller ones picking up. Can you just give us more color? Are these new requirements for expansion in those top three markets?

And then if you look into the second half as we think about the sustainability of the 1.3 million leasing, can you just give us color on the pipeline in terms of maybe qualitative and quantitative comments around kind of how the pipeline of deals are developing in the second half??

Joel Marcus

Well, yes, this is Joel. Vikram, let me say maybe this regarding your first question. I think we probably don’t want to say given just the proprietary nature of what we do and how we do it, talk too much about requirements. Some are sole-sourced RFPs. Some are broader RFPs. Some are existing tenants that come from our own tenant base that aren’t in the markets.

I don’t think we want to make any comments, particularly about that. I think when it comes to leasing, we can only give you the best judgment we have based on Dean’s affirmation of guidance both on — when it comes to the issue of rental rates, occupancy, et cetera. We haven’t given our view of 2024 yet. We will do that toward year-end.

But I think it’s fair to say that, remember, we’ve got a long history, and Peter cited some of the numbers of quarterly leasing. The vast majority of that comes from our own tenants. And so we have — I think we have our finger on the pulse and ear to the ground in a way that very few people or groups could have.

And I think that gives us the confidence that we can achieve our business plan for this year that by the way we articulated last November, and we’ll do the same. I think beyond that, I’m not sure we can or want to give any further color.

Vikram Malhotra

Okay. I was just talking about like the second half of ’23 in terms of the pipeline to hit the second half run rate of 1 million or whatever, 1.2 million feet in leasing. But I’m happy to clarify that off-line. I guess just, Dean, on the quarter, you mentioned there was a very modest pickup from Toast, but you did beat Street estimates. And I’m wondering if you can just clarify, a, from your vantage point, the source of that beat and then why that beat did not translate into an uptick in the guide? Is there something offsetting in the second half that kind of reduces the magnitude of the beat in 2Q?

Dean Shigenaga

Not as it relates to NOI, Vikram. I think that was just a timing difference. I can’t speak to the various sell-side models on what drove the timing differences. But from our view of the world, our deliveries were, by and large, on track with our expectations. So that doesn’t translate to upside there.

And there were — that wasn’t the only line item that there was a variance on. If you look across consensus, there were some other line items. I think the G&A is an example. We are lower on G&A than consensus across coverage. But the key driver was that the NOI line item.

Vikram Malhotra

Okay. That’s helpful. And then just last one. Specifically, I think one of your top tenants, maybe I’m pronouncing them wrong, Illumina, they called out reduction of real estate as a part of their cost reduction plan overall into the next year or so, call out, one or two specific projects on their call. And I’m wondering you have any update in terms of your exposure with them?

Joel Marcus

Yes. So I’ll make a comment. Remember, Illumina still is a pioneer and a leader in their category. They did have an activist attack from icon regarding some management strategies kind of weirdly enough a lot to do about GRAIL, the EU and the FTC took issue with or Illumina acquiring GRAIL.

Well, the weird thing is GRAIL was started and spun out of Illumina, and it made no sense, but yet here’s an ideological kind of a thing going on. Illumina is as strong as ever. They have a — they’ve got a lot of their market that they can still left to penetrate, but I’ll ask Dan Ryan, who run San Diego and who’s been very involved in Illumina that maybe give you a kind of a broad view of what’s going on in their campus.

Dan Ryan

Yes. So the — what you saw in the headlines is they are currently subleasing. They leased about 300,000 square feet in — not on our campus, but in the UTC area for pure office space. They have put that on the sublease market. They continue to advance with us discussions about adding a building or two to the campus, which would be more of their laboratory life science and manufacturing space, they look that they’re kind of in desperate need to continue to innovate.

So that’s really what we’re seeing from them. And then they — I think they’ve had bits and pieces of real estate up in the Bay Area that they no longer deem as critical. So, we expect a pullback to San Diego, and I do expect to engage with them later in the year on additional laboratory office space on campus.

Joel Marcus

Yes. The two sites that they announced, they were retrenching from were not owned by and operated by us.

Operator

Thank you. And our next question today comes from Tom Catherwood with BTIG. Please go ahead.

