The operator begins the conference call and introduces Paula Schwartz, who then introduces Joel Marcus, the Executive Chairman and Founder of Alexandria Real Estate Equities. Joel acknowledges the company's solid performance in the second quarter and the release of their corporate responsibility report. He also congratulates the team for securing 100% renewable energy for their Greater Boston cluster market.

The author discusses the shift in the life science industry from a bull market to a bear market in February 2021 and their efforts to adapt and maintain their competitive advantages. These include their first mover advantage in top life science clusters, high quality assets in desirable locations, and strong relationships with tenants such as Lilly. They also mention their focus on redeveloping and developing mega campuses and reducing their non-core assets.

The company continues to have a strong balance sheet and experienced management team. They had solid growth in FFO per share, with a majority of their ARR coming from mega campuses and investment grade companies. They have maintained stable occupancy and have strong EBITDA margins. They are focused on leasing and increasing occupancy for their upcoming 2025 rollovers and deliveries. They are also working on recycling capital for future growth.

The life science industry is a crucial and highly valued sector that drives innovation in the discovery of new medicines. It has been significantly impacted by the COVID pandemic, but is recovering and receiving strong levels of capital from diverse funding sources. The industry is advancing at an unprecedented pace, with biomedical and government institutions and private biotech companies playing key roles in fueling research and development. Private life science venture funding has been particularly strong this quarter, reaching over $12 billion.

The year 2022 is expected to be the third highest year for life science venture dollars, with pre-commercial biotech companies and follow-on financings experiencing historic highs. However, IPO volume and the XBI index do not accurately reflect the market, as there are both successful and struggling biotech companies. Commercial stage biopharma and large pharmaceutical companies are committing record levels of capital to R&D and M&A, driven by the need to recruit and retain scientific talent. This is reflected in a recent lease with a multinational pharmaceutical company on a mega campus in San Diego. The life science product, service, and device tenant segment accounts for 21% of ARR.

The BioSecure Act, if passed, will limit the use of Chinese contract manufacturing and research organizations, which is viewed as positive. The FDA has approved many novel therapies, with 50% of them developed by Alexandria tenants. A recent approval includes a novel antibody for treating early Alzheimer's disease. The life science industry is strong and fueled by innovation and diverse funding sources.

The company remains committed to creating and growing life science ecosystems and clusters to accelerate innovation in the healthcare industry. The strong demand for therapies and medicines due to pent-up demand from the pandemic is expected to continue driving growth in the sector. The company delivered 284,982 square feet of leased space in the second quarter, with a total of $42 million in incremental NOI for the year. The development and re-development pipeline, mainly located in high barrier to entry submarkets, has been successful due to the company's strong brand and operational excellence.

The company's development and re-development pipeline is expected to deliver significant incremental NOI in the near-to-medium term, with $480 million expected to be delivered in total. The company has a strong track record of leasing and retaining tenants, with 83% of leasing during the quarter coming from existing tenants. The company's high-quality mega campus model, AAA locations, operational excellence, and strong balance sheet have created a moat and established the company as a trusted brand in the life science real estate market. The market is currently experiencing a flight to quality, with many inexperienced and undercapitalized developers struggling to lease their projects.

During the second quarter, the company leased over 1 million square feet, with both GAAP and cash rental rates increasing. The majority of renewals had a positive impact on rental rates. The supply of new buildings is expected to peak in 2024 and decrease in 2025. The company is making progress on its asset recycling program, with $806.7 million in pending transactions and $77.2 million in closed sales. The company expects more interest in its non-core asset sales due to anticipated rate cuts and improved financial markets. The lack of available financing has affected capital markets activity in the commercial real estate industry.

In the second quarter of 2024, CMBS issuance has increased significantly, providing positive momentum for the company's efforts. The CFO, Marc Binda, reported solid operating and financial results, with total revenues and NOI increasing due to the company's development and re-development strategy. FFO per share diluted as adjusted was $2.36, above consensus, and the company reiterated its full-year 2024 guidance. 74% of annual rental revenue comes from collaborative mega campuses, with high-quality cash flows and strong collections. Leasing volume was strong in the first half of 2024, up 27% from the back half of 2023 and consistent with historical averages.

The company has benefited from its scale, tenant relationships, and brand loyalty, with 79% of leasing activity coming from existing tenants. Rental rate increases for the first half of 2024 were strong and the outlook for the full year remains solid. Lease terms for new leases were consistent with previous years and the overall mark-to-market for cash rental rates is 12%. TIs for renewals and releasing of space were consistent with historical averages and total non-revenue enhancing expenditures are expected to be lower than the five year average. Same property NOI growth for the second quarter was solid and the outlook for the full year remains consistent with previous updates.

The company's overall capacity for the quarter was strong and in line with previous quarters. The team has successfully addressed most of the lease expirations for 2024, with only a modest amount remaining. Looking ahead to 2025, there are some key lease expirations that may require time to re-lease or reposition the assets. The company also saw growth from their development and redevelopment projects, with 284,982 square feet delivered and $16 million in annual net operating income generated. Additionally, there is potential for significant future growth in net operating income as free rent from recent deliveries burns off.

The company has $5.4 million of development and redevelopment projects that are 61% leased or negotiating, expected to generate $480 million of incremental annual net operating income over the next four years. They have completed an extension of their ground lease at Alexandria Technology Square, requiring a prepayment of rent of $2,135 million in 4Q ‘24 and 1Q ‘25. This will be amortized into non-recoverable ground rent expense starting in 3Q ‘24 through 2088. The company has increased their guidance range for disposition sales to reflect the funding for the first ground lease payment. The asset is viewed as a generational asset and has seen a significant increase in NOI since it was acquired in 2006. The company is pleased with the outcome and believes the extension enhances the long-term value of the campus. They are also focused on completing committed and under construction projects and reducing the time from lease execution to delivery.

