Operator:

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2024 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, today’s event is being recorded. I would now like to turn the conference over to Paula Schwartz. Please go ahead.

Joel S. Marcus:

Thank you, Paula, and welcome, everybody. With me today are Hallie, Peter and Marc, and we welcome you to our second quarter earnings call. And, thank you and congratulations to the Alexandria family team for another very solid second quarter operating and financial performance given the continuing uncertainty of the backdrop as soaring U.S. debt and government spending problems continue pretty much unabated. And, in thinking about our daily efforts, we all think about the Navy SEAL credo, The Only Easy Day Was Yesterday. Also, huge congrats to our team on the June 2024 release of our corporate responsibility report, which reinforces our longstanding operational excellence across our one of a kind Labspace platform and to the team for securing 100% of the electricity needs with renewable energy for 100% of our Alexandria paid accounts in our Greater Boston cluster market, a phenomenal achievement. Thank you, team. And, thinking about long-term strategic thinking since the bull market of the life science industry turned in February of 2021, I would say the market moved from a historical long bull run to a bear market in, as I said, February of 2021 and we’ve worked every single day to re-engineer and fine tune our long-term competitive advantages of this one of a kind leading Labspace platform. Our goal is much like it was, but very different given the facts of course, after the 2008, 2009 great financial crisis and the bear market aftermath to position ourselves to come out of this sector bear market with the acumen and business strategy really to enable our life science industry and tenant growth much as we led the long historical bull market 2014 to 2021 with record breaking earnings growth for our sector. So, in thinking about our competitive advantages, and what we choose to really emphasize. I think most importantly, our first mover advantage in the top life science clusters, we continue to refine and refocus our footprint, and you see that by our actions quarterly. Our high quality assets aggregated in desirable and well-amenitized mega campuses, we continue this monumental effort really driven to and by our re-development and development efforts in each of our massive mega campuses and our attempt to reduce and hopefully successful strategy our non-mega campus pipeline, future pipeline and obviously the sale of most of our non-core assets over time. That’s going to be critical to our go-forward business plan. High quality cash flows and substantial embedded future net operating income will be even more secure, given that platform focus. Our longstanding tenant relationships that demonstrate stellar brand loyalty continue. Lilly is a great example with multiple strategic relationships there. We continue to be backed by our fortress balance sheet with significant liquidity, unique and deep life science expertise which is a hallmark of this company from day one, and we’re very proud of our long tenured and highly experienced management team. And, as I move from kind of our strategic thinking about what we need to do to be at the vanguard of the next bull market for life science, the life science industry, I want to take a reflection on my take of the second quarter and our future planning. It goes without saying that we had a very solid FFO per share growth in this quarter, this past quarter, second quarter of course of 5.3% and 6.3% for the six months this year and especially I think positive given the backdrop. An astounding 74% of our ARR comes from the mega campuses and we hope to push that over 90% in a short handful of years as our major moat, as the major moat of our business. 53% of our ARR is from investment grade or big cap companies, the strong quality of cash flows and the 96% of our leases having contractual rental rate increases gives us great future protection. We’ve maintained stable occupancy with a very solid leasing quarter with solid economics and we continue to have very solid cash same store NOI growth. Our EBITDA margins are best-in-class and we’re also working hard to reduce our go-forward CapEx and G&A. We are anchored by our fortress balance sheet, as I’ve said, with strong liquidity and almost one-third of our debt expires after 2049 with an average term of 13 years. Over the next few months, we are laser focused on leasing the remaining 1 million approximately square foot rolling this year and getting a strong jump on the significant 2025 rollovers. Also over the next few months, we are laser focused on our ‘24 and ‘25 deliveries and continue to increase our leasing on those well beyond the current 87% to drive NOI growth. We’re making significant progress on our recycling of capital for 2024 and beyond. And finally, the life science industry, which Hallie will comment on in-depth here, is the crown jewel and the cherished industry of our country and truly the world’s leader in innovation in the discovery of new medicines. It is virtually the only industry which fundamentally enables better health, well-being and longer and happier lives. We have built this one of a kind company to be at the vanguard of this cherished life science industry as it recovers from the aftermath of the COVID rocket ship. And, without further ado, let me turn it over to Hallie.

Peter M. Moglia:

Thank you, Hallie. A respected economist recently made the case that pent-up demand from the pandemic has continued to be a key source of inflation which is one of the reasons the raising of short-term rates has been ineffective and that sectors of the economy with pent-up demand will continue powering the economy going forward in 2024 regardless of rates or who wins the election. Healthcare was one of the sectors mentioned. Patients returning to doctors’ offices and hospitals are releasing pent-up demand for therapies and medicines, which should send a strong signal to the industry to grow. We look forward to enabling that growth. I’m going to discuss our development pipeline, leasing, supply and asset sales and then hand it over to Marc. In the second quarter, we delivered 284,982 square feet, 100% leased with 92% of the space contained in mega campuses located in our high barrier to entry submarkets. The annual incremental NOI delivered during the quarter equaled $16 million bringing the year-to date total to $42 million. Development and re-development leasing of approximately 341,000 square feet was more than three times the volume of last quarter led by strong credit tenant leasing. The ability to execute on our development and re-development pipeline when others are clearly struggling is mainly attributed to our strong brand built on operational excellence and the attractiveness of our mega campus platform which houses 69% of our current pipeline. Projects to be delivered in 2024 and 2025 are 87% leased and projects expected to stabilize in 2026 and beyond are 40% leased or under negotiation because of our continuing strong execution during the quarter. Our development and re-development pipeline is expected to deliver very significant incremental NOI of approximately $480 million in the near-to-medium term. $187 million of this NOI is expected to be delivered through the fourth quarter of 2025 and the remaining $293 million will be delivered from the first quarter of ‘26 through the Q1 of ‘28. To execute on this, we will only need to average approximately 61% of the leasing per quarter through the first quarter of ‘28 and we executed this quarter. Transitioning to leasing and supply, the leasing market is in a flight to quality. Failed projects are often in tertiary markets and operated by inexperienced entities with little to no know how or capital to fund tenant improvements. The majority of fully vacant buildings in our markets are recently delivered buildings from these entities who majorly underestimated the skill sets needed to be successful in life science real estate and pick sites as if they were investing in office. High-quality locations in the core areas of innovation and high-quality sponsorship matters. Many of these new entrants are learning that the hard way. Alexandria sets the standard for sponsorship in life science real estate and our consistent occupancy, tenant retentions and strong tenant relationships which accounted for 83% of our leasing during the quarter. Our reflections are reflections of that moat we have created with our high-quality mega campus model residing in AAA locations, our operational excellence and our fortress balance sheet. Although the search rings of the tenant bases have expanded with the delivery of new supply, the strike rings have tightened as quality tenants leery of inexperienced and undercapitalized developers choose the trusted brand. We leased 1,114,001 square feet during the second quarter highlighted by the strong leasing in a development and re-development pipeline, I noted earlier. GAAP and cash rental rate increases were 7.4% and 3.7% respectively. Over 90% of our renewals were either neutral or had a positive mark-to-market. On competitive supply, 2024 is going to be the peak year for new deliveries and then it will begin to dissipate in 2025 to about half of what we will deliver in 2024. We are likely to see little-to-no new deliveries from pretenders after 2025 unless projects currently under construction are delayed. I’ll conclude with an update on our value harvesting asset recycling program. As mentioned on the last call, our value harvesting transactions will be heavily weighted towards the third and fourth quarters but significant progress continues to be made. During the quarter, we closed on the $60 million non-income producing asset in New York and increased our pending transactions subject to letters of intent or purchase and sale agreement negotiations by approximately $549 million to a total of $806.7 million. This combined with our $77.2 million in closed sales and $27 million of forward equity sales agreements expected to be settled in 2024 brings our pending and closed transactions to $884 million approximately 59% of the midpoint of guidance for dispositions, partial interest sales and equity. Interest in our non-core asset sales remains consistent and we believe the anticipated rate cuts and thawing of the financial markets will bring more buyers and have a positive effect on values. The lack of financing available to investors has been the driver of the widely reported lack of capital markets activity in the broad market. Capital flows have a major impact on valuations and commercial real estate debt has trended downward as a percentage of GDP for the last two years prior to the first quarter of ‘24. However, this appears to be reversing as new CMBS issuance for the first half of 2024 is up nearly threefold from the same period last year, which should provide positive momentum for our current and future efforts. With that, I will pass it over to Marc.

Joel S. Marcus:

Thank you, Marc. And operator, we’ll go to questions, please.

Farrell Granath:

Hi. This is Farrell Granath on behalf of Josh. I quickly wanted to ask about, as you’re mentioning, the Alexandria Technology Square mega campus, kind of that repositioning going from multi-tenant or going to multi tenancy from single tenancy. I was wondering if you could discuss the driver of this change and if you’re seeing any shift in demand of the market for single tenants?

Farrell Granath:

Great. Thank you. And also I noticed in between the 1Q, 2Q letters of intent and pending along with closed acquisitions that there was a slight kind of, I don’t know, dropping off of the LOIs. So, I wonder if you could comment on that either, if things are coming out of the pipeline due to different circumstances, pricing negotiations?

Peter M. Moglia:

Yes, I mean --

Marc E. Binda:

Yes, I was just going to say, yes, I think what you’re referring to is the lease percentage on the development pipeline. It wasn’t that leases were leased and then weren’t leased. What happened there was we actually added a little bit more square feet into one of the assets at 311 Arsenal. That was a project that has been coming back to us in phases. And so the project just got larger this quarter and as a result the lease percentage went down. So, I don’t know that there was any type of surprise there.

Marc E. Binda:

Yes. No, I don’t think there’s yes, look, if you look at last quarter the pending items that we were looking at, I think that number has come down a little bit. But I think that number came down by a pretty small amount if I recall correctly. So, I don’t know if there’s anything shocking or surprising from our end. I think we’re focused on conserving capital and putting our capital into the active pipeline and focus on dispositions at the moment.

Operator:

Thank you. And our next question comes from Anthony Paolone with JPMorgan. Please go ahead.

Peter M. Moglia:

Yes. Hey, Tony, it’s Peter. Yes, look, the things that we’ll have cap rates published, I think you’ll find to be in line with our commentary of good quality assets are still in demand. I don’t want to spoil any thunder for next quarter, but we do have a couple of things that are going that are pretty good. Noncore assets though can certainly not necessarily be representative of our prime assets that we plan on holding in perpetuity. But GAAP rates are a tough thing to figure out these days what people’s returns, what they are looking for largely depends on their cost of capital which has been varied throughout the last few quarters. But I’m going to go ahead and wait till I think next quarter we’ll have something to publish and you’ll see the numbers.

Joel S. Marcus:

Well, I think if you look at the percentage of ARR coming from the mega campuses and that’s not you have a series of assets. Remember, this company was built over decades on individual acquisitions and then individual redevelopments and developments. And then the first mega campus that we bought was Tech Square, in fact, in 2006, and that really kind of launched that strategy, followed by Campus Point in 2010, and then the New York campus, which was our first mega development campus. So, I think you just have to think of it in terms these are still really very, very good assets, and we’ve moved in many cases and shed many of our more core assets in the suburbs, and we still have quite a number of standalone assets, not really in the outer suburbs that we’ve transacted over the last handful of years, and I think we’re looking at that. So, I’m not sure it’s easy to give you exact percentages, but as I said, our main goal is to move our mega campus annual rental revenue into the high 80s or low 90s over the next short handful of years, Tony, if that’s helpful.

Operator:

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

Joel S. Marcus:

Yes. So, I’ll ask Peter to comment from his perspective. But I think if you think about again, you said it, individual leases that come up quarter-to-quarter certainly drive those stats. I think it’s fair to say and Hallie has commented on this on a number of occasions, We’re seeing more demand from the earlier stage companies and the revenue generating companies, it’s the in between the biotechs that are in the clinic waiting for clinical milestone achievement that I think has caused some of the disruption in the normal leasing transactions that have gone on. And I think this quarter there was just more at the earlier stage, and those people can’t commit to 10 or 15 year leases because they’re likely to grow, and that’s the reason to have them on a mega campus because we can provide them 5,000, 10,000, 20,000, 30,000 whatever they want and we can double and triple their footprint on a mega campus, whereas an individual building, oftentimes, you can’t really do that.

Michael Griffin:

And Peter, do those smaller tenants I guess require the larger TI packages? I noticed that free rent was stable quarter-over-quarter, but it seemed like TIs and LCs went up. So, what’s that just a one off maybe driven by one lease or what was driving that?

Michael Griffin:

And then maybe just one more if I could just on the development pipeline. I noticed that the 651 Gateway project was pushed to ‘26. Is this just a function of maybe more tepid demand in South San Francisco and at what point would you have to stop capitalizing costs on this project and start having it flow into the income statement?

