The Alexandria Real Estate Equities Third Quarter 2023 Conference Call began with the operator welcoming participants and providing instructions for the call. Paula Schwartz from Investor Relations then introduced Joel Marcus, Executive Chairman and Founder, who made a statement about forward-looking statements and turned the call over to Hallie, Peter, and Marc for the presentation. Marcus also mentioned the recent resignation of Chief Financial Officer Dean Shigenaga, who will remain a full-time employee and be present for the Q&A portion of the call. Marcus then shared quotes from Warren Buffett and an unnamed institutional investor, highlighting the company's opportunistic approach in the current market.

Alexandria is a leading life science REIT with a desirable real estate portfolio and a strong market position. The company has a fortress balance sheet and a consistent dividend, with plans for 7% FFO per share growth in 2023. The company has also seen significant net operating income in the first three quarters of the year. The management team is confident in the company's ability to continue to dominate its key submarkets and maintain pricing power. Additionally, the company's focus on retaining cash flows for reinvestment has positioned them for future growth. The upcoming FDA drug approvals are seen as a major opportunity for the life science industry, and the company is well-positioned to benefit from them.

The biotech market was strong from 2015 to 2021, with biotech accounting for three quarters of approvals. This year, there have been 45 approvals so far and it may surpass the record of 59 in 2018. Leasing in the third quarter was solid with long-term leases and high leasing spreads. The life science industry is healthy and thriving, despite economic challenges. Internal growth is steady with strong occupancy rates. External growth efforts are ongoing and the company is self-funding for the foreseeable future.

The life science industry is experiencing strong growth, but some skeptics doubt its health. Alexandria, a self-funded business, is well-positioned to capture future demand from its over 800 tenants and other potential tenants. The company plans to continue its operational excellence and execute a self-funding plan for the next few years. The industry is expected to continue growing due to various demand drivers, making Alexandria a go-to partner for the life science industry.

The life science industry is driven by massive unmet medical need, event-driven growth, and robust funding sources. This results in secular growth and increased demand for Alexandria lab space, even during an economic downturn. This investment leads to longer, healthier lives, as evidenced by the FDA's approval of 43 new therapies and 6 novel gene, cell, and RNA-based therapies this year.

The number of FDA approvals for new therapies is expected to exceed the record high in 2018. These new therapies, such as GLP1 medicines for obesity and AI tools, are important for patients and have a significant market potential. AI tools do not eliminate the need for lab space and may actually increase the demand for it. The misconception that small and mid-cap biotech companies are a proxy for the entire life science industry is incorrect. The industry is complex and diverse.

Multinational pharma companies are investing heavily in R&D and acquiring innovative products, with biopharma alone investing $278 billion in 2022. M&A activity has also increased, with $112 billion in acquisitions in 2023. Large pharma companies heavily rely on acquisitions to fill their pipelines, and M&A has a positive impact on net absorption in clusters. M&A can also lead to the expansion of acquired companies and the formation of new companies within ecosystems.

Pharma companies need to attract top talent and have strong infrastructure to continue producing successful medicines. Alexandria is a leading brand in this area and has seen success with its commercial and pre-commercial biotech tenants. While the public market for small and mid cap biotechs remains challenging, companies with promising pipelines have been able to raise significant funds. Private biotech funding has also remained strong, with projections for 2023 exceeding pre-pandemic levels.

The data shows that the majority of current financings are led by outside investors, indicating a healthy appetite for new deals. The new lease with Altos Labs on the One Alexandria Square Mega Campus in San Diego is an example of a successful private company. Life science products, services, and devices are a crucial part of the industry, but companies are facing challenges post-COVID as they reset strategic priorities. However, new areas of science and successful products are emerging, creating new demand. Companies are being cautious with their spending and are looking for reliable lab space in prime locations with the necessary infrastructure and support for their work.

The paragraph discusses Alexandria's unique lab space and their optimistic outlook for the future of the life science industry. It also mentions the contributions of Dean Shigenaga and the recent scientific revelation of a comprehensive map of the human brain.

The article discusses a map that will help in understanding and treating brain-related diseases. The author shares their personal experience with Alzheimer's and highlights the importance of the life science industry in improving lives. They also mention the company's development pipeline, leasing supply, and asset sales, and introduce the new CFO. The company has delivered over one million square feet in high barrier to entry submarkets, with a total NOI of $120 million. The initial stabilized yield is 6.5%, with some projects yielding up to 9.5%. One project in Cambridge is 99% leased, and another in the Shady Grove mega campus has successfully leased 23% of its space. The Cambridge asset was a build-to-suit core investment that expanded the company's mega campus.

