The operator welcomes everyone to the Alexandria Real Estate Equities 2023 Fourth Quarter and Year-End Conference Call. The call contains forward-looking statements and the company's actual results may differ from these statements. Joel Marcus, Executive Chairman and Founder, expresses his confidence in the company's success and impact in the healthcare industry. Alexandria has achieved superior results, distinctive impact, and lasting endurance. The company's total shareholder return since IPO is over 1,500%, beating all benchmark REIT indices and most other healthcare REITs. Alexandria's tenants have played a significant role in the development of 50% of FDA approved therapies in the last decade.

In 2023, Alexandria had a successful year, with notable achievements such as 11% NOI growth and a record $265 million of incremental NOI. The company also continued to lease out its properties, with two key leases in the fourth quarter to Novo Nordisk and Cargo Therapeutics. Additionally, 76% of leasing was with existing tenants, and the company is expecting more significant leases to mature in the near future. Overall, Alexandria's 2023 performance was highly resilient and sets a strong foundation for future success.

The company expects to make progress on lease expirations and filling vacant space while achieving positive rent growth in 2023 and 2024. They have a strong balance sheet and believe the life science industry will benefit from key macro tailwinds. The company has decided not to proceed with the redevelopment of their 42nd Street asset in New York City due to challenging state and local policies. They have successfully grown the commercial life science market in New York City and will continue to focus on their ACLS mega campus. This decision was made out of prudence.

Peter Moglia, speaking on behalf of Flagship Pioneerings, acknowledges the challenging conditions of 2023, which included economic turbulence, climate change, and political unrest. Despite this, Alexandria had a strong performance and maintained strong earnings growth. Their balance sheet is strong and they have proven their ability to self-fund investments. Moglia discusses the company's development pipeline, leasing, supply, and asset sales, and hands over the discussion to Hallie. In the fourth quarter, they delivered over 1.2 million square feet and a total of 3.2 million square feet for the year, resulting in an incremental NOI of $265 million for the year and $145 million for the quarter, the highest in the company's history.

In the fifth paragraph, the company discusses their initial weighted average stabilized deal for 2023 deliveries and the positive momentum in development and redevelopment leasing activity. They also mention their strong pipeline for future projects and the demand from their credit tenant base. The company then transitions to discussing their leasing and supply, stating that they have returned to positive fundamentals and have a competitive advantage with their Mega Campus model. They highlight that 63% of their leasing was completed in Class A mega campuses, resulting in strong rent increases for the year.

The demand for office space in Greater Boston, San Francisco Bay, and San Diego has increased compared to the previous year, indicating a positive trend in the industry. However, there are still some projects on hold due to caution from management teams and boards. The company is winning most of the current high-quality demand due to its location, experience, scalability, operational excellence, and reliability. They are closely monitoring supply in their databases and expect 2024 to be the peak year for new deliveries, followed by a slowdown in 2025. In Greater Boston and San Francisco Bay, there has been an increase in unleased competitive supply due to project deliveries being pushed from 2023 to 2024. In San Diego, there has been a slight decrease in unleased competitive supply, but this is offset by leasing in those projects.

The direct and subleased vacancy rates in Greater Boston, San Francisco Bay, and San Diego have all seen increases, with the most significant rise in the San Francisco Bay market due to unleased new deliveries. The company's value harvesting asset recycling program has been successful, with well-located and stabilized assets commanding premium valuations. The recent sales of properties in need of repositioning also received solid valuations. However, due to the unstabilized nature of these sales, cap rates cannot provide accurate return expectations. A directional comp from Healthpeak's sale of a fully leased building in Torrey Pines can be used as a reference.

The purchase price of a recent acquisition yielded a 5.3% cap rate, despite challenges. The life science industry is experiencing a reset from its previous highs, but remains a strong and growing sector with a positive outlook. The XBI and large biopharma performance ended 2023 with positive numbers, and Alexandria tenants Eli Lilly and Novo Nordisk saw significant increases in their stock value.

In December, a significant lease was announced with Novo Nordisk for their new US R&D headquarters. 2023 saw a high number of M&A deals, driven by pharma's need to bolster pipelines due to patent expirations. This creates a positive cycle of innovation. The FDA approved 55 novel medicines, including eight advanced cell and gene therapies. Large pharma, which makes up 19% of the company's ARR, continues to invest in R&D to combat potential revenue loss from patent expirations.