Marc E. Binda:

Yes. Hi, Michael. Yes, there’s not a magic number there in terms of when it would turn off. There’s continuing activities today on doing work on those floors that remain to be leased and delivered. But yes, if there was a situation where those activities ceased, where the demand just couldn’t catch up with the supply there then we would have to shut down those portions of the project that no longer have activity. So, we’ll continue to watch that very carefully.

Peter M. Moglia:

Thank you.

Richard Anderson:

Thanks. Good morning out there or good afternoon, excuse me. So, on the leasing front, you had the mix issue this past quarter. But if you sort of look at what you did in the first half and compare that to what you’re guiding to which didn’t change, that would imply like a GAAP number of 8%, average 8% up in the second half and a cash average of about 5%. Is that right? Am I thinking about that correctly if I just do a sum product of the math or am I missing something?

Richard Anderson:

Okay. And Peter, I’m going to see if I can ask a cap rate question at a different angle, see if you shut me down as well. But do you have a differential between core and noncore assets in terms of cap rates? Is there a spread that you guys think about in terms of what you think is a long-term hold and what’s not?

Richard Anderson:

Okay, great. Last question, you’re funding a lot of your development or most of it with dispositions. And I’m curious if you think by doing so, you, I guess, expose yourself to impairments in this market. Do you kind of view this in some ways as a cleansing event that and I suppose you do, like you wouldn’t necessarily be using dispositions if your stock was at $200 a share, but you are. Is that the silver lining to this long-term in your opinion or is that not the way to look at it?

Peter M. Moglia:

Yes. Look, I think it is a bit of a silver lining but I would say that it would have happened anyway because of our observation that the mega campus model was where we needed to be headed. So, ultimately those assets maybe it would have been at a slower pace, but we would have, been selling those noncore, non-mega campus assets over time anyway.

Richard Anderson:

Okay, great color. Thanks folks.

Wesley Golladay:

Hi, everyone. Just looking at the dispositions, it looks like you have about 10 million square feet of non-mega campus development potential. How much of that would you like to I guess be part of your disposition program?

Wesley Golladay:

Okay. And then looking at the ground lease purchase, you did mention it was a generational asset, did have a lot of term on it already before you extended it. Is there any other ground leases you’re looking to extend actively at the moment?

Marc E. Binda:

Yes, sure. Hi, Wes. I was just going to say Tech Square, if you look at the ARR subject to ground lease was far and away the largest ground lease that we have. It was about a third of the ARR subject to ground leases. The balance of that is spread across I think 29 different properties. And then if you think about where the lease terms are kind of on a pro form basis once the amendment or now that the amendment is done. It’s a little bit more of 60 plus years. So, I think we’ve got pretty good term on in terms of the remainder of our ground leases.

Operator:

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

Peter M. Moglia:

Well, look it is consistent with the way we’ve characterized demand. By and large across our regions there has been a barbell of early-stage companies being very active and large pharma being very active and not as much in the middle due to a lack or not necessarily a lack of wanting to grow, but lack of confidence to grow. So, we do expect that the middle will fill in over-time especially considering the metrics that Hallie started to or had presented but it’s not a trend it just happened to be we had a number of earlier stage company leases rolling and it just was a coincidence.

Michael Carroll:

Okay. And then can you guys provide an update on your supply outlook. I know in prior calls you provided some stats given the scheduled deliveries in ’24 and in 2025 as a percentage of inventory in the top three cluster markets. I mean, have those stats changed at all? Or can you provide us an update on how you’re viewing that?

Michael Carroll:

Okay. And then just last one for me, I know you already talked about the Gateway project, but I know you had two developments that were 100% leased at Winter Street and Harriet Tubman Way that got pushed out, it looks like roughly a quarter or so. Is that just delays in the construction or is there any reasons why those stabilizations were pushed out a few quarters?

Michael Carroll:

Okay, great. Thank you.

Vikram Malhotra:

Good afternoon. Thanks for taking the questions. I guess, Joel, maybe bigger picture, you laid out a pretty compelling longer-term scenario for life sciences in the portfolio. And just want you to if you could help us marry that with the near-term. It sounded like there’s still some challenges, but also were inflecting from a supply delivery standpoint. So, just help us like what should we be watching for near-term inflection, it sounded like a little more tepid near-term than the long-term?

Vikram Malhotra:

No, that’s helpful. And just maybe one more, I guess maybe Marc you can or Peter. You’ve done a bunch of repositionings or at least put properties into repositioning. I’m just trying to understand like bigger picture what the opportunity set is or how to split it between like this was office, we always intended it to reposition the lab versus where we got to just redevelop. So like, for example, the Apple repositioning where Apple was, correct me if I’m wrong, I thought that was going to be a renewal originally, but now you’re repositioning it. So, I’m just trying to think about the opportunity set down the road and like what the impact to numbers is.

Peter M. Moglia:

Yeah. And just maybe a footnote on that. So, Apple is in the process of negotiating a renewal on the majority of the buildings, but they’re giving back two of the buildings, which Marc highlighted. I think the good news is, one is, I think imminently releasable as R&D and the other is warehouse, which we do have a client who’s actually very interested in that. And based on what we’ve seen in the market, there also could be some demand for data centre activity there. So we’re not necessarily we had in our forward model, we had assumed this scenario that we would get back two buildings that weren’t adjacent to their campus where their other buildings are and that they would take those forward and that’s exactly how it played out.

Operator:

Thank you. And our next question comes from Jim Kammert with Evercore. Please go ahead.

Marc E. Binda:

Hey, Jim. This is Marc. Yeah, you’re right. There was actually one project that was already leased where the tenant actually came back to us to actually add on additional term. That project has not been finished yet, hasn’t been completed. So, a bit of a conundrum where you put that, but given that that project hasn’t delivered, it’s in the development pipeline. That’s a project in San Diego and we were happy to see that happen because we got an extra term out of it. So, that’s the reason for that. That doesn’t happen very often.

Marc E. Binda:

That’s right.

Operator:

Thank you. And our next question comes from Peter Abramowitz with Jefferies. Please go ahead.

Joel S. Marcus:

Yes, the answer is no. And the mix of the different segments, whether it be product and device, multinational pharma, private biotech, all were actually pretty strong and a mixture of those, public biotech was probably among the lowest. That’s just how it works, given what we’ve said about the barbell, but nothing don’t read anything into if you look at first quarter was extremely strong, this quarter’s more muted, but still pretty solid. And I think it kind of just is kind of down the middle of the fairway as we see it at this juncture.

Joel S. Marcus:

Yes, I’ll ask Hallie to answer, but my kind of the one thing that would make a huge difference would be the true opening of the IPO market, which signals that you’ve got long term investors, crossover investors and even earlier stage investors participating. The IPOs that have happened to date are kind of few and far between and they’ve traded down on an average pretty substantially. So, that’s one thing that would be very recognizable and has been something that has led some of the other bull markets. But Hallie, you could comment more in-depth.

Peter Abramowitz:

That’s helpful. Thank you.

Dylan Burzinski:

Good afternoon, guys. Thanks for taking the question. Just sort of wanting to touch on retention here. I know historically your guys’ retention has typically been in cost of 75% to 80% range. But over the last six quarters that started to trend down, I guess just curious as we sort of look out over the next year or so as the supply pipeline continues to deliver, should we expect that to continue to have an impact on your guys’ retention? And I guess just looking at the last six quarters, I mean, is there something else besides supply that is sort of driving that lower retention rate?

Marc E. Binda:

Yes. Dylan, I think if you’re just looking at renewals as a percentage of expirations, it’s really hard to get the full picture. Case in point, you’ve got as an example, you’ve got Moderna and Tech Square that we talked about right where large space that they will not be renewing, right. But what’s missing is, right, they signed 462,000 square foot lease at a new development. So, it’s difficult just to take the retention rates right off the face of the leasing page. I mean, the way we look at it, when we normalize for those sorts of things, we really haven’t seen a drop off in retention.

Joel S. Marcus:

Well, I think it’s way more complicated than that. People in this industry don’t move for a buck a foot difference, that’s just not relevant. And also the sponsorship of who they lease from is critical because there have been a number over the last year of significant failures of others in this industry where labs have been shut down and major damages happen to the science or the people in the laboratories. So, operating with the best of breed in the industry makes a big difference. We don’t see anybody that’s just going to move to a place for some small difference that just doesn’t happen. And if the tenants are decent, our mega campus strategy is aimed at always having inventory to allow these companies to grow and to retain them. So, that’s the big issue. Supply isn’t really the big issue now. Supply does impact leasing in the sense that when somebody is looking at space, they could cite other locations. But if the locations aren’t really dead centre comparable then those comps don’t really make a big difference and people aren’t going to pick up and leave for as I say a few bucks cheaper rent, it just doesn’t happen in this industry.

Operator:

Thank you. And our last question today comes from Omotayo Okusanya with Deutsche Bank. Please go ahead.

Joel S. Marcus:

Yes. So, Marc, you could comment on overall mark-to-market and Peter, you could give some observations if you want.

Peter M. Moglia:

We’ve been looking at a lot of data around where face rates are and Boston is and the rest of our large markets are pretty consistent where rents have come off the peaks of 2021, 2022, but they’re still well above the pre pandemic rates. Of course, you still have more concessions today in the form of TIs for the newly built space. But we’re pretty happy considering the supply dynamic that rents are still above the pre pandemic levels.

Operator:

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

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.

Operator:

Good day, and welcome to the Alexandria Real Estate Equities First Quarter 2024 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 Ms. Paula Schwartz with Investor Relations. Please go ahead, ma'am.

Joel Marcus:

Thanks, Paul, and welcome, everybody to Alexandria's first quarter '24. With me today are Hallie, Peter and Marc. First of all, a thank you and congratulations to our ARE's family team for a very solid first quarter against a continuing tough macro with stubbornly high interest rates and continuing non-transitory inflation instigated by the federal governments really uncontrolled spending. In fact, our annual debt service now is greater than our defense budget crazy. Also huge congratulations to the entire team as Alexander has once again been named one of the most trustworthy companies in America by Newsweek, and nominated as such by our 3 constituencies, our customers, our investors and our employees. Guided by Alexandria's core values of integrity, mutual respect, egoless leadership, humility, transparency, teamwork and trust, we have established ourselves at the Vanguard in the heart of the $5 trillion secularly growing life science industry. We're very honored that Newsweek has again recognized us with this important award, which is a testament to company's values and to the trust that our tenants, investors and employees have in our one of a kind brand. And as we said before, as Jim Collins has said, Alexandria has achieved the 3 outputs that define a great company, superior results, distinctive impact and lasting endurance. We remain unwavering in our efforts to build upon these outputs and to continue to maintain our stellar reputation and the most trusted brand for life science real estate providing essential infrastructure enabling the development of new safe and effective medicines. Remember over 90% of diseases have yet to have addressable therapies or cures. Remember 2, the top causes of death in the United States remain cancer, heart disease and the third fentanyl and methamphetamine and that is a profoundly sad statement of fact. So my quick take on the first quarter, Alexandria is a one of a kind company with a great brand as I said, scale, dominance and our unique cluster strategy together with the fortress balance sheet. We've posted 7.6% year-over-year NOI growth which is I think very solid in this environment, 7.3% year-over-year FFO growth, 5% dividend growth and our collections 99.9%. We had a strong leasing quarter with solid leasing spreads and we continue strong occupancy despite recently acquired vacancy. We also posted very solid same store growth and also very solid guidance. We are particularly laser focused on leasing for the 2025 pipeline as well as redevelopment space to be delivered in 2025 and of course the leasing of vacant space in 2025, which is the fastest space to deliver to our growing tenants. And much like we did during the great financial crisis, we're pushing forward our pipeline because of the need for Alexandria's Labspace coupled with solid indicators of positive rebound for life sciences in 2024 which Hallie will address. Lease expirations for 2024 and 2025 on a combined basis are down as well as unresolved expirations for both 2024 and 2025 on a combined basis being down as well. Peter will talk about capital recycling, but for the quarter so far, we've had approximately $275 million of noncore assets sold or pending and we're about so that means we're about 20% through our targeted $1.4 billion of recycling of capital for our business for 2024, and we feel very comfortable where we are today. And then finally before I turn it over to Hallie, I mentioned in our last earnings call our decision to sell 219 East 42nd Street, New York City, the former Pfizer headquarters building ultimately for residential use. A very good decision reinforced by the continuing. My own view and competence of the State of New York and the City of New York in continuing to incentivize and foster empty one-off buildings for so called life science use while turning their backs on fundraising of startup companies, which is the heart and soul of the New York City life science ecosystem and which is so badly needed. There has been of all the regions no lab leasing in New York City in the first quarter whatsoever and yet the state and the city are proposing fostering more and encouraging more people to deliver space. We sit in a very good position with our campus, but nonetheless when you have local and state governments who are not mindful of using funding better spent on funding startups and also the health, welfare and safety of the citizens, that's very disconcerting. So with that I'm going to turn it over to Hallie for a number of important comments. Hallie?