The Maryland asset has a lower yield due to complex site conditions, but it has been well received by the market and is expected to perform well in the long term. Leasing activity has increased in the second quarter, with LOIs covering nearly 230,000 square feet of space in the pipeline. A lease termination at a mega campus development in Torrey Pines resulted in a stronger credit tenant and higher rents. The pipeline is currently 63% leased and expected to generate $580 million of annual incremental NOI through the third quarter of 2026.

Alexandria's leasing activity declined from 70% last quarter due to the delivery of fully leased projects and the addition of a new property in Sorrento Mesa. However, their highly curated mega campuses in desirable life science clusters continue to attract high quality tenants. In the third quarter, they leased 867,582 square feet, with Maryland leading the way. Overall, leasing activity has remained consistent with pre-COVID levels, and the amount of expiring leases available for the rest of the year is relatively low.

In the third quarter, Alexandria experienced strong cash and GAAP rent increases, indicating the enduring value of their brand and platform. Their year-to-date lease term of 11 years exceeds their average since 2014. Demand has slowed from the peak of the COVID period, but is increasing in certain markets. The demand profile is described as a barbell, with most requirements falling in the 5,000 to 30,000 square foot range or over 100,000 square feet. Alexandria is well positioned to capture this demand due to their existing relationships, which have accounted for 80% of their leasing over the past year.

The company's mega campus offerings and high barrier to entry submarkets make it a top choice for high quality companies. They have a large and loyal tenant base that helps drive leasing activity and mitigate the impact of generic supply. The company provides statistics on projected competitive supply additions for 2025 in Greater Boston and San Francisco Bay, showing a decrease in unleased competitive supply in 2023 and an increase in 2024, but a slowdown in 2025.

In 2025, the unleased competitive supply in the market is expected to increase by 1.2%, indicating rational behavior from developers. In San Diego, the unleased competitive supply is estimated to decrease by 1.6% due to project delays and changes in use. In 2024, the unleased competitive supply will increase market inventory by 6.9%, driven by projects delivering in 2024 instead of 2023. In 2025, there will be a 3.3% increase in unleased competitive supply, mainly due to a pre-leased project. Direct and sublease market vacancy has increased in Greater Boston and San Francisco, while San Diego has seen an increase in direct vacancy but stable sublease vacancy. The company's asset recycling program continues to be successful due to high demand for life science assets.

The company is close to meeting their guidance for the year, with 95% of dispositions completed or under agreement. Their strategy for the year is to sell partial interests and non-core assets in order to fund their development projects. Despite a challenging economic environment, demand for their assets remains strong. In September, they closed on a sale of a portion of their Fenway campus to Boston Children's Hospital, providing funding for the project and securing a key anchor tenant.

The financial results for Austin Children's and Alexandria for the third quarter were strong, with total revenues and NOI up 8.2% over the prior year. The increase was primarily due to the commencement of new development projects and strong same-property performance. FFO per shared diluted as adjusted also increased by 6.1% over the prior year. This growth is expected to continue, with a projected 6.7% increase in FFO per share for 2023. The high quality and well-located campuses, along with operational excellence, continue to attract investment-grade and publicly traded tenants, making Alexandria one of the top REITs in the industry.

In the third quarter of 2023, the company's collections remained high at 99.9%, with strong adjusted EBITDA margins of 69%. The average lease terms for leases completed in 2023 were 11 years, with 96% of leases containing annual rent escalations of 3%. Same-property NOI growth was in line with guidance, with a solid outlook for the rest of the year. Leasing volume for the quarter was in line with historical averages, with a low number of expirations at the beginning of the quarter. Rental rate growth for lease renewals and re-leasing was strong, driven by transactions in various markets.

The company's rental rate growth for leased renewals and re-leasing space is expected to be strong, with a 30.5% increase on a cash basis. Capital expenditures are divided into two categories: development and redevelopment, and non-revenue enhancing expenditures. The company's occupancy for the third quarter was in line with expectations at 93.7%, with a projected increase to 95.1% by the end of 2023. The company has already leased 50% of the spaces expected to deliver by year-end, with 20% designated as held for sale and 30% still to be resolved, including a 100,000 square foot space under negotiation.

The company has a strong balance sheet with a lot of liquidity and no debt maturities until 2025. They are on track to achieve their net debt to adjusted EBITDA goal by 4Q '23 and are focusing on self-funding through dispositions and partial interest sales. They expect most of the proceeds from these sales to come from outright dispositions. The team has made good progress with $875 million completed and another $699 million expected to close in the fourth quarter. They are targeting dispositions of land, non-core assets, and properties that require significant capital to lease. Their FFO payout ratio is low and conservative with a 5.2% increase in common stock dividends over the last 12 months.