Pharma companies are looking to partnerships and M&A to offset revenue gaps, but they also have strong balance sheets and a large amount of available funds for internal research and M&A. Recruiting and retaining top talent is crucial for innovation, and Alexandria's mega campuses offer amenities and community for scientists. Biotech companies with marketed products are increasing their presence on Alexandria's campuses, and clinical stage companies are transitioning to commercial stage. Pre-commercial public biotech companies have seen success with data-driven milestones and significant follow-on financing, including through alternative structures.

The San Francisco-based tenant BridgeBio has raised over $900 million in the past year and is expected to have access to additional liquidity as the IPO market opens up in 2024. Private biotechnology investments have slowed down but are still higher than pre-COVID levels. Life science product, service and device tenants, which make up 21% of the ARR, are critical for developing new medicines and are creating advanced technologies that require specialized infrastructure and talent.

Alexandria, the trusted brand for life science real estate, has had a successful year in 2023 with an 11.5% increase in total revenues and a 12.2% increase in NOI. This was largely due to strong same-property performance and record high development and redevelopment projects. FFO per share diluted as adjusted was also up 6.5% over the previous year. The company's success is attributed to their disciplined execution of their mega campus strategy.

In 2023, our company experienced strong rental revenue from investment-grade and publicly traded tenants, with 75% coming from our collaborative mega campuses. Our collections and adjusted EBITDA margins remained high, and most of our leases have annual rent escalations. Same-property NOI grew in line with previous guidance, but was slightly impacted by temporary vacancy at four properties. We expect to see accelerated growth in the second half of 2024, driven by rental rate growth and occupancy growth. Leasing volume was solid for the year, with 76% coming from existing tenant relationships.

In 2023, rental rate growth for lease renewals and releasing space was strong, with an increase of 29.4% and 15.8% on a cash basis. This was the third highest annual amount in the past 10 years. The company was able to backfill a 100,000 square foot space in San Carlos with a clinical-stage biotech company, resulting in a slightly negative starting cash rent compared to the previous tenant. Excluding this transaction, rental rate increases for the quarter would have been 21.4% and 9.7% on a cash basis. The company expects solid rental rate growth for 2024, with a midpoint of 15% and 9% on a cash basis. The overall mark-to-market for cash rental rates remains strong at 14%. Non-revenue-enhancing expenditures, such as TIs and leasing commissions, have averaged 15% of NOI over the last five years and remained low in 2023. Year-end occupancy was also solid at 94.6%, with the primary driver of the increase being space delivered in San Diego.

The company expects modest growth in occupancy for year-end 2024 and has a strong balance sheet with high liquidity and low debt maturities. They plan to focus on enhancing their asset base and recycling capital through dispositions of non-core assets. In 2023, they completed $1.3 billion in dispositions and did not issue any new common equity. The team is focused on executing their capital plan for 2024 and has pending dispositions totaling $142 million.

In summary, the company expects to focus on selling non-core assets rather than partial interest sales in 2024. They recognized impairments of $271.9 million in the fourth quarter, including charges related to the sale of two properties. The company also expects strong cash flows from operating activities after dividends in 2024, which will support growth in annual dividends. They have a low FFO payout ratio and have seen significant external growth in terms of incremental annual NOI onboarded in 2023 and the fourth quarter of 2023. The majority of their rental revenue comes from investment-grade or publicly traded large cap tenants.

The company expects a significant earnings benefit in the first quarter of 2024 due to a large amount of deliveries and a projected growth in net operating income. They also anticipate a decline in capitalized interest compared to the previous year, but this will be offset by an increase in the weighted average interest rate. The realized gains from venture investments in the fourth quarter were lower than expected due to a large realized loss, but the average FFO per share has included $96 million of realized gains from venture investments in each of the last three years.

The company has a positive outlook for quarterly realized gains from venture investments in 2024 and reaffirmed their guidance for that year. The guidance includes a modest increase in EPS and FFO per share, and the company plans to file a new ATM program in the near future. During the question-and-answer session, the company discussed the occupancy uplift in their guidance, which includes 300,000 square feet of leases that have already been signed and will commence next year. The company also mentioned having $3.4 million of lease rules in 2024.