Peter Moglia :

Thanks, Hallie. I know myself, family and friends benefited from innovation that has occurred since 2008. So appreciate the context you just gave us. I'm going to go ahead and discuss our development pipeline leasing supply and asset sales, and then I'll hand it over to Marc. In the first quarter, we delivered 343,445 square feet into our high barrier to entry submarkets covering 5 projects. The annual incremental NOI delivered during the quarter aggregated to $26 million. Development and redevelopment leasing during the quarter was approximately 100,000 square feet. In addition to the executed leases, we signed 162,000 square feet of LOIs during the quarter which will see future development and redevelopment pipeline leasing. Base leased or under negotiation in our current and near-term projects under construction increased by 3% over last quarter to 63% and projects delivering in 2024 and 2025 are 80% leased. From the second quarter of 2024 through the end of 2027, we expect to deliver approximately $480 million of stabilized NOI from the current pipeline. Transitioning to leasing and supply, as we noted last quarter, the bottom of demand was reached during the first half of 2023 and it continues to incrementally recover in our core markets. We expect that the lack of funding activity in early 2023 will continue to be an overhang to full recovery for a quarter or two, but we have strong conviction that a recovery will be achieved in the near-term given the key fundamentals Hallie outlined. Alexandria is well-positioned to weather these storms given the moat enduring competitive advantages we continue to widen and build. We leased 1,142,857 square feet during the first quarter, consistent with our pre-pandemic velocity. GAAP and cash rental rate increases were extraordinarily strong at 33% and 19% respectively and the related tenant improvements and leasing commissions trended down 16% compared to our 2023 leasing costs. Our teams continue to closely track competitive supply building by building in our proprietary databases. As noted in last quarter's call, we expect 2024 to be the peak year for new deliveries and then begin to dissipate in 2025. In Greater Boston, unleased competitive supply estimated to be delivered in 2024 decreased significantly from 7% of market inventory in the fourth quarter to 1.6% due to 3.3 million square feet of competitive projects delivering in the first quarter. Approximately 1.17 million square feet of those projects were moved from an estimated 2023 delivery to a 2024 delivery last quarter. The unreleased delivered space is reflected in the direct vacancy numbers I'm going to present. In 2025, the unleased competitive supply in Greater Boston will increase market inventory by another 2% which is an expected slowdown from the 2024 levels. In San Francisco Bay, unleased competitive supply estimated to be delivered in 2024 is 9.6% of market inventory which is a 1.1% decrease driven mostly by reclassifying a 0.5 million square foot project from a 2024 to 2025 delivery due to a temporary delay in construction. In 2025, the unleased competitive supply in San Francisco will increase market inventory by 3.7%, a 1.5% increase over last quarter due to that reclassification. In San Diego, unleased competitive supply estimated to be delivered in 2024 is 5.1% of market inventory, a 1.6% decrease from last quarter due to moving 2 projects from an estimated 24 delivery to 2025. In 2025, the unleased competitive supply will increase market inventory by another 3.8%, a 1.1% increase due to that reclassification, but offset somewhat due to first quarter leasing at those projects. To update you on direct and sublease vacancy, direct vacancy in Greater Boston is up 593 basis points to 12.98% due to the previously mentioned 1Q '24 deliveries. It has climbed more moderately in San Francisco up 175 basis points to 14.11% propelled by 147,000 square foot spec delivery in San Carlos. In San Diego, direct vacancy increased by 244 basis points to 10.41% driven primarily by the inclusion of space not vacant today, but now known will be vacant soon. Sublease vacancy decreased in Greater Boston by about 3 quarters of a percent to 5.17% increased in San Francisco Bay by 0.5% to 6.28% and increased by a third of a percent in San Diego to 5.7%. Again, 2024 is the peak year of disruption from supply. Alexandria is studying 94.6% occupancy is another data point supporting the effectiveness of our wide moat and enduring competitive advantages. I'll conclude with an update on our value harvesting asset recycling program. After a busy quarter four 2023 schedule where we closed on $439 million in asset sales marketed and negotiated throughout the year, we spent the first quarter priming our disposition and partial interest sales pipeline for what will likely be a closing schedule heavily weighted towards the third and four quarters. Early progress is reflected in pending transactions subject to letters of intent or purchase and sale agreement negotiations of $258.1 million and there are a number of other ongoing active sales efforts. Buyers of noncore assets are generally private equity, family office, local operators and institutionally backed real estate partnerships looking to diversify their asset mix with life science real estate. During the quarter, we closed on assets totaling $17.2 million inclusive of 99 A Street in the Seaport, which executive management deemed to no longer be strategic due to its one off profile and our pivot to 285, 299, 307, 347 Dorchester Avenue acquired during the quarter, which is nearby with similar red line access, but has the scale to be a future mega campus. We remain committed to our self-funding strategy and our offerings remain attractive to investors looking for exposure to life science real estate given the promising outlook for the industry how we presented despite near-term supply challenges. With that, I'll pass it over to Marc.

Joel Marcus :

So operator, let's go to Q&A kindly.

Josh Dennerlein:

Peter, just wanted to follow-up on your question or your comments on asset recycling. Could you just kind of provide more color on it sounds like you're pausing or relooking at what you're selling, so maybe there's a little bit slowing activity near-term? I guess just what's driving that and how is the potential pool changing?

Josh Dennerlein:

Okay. Because I think if I'm not mistaken it looks like what you had pending versus 4Q or under like letter of intent versus like today, it looks like it fell a bit. Is that just is there anything fallout?

Josh Dennerlein :

Then Marc just wanted to follow-up on your comment on leasing spreads in 1Q and just it sounds like there's a slowing for the rest of the year on rental rate increases. Just kind of curious how we should think about the cadence through the rest of the year?

Operator:

The next question will come from Michael Griffin with Citi.

Joel Marcus:

Yes, so this is Joel. I'll let Peter answer that. But I think the words you used are pretty inaccurate. One project in San Diego was moved to the following year, not kicked down several years of the can because there is a very substantial credit tenant lease they're working on that makes it more complex to deliver the space as we originally intended. So I think your thinking is not like the federal government not getting a budget and just kicking it down that's not what's going on here. Peter?

Michael Griffin:

That makes sense and appreciate the clarification there, Joel. And then just on the leasing environment, specifically as it pertains to the development pipeline. Would you have to give up more in concessions in order for tenants to sign leases or would you rather leave some vacancy in those developments with a go at or after stabilization in order to potentially get better rents if the environment improves?

Operator:

The next question will come from Vikram Malhotra with Mizuho.

Marc Binda:

Yes, I mean, I think we're on track. It's not unusual for us as we get out as we kind of get through the year to shrink the range as we get more and more comfortable. So we shrunk the top end and the bottom end with no change to the midpoint of our guidance. So I think we still feel good about very solid growth this year of 5.6% over 2023.

Vikram Malhotra:

Okay, fair enough.

Vikram Malhotra:

Makes sense. I think there were a bunch of shorter term renewals or I guess extensions into '25, because we did see the '25 overall move up. And I'm just wondering like what sort of what was the nature of those discussions? Is it kind of tenants are uncertain about space needs or what drove those relatively higher volume of short-term renewals?

Vikram Malhotra:

And just one more I can just slip in. I think there was a comment about '24 being sort of the bottom or at least your trajectory seems to be in recovery from here on into '25. I'm wondering if you can just elaborate on that. Is it demand? Is it what parameters or factors are you seeing that give you confidence in this demand recovery into 2025?

Hallie Kuhn:

As I walked through in the data across our different segments, just remember that we have a very diverse set of different tenant demands ranging from small private biotechs, public biotechs, large pharma institutions, life science tools product devices. So each of those you have to look at differently. But across each one of those, we are seeing strength. And again, we are coming down off 2021, but still quite strong compared to any year previously. So, venture capital continues to be at a very robust pace. Mega rounds, which are a great indicator of what will be near-term demand drivers, oftentimes just in time space, have really picked up with 34, just this quarter. On the public biotech side, follow on financing, very strong historic quarter, but also IPOs, the window is opening slightly. We'll see how that trend continues over the rest of the year. And then pharma demand, we continue to see a number of very large requirements across our regions, very much driven by the need to be able to recruit the best talent and ensure that they can innovate for years to come. So I think across each of our segments, we're seeing continued strength in the backdrop of, of course some challenging macro markets.

Rich Anderson:

Peter, what's the tail of supply? And by that I mean, okay, let's say we peak in deliveries this year, but there's that doesn't just shut off the light switch and you're off to the races or shut up turn on the light switch. There's a period of time where there's free rent to burn from your competition and that impacts your ability to operate nearby facilities perhaps. I'm wondering is it a year lag where you could really start to see cash flow rolling again for Alexandria or is it shorter or is it longer? I'm just curious, yes, maybe we're getting to a point where we're peaking on deliveries, but then when do we start peaking or get back up and running on a cash flow basis for the company?

Rich Anderson :

You got a crystal ball.

Rich Anderson:

Yes, fair enough. And then as it relates to you guys using that those observations that you just made, would we expect you to continue on your kind of existing pace of development starts funded primarily through dispositions? Or do you feel the need to maybe slow it down a little bit on the view that disposition funding is not a forever strategy? Assuming the stock stays where it is, hopefully not, but let's say everything I'll hold everything else constant or starts down next year up to meet the demand. What do you think from Alexandria's lens?

Operator:

The next question will come from Wes Golladay with Baird.

Marc Binda:

Yes. Hi, Wes. This is Marc. Yes, I think last quarter, we did believe that the second half of the year would have some acceleration. I think our view is that the second half will be strong to in line with guidance right now. And I think to be fair, I think the first quarter came in pretty strong. So I think second half, we expect to be strong.

Joel Marcus:

Yes. So Hallie, you could kind of comment on that. I think that's ongoing frankly, but.

Operator:

Your next question will come from Tom Catherwood with BTIG.

Peter Moglia:

I don't think it's competing very well at all. And that's illustrated by our occupancy and the cash and GAAP rent spreads that we reported today. I mean, we've been saying for a long time that our brand and platform of mega campuses means a lot to our tenants and I think it's just proving out. Remember a lot of the supply is one off in tertiary markets and it's the type of profile that things get super tight in areas like Cambridge or Torrey Pines or South Lake Union, in Seattle, they might catch a bid just like tertiary markets and office would when there'd be spikes in office demand. But for now nothing is really moving outside handful of leases here and there outside of what we're doing. Because as we say all the time, if Alexandria has space available that fits what the tenants need are 90%+ of time, they're going to come to us because we know what we're doing. We can scale them. We have operational excellence, and I say this all the time, no one's going to get fired, for picking an Alexandria building. You might get fired for picking a building from someone who has no idea what they're doing.

Peter Moglia :

Yes, it's a great question. We get asked, my first reaction is always well, gosh, if we weren't there by now, it wasn't a priority. I believe they'll probably be some opportunities that we will look at in the future. If we put our brand on the building and people know we're operating it even if it's in a newer market, it can be successful. A great illustration of that is what we did in the Fenway. We came in there, it was an unproven market. The 201 Brookline asset that we bought was about 17% leased. We come in, put our brand on it, put our knowhow into it and within I think 3 quarters it was fully stabilized. That said that was a submarket that we knew was going to be had a lot of the fundamentals that make a good submarkets. Some of these areas that the supply is in today, I don't see the same profile. So probably a tougher decision down the road. But what happens to those buildings, I think a lot of them will become office buildings. Frankly, offices certainly not dead, probably office that was built in the ‘60s and ‘70s and even the ‘80s might have to go away because it's functional obsolete. But if you built a new lab building and you couldn't lease it as lab, it's probably going to be a pretty good office building. But again crystal ball, that's just my opinion.

Anthony Paolone:

I guess first question is your development yields seem to have been around 7% for a number of years at this point. And Joel, you mentioned interest rates being stubbornly high. But if this is the rate environment on a go forward basis. Is that 7% is that an appropriate level for you all to continue with the program or and maybe you've just been over earning on spread in prior years or does that number have to go up? Like how do you think about that?

