The Alexandria Real Estate Equities Second Quarter 2023 Conference Call began with an introduction from Paula Schwartz of Investor Relations, followed by remarks from Joel Marcus, Executive Chairman and Founder. Marcus thanked the company's team for an operationally and financially successful second quarter, noting that the pandemic had only reaffirmed the strength of the life science industry and the need for their lab space infrastructure.

The finance and accounting team of Alexandria recently won the 2023 NAREIT Gold Award for best REIT reporting and transparency, the most ever by any REIT. During the second quarter, they achieved strong FFO per share growth, leasing 1.3 million rentable square feet, and increasing NOI by almost $200 million. The success of the quarter is a testament to the strength and quality of the Alexandria platform, as well as their successful expansion of their credit facility to $5 billion.

Alexandria's Science and Technology team has observed that the life science industry is secularly growing, with an estimated market value of over $5 trillion and $450 billion in estimated 2023 R&D funding. M&A and Series A rounds have been increasing, and biologics have been attracting the majority of early-stage investments. This industry is driven by the achievement of scientific, clinical and commercial milestones, and the demand for Alexandria's essential 24/7 lab space infrastructure across their cluster markets is continuing. There is incredible innovation taking place within their lab-based facilities to address the 10,000 known diseases.

The health of the tenant base is strong, with multinational pharma making up 17% of ARR and biopharma deploying $267 billion into R&D, an increase of 57% in the past 10 years. M&A activity is up, with $97 billion in the first half of 2023, and venture-backed biotechs are seeing healthy activity with $17.7 billion invested in the first half of 2023. Private biotechs with strong technologies and clear value inflection milestones are rising above the fray.

The public biotech segment of BioRealty's tenant base makes up 14% of their ARR and includes companies such as Amgen, Gilead, Vertex, and Moderna. Preclinical and clinical stage public biotech tenants make up 10% of their ARR and have recently raised substantial follow-on public equity financing due to promising clinical data. BioRealty's tenant rent collections were at 99.9% in 2Q '23 and they have already collected over 99.7% of July rent. The life science industry is uniquely positioned to tackle and solve major health care challenges due to groundbreaking technologies, new modalities, and massive unmet medical need.

The FDA has approved over 450 new drugs in the past decade, with 2023 on track to be a near all-time record high year of new drug approvals. Alexandria's lab space infrastructure is essential for tenants to advance scientific discoveries and improve human health. Pfizer and GSK have each received new approvals this year for RSV vaccines, and Biogen's tofersen received a Vanguard approval for ALS. Alexandria's lab spaces are constantly and consistently capturing and storing scientific throughput, which drives the utilization of and demand for space.

Alexandria's lab space assets measure energy consumption as a relevant metric, and the lab and non-technical spaces are integrated to enable workflows between the two. Collaboration is fundamental to innovation and productivity in the life science industry, and 17 of the top 20 multinational biopharmas lease space from Alexandria to access early innovation. Collaborations between these companies are tightly managed due to proprietary and regulatory considerations.

Jenna and Peter have discussed the current economic environment and how the life science industry has been affected by it. Nonetheless, progress is still being made and Alexandria is well-positioned to capitalize on the "golden age of biology." In the first quarter, Alexandria delivered 387,076 square feet in four projects with an annual NOI of $58 million, bringing the year-to-date total incremental additions to NOI to $81 million.

Alexandria Real Estate Equities had a successful quarter with an initial weighted average stabilized yield of 6.4%. Development and redevelopment projects saw an uptick in activity, with 142,000 square feet of leases signed, and 42,000 square feet under negotiation. Two near-term projects, 401 Park Drive and 421 Park Drive, are expected to commence construction in the next three quarters, stabilizing in 2025 and beyond. Alexandria has the optionality to fund its value creation pipeline with a joint venture and presold research institute. At quarter end, the pipeline was 70% leased and is expected to generate greater than $605 million of annual incremental NOI, primarily in the second quarter of 2026. Despite a challenging market, Alexandria's strong brand loyalty, mega campus offerings, and operational excellence drove strong leasing numbers.

Alexandria achieved a leasing volume of 1.3 million square feet in the second quarter and experienced 16.6% and 8.3% rental rate increases on a cash basis. There has been an increase in demand, and Alexandria is well positioned to capture this demand due to their existing relationships and mega campus offerings. In the first half of the year, 82% of their leasing was from existing tenants. The data presented in their G&A REIT meetings and white paper was from the first quarter of '23.

This paragraph provides an overview of the unleased competitive supply in three core submarkets: Greater Boston, San Francisco, and San Diego. In Greater Boston, unleased competitive supply will increase market inventory by 1.6% in 2023 and 5% in 2024. In San Francisco, unleased competitive supply will remain unchanged in 2023 and increase market inventory by 8.8% in 2024. In San Diego, unleased competitive supply will decrease market inventory by 0.8% in 2023 and increase by 4.9% in 2024. In all three submarkets, direct vacancy stayed stable while sublease vacancy increased, resulting in a net increase in available space and operation.