The company will have about 1.8 million square feet of unresolved space after accounting for anticipated redevelopment and development. This is a manageable number compared to their historical leasing rate. The company expects net effective rents to bottom out soon, with some pricing power for larger requirements. The company is approaching the midpoint of their acquisition guidance due to transactions in process, not because they want to be more aggressive. They have also sold some noncore properties, such as those in New York.

During a recent conference call, Joel Marcus, CEO of Alexandria Real Estate Equities, discussed the company's plans for the rest of the year. He stated that they are focused on selling noncore, noncampus assets and feel confident about this strategy. When asked about their pipeline for dealing with expirations and developments, Marcus declined to give specific details but indicated that each lease and market is unique and not a commodity product.

During a conversation with Vikram Malhotra, Joel Marcus and Hallie Kuhn discussed the latest thoughts on office versus lab space among tenants in the portfolio. They clarified that the lab space is essential for researchers and there is no rationalization of that space. However, there may be a need for larger office requirements as companies grow. Biogen's recent announcement of rationalizing office space only applies to their pure office space, not their lab space. Biogen is a big company with dedicated office space for various functions.

During a conference call with Wedbush, Rich Anderson asks about the impairment and free rent burn at the company. Joel Marcus and Marc Binda respond, stating that there may be more impairments in the future as the company sells non-core assets, and that the $114 million of free rent burn is a reflection of the difficult market conditions. They also mention that the company delivered $265 million of NOI this year, with many long-term leases.

The speaker is discussing a specific lease at 835 Industrial and the reasons for the decline in rents. It is believed that the decline was due to a specific situation where a tenant vacated and a new tenant was found quickly without the need for tenant improvements. This specific situation is seen as a positive for the company.

The speaker discusses the positive M&A activity experienced by Alexandria, as mentioned by Hallie.

Marcus explains that the impact of acquisitions on space demand varies depending on the size and nature of the acquisition. Strategic acquisitions tend to lead to expansion, while smaller bolt-ons may not. The first half of this year will be impacted by four vacant properties, but the company expects to make progress on leasing them in the second half.

The company has a significant amount of free rent that has already been leased and will contribute to their numbers in the second half of the year. The decision-making process for tenants has been slow, with a preference for available build space rather than planning ahead. This is especially true for smaller companies, while larger companies need to plan ahead due to less inventory in their size range. The just-in-time leasing trend is still prevalent, particularly for biotech companies that hit milestones and need to scale quickly.

The second question asks about elevated concessions in the market, but Peter explains that these are mainly for new development space and not needed for the operating portfolio, as tenants can recycle their tenant improvements. Concessions are not as necessary for existing properties, especially for larger spaces.

During the conference call, the speaker addressed a question regarding the company's 2024 exploration schedule and the decrease in expirations moving into redevelopment. They mentioned that the decrease was due to the decision to sell one of their assets. The speaker also discussed the company's plan to include $95 million to $125 million of investment gains in earnings, despite recent impairments. They stated that over the past three years, the company has averaged $96 million per year in investment gains.

The company has seen modest impairments compared to gains over a longer period of time. They are feeling optimistic about M&A and believe they can deliver on their guidance of $95 million to $125 million in gains. They have over $300 million in unrealized gains on their balance sheet that could potentially be tapped. They have reiterated their guidance, indicating confidence in hitting their numbers. There has been some delay in leasing decisions from tenants due to the uncertain environment, but the company believes that the prospect of interest rates continuing to drop may lead to increased activity and urgency from tenants.

Joel Marcus and Peter Moglia discuss the different sectors in the biotech industry and how they are driven by different factors. They also address the leasing prospects for projects scheduled to be stabilized in 2025 and mention that they will provide more information on this during their first quarter call. Dylan Burzinski asks about the increase in TIs for new development leases and Peter Moglia attributes it to the current supply and demand imbalance, stating that it is likely to be the new normal going forward.

The speaker discusses the increase in competition and construction costs in the real estate market, leading to higher prices for tenants. They also mention that some sectors are more willing to invest in space than others. When asked about the profile of buyers for their noncore assets, the speaker declines to comment. The call concludes with the speaker wishing everyone a safe and healthy new year.

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