Peter Moglia:

Yes. Look, Tony, I think you really have to look Joel laid out what creates opportunities that we may capitalize on, but we are going to be looking obviously at cost of capital. We can't make decisions though on what we think or what the cost of capital is today. We absolutely take a longer look. So as an analyst, you would look at the internal rate of return that you will get on a development because you know that if you believe that fundamentals are going to improve over time, you could do something with a 6 yield today, a 7 yield today. But as cap rates adjust, as rental growth adjust, you look out 10 years and you get an IRR that's above your weighted average cost of capital today. And then you have confidence to go forward. So I know it's real easy to just look at initial yield and we publish that because it's an interesting topic to everybody and rightly so. But in challenging times like this, you really have to take a longer view because you don't want to miss on opportunity that would be very strategic and excellent for your shareholders over the long run. And that's what we're trying to do.

Joel Marcus:

Yes. So Tony, as we've said, our guidance assumes no equity, same was true in 2023 to remind everybody. And our focus is on as sources of capital to fund our business on the noncore assets outside of the mega campus. But obviously you reevaluate that on an ongoing basis just like we have in past practice.

Peter Moglia:

Yes. Like we're anticipating a very flat environment. Opportunities that Alexandria can provide in a mega campus are likely going to perform much better, materially better than some of the supply that's going to be delivered. But certainly supply is going to weigh on rents and, but we don't necessarily see a retrenchment outside of certainly levels that were hit in 2021 and 2022 are going to be back we're going to back off from that. But the area the rental areas of '17, '18, '19 that our submarkets were in, I'm certain will be the bottom and it'll grow from there.

Jim Kammert :

Joel, certainly appreciate your comments that demand can be more event driven for the lab business, which is understandable. But is it possible for the team to provide just a little bit more context or quantification regarding your tenant interest in your development and redevelopment pipeline today, say, versus 90 to 180 days ago? And when I say context, I'm thinking the number of tenants you're holding discussions with, the range of space requirements they might be seeking and maybe the timetables for making decisions, just trying to get some more comfort into the visibility of the lease up?

Operator:

The next question will come from Dylan Burzinski with Green Street.

Joel Marcus:

Yes. No, I think that's a really I'll ask Peter to comment, but I think that the last point you raised is really the point. The mega campuses provide, I mean we were first mover, we have by and large in almost every market, I can't think of any market where we don't have really best locations. And if somebody wants to grow and grow on your campus that's going to be a lot better for the long-term growth and health of the campus and the company as opposed to somebody who wants to go into a one off building somewhere. That's just even if the yield is potentially higher, I don't think so. And remember too with 3% plus bumps each year, the ending rental value on certainly development 10, 15, 20 year leases is pretty substantial. But Peter?

Operator:

The next question will come from Michael Carroll with RBC Capital Markets.

Joel Marcus:

No. And you can just look at what's happened as Hallie outlined in the first quarter, Michael, again event driven, it's not a direct correlation to economic environment or interest rates that just how this sector in industry kind of walks the walk. And it's not totally shielded by that, because if there was to be some, I mean imagine if China decided to invade Taiwan, the market seized and rates spiked in some crazy fashion or something obviously that would have an immediate impact on everybody. But I think no not the deferral isn't going to change if somebody hits a great milestone they're going to be able to finance. Now maybe there might be a higher concession on the underwriting or the overnight or whatever method they choose. But that's a rather infinitesimal cost to capital issue for companies.

Joel Marcus:

Of course. And most of that is done at the venture level. And so when somebody is pioneering a new area venture and not so much the publicly traded markets. But once you get into the clinic then if you are fortunate enough to get public then the public markets kind of take hold of that.

Michael Carroll:

And then just last one for me. I know there has been discussions where, the Board as some of these tenants have been making like veto decisions if companies can lease space or not. I mean is that are the boards loosening up? Are they willing to make these decisions now?

Operator:

Next question will come from Omotayo Okusanya with Deutsche Bank.

Joel Marcus:

Yes. I don't think we would announce such a thing on an earnings call willy-nilly. It's based on tenant demand, of course.

Joel Marcus:

Well, I think based on the questions that have been raised on the call right now and Hallie's commentary, I think we've said since October, the market certainly have gotten better, yes.

Joel Marcus:

Yes. Thank you, everybody. Just remember May is Mental Health Month and we'll be very focused on that with our efforts on a number of corporate social fronts. So be safe. Take care. God bless. Thank you.

Operator:

Good afternoon, and welcome to the Alexandria Real Estate Equities 2023 Fourth Quarter and Year-End 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, Investor Relations. Please go ahead.

Joel Marcus:

Thanks, Paul, and welcome, everybody. Consistent with Alexandria is building the future of life-changing innovation in medicine and at the Vanguard and the heart of the $5 trillion secularly growing industry, I want to wish everyone a safe and healthy 2024. On the cover of our press release and supplemental package, we've included the great Jim Collins quote about Alexandria, Alexandria has achieved the three outputs that define a great company

Hallie Kuhn:

Thank you, Peter, and good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. Today, I will provide a recap of the life science industry in 2023 and an overview of the health and demand drivers of each of our life science tenant segments as we kick off 2024. John Templeton wisely wrote that bull markets are born on pessimism, grow on skepticism, mature on optimism and die of euphoria. While the reset of the life science industry from euphoric 2021 highs has been rocky, healthy pessimism is seeding renewed momentum, underscored by rational valuations and capital flowing to the strongest technologies and experienced management teams. Fundamentally, the staggering unmet medical need that drives the $5 trillion secularly growing life science industry has not debated, and the opportunity for companies and investors in the life science sector to positively impact human health and disease is massive. Through the ups and downs, the trajectory of the industry is positive, translating long-term, into a healthy and expanding tenant base. This sentiment is reflected in the numbers. The XBI, a weighted index of small and mid-cap biotech ended 2023, up 8%. Large biopharma performance, which had an exceptional 2022, while the rest of the market generally languished, ended flat. Two notable exceptions were Alexandria tenants, Eli Lilly and Novo Nordisk both of which ended the year up over 50% as the market for their novel diabetes and obesity medicines accelerated. And as Peter mentioned, in December, we announced a significant lease with Novo Nordisk for their new US R&D headquarters on our Waltham Mega campus in Greater Boston. Another 2023 biopharma trend was M&A. Excluding mega mergers over $50 billion, 2023 set a new high watermark with $159 billion in acquisitions. These were largely sub-$10 billion deals driven by pharma's need to bolster pipelines as they face steep revenue loss due to patent expirations. As M&A dollars are recycled back into the industry, it creates a positive cycle of innovation as scientists and entrepreneurs start their next new venture. Altogether, the M&A life cycle is an important driver of demand across our regions. With respect to the FDA, 55 novel medicines were approved in 2023, the second highest year on record and double the average number of annual approvals 20 years ago. There were also eight advanced cell and gene therapies approved. Tenant Vertex received FDA approval of CASGEVY this December, a potentially curative therapy for severe sickle cell disease and the first approved treatment utilizing a novel genome editing technology known as CRISPR. The takeaway is that the industry's model is working, novel scientific discoveries, such as CRISPR, which was elucidated just over a decade ago are translating into impactful medicines for patients. Now let's take a closer look at the health and demand across each of our life science tenant segments. First, large pharma, which makes up 19% of our ARR continues to deploy substantial capital towards internal and external R&D, equating to over $270 billion in R&D spend. Commitment to R&D is an imperative for pharma. Over the next decade, the top 20 pharma are staring down approximately $200 billion of lost revenue as patents expire, new competitors enter the market and a subset of medicines become subject to potential price setting by Medicare through the recently enacted IRA legislation. And where does pharma look to offset gap in revenue to smaller and nimbler biotechs. Currently, $3 out of every $5 of top 20 pharma revenue stemmed from medicines acquired through M&A and partnerships. Fortunately, this segment is well positioned with strong balance sheets and an estimated $1 trillion in available firepower to leverage. All told, we expect healthy levels of internal research and M&A to continue through 2024 and beyond. Importantly, innovation requires people and a critical component of the pharma equation is stellar talent. Recruiting and retaining scientists is more important than ever. Cancer can't be cured from the couch and expectations of a scientific workforce where working from home is not an option or high, requiring amenities and community that the scale of Alexandria's mega campuses are uniquely positioned to provide. This need is driving several large pharma requirements across our clusters. Transitioning to public biotechnology. Our ARR from biotechs with marketed products increased to 17% compared to 14% in 3Q. This increase is due to the delivery of Moderna's new headquarters at 325 Binney Street on our One Kendall Square mega campus, as well as several clinical stage companies transitioning to commercial stage after receiving marketing approval for new therapies. This segment continues to mature, with tenants such as Vertex eclipsing a market cap of $100 billion in 2023. Next step are our pre-commercial public biotech companies, which represent 8% of our ARR. For this segment, data trumps all. Companies that meet expected milestones have executed significant follow-on financings and stock prices have responded positively. In total, nearly $20 billion in follow-on financing was raised on U.S. stock exchanges in 2023, a quarter of which was raised by Alexandria tenants. Companies have also tapped alternative financing structures such as pipes and royalty deals providing additional access to liquidity. Our San Francisco-based tenant BridgeBio has raised over $900 million in the past 12 months from a combination of these sources, driven by clinical data for a novel medicine treating transthyretin amyloid cardiomyopathy, a potential fatal disease of the heart muscle. As the IPO market cracks open in 2024, companies with the right clinical pedigree will be able to access additional liquidity. Last week, the first IPO of the year by asset-based CG Oncology priced above their target range and raised $380 million. On to private biotechnology, which encompasses 10% of our ARR, while life science venture investments slowed in 2023 relative to the highs of 2021 and 2022, it still exceeds pre-COVID levels and came in at approximately $40 billion. Series A, B and C rounds are predominantly being led by outside investors. Speaking to healthy levels of new investments, with the caveat that valuations have come down and deals often take longer to close. Funds have been conservative deploying the capital raised in the past several years and have ample dry powder. As the market's warm, we expect venture activity to remain strong through 2024. One counterbalance is that we may see less later-stage financings as a subset of companies go public instead of raising another round of private capital. Next, our life science product, service and device tenants, which represent 21% of our ARR. This segment includes contract manufacturers, diagnostic firms and research tool companies, all of which are critical and complementary to companies developing new medicines. For example, research tool companies are creating the next generation of advanced life science technologies such as super-resolution microscopes and DNA sequencers that can process an entire genome in half a day. These technologies often require large specialized footprints, complex infrastructure and highly trained scientific talent. As the trusted brand for life science real estate, our tenants look to Alexandria to safeguard the billions of dollars of equipment, intellectual property and assets housed within their labs. Last, our institutional tenants totaling 11% ARR as well-funded often credit tenants, institutions continue to be an engine of innovation within our ecosystems. One pioneering institutional tenant that came out of stealth this month is Cambridge-based Arena BioWorks. With $500 million in funding, Arena hired scientific luminaries from around the country, with the goal to combine and accelerate academic research and venture-backed drug development under one roof. Returning to where we started, the life science industry is squarely in the realm of healthy skepticism, exceeding the very early innings of the next bull run. We are not completely out of the woods yet with question marks around interest rates and 2024 election looming. However, accelerating pace of scientific innovation, access to significant capital from multiple sources and enormous unmet need for life-saving therapies will propel the industry forward and translate into healthy demand and increasing long-term revenue. With that, I will pass it over to Marc.

Joel Marcus:

So, please open it up for questions, operator.

Josh Dennerlein:

Hey guys. Thanks for time. I just wanted to explore the occupancy uplift that you're assuming in guide. Just how much of that occupancy uplift is just driven by leases you've already signed versus leasing that you're assuming that still has to get done?

Marc Binda:

Yes, sure. Hi Josh. So, we do have about 300,000 square feet of leases that we've already signed that have not commenced that will commence next year. So we have a good head start headed into 2024. I think to put things into perspective, we've got about $3.4 million of lease rules next year. But after you back out the space that we've anticipated, we'll go dark into redevelopment or development that only leaves you with about 1 1.8 million square feet that's not resolved. So, I think that number feels pretty manageable relative to our historical run rate on leasing.

Josh Dennerlein:

Appreciate that. And then it looks like supply is going to peak this year. Just kind of what's your latest thoughts on timing for net effective rents bottoming, any kind of variation across your three core markets?

Peter Moglia:

Yes, I'll take it, Josh. Hard to predict. But certainly, the effects of 2023 supply has been seen net effective rents. We've seen TIs increase remarkably, we've talked about that before. TIs aren't going to go any further up, because they're already pretty high. I'd say, there's some pricing power to the tenant if they've got a very large requirement. But outside of that, I think things have been holding relatively well.

Peter Moglia:

Yes, thank you.

Anthony Paolone:

Yes, thanks. First question is, it's early in the year, and it seems like you're approaching the midpoint of your acquisition guide. So just curious, if these were transactions that were in process when you're setting up the guidance or if you just are seeing a lot of stuff that's attractive or you feel like it's a time to play more offense.