Alexandria has been able to make progress towards its value harvesting goals, having closed $701 million in sales and having another $175 million pending, with the majority of those identified assets being non-core non-campus assets. Notable sales closed in the first quarter include the sale of 100% interest in 11119 North Torrey Pines Road for $86 million. 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%. Volume for 2025 is expected to be lower than 2024 due to high construction costs, higher cost of capital, a lack of available debt financing and adequate supply currently under construction.

Peter reported that they had sold 20.1% of their joint venture interest in 9625 Towne Centre Drive for $32 million at a 4.5% cap rate. They also sold a portfolio of non-core assets for $365.2 million at a 5.2% cap rate, as well as an office asset in Newton, Massachusetts for $214 per square foot at 70% occupancy. These sales were part of their value harvesting asset recycling program and will help fund their 2023 growth. Dean reported that total revenues for the second quarter were $713.9 million, up 10.9% from the second quarter of 2022.

The NOI for the second quarter of 2023 was up 12.2% from the previous year, driven by the completion of development and redevelopment projects. FFO per share was up 6.7%, and the collections remained very high at 99.9%. Same-property NOI growth was in line with guidance for the full year, with a midpoint of 3% and 5% on a cash basis. Leasing volume was 1.3 million rentable square feet, and rental rate growth on lease renewals and re-leasing the space was up 16.6% and 8.3% on a cash basis.

In the second quarter of 2021, rental rate growth was driven by transactions in Seattle, Maryland, and Research Triangle, and the outlook for rental rate growth remains solid. Capital expenditures are divided into two categories: development and redevelopment, and non-revenue enhancing capital expenditures. Tenant improvement allowances related to lease renewals and re-leasing were modest, and occupancy was in line with expectations at 93.6%. The outlook for 2023 occupancy is 95.1%. Vacancy of 2.2% includes 900,000 rentable square feet from properties recently acquired.

The company has been successful in leasing 23% of recently acquired vacancy and 14% is still under negotiation. They have increased liquidity on their balance sheet and pivoted towards outright dispositions. They have a low FFO payout ratio and a three-year run rate of $1.1 billion in net cash flows from operating activities. In addition, they have realized $22.5 million in FFO from venture investments and gross unrealized gains of $373 million from their investments. There is also $605 million in incremental net operating income from their pipeline of 6.7 million rentable square feet.

This paragraph discusses the company's projects and guidance for 2023. It states that 3.7 million rentable square feet is expected to reach stabilization in 2020 and generate $277 million of incremental net operating income. Additionally, the company has another 3.7 million rentable square feet that is expected to reach stabilization after 2024 and will generate $328 million of incremental net operating income. The per share outlook for 2023 was updated to a range plus or minus $0.03 from the midpoint of guidance, and the range of guidance for EPS is from $2.72 to $2.78, and the range for FFO per share diluted as adjusted is $8.93 to $8.99. The company's strategy for dispositions and sales of partial interest for 2023 is to focus on enhancement of its overall asset base, and this resulted in an update to sources and uses of capital due to the replacement of a potential sale of a partial interest with an outright sale of properties.

Dean Shigenaga explains that the increase in occupancy anticipated in the fourth quarter is due to 400,000 square feet of executed leases that will commence, some leasing activity that needs to be completed, and some spaces being delivered out of their development pipeline. He also mentions that the team needs to complete 1.2-1.3 million rentable square feet of leasing activity on a quarterly basis to hit their target.

Dean Shigenaga explains that the company took back a space from Toast in the second quarter, which was part of an acquisition from January 2021. The space was targeted for conversion to lab space and the team quickly leased the remainder of the project at rental rates that exceeded their initial underwriting. Steve Sakwa then asked about the dollar amount from the termination fee and what flowed through in Q2 and Q3.

Dean Shigenaga explains that the company was able to take back space from Toast and will get 111,000 rental square feet back in 3Q to commence their redevelopment. The remaining 22,000 rentable square feet will be back at the end of 2024. This arrangement will allow the company to earn revenue through the end of 2024, with a slight pickup in FFO for 2023 and 2024. The company is also confident in their outlook for rental rate growth for 2023, with a range of 28-30%, and 12-17% on a cash basis.

Dean Shigenaga states that the rental rate growth of 48% and 24% on a cash basis in the first quarter was driven by Greater Boston, San Francisco, Bay Area and Seattle. In the second quarter, the rental rate growth was 16.6% on a GAAP basis and 8.3% on a cash basis, which is considered outstanding. Peter Moglia adds that they will consider selling additional properties over the disposition guidance range if the values are attractive.