The company is projecting $375 million in net cash flows from operating activities for the current year and expects to see continued growth in the future. They have $580 million of incremental annual NOI coming online from their pipeline of projects, with two key projects expected to generate $114 million in the fourth quarter. They also have additional projects expected to stabilize and generate more NOI in the coming years. The company experienced a slight increase in capitalized interest in the third quarter, but this was offset by strong core operations. They have provided updated guidance for their future performance.

The company's per share outlook for 2023 has been updated to a range of plus or minus $0.01 from the midpoint of guidance, with a strong 6.7% growth in FFO per share. The company is unable to comment on details for 2024 yet. There is a new supply dynamic in the submarkets of Cambridge and South San Francisco, but the company's mega campus platform and reliability give confidence to tenants and can help overcome the competition. The impact in Cambridge is expected to be less than in South San Francisco.

The speaker discusses South San Francisco's oversupply and how it is located in an undesirable area. The speaker also addresses a question about occupancy and explains that a large portion of the planned increase is already secured through leases and sales. They also mention a signed LOI for a lease on a significant amount of space. The speaker then responds to a question about the potential for losing occupancy due to tenant pay issues and lease terminations, and explains that they have limited expirations and are in negotiations for a lease on the remaining space.

The speaker mentioned that there are no major projects expected to begin construction in their core markets beyond 2024.

The speaker asks about a comment made over a year ago regarding the market for development and how it has changed. Another speaker responds by saying that the comment was meant to express that 2024 would be a peak of supply deliveries, and there are only a handful of projects starting in recent times. The speaker also mentions that developers are starting to understand that there is enough supply in the market. The speaker also mentions that the company plans to be self-funding for this year and 2024, and this will be discussed further at Investor Day. The speaker also asks if there is a limit to the disposition program and if it can continue indefinitely. The response is that this will be discussed at Investor Day.

Joel Marcus and Peter have been discussing the company's growth potential and their ability to self-fund for next year. They also mention their partnership with tenants and how their needs have changed over the past six to 12 months, specifically in managing cash and making decisions in the current economic environment. They emphasize the importance of understanding and working closely with clients to meet their needs.

Peter Moglia and Hallie Kuhn discuss the deep relationships they have with their tenants and how they have been able to work with them during tough times. They also mention the potential for increased demand for lab space due to the adoption of AI and give an example of a signed lease with a property in San Francisco.

The speaker discusses the impact of pre-leasing rates on capitalized interest for the 2025 deliveries and notes that it is just one aspect of the business. The amount of capitalized interest is determined by the size and scope of construction activities for the assets.

The speaker explains that the amount of capitalized interest depends on the pace of deliveries and construction spending. If deliveries exceed construction spending, capitalized interest will decrease, and vice versa. They also mention that for projects scheduled for 2025 and beyond, pre-leasing is not yet in the "sweet spot" for tenants to make decisions, so it's too early to determine the breakeven rate between NOI and interest expense. They suggest that if a building has a 7% yield and capitalization is around 3%, then a 50/50 split between delivered and turned off units would result in a neutral impact on capitalized interest, but this is not typically the case.

The speaker discusses the high pre-leasing on assets for 2023 and 2024, and notes that pre-leasing for 2025 typically increases as the building nears completion. They also mention their competitive advantage in the current market due to their ability to provide flexible and expandable lab space on their campuses.

The speaker discusses the company's competitive advantage and moat against one-off buildings and how they are seeing an increase in vacancy in San Francisco due to buildings being built in shell condition. They also mention that some developers are agnostic about whether their projects will be office or lab space and that they are counting these projects as competitive supply. Additionally, there is a discussion about the company's development pipeline and potential opportunities for acquisitions.

The speaker, Joel Marcus, responds to a question about potential opportunities for M&A in the next 12-18 months. He mentions that they had a slow quarter but still see M&A as a positive opportunity, especially in filling the pipeline for drugs coming off patent. Most of the M&A opportunities they see are related to R&D, rather than classic manufacturing. The other speaker, Hallie Kuhn, adds that M&A should be looked at holistically and is a major component of large pharma strategies for the next decade and beyond.

The company is looking to recoup over $130 billion in lost revenue due to patent expirations. This has led to an increase in acquisition activity, which will result in additional R&D needs and upgrades. The company recently had a situation where two tenants were switched out, but this is not a common occurrence. There is pent-up demand for space in some of the company's mega campuses, particularly in Cambridge and San Carlos. The Alexandria Center for Life Science in New York City is another example of this.

The speaker, Joel Marcus, thanks the audience for paying attention and mentions that in some places, they have to juggle multiple tenants. The operator then concludes the question and answer session and turns the conference back over to Mr. Marcus for any closing remarks. Mr. Marcus thanks everyone for listening and concludes the conference.

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