Anthony Paolone:

Okay. So there's no like anticipation that you want to pick up the [indiscernible]. And then just on the disposition side, you talked about some of the noncore stuff like having New York under contract. But like when you look at the rest of the dispositions that you're thinking about for the rest of this year, do you think you'll have better execution on noncore sales? Or do you think selling stakes in more core higher-quality stuff is where you might get either more capital or better execution at this point?

Anthony Paolone:

Okay. All right. Thanks.

Operator:

The next question comes from Vikram Malhotra of Mizuho. Please go ahead.

Joel Marcus:

Yes. So I don't think we would want to talk about pipeline that I think is pretty confidential stuff, Vikram. But I think you can assume every lease is somewhat different, and every market is somewhat different. I mean, if you go back and look at the cargo therapeutic, that was a very unique lease in a very unique set of circumstances. So it isn't like -- this is not a commodity product. This is a generally a premium priced, noncommodity product. So, it's not like you have the same bunch of folks waiting for the same amount of space in the same, kind of, market type place. It's just not that kind of a business.

Joel Marcus:

That's always asked. Hallie, do you want to kind of comment on that?

Peter Moglia:

This is Peter. Just to be clear, Biogen is rationalizing their pure office space, nothing to do with their lab space.

Vikram Malhotra:

That’s it. Thank you.

Operator:

The next question comes from Rich Anderson of Wedbush. Please go ahead.

Joel Marcus:

Yes. Marc, do you want to comment on that?

Rich Anderson:

Okay. And then second question, on the $114 million of free rent burn that's good in the sense that you've got new cash flow coming in, but it's also free rent and it is what it is. It's not necessarily a good thing. Where does that compare if you can quantify it to the past and how much of it is a reflection of the current difficult headwinds that are facing you? And how do you expect that free rent sort of exposure to trend on a go-forward basis?

Marc Binda:

Yes. Hi, Rich. So we did -- yes, we had $114 million of free rent that will be burning off. I guess just to put that into perspective, we delivered $265 million of NOI this year, that's annual NOI. And a lot of those leases are very long-term in nature. So it's not a direct correlation one for one, but if you just do the simple math there, it's less than less than half a year on what is generally on average, those types of leases are 10 years and longer. So I don't think it's something that we're super concerned with. But to be fair, free rent has trickled up a little bit as we've seen.

Marc Binda:

I mean we published our free rent statistics, Rich. And I think it was about months 3 – 0.3 months per year of rent at the end of last year. And I think we're at 0.6, so it's ticked up a little bit this year, but still relatively modest compared to the length of leases.

Peter Moglia:

Yes. Hi, Rich. It's Peter. The great financial crisis, it was more like one. So we're -- it's still pretty healthy considering the market dynamics.

Peter Moglia:

Thank you, Rich.

Michael Griffin:

Great. Thanks. I want to go back to the Cargo Therapeutics lease at 835 Industrial. Joel, I know you mentioned that it was something specific driving that, but was wondering if you can give any more color on what drove the decline in rents? Was it a function of cargo willing to take occupancy pretty quickly? Or are there more worries about supply and where rental rates are going?

Michael Griffin:

Got you. That's helpful. And then I was wondering if you could provide any additional color on the recent asset sales, the ones in Greater Boston and San Diego. It seems like they're aggregated in the supplemental and given there -- it seems like they're kind of lowly occupied. I'd be curious if you can kind of give us pricing, particularly on the asset in Cambridge, maybe what a yield would be on a stabilized basis?

Peter Moglia :

Yes. I mean that speculating on what the Cambridge asset would be on a stabilized basis, I'd just kind of point to where we've seen stabilized things in Boston trade ourselves in the low to mid-5s. With the Necco transaction we had a couple of quarters ago, Boston Properties last quarter did something in the high 5s, but it's about two or three years from cash flowing. So I pointed to, in my commentary, a 5.3% cap rate in Torrey Pines for a building that's fully leased long-term to a credit tenant but that tenant has decided not to move in. So I've said it before, we speculate that good, well-located assets with good credit and good lease term are going to be in the low 5s, the sub-5 cap rates are no longer with us due to rates. Hopefully, that's helpful.

Joel Marcus:

Yes. Thank you.

Jim Kammert :

Thank you. Good afternoon. Thematically, in Alexandria's experience, Hallie mentioned a lot of this positive M&A activity. Has that historically in your experience translated to a net incremental space demand across your portfolio? Meaning or is it more of a credit upgrade. I'm just trying to understand if the acquirers really tend to over time expand their lab footprint or they already have kind of underutilized space.

Jim Kammert:

All right. Fair enough. And then a technical question, I'm sorry. You note that the fourth quarter sort of same-store progression in the first half of this year will be a little depressed by the vacancy associated with four properties what would have to happen at those properties from a leasing perspective from where they are today to get to 3% same-store NOI guide at the bottom end of your range. I mean, does anything have to happen? Or I'm just trying to understand the order of magnitude might in terms of incremental leasing for that portfolio to bench in your range?

Marc Binda:

Yes. So we gave the leased/negotiating stats. I think it was about half of that 64% was leased and the other half was negotiation. And that stuff is expected to benefit the last half of the year. We do need to continue to make progress on that. But then we do have a significant amount of free rent that's contractual that has already been leased. It will also contribute to the numbers in the back half of the year.

Operator:

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

Peter Moglia:

Yes. Decision-making has been slow. And I mean, I guess what I've talked about is that and tenants not wanting to invest in space. So the preference has been to go into available build space, things that are vacant or rolling or subleased rather than plan ahead and move in 12 months later into a development project. A lot of that has to do with a lot of the requirements over the past year and a half have been small, versus a larger requirement that you might not be easy to find and you need to put into a newer building. But that I don't think anybody is waiting to the last minute. It's really a function of the size of the company. If you're under 15,000 square feet or even under 20,000 square feet, you probably have options. If you're above that, you definitely need to plan ahead, because there's a lot less inventory in those sizes.

Tom Catherwood:

Appreciate that. And that actually kind of leads into the second question, which is, Peter, you had mentioned elevated concessions, and we hear about that kind of across the market, yet if we look at your second-generation leasing costs in 2023, they were a good bit lower than in 2022, especially if we do it on a kind of per year average basis. So can you speak maybe about how concessions are trending for new and renewal leases at existing properties as compared to leases at new developments and maybe where the economics are different on that side?

Tom Catherwood:

Appreciate the color. Thanks everyone.

Operator:

The next question comes from Jamie Feldman of Wells Fargo. Please go ahead.

Joel Marcus:

Yeah. Marc, do you want to comment on that?

Jamie Feldman:

Okay. Thanks for that. And then the $95 million to $125 million of investment gains that you plan to include in earnings, you said you took an impairment recently. I mean, what gives you conviction that you can hit those numbers? And do you think you'll see more impairments netting that out?

Jamie Feldman:

So do you mean that you think you'll see some increase in values and take gains on that? Or based on where values are today, you still can deliver that $95 million to $125 million?

Joel Marcus:

But the fact that we've reiterated guidance here, I think Jamie should give you comfort that we think we can hit those numbers pretty comfortably. Otherwise, we wouldn't stick with it.

Operator:

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

Joel Marcus:

Well, I think, again, if you go back to Hallie's comments and think about the different sectors, each sector is kind of driven by different issues when it comes to, say, big pharma or big cap bio, those are dependent upon their needs and not on the vicissitudes of the capital markets today or whatever. But then you contrast those to clinical stage biotech who are waiting to hit a clinical milestone or not, than those -- that's where -- and Peter has reemphasized this a number of times, boards want to be really careful not to get ahead of their skis. So it really depends on the sector that you're looking at. It's not a one-size shoe fits all, if you will.

Joel Marcus:

Yes. So maybe let's do this since we're doing fourth quarter and year-end 2023, let us and Peter Macken [ph] noted this, will specifically address that on our first quarter call, if you don't mind.

Joel Marcus:

Okay. Thank you.

Dylan Burzinski:

Hi guys. Thanks for taking the question. Peter, I just wanted to go back to one of the comments you made regarding one of the questions asked a little bit earlier on $200 a square foot for new development leases for TIs being the norm last year versus $300 a square foot today. Do you -- would you attribute that to solely the imbalance between supply and demand today? Or do you expect that to sort of be the new normal moving forward?

Joel Marcus:

Yes. And again, I think you have to distinguish different sectors have different tolerances for investing in space and they can be pretty dramatically different. And as Peter said, the structural inflation that we have brought on ourselves over the last number of years as a country and really as a world is pretty much here to stay. So -- and that's true across all real estate classes.

Joel Marcus:

Yes. I think we'd rather not get into that issue and just let it be at this moment. I don't think we want to discuss that on an earnings call. Sorry.

Operator:

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

Operator:

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

Operator:

Good day, and welcome to the Alexandria Real Estate Equities Third 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.

Joel Marcus:

Thank you, Paula, and welcome, everybody, to our third quarter conference call and the order of speaking today will be, I’ll kick off, Hallie will follow, Peter will follow Hallie and then Marc will do clean up as most of you know, Dean Shigenaga stepped down as Chief Financial Officer on September 15th. He'll remain full-time employee and will be on our Q&A call. But Marc is going to, and Dean is mostly responsible for the quarter. But Marc will handle today's call on the presentation. I want to start off with two quotes. First by one of the most legendary, by two legendary investors. First one is Warren Buffett who has said and many know, this quote, be fearful when others are greedy and opportunistic when others are fearful and so we are. And a quote from one of the most legendary institutional investors on Alexandria. Alexandria is a life science industry leader solely publicly traded pure-play REIT at its current discounted valuation we believe concerns about competitive supply and distress for some of the company’s life science tenants were overblown and sufficiently discounted in the company’s valuation. We believe the management team has assembled a desirable real estate portfolio, enjoys a leading market share position in its geographic markets and has solid expectations for long-term demand-driven growth. So I want to thank each and every member of the Alexandria family team for a strong and operationally outstanding third quarter for this one of a kind read, especially in a very challenging, and continuing disruptive macro environment. Our size, scale and the dominance we've chosen to undertake in our key submarkets coupled with our irreplaceable brand of importance to our over 1800 tenants represents a distinctive impact few other REITs will ever enjoy. We continue to dominate those of our key submarkets where we have created a leading position and continue to maintain pricing power for a highly desirable mega campuses which enable life science entities to meet their mission-critical needs and also a path for future growth. Couple of thoughts on the third quarter. We continue to maintain a fortress balance sheet, one of the best in the entire REIT industry. We continue our consistent strong and increasing dividend with a focus on retaining significant cash flows after dividend payment for reinvestment. We're well on track for a 7% FFO per share growth for 2023, fueled by our onboarding of substantial net operating income, the first half approximately $81 million, the third quarter approximately $39 million and the fourth quarter, approximately $114 million. A few comments on FDA drug approvals, which is the holy grail of the life science industry and Hallie will have more to say. During the period, which was the bull biotech market 2015 to 2021, almost three quarters of approvals were biotech and 25% were pharma. So biotech continues to be the mainstay of innovation. This year as Hallie will detail, 45 approvals to-date and it could surpass the all-time high of 59 in 2018. Hallie will address the health of the life science industry and the demand generators. But third quarter leasing of approximately 870,000 rentable square feet was very solid and especially with a weighted average lease term of an amazing 13 years and very strong, leasing spreads, almost 20% on the cash basis and almost 29% on a GAAP basis while leasing costs were decreasing. Life science tenant health is one of the most frequently asked questions and again Hallie will address that in depth. We are in a de facto recession and in the self-inflicted inflationary and high interest rate environment. So that is driving caution, but the life science industry is unequivocally healthy thriving, and the key to improved healthcare outcomes which are desperately needed for all of us. Internal growth remains steady and solid with same-store cash NOI growth for the year at a strong 5.6%, occupancy on course for about 95% plus as of yearend and Mark will have much more to say on internal growth. Peter will detail external growth and our strong efforts of onboarding the substantial net operating income as I just referred to, and he will also update as he does each quarter supply dynamics. Peter will also give a brief update on the status of our self-funding for the balance of 2023 and the year as a whole. Let me say in summary, we know this is a tough show me market filled with many skeptics. Many of those skeptics doubting the health of life science industry despite clear facts to the contrary over blowing the impact of the elevated levels of new construction, no matter the quality location and/or sponsor or operations and we know of numerous operating debacles causing substantial damage to tenants by so-called other operators to their science doubting the ability of Alexandria, the self-funded business, despite clear facts to the contrary. Each and every reporting quarter, we intend to continue our world-class operational excellence with exceptionalism in all we do and we intend to capture virtually all of the future demand of our over 800 tenants and virtually all of the future demand of non-tenants who meet our underwriting requirements. And we intend to execute a perfect thread the needle self-funding plan for the remainder of 2023, as well, as 2024 as our assets continue to remain scarce and still in demand. And then finally, before I turn it over to Hallie, I would say remembering that CREDO of the Navy Navy SEALs, the only easy day is yesterday. So Hallie take it away.