Dean Shigenaga discussed the 19% mark-to-market across the portfolio, which was 27% at the start of the year. This decrease is primarily driven by leases that have been executed over the last few quarters. When asked about additional development and redevelopment, Shigenaga mentioned that they are exploring spaces that will become available in 2024 due to recently acquired opportunities.

This paragraph discusses the development and redevelopment opportunities for the future. The number of opportunities is much smaller than the 1.2 million square feet expiring in 2024, and is estimated to be around 684,000 square feet for future development. The remaining 400,000-500,000 square feet is for redevelopment opportunities. The company is going to remain disciplined in their approach to new projects and will focus primarily on projects in their mega campuses. Preconstruction activities will continue to be advanced on the future pipeline projects, but entitlements and design can take years to complete, and sometimes require infrastructure before vertical construction can commence.

Joel Marcus and Jenna Foger discuss the split between lab and non-technical space in their buildings, which is typically 50-50 but can be up to 60% lab in some cases. They also mention that they are actively pushing for entitlements and site design for two new mega campuses on the West Coast and East Coast, and they want to make sure that their spread to cost of capital and long-term IRRs are sufficient before they begin construction.

The company had a lease termination with Toast that resulted in a $15 million total consideration, with a deferred rent number of $5-6 million. This effectively replaces cash flow that was in place prior to the arrangement and there is very little upside through 2024. In addition, the company has pivoted from selling more JV's to wholly-owned asset sales, which may be due to pricing decisions.

Joel Marcus discusses how the company has grown from a garage startup in 1994 and how they have been moving towards a mega-campus strategy in core, high barrier to entry markets. Peter Moglia then talks about how they decided to keep a development asset and sell their non-core assets to fund their pipeline. Finally, Michael Griffin asks if Joel expects VC funding to pick up in other markets in order to see incremental demand.

Peter mentioned that the biotech flywheel is starting to turn again, indicating that the pace of activity is increasing. Joel and Jenna provided some insight into the venture capital market, noting that there is still a healthy level of investment in life science activity, particularly in the Greater Boston area. They also noted that there have been disciplined allocations of capital and an all-time high of Series A investments at $60 million this year.

Joel Marcus and Peter Moglia discuss the long-term bull market in the biotech sector that has been seen since 2013-2014, and the recent increase in demand for their top three markets. They also note that there are a number of companies preparing for an IPO in 2024 and that the Fed's action, along with the strength of activity, M&A and partnering, have had significant upticks, which is a positive sign.

Peter Moglia discusses the recent advancements in the diabetes, obesity, and neurodegenerative areas, and attributes the uptick in tenant activity to the decrease in uncertainty in the economy and life science industry. He also notes that there has been a slowdown in non-dedicated life science development, with a few exceptions.

Joel Marcus responded to Vikram Malhotra's question about the increase in the top markets and the sustainability of 1.3 million leasing in the second half. He explained that they are not able to provide too much information about the requirements due to their proprietary nature, but they have a long history of leasing and their own tenants provide the majority of that leasing. Marcus also said that they will provide their view of 2024 toward year-end.

Dean Shigenaga explains that the beat in NOI for the quarter was due to a timing difference and not due to any upside. Joel Marcus then comments on the company's exposure to Illumina, noting that they are still a pioneer and leader in their category.

Illumina is looking to expand their market by leasing 300,000 square feet of office space in the UTC area and potentially adding a building or two to their campus for laboratory, life science, and manufacturing space. They have also been retrenching from other sites not owned or operated by them. Peter has commented on continuing to focus on mega campuses and allocating capital there, and he has suggested that these campuses garner rental rate premiums, though he does not have a sense of the level of premium compared to market.

Peter Moglia and Joel Marcus discussed the mark-to-market of their portfolio, with the best opportunities being in the mega campuses. Moglia does not have a breakdown of each asset's mark-to-market, but Marcus noted that it is typically in the range of 15-20%. Burzinski asked if they expect to feel pressure on development yields due to higher concessions for new leases, to which Moglia confirmed.

Joel Marcus and Dean Shigenaga discuss the landlord contribution to tenant improvement and how it is affected by the size of the company. They also discuss the occupancy of the company and how it has grown historically. They are confident that they can continue to grow in the future.

Joel Marcus and the other speaker discussed the occupancy of their asset base and how they have strong relationships with tenants. They are aiming for a 95.1% occupancy rate by the end of 2023, and their pipeline is set to bring on a lot of NOI. They have also made acquisitions in the Greater Boston area to convert existing vacancy into first-time lab space, which will help increase occupancy. They concluded the call by thanking everyone and wishing them a great summer.

This summary was generated with AI and may contain some inaccuracies.