Tom Catherwood

Just one for me. Peter, I appreciate all your commentary about continuing to focus on mega campuses and allocate capital there. In the past, you’ve talked about how these campuses garner rental rate premiums. Do you have a sense of kind of the level of premium you’re getting compared to market? And then maybe a little bit more broadly, do you have a sense of how your 19% mark-to-market is split between your mega campuses and the noncore assets that you’re bringing to market?

Peter Moglia

Yes. As far as the premium goes, Tom, our study indicates that it’s about 20% more in net effective rent that you’re going to get versus a one-off project. Companies are going to pay for the amenities and pay for the scalability and the desirability of the asset. What else did I not cover on your question there?

Tom Catherwood

Just trying to see if you have a breakdown with what you’re selling as you’re looking at that 19% mark-to-market that Dean had referenced is what you’re selling 5%, 0% and what you’re holding in the mega campuses is, is that 25%, 30% when it comes to mark-to-market? Or is it more consistent kind of across your portfolio?

Peter Moglia

Yes, I don’t have the breakdown of each and every asset we’re selling and what the mark-to-market is. But by and large, the best mark-to-market opportunities are in the mega campuses, and we are holding onto those assets. So what we are selling would be the one-offs that would not garner those types of premiums.

Joel Marcus

Yes. And I think we’ve historically said on a number of the asset sales we’ve had to date, a typical mark-to-market has been 15% to high 20%, somewhere in that range, which is pretty good.

Operator

And our next question today comes from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski

And appreciate the comments on sort of net effective rent for the operating portfolio. But just curious, we’re hearing that concessions are higher today for new leases, particularly on the development side. So you guys expect that you might start to feel pressure in terms of net effective rents impacting development yields moving forward?

Peter Moglia

Yes, you are correct. On the development side, new leases, tenants are conserving cash. They are looking to the landlord to provide more tenant improvement. So that is creeping into the ether there. We will be, in some instances, able to push the rents to make up for that — some of that or all of that.

The good news is on the operating side because the spaces are built out because they’re built out generically. We have very few concessions and TIs. We need to put out in order to lease or renew that space.

Joel Marcus

Yes. I would also say if you look at the bigger the credit and the bigger the Company, the landlord contribution to build out is not as essential. And in fact, the — one of the big pharma buildouts that we’re working on in one of the top markets, the contribution by the pharma is about $750 a foot.

So, oftentimes, the configuration or triangulation or architecture of a deal oftentimes is based, to some extent, on credit and need to put in unusual situations, unusual features that only that tenant would want and that’s — that would be on the tenant’s bill not something we would do. So that’s something else you have to keep in mind.

Dylan Burzinski

That’s helpful. And I just one more, going back to sort of occupancy and realizing that you guys are still targeting, call it, low 95% in terms of occupancy at year-end. Just as we think about the trajectory over the intermediate term, I mean, do you guys think that you can continue to grow on this front? Or should we sort of view this as you guys approaching structural vacancy?

Joel Marcus

No, I don’t think so. I think look historically at how we’ve grown, I’ll ask Dean to comment, but then also think about over time, we have an asset base where we can almost double the size of the Company. So, I don’t think we’ve reached any plateau in any way, shape or form.

Dean Shigenaga

Yes, it’s Dean here, Dylan. I agree. You’ve seen occupancy in our asset base the way we manage our business have really strong relationships with our tenants and really deliver a level of excellence in operating our buildings. Our occupancy can grow to 300 basis points from or more than that above our bogey — 200 or 300 above our midpoint bogey for the end of ’23.

So at 95.1% is the midpoint you referenced. I mean we’ve been in the 98% occupancy range. So there’s plenty of room to grow there. And as Joel had also mentioned and as you guys are well aware, our pipeline is set to bring on a tremendous amount of NOI and that gives you visibility all the way into ’25 and a little bit going up to ’26 now.

Joel Marcus

Yes, remember, a number of our acquisitions that happened over the last couple of years in Greater Boston involved and one was mentioned the whole Fenway area, existing vacancy that as part of, say, a conversion to first-time lab space and those give, I think, great opportunities for occupancy gains.

Operator

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I’d like to turn the conference back over to Joel Marcus for any closing remarks.

Joel Marcus

Just want to say thank you, everybody, wishing you a great summer and look forward to our third quarter call.

Operator

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.