Peter Moglia:

Thanks, Hallie. Before I launch into my commentary, I’d like to acknowledge the great contributions we've received from Dean Shigenaga, Dean is one of the smartest and hardest working people I've come across in my 33 year career. He's played a huge part in the building of Alexandria and to what it is today, and wanting to thank him very much for everything he's done for this company. Thanks Dean. On our fourth quarter 2022 call, I spoke about our optimism for the future of the life science industry referencing that we are in the early innings of the golden age of biology. And I pointed out that we've only had the blueprint of the human genome for 20 years. And in that time, we've developed more new modalities to attack disease than in the previous 100. On Friday, October 13th, buried on the third page of Section A in the Wall Street Journal, another scientific revelation was reported. One that scientists liked into the human genome project and that could yield similar results in neuroscience. And the international team of scientists unveiled the most comprehensive map of the human brain ever completed. A map that the article stated will set a critical foundation for the understanding and eventually treating brain-related diseases, such as Alzheimer's, epilepsy, schizophrenia, autism and depression. As I watched my own mother declined daily due to Alzheimer's and experienced the enormous emotional, monetary and time burden and inflicts on our family, I have a full appreciation of what this map being do for mankind. It's yet another example of how important the life science industry is to improving our lives and how it's only going to grow and influence. And that ladies and gentlemen, is why this $5 trillion secular growth industry is poised to drive our business for decades to come. I'm going to discuss our development pipeline, leasing supply and asset sales, and then hand it over to our very capable new CFO, Marc Binda. In the third quarter, we delivered 450,134 square feet and seven projects into our high barrier to entry submarkets, bringing total deliveries year-to-date to one million, two hundred ninety thousand seven hundred and twenty one square feet covering 10 projects. Annual NOI for this quarter’s deliveries totals $39 million bringing the year-to-date total incremental additions to NOI to $120 million. The initial weighted average stabilized yield is 6.5%. Six of the 10 projects delivering spaces here have initial stabilized yields ranging from 7% to 9.5%. Two are at 6.3% and two are in the mid fives. One of those developments in the mid fives is located in Cambridge and is 99% leased and the other is in our Shady Grove mega campus and successfully leased 23% of its space in the third quarter. The Cambridge asset is in a prime location and its yield reflects the cost to acquire it, which was justified, because we had commitments to fill 100% of it before closing making it a build-to-suit core investment that expanded our ACKS mega campus. The Maryland asset’s yield has been driven down by complex site conditions, but it has been very well received by the market and we are bullish on its long-term performance as part of our Shady Grove mega campus. Development and redevelopment, leasing activity at approximately 205,000 square feet was higher quarter-over-quarter for the second quarter in a row, which we are pleased to see in an environment where tight financing markets have focused tenant demand on turnkey space. In addition to the increase in development, redevelopment, leasing during the quarter, we signed LOI's covering nearly 230,000 square feet of space in our pipeline, including one for 185,000 square feet, with a high quality tenant - high quality credit tenant that may materially expand into the mega campus as they refine their programming indicating a continuation of positive momentum. During the quarter, we executed a lease termination with a tenant at our 10935 and 10945 Alexandria Way mega campus development in Torrey Pines, and leased approximately 89% of the space to a stronger credit tenant. This is a win for Alexandria as we were able to substitute a higher credit tenant into the new development, increase the term for that space by three years and receive higher rents. We did increased the TI allowance for the new tenant, but the incremental rent we are receiving yields at 14% return over that incremental TI allowance, all in all a great outcome. At quarter end, our pipeline of current and near-term projects is 63% leased and 66% leased in negotiating which includes executed LOIs and is expected to generate $580 million of annual incremental NOI through the end or through the third quarter of 2026. The decline from 70% lease last quarter despite leasing approximately 205,000 square feet was mainly due to the, to the delivery of fully leased projects at 141st Street and 751 Gateway and the addition of 10075 Barnes Canyon Road in Sorrento Mesa, which has 17% of its future space underwhelm LOI and significant additional activity underway. Transitioning to leasing and supply, Alexandria's pioneering establishment of highly curated mega campuses featuring Class A, A plus facilities at main and main and the world's most desirable high buried entry life science clusters provides an enduring foundation for our existing asset base to perform in even the most challenging times. We are executing and winning nearly every high quality leasing opportunity when we have available product, a testament to the daily operational excellence demanded and required by our mission-critical tenants. We leased 867,582 square feet and the third quarter of ‘23 with Maryland significantly supporting the leasing activity led by San Diego and Greater Boston. Leasing activity has come from a broad base of our regions, both this quarter and year-to-date in which we have leased a total of 3.41 million square feet with Seattle San Francisco, San Diego, Greater Boston, and Maryland all materially contributing to our overall leasing activity. These quarterly and year-to-date leasing volumes are consistent with our pre-COVID levels. As you can see in the company highlights section of the Q3 supplemental on pages little Roman numeral, 19 and 20. Although below our historic average of a million square feet, this leasing volume is strong considering the amount of expiring leases available for lease for the rest of the year is relatively low at approximately 623,000 square feet. Very strong cash rent increases of 19.7% and GAAP rent increases of 28.8% during the third quarter, provide clear evidence of the long-term enduring value of Alexandria’s brand and platform and are consistent with our year-to-date stats of 18.1% and 33.9% for cash and GAAP increases respectively. We'd like to call your attention to the year-to-date weighted average lease term of 11 years, which you can find on page little Roman numeral 22 of the supplemental that significantly exceeds our weighted average lease earned since 2014 of 8.7 years. In our first quarter earnings call, we noted that demand has slowed from the rocket shift COVID period of 2020 and 2021. And last quarter, we reported that we were seeing demand increase especially in our Greater Boston, San Francisco and San Diego markets. We see demand holding steady today and believe it will trend upward, but are fully aware that the volatile geopolitical environment we are in can create the uncertainty that sometimes slows decision making. As we've discussed in a number of investor meetings since our last earnings call, the demand profile is best described as a barbell. We're seeing most of the requirements in the 5,000 to 30,000 square foot range coming from either emerging stage companies that have achieved milestones and need growth space or large requirements of a hundred thousand square feet or more from large pharma and biotech looking to grow or establish a footprint in our clusters, driven by specific new modalities prevalent in those clusters coupled with the talent available on those locations. 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. Over the past year 80% of our leasing has been generated from existing tenants. In addition, our mega campus offerings provide the ability to scale in a wide variety of amenities making them the clear choice for high quality companies. I am sure you are all interested to hear analysis of supply, so I’ll conclude this section with an update on these statistics, which will include our projected competitive supply additions delivering in 2025. As a reminder, we perform a robust 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 triple A 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 impacts of generic supply. The slides we provided on pages Roman numeral 8 through Roman numeral 13 of the supplemental illustrate this and are hopefully helpful. In Greater Boston, unleased competitive supply remaining to be delivered in 2023 is estimated to be 1.1% of market inventory, a 0.5%, decrease over last quarter. In 2024, the unleased competitive supply will increase market inventory by 6.1%, a 1.1% increase driven by the addition of a new competitive project. In 2025, the unleased competitive supply will increase market inventory by 3.7% an expected slowdown from 2024 levels. In San Francisco Bay, unleased competitive supply remaining to be delivered in the second quarter of ‘23 is estimated to be 5% of market inventory, which is a reduction of 1.6% over last quarter due mainly from deliveries. In 2024, the unleased competitive supply will increase market inventory by 8%, a 0.8% reduction unfortunately not driven by leasing, but due to a downward revision of estimated square footage to be delivered during the year. In 2025, the unleased competitive supply will increase market inventory by only 1.2%, which is a good indication that developers in this market are beginning to act rationally. In San Diego, unleased competitive supply remaining to be delivered in the third quarter of ‘23 is estimated to be 1.9% of market inventory, which is a decrease of 1.6% due mainly to projects being delayed into 2024 or delivered with unleased space now reflected in direct vacancy and one project developer deciding not to pursue a laboratory use. In 2024, the unleased competitive supply will increase market inventory by 6.9%, a 1.9% increase driven primarily by the aforementioned projects delivering in 2024 instead of 2023. In 2025, the unleased competitive supply will increase market inventory by 3.3%, driven primarily by our 75% pre-leased 10935, 10945 and 10955, Alexandria Way project. Direct and sublease market vacancy for our core submarkets is updated as follows

Joel Marcus :

Yeah, let's go to Q&A. And sorry for the long presentation but important to get all the facts out there.

Joshua Dennerlein:

Hey guys, I appreciate all the color in the new slides on the supply dynamic across your submarkets. Just kind of curious how we should think about that supply that's coming online and the vacancy you mentioned and just how that will impact market rents and GI's across maybe as in particular, Cambridge in South San Francisco?

Peter Moglia:

Yeah, certainly, it's going to be part of the negotiation with tenants. What we believe is that our mega campus platform and our reliability and brand will - gives confidence to tenants that they're going to be well taken care of. And so there is a premium to that that will help us overcome the competitive supply dynamic when it comes to that.

Joshua Dennerlein:

Then one more question from me on the occupancy front going from your 3Q 93.7 to just the occupancy guide range of I think 94.6 to 95.6 just, what are the kind of moving pieces in there? Is there anything you still have to accomplish? Or is that kind of all baked in at this point?

Marc Binda:

Yes, sure. Hi, it's Marc. Yeah, so about - going from that 140 basis point increase, about half of it was from leases that we leased either in the current quarter or prior quarters that’s delivering next quarter. So a big chunk of it's in the bag. And then about another 20% was for some assets that were designated as held for sale after the end of the quarter, in October that we expect to sell. And then that that leaves about 30% and then of that, a big chunk of it relates to that space in San Carlos. It was the former - space which we do have a signed LOI there and hope to execute on.

Joel Marcus:

Yeah, no problem. Our pleasure.

Georgi Dinkov:

Hi, this is Georgi on for Vikram. Can you square your views on not losing more occupancy than the GFC given you have seen several tenant pay issues and lease terminations in the past two quarters. And even though you have limited expirations, good credit issues, depressed occupancy?

Georgi Dinkov:

Okay. And can you just give, I guess more color on 270 Bio? I believe they're backed by Bluebird, but how would it would work if their cash position deteriorates going forward?

Georgi Dinkov:

Right. Thank you.

Operator:

Our next question will come from Michael Griffin of Citi. Please go ahead.

Joel Marcus:

Yeah, so I think as Marc said, let's wait for Investor Day to do that.

Joel Marcus:

Yeah we're under confidentiality. So we can't. So stay tuned for Investor Day or year-round and we will give you know as much detail as we're able to.

Operator:

Our next question will come from Rich Anderson of Wedbush. Please go ahead.

Joel Marcus:

Yep. Peter do you want to maybe address that?

Rich Anderson:

Okay. Fair enough. And then, real quick second question and then we're running along here. Joel, you said the word self-funding for this year and for 2024 and anticipating your response wait till Investor Day, but let me just ask anyway, is the disposition program kind of not infinite, but I mean, if you're always selling assets and funding something that's probably a better and newer asset to your development pipeline, is that something that can go on in perpetuity or is there a ceiling to which you have to sort of cut off the disposition program and reassess?

Rich Anderson:

You got it. Thanks very much, everyone.

Operator:

And our next question today will come from Tom Catherwood of BTIG. Please go ahead.

Joel Marcus:

Well, I think that the obvious one is one that a number of people mentioned throughout the commentary. And that is certainly in the small and medium size companies that are emerging that are dependent upon whether it be private financing or public market financing or cash on hand. The fact that we're in this de facto recession, inflation and high interest rate environment just makes the management of cash, the management of burn, the management of decisions, just more methodical. And yeah, maybe just more methodical. So our job is to understand those needs and work intimately with the clients to make sure that we're doing the best job that we can to meet their needs. And I think we've done a great job of that. And we have very, very close relationships. These are not ones they sign a lease and that's it. These are ongoing very deep relationships. So we're generally pretty intimately involved in a lot of the decision making.

Tom Catherwood:

Got it. Thank you. Thank you for those answers. And then, kind of following up on that, maybe if I switchover to Hallie, Hallie I appreciate - Hallie I apologize. Appreciate the detailed market update. I was kind of really interested in the comment you made around AI adoption potentially leading to the need for incremental lab space. And that you were potentially seeing the early signs of that. Can you provide more kind of color on that comment? And maybe what you're seeing in the market in that regard?

Tom Catherwood:

Appreciate the color. Thanks everyone.

Operator:

Our next question will come from Connor Siversky of Wells Fargo. Please go ahead.

Joel Marcus:

So Marc you might want to comment on that, but that's kind of used in isolation because that's just one piece of the business. But Marc, go ahead and comment.

Connor Siversky:

I appreciate the color. Is there any way, I mean, let's just say we took the most simplistic form of the deliveries in that context, what a kind of breakeven pre-leased rate would look like as those projects come online?

Connor Siversky:

Well, I mean, we can we can take it offline. What I mean to say is if we if we use the schedule of deliveries and when those projects are supposed to roll online is what would be the breakeven rate between say the NOI contribution and the interest expense, that would be absorbed on the P&L as those projects roll online and they are moved from capitalized to the P&L on the interest expense?

Connor Siversky:

Got it. Understood. Thank you.

Steve Sakwa:

Thanks. Lot my questions have been asked. But I guess Joel, I'm just curious given the challenging funding market for maybe many of your private competitors. I'm just wondering to what extent are you gaining any kind of market share to the extent that you can do fit outs and build outs of smaller lab space and to what extent have your peers maybe not been able to do that? And is that maybe delaying some of the new supply coming to market?

Peter Moglia :

Hey, to dive a little - this is Peter. To dive a little bit deeper into that. You'll notice the big increase in vacancy in San Francisco of buildings essentially that delivered and they delivered in shell condition. I took a deep dive with the team as like guys, what does this product look like? And a lot of it is just our buildings that are basically waiting to see whether they should be office or lab. They were built with an ability to be lab and so we're counting them in our supply numbers, but they could very well go office because nobody is super committed. But you're also right in that those developers are not able to go ahead and just build out TI's because their financing isn't there for that. But I wanted to bring attention to that because you reminded me of it, you're seeing vacancy numbers, you're seeing supply numbers. A lot of these projects are agnostic about whether or not they're going to be office or lab especially in the larger markets. But we are counting on them on our competitive supply because they could be. But they may very well not be and they very well may fail if they don't have financing to provide TI's.

Joel Marcus:

Okay. Thanks, Peter.

Dylan Burzinski:

Hi guys. Thanks for taking the question this afternoon. Just curious, I know you guys touched a little bit on the development pipeline, but just wondering if there's any sort of interesting opportunities that are you guys are witnessing or seeing on the acquisitions front? And if not today, do you expect to sort of see any interesting opportunities come refreshing over the next, call it 12 to 18 months?

Dylan Burzinski:

Thanks. That's all I had.

Aditi Balachandran:

Hi all. Just a quick one for me. I know how you mentioned that M&A is an overall positive. So do you have an idea of how much incremental demand it could possibly drive? And I guess, how much of that would be for pure lab space versus the product or drug manufacturing space?

Hallie Kuhn:

Yeah, with M&A as I mentioned, you really have to look at it as a on a case-by-case basis for specific M&A, I think that the better way to look at it is holistically and as Joel mentioned, M&A and licensing is a huge component of large pharma strategy for the next decade and that will likely continue beyond that. They're looking to recoup something on the order of over $130 billion in revenue, that'll be lost due to patent expirations. And so when you look at that acquisition activity on a whole, the net positive is certainly going to lead to additional R&D needs and is also a benefit from the perspective of upgrades and credits. Given that when an acquirer comes in and buys a smaller company, we get the upgrade on the credit from the in place lease.

Joel Marcus:

Yeah. Thank you.

Wes Golladay:

Hey everyone. Thanks for sticking around for the final question. I just had a quick question on the development pipeline, just like the ‘23 and the ‘24 pipeline that’s well leased. Do you have any, I guess plans to change any more of those tenants out like you did this quarter? Or is it pretty much locked in at this point?

Wes Golladay:

Fantastic. And a quick follow-up. Are you seeing any - I guess pent-up demand to get into some of these mega campuses where they've been fully occupied for years and do you have a little bit of tenant churn? And do you have any situations where multiple tenants are going to the space?

Wes Golladay:

Thanks for paying attention to.

Operator:

This will conclude our question and answer session. At this time, I'd like to turn the conference back over to Mr. Marcus for any closing remarks.

Operator:

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

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.

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.

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.

Operator:

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

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.

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.

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.

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?

Joshua Dennerlein:

Rental rate growth.

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...

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?

Joel Marcus:

Any other question there?

Operator:

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

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.

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.

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?

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.

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?

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?

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.

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.

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.

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?

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.

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?

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?

Operator:

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

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.

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.

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.

Joel Marcus:

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

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?

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?

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.

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?

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.

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.

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.

Joel Marcus:

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

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.

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?

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.

Joel Marcus:

So operator, can we go to questions, please?

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?

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.

Dan Ryan:

Yes. No, I think not Peter did perfectly.

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?

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.

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?

Steve Sakwa:

Yes.

Operator:

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

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.

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.

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?

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.

Anthony Paolone:

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

Peter Moglia:

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

Operator:

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

Joel Marcus:

Yes. So Dean?

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?

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?

Operator:

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

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?

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.

Operator:

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

Dean Shigenaga:

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

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.

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.

Operator:

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

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.

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?

Operator:

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

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.

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?

Operator:

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

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.

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.

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?

Georgi Dinkov:

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

Dean Shigenaga:

Yes, nothing significant in the quarter.

Joel Marcus:

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

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.

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.

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.

Joel Marcus:

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

Operator:

Good afternoon, and welcome to the Alexandria Real Estate Equities 2022 Fourth Quarter and Yearend 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’d now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

Joel Marcus:

Thank you, Paula, and welcome everybody. With me today, are Hallie Kuhn, Peter Moglia and Dean Shigenaga. Want to thank you for joining Alexandria's fourth quarter and yearend 2022 earnings call and wishing you a safe and healthy new year. And thank you to our Alexandria family team members for their continued operational excellence across all facets of our unique business platform. A truly mission-driven, one-of-a-kind company. We have truly exceptional fourth quarter and 2022 yearend results and by any and all metrics, we're very proud, thankful, and humbled, while many public recording companies ever really struggled mightily during this past year. I'd like to take a moment to tick off what I consider to be some of the most notable news for Alexandria. Truly amazing that Alexandria has delivered approximately 8.5% FFO per share earnings growth while continuing to strengthen our fortress balance sheet, the strongest in our history and Dean will give you more details on that. Against the backdrop of a very deleterious macro-market in this 2022 year and really again, nothing short of operational excellence to the team. With our highly leased development pipeline and continued strong leasing and Peter will comment on that, Alexandria is well positioned to deliver strong earnings growth again in 2023. We have continued to create long-term shareholder value with a total shareholder return from IPO through the end of this -- end of the year, December 31, 2022 of 1673% compared to the MSCI read index of 684%, S&P 500 of 628% and NASDAQ 838%. So a wide margin upbeat. Alexandria continues to produce stable, increasing, long duration cash flows and an increasing dividend. We're very proud of our approximately 1,000 client tenant base, a one of a kind treasurer that continues to generate remarkable demand for our Alexandria lab space and Peter and Dean will highlight more on this, but again, two million square feet leased in fourth quarter, over eight million for the year and almost 18 million for the last two years with rental rate increases last year of about 22% on a cash basis. Pretty amazing stats and we're very proud of our own tenant base, which is generated by far and away the majority of that lease space. 4Q '22 and yearend 2022 was another strong quarter by all fundamental financial metrics and a few others and Dean will highlight some of this, almost 100% -- almost a 100% on collections from a very strong and durable tenant base and very proud of almost 95% occupancy and we put in I think very strong same-store performance both for the quarter and the year. Innovation in medicine is but must continue to be a national imperative. One in four of us will develop a neurodegenerative disease. Nearly 40% of adult men and women will be diagnosed with cancer during their lifetimes. One in five in the nation's population suffers from mental illness and we're continuing to see over a 100,000 deaths due to overdose last year, despite all of the efforts that certainly this company has made with our Dayton project, but just a literally a war out there, which does not seem to be in check and governments at the federal, state and local level need to double down with the vast amount of resources that have been appropriated over the last few years and really focus on this mental health issue. A comment about our successful and continuing value harvesting and recycling of our precious capital, Peter will detail that, but amazingly stellar 2022 with $2.2 billion successfully harvested and then reinvested in a highly disciplined, disciplined manner and Peter and Dean will also comment on the excellent and steady progress we've made year to date, just one month in to our 2023 business plan for value harvesting and capital recycling and we're very optimistic about that. And then before I pass it over to Hallie, want to particularly call out and thank our particularly call out and thank our finance team and all those who had a hand in the impressive balance sheet accomplishment set forth on Page XB of our supplement. I am very proud that we once again have the strongest balance sheet in the company's history. So with that, I'm going to turn it over to Hallie for further comments.

Peter Moglia:

Thank you, Hallie. 2022 was quite a volatile year in the macro markets, a reminder that all businesses are subject to cycles, some more than others. The pruning we see in the tech industry today is not a surprise to anyone who's been around since the turn of the century. However, much like a broken bone, it will come back stronger after it heals. Unlike tech, developing products and services to address disease is hard and takes a lot of time, much harder and more time consuming than creating the next app to book a reservation or share recipes. Because of that, there is more discipline in life science investment, a discipline Alexandria has mirrored in our real estate strategy, which is why through the dot-com bust to the financial crisis, to whatever you want to label today's conditions, our business remains sound, as you can see in our results this quarter and during those historic down cycles. Despite the macro headlines, we remain optimistic and excited for our business as we are in the early innings of the Golden Age of Biology. We have only had the blueprint of the human genome for 20 years. And in that time, we've developed more new modalities to attack disease than in the previous 100. It's going to be hard, and it's going to take time, but the industry is going to have options for people with Alzheimer's. It's going to perfect technology to detect pancreatic cancer in time to save lives and much, much more. So let's all remember, it's hard, it takes time and patience, and then you will understand why life science research and development continues through the proverbial thick and thin of economic cycles, making our business resilient and essential. With that said, I'll briefly touch on our development pipeline progress, update you on construction trends, discuss our leasing and update you on investor demand for life science real estate. In 2022, our best-in-class development teams continue to deliver high-quality, purpose-built laboratory space to our tenants on time and on budget in a very challenging construction environment, which I'll touch on in a moment. During the fourth quarter, we delivered just shy of 500,000 square feet, with $28 million in annual NOI commencing during the quarter. For the year, we delivered 1.77 million square feet spread over 15 development and redevelopment projects, with annual NOI of $119.2 million commencing during the year. Initial stabilized yields for recent deliveries averaged 6.8% and 6.3% on a cash basis, reflecting the healthy contractual annual increases embedded into our leases. As of year-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 72% leased. Approximately 77% of that leasing has come from our approximately 1,000 existing tenant relationships. New projects added this quarter include 1450 Owens, which is approximately 213,000 square feet and will be 100% funded by our joint venture partner; and 10075 Barnes Canyon Road in Sorrento Mesa, which will be 50% funded by our joint venture partner. Both projects are under active leasing negotiations. Deliveries primarily commencing from the first quarter of '23 through the fourth quarter are expected to add $655 million in annual incremental NOI, reflecting a strong pipeline driven by consistent demand even in this volatile time. Transitioning to leasing, the fourth quarter results continue to demonstrate the strength of our unique one-of-a-kind company, with leasing volume of 2,322 square feet leased in the quarter, the fourth highest total in company history. The 8,405,587 square feet leased for the year is the second highest annual total in company history. And as you can see in the supplemental, the -- our guidance for strong mark-to-market growth remains unchanged from Investor Day with a range of 27% to 32% on a GAAP basis and 11% to 16% on cash. These results are certainly reflective of Hallie's commentary on the strength of VC funding and the stellar 2022 performance of large pharma. With $300 billion in cash on hand, we anticipate further investment in growth from this high-credit tenant sector in 2023. And the successful conversion of early innovation to commercialization reflected in the 37 FDA approvals in 2022 will incentivize continued investment in new and existing companies that have sound business models and underlying science, a cohort of companies Alexandria has a unique ability to identify. The highest quality life science tenants always consider occupancy in the best assets as an imperative. Their facility and campus are not only used for research and development, but is a critical tool for them to recruit and retain the best scientific and management talent in the world, which is by far their greatest asset. Therefore, demand for Alexandria facilities and our unrivaled mega campuses remains healthy as the facilities are A+, and our operational excellence is highly sought after. Moving to construction cost trends. At a high level, it appears the construction industry is on the cusp of slowing down. One of the leading economic indicators of the industry is the AIA Architectural Billings Index that leads nonresidential construction activity by nine to 12 months. Design work is at the front end of projects, so architects are the first consultants to slow down. Recent numbers show the 3% moving average heading towards no growth in billings, and commentary from the AIA was that fewer clients are expressing interest in starting new projects. For the first time since the postpandemic restart of construction projects, which was the genesis of significant cost inflation and supply chain problems, we're starting to see some signs of materials pricing flattening out and general contractors and subcontractors looking for work. That said, there are still items such as aluminum, rebar, copper and glass of 16% to 21% over this time last year, and it's still very difficult to obtain electrical switchgear, emergency generators, building controls and smart air handling units because despite an improvement in availability of chips, there are more products using chips than ever before so demand for them is still ahead of supply. Laboratory buildings are heavy consumers of these hard-to-get items so to keep a laboratory construction project on time and on budget is a difficult task. Alexandria has the Intel and experience needed to make quick decisions and relationships with critical vendors to ensure we have access to the materials and labor needed to meet our schedule and budgets. Despite the continued construction market pressures, as mentioned, we do believe the industry is on the cusp of slowing down, and we do expect cost escalations to reflect that in 2023, reducing from 9% to 10% -- from the range of 9% to 10% experienced in 2022 to 4% to 6% in 2023. However, the $2.3 trillion infrastructure spend over the next eight years will continue to put pressure on costs and labor so we will continue to conservatively underwrite and manage our value creation projects. As of the end of the year, 81% of our active development and redevelopment projects, aggregating 5.6 million square feet, are under GMP or other fixed contracts, which is consistent with the run rate we have maintained during these volatile times. Anticipating year-end volatility in the real estate investment markets, we completed our 2022 value harvesting and asset recycling efforts in the third quarter with impeccable execution as we laid out at Investor Day. Overall, we completed $2.2 billion of value harvesting, with the improved properties achieving a weighted average cap rate of 4.4%, realizing a total gain of $1.2 billion and a value creation margin of 107%. This is a tremendous achievement considering the volatile interest rate environment in 2022 with many real estate investors on the sidelines. It speaks to the desirability of our assets, which are in the best markets with high-quality tenants and managed with operational excellence. High-quality life science assets are scarce, and that is reflected in the pricing. We have started working on, and are making good progress on 2023 value harvesting and asset recycling, and we'll update you on that next quarter. But in the meantime, we'd like to report on three notable non-Alexandria sales that illustrate that there is still strong demand for life science real estate product. The first is the sale of 1828 El Camino Real and [indiscernible] in the Bay Area. Anchored by three non-credit life science tenants, the property is 98% leased, but is extremely low quality, with limited window line, no shipping and receiving, no backup power and venting through the windows to get adequate HVAC. Despite this, an investor paid $902 per square foot for this asset at a cap rate of 5.8%. The second trade was in the Route 128 submarket of Lexington, where a single non-credit tenant occupied 101,310 square foot manufacturing building at 20 McGuire Road sold in October for $878 per square foot and a 6.2% cap rate. The third comp, which closed last week, is an R&D campus known as the Gauge and Center Point in the Route 128 submarket of Waltham. It traded for $983 per square foot and a 5% cap rate. It was reported that some of that -- some vacancy existed at that property and that the stabilized return is likely to be in the high 5s. As the Fed continues to pull levers to battle inflation, we expect we will see cap rates move up, but much less on a relative basis to other product types, and thus we remain well positioned to fund our value creation pipeline efficiently and at a relatively attractive pricing by harvesting our value creation among other sources. With that, I'll pass it over to Dean.

Joel Marcus:

Thank you. Operator, you can open it up for questions, please.

Steve Sakwa:

I guess I wanted to just circle back to some comments, Dean, you made about some of the pending sales and joint venture interest. I'm just wondering if either you or Peter could provide a little bit more color on what the institutional market is sort of looking for? Maybe how pricing has changed over the past six months? And can you give us any sort of flavor on the timing of when some of these transactions make it over the finish line?

PeterMoglia:

Sure. Obviously, there's only a few product types out there that people are comfortable in investing in right now. And obviously, life science real estate is 1 of them. So we are -- I mean, been receiving calls on a fairly regular basis from some existing partners that are excited to see what we have going this year. As I mentioned during my comments, cap rates are expected to rise from the peak. But as I've also said in the past, we don't anticipate, on a relative basis, to be very high. And I'm not going to speculate right now on where they'll be. We'll start reporting once we have more data, but they will be sticky given the scarcity of opportunities for life science real estate.

Joel Marcus:

Yes. So each one of those was unique in and of itself. I don't want to get too granular, but I think the one in the Route 128 corridor really enables us to piece together three different projects into a more than 1-million-square-foot mega campus, and we have some great activity from our 1,000 tenants to help fill that. So we're very optimistic on that and feel like that was very strategic. It's also under lease back for a number of years, so it will be continuing to cash flow. The other acquisition was a unique acquisition in downtown Austin. We felt that it was a superb location. It's also under a lease back for a period of time. So we'll continue to generate good revenue, and I won't comment on what our future business plan is for that, but we think there's a really great opportunity to do something unique in that spot, if that's helpful.

Georgi Dinkov:

So I was wondering what are your thoughts on the sublet market in the sector? And have you seen an uptick with more companies subleasing space across the board and specifically in your markets? And could you please remind us what percentage, if any, of your portfolio is currently subleased?

PeterMoglia:

Yes. I've got some sublease statistics so I will -- for our larger markets. I will say that the amount of sublease space overall has come down in the -- over the last couple of quarters. One of the reasons for that is built out lab space is very attractive, especially for companies today that want to try to limit their out-of-pocket investment in the space. So Boston is at about 4.7% right now sublease. And again, anything of quality and that's built out is moving fairly quickly. San Francisco has been reduced to 2.3% and San Diego only has 2.1%. So these are all very normalized numbers for any cycle.

Peter Moglia:

It's less than that.

Joel Marcus:

SP1 I don't know, Dean, if you know that, what asset that was or you want to...

Joel Marcus:

I don't either.

Operator:

The next question comes from Michael Griffin of Citigroup Global Markets. Please go ahead.

Joel Marcus:

Yes, this is Joel. Let me make a topside comment, and then I'll turn it over to Peter. I think you have to -- if you're asking about general sentiment, Peter will comment if you're asking about our sentiment it's different because we generally have a certain targeted demand from our existing client base, and therefore, by making, say, the acquisition we did or doing things that we do to create an environment where companies want to go, it really is focused on our kind of game plan. But if you're looking at a topside view, I don't know, Peter, you could share topside view on Waltham generally.

Joel Marcus:

And keep in mind, there will always be demand among more R&D-light companies for Route 128 in Waltham than in the heart of Cambridge. That's just how it's been for decades now.

Joel Marcus:

Yes. I'll ask Dean to do that, but obviously, each and every situation is different, but Dean, upside view?

Operator:

Next question comes from Josh Dennerlein of Bank of America Merrill Lynch. Please go ahead.

Joel Marcus:

Dean, do you have any information on that?

Josh Dennerlein:

Okay. And then just -- since I'm newer to the story, just kind of curious why the disclosure on that type company. It looks like it has a small market cap.

Operator:

The next question comes from Richard Anderson of SMBC Nikko Securities. Please go ahead.

Richard Anderson:

I totally was, sorry about, Joel. So Peter, you talked about cap rates in your opening comments, and I think, Dean, you mentioned some partial interests that are far along and may be announced shortly. How would you characterize the quality spectrum of what you're looking at for partial interest? Are we talking very high-quality assets like the Binney Street transaction a while back or more middle of the road is a mechanism to minimize the cap rate, but also keep hold of your best assets and not relinquish too much of that opportunity going forward?

Richard Anderson:

Are we sub-five, you're not talking about pricing just yet? Or can you give any...

Richard Anderson:

Fair enough. And then second question for me is for Dean. You have an average debt exploration, I think, of 13 years, you said, I think your average lease term expires in 7 or 8 years. I'm wondering if that provides you any opportunity in the future in the interest of matching liabilities with assets, your way conservative in that comparison as it stands today. Do you ever see that, that gap shrinking whereas maybe the opportunity to raise shorter-term debt or lengthen lease term would make sense for the company? I'm just curious if that spread that you have in place now is something that could wiggle around a little bit in the future?

Operator:

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

Joel Marcus:

Yes. I can give you my thoughts, and Peter can share his. I think it's hard to compare past cycles because the level of technological development in biotech was so different. Today, it's much more sophisticated new modalities. So when you have M&A today, it used to be oftentimes you're buying a company for maybe a pipeline and you like to hold on to the people, but maybe space is less valuable going back maybe a decade or two. Today, that space is pretty critical, especially if it's located in a top-tier cluster market like Cambridge. Not only do you want the people for recruitment, retention and just working on the projects, but you've also got probably built into the space some pretty sophisticated new modality technologies, both at the lab side and in the R&D manufacturing, which is kind of integrated so closely. So I think it's harder to tell. I think, again, there's going to be a whole series of different types of uses of capital. A lot of it will be partnering, which has historically been probably the favorite approach of pharma. There will be some acquisitions. You've got a Federal Trade Commission that's pretty hostile to any acquisition in any industry these days. So you'll probably see bolt-on acquisitions where people will want to keep that group and that technology in tow. But I don't think it's is easy to look at, say, big mega mergers in the past and think that, that has any relevance to today. And I think the key buy line for life science in 2023, in addition to what Hallie kind of framed out is what will be the velocity, the depth and the focus of this large cash hoard $300 billion. And if you leverage it, you could be as much as $500 billion to $600 billion. But Peter, you could comment just historically and what you've seen.

Joel Marcus:

Yes. Hallie, any final comments on that question?

Tom Catherwood:

Great. I really appreciate the thoughts there. Maybe sticking with Pfizer, we did notice that in New York, 219 East 42nd Street moved from future developments to intermediate developments. If memory serves me, I think there was a 6-year sale leaseback on that asset. What are your current plans, if any, on that building in a potential project?

Operator:

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

Joel Marcus:

Yes. Peter, you could comment generally to upside.

Michael Carroll:

Okay. Dean, do you know if you're like competitors on the development pipeline? I mean, is that where the drop-off in demand is coming from is that first-generation type space?

Joel Marcus:

And major overruns on budgets, I can think of 1 project in Boston where a client went there because we didn't have exactly the space that they needed, and then they came back to us when the developer had a huge overrun on costs. So that goes on all the time.

Joel Marcus:

Yes. That is a project that we own where they're rotating out of that, and that will be a future development project -- redevelopment and development.

Dave Rogers:

Maybe this is for Dean. But I wanted to talk about the leasing spread. When you excluded the 2 leases in the quarter, obviously, very strong performance for the company overall. Curious about the guide for this year, which you gave in December, reaffirmed last night. But at the 11% to 16%, I think you had said that there was some incremental component of that that was non-life science maybe. But can you give us a sense of kind of that 11% to 16%. Is that more a function of kind of market rents may be slowing down? Or is that just a function of kind of more different leases that have been added to that pool?

Dave Rogers:

That's fair. And then maybe to follow up, Peter, in your last question in terms of kind of market rent growth, it sounds like it's bifurcating even further, probably between kind of the higher-quality and lower-quality assets. What does that spread look like today maybe across the portfolio or maybe pick the top three clusters in terms of kind of where replacement rents might be going versus where maybe a more traditional kind of A- asset might be performing today at a market rent level?

Operator:

The next question comes from Dylan Burzinski at Green Street Advisors. Please go ahead.

Peter Moglia:

I don't have any specific examples other than maybe what I just talked about and the comp in is a really just terrible conversion. Burlingame is on the Peninsula. It is very close to South San Francisco. So to get a fully leased comp at an almost 6% cap rate, I think, probably illustrates that conversions aren't that appealing. I would expect good quality, purpose-built lab in Berlingame to be at least 100 to 150 basis points lower than that.

Dylan Burzinski:

Okay. That's helpful. And then, I guess, just looking at the supply picture, are there certain markets or submarkets where you're starting to see supply pick up and maybe become more of a risk here?

Dylan Burzinski:

Yes.

Dylan Burzinski:

Okay. Thanks. That's it for me.

Jamie Feldman:

Thanks for taking my question. So I know you spoke a lot about how differentiated AllexInterest portfolio is and leasing demand is. But if you look at the market that it does kind of show in some of these markets, you're seeing flattish rents and concessions rising and net effective rents been declining month-over-month or maybe quarter-over-quarter. Are you seeing that at all in your portfolio? I mean, are you still pushing rents? And I know you said the concessions haven't grown a lot, but can you just provide some more color on how that really looks for your business versus maybe what we're seeing overall in the market?

Jamie Feldman:

Can you say maybe by how much like quarter-over-quarter? Do that like a same-store basis, how much you're pushing net effective rents?

Peter Moglia:

Yes. I wouldn't doubt, Jamie, that other developers are offering concessions to try to bridge the gap between the quality and reputation that we have and what they offer. Our numbers are still stable at this point.