The paragraph discusses the decline in capitalized interest and the strong balance sheet of the company. The company's leverage remains low and they have a high level of liquidity. They have recently extended their credit facility and remain disciplined in their funding strategy. Their disposition strategy focuses on selling assets that are not integral to their mega campus strategy and they may also consider reducing the size of their future pipeline through asset recycling.

In July 2024, the company completed the sale of a vacant building in Manhattan for $60 million. This sale, along with pending dispositions and equity raised, totals $912 million, which is 59% of the company's guidance of $1.55 billion. The company plans to pause on future issuances under their ATM program and fund a significant amount of their equities with retained cash flows. They have a conservative FFO payout ratio of 55% and have seen realized gains from venture investments. The company has updated their guidance for 2024, with an EPS of $2.98 to $3.10 and a maintained midpoint for FFO per share of $9.47, representing a 5.6% growth.

During the question and answer portion of the conference call, an analyst from Bank of America asked about the repositioning of the Alexandria Technology Square mega campus from single tenancy to multi-tenancy. The CEO explained that this was due to Moderna moving out and leaving laboratory assets behind, and that this was not a fundamental change. The analyst also asked about a slight drop in LOIs between the first and second quarters, to which the CFO responded that this was due to leases not being finalized rather than being lost.

The speaker discusses the decrease in lease percentage at 311 Arsenal due to an increase in square footage. They also address a slight difference in the pending acquisition signed letters of intent in comparison to the previous quarter. The company's focus is on conserving capital and putting it towards their active pipeline and dispositions. The next question is about cap rates on pending sales and updates on property values and cap rates in their markets. The speaker mentions that cap rates for the pending sales are in line with their commentary and there are some positive developments for next quarter.

The speaker discusses the company's noncore assets and their representation of the high-value assets they plan to hold long-term. They mention the difficulty of calculating GAAP rates and the variation in returns depending on cost of capital. The company is leaning into their mega campus strategy and shedding more noncore assets, with the goal of having high 80s to low 90s of annual rental revenue from mega campuses in the near future. The percentage of noncore assets in the portfolio is not specified, but the company has been shedding more core assets in the suburbs and focusing on mega campuses since 2006. The speaker responds to a question about the percentage of noncore assets by stating that their main goal is to increase the percentage of annual rental revenue from mega campuses.

Michael Griffin asks a question about the decline in weighted average lease term in the company's renewals. Joel Marcus explains that this is due to an increase in demand from earlier stage companies who cannot commit to long-term leases. Peter Moglia adds that this is a result of many of the recent leasing being for early-stage companies who expect to grow in the future.

The company has adopted a mega campus strategy to accommodate growing tenants, but there is no specific trend driving this decision. The increase in TI and LC costs in the quarter was due to specific lease renewals and the age of certain spaces, but overall it is still within the company's average since 2020. The delay in the 651 Gateway project is due to market conditions.

The speaker explains that the lower leasing numbers in South San Francisco are due to a lack of demand in the area. They also mention that the building being redeveloped is an old one and that there are ongoing transactions that were not present in the previous quarter. The speaker also mentions that there is no specific number for when they would stop capitalizing costs on the project, but they will continue to monitor the situation. A question is asked about the leasing mix issue in the past quarter and the speaker confirms that the numbers for the first half of the year and the guidance for the second half suggest a GAAP increase of 8% and a cash average of 5%.

The speaker acknowledges that their analysis of leasing volume is not perfect, as volume can vary from quarter-to-quarter. They are still confident in their guidance for the year, which may imply slightly lower numbers than the first half. There is a differential between core and noncore assets in terms of cap rates, with a spread of 100 to 200 basis points between prime and non-prime locations. The company is funding development with dispositions, which may expose them to impairments in this market, but they view it as a necessary step in their current situation.

The speaker, Joel S. Marcus, believes that the recent drop in the life science industry is a silver lining because it has made them realize the importance of having a mega campus with great amenities to attract and retain tenants. This has been their focus for some time and they plan to continue selling noncore assets to further refine their strategy. Peter M. Moglia agrees and believes they would have eventually sold these assets anyway. They have already transitioned from outer suburbs to inner core markets as the company has grown.

In this paragraph, the speaker discusses the company's focus on development and selling non-income producing land. They also mention a recent ground lease purchase and the potential to extend other ground leases in the future.

The speaker discusses the length of the lease terms and how they are now at around 60 years. They also mention that most of the leasing activity is coming from early-stage biotech companies, which is consistent with the overall demand for space in the industry. However, they expect the middle market to fill in over time. The demand for space is strong across multiple data points and segments of the tenant portfolio.

The speaker discusses the diversity of companies in the life science industry and provides an update on the supply outlook. They mention that there has been progress in scheduled deliveries, with only 5% of total inventory left to deliver this year and half of that amount to be delivered next year. There have been some delays in the construction of two developments, but both are 100% leased.

The speaker, Joel Marcus, answers a question from Vikram Malhotra about the near-term outlook for the life sciences industry. Marcus acknowledges that there may be some challenges in the near-term, but overall, he believes the industry has a strong long-term outlook due to its critical importance and strong funding and diversity. However, he notes that there is currently an oversupply of space and it is difficult to predict how this will affect demand in the future.

The speaker discusses the company's optimism for the future and their plans to make adjustments to their assets and capital plan to attract more tenants and protect against potential economic shocks. They also mention their repositioning strategies, such as redeveloping office spaces into labs, and give an example of a successful repositioning with Apple in Austin.

The company is getting back warehouse and R&D spaces and is marketing them. Some buildings may be converted, but the majority will be repositioned for multi-tenant use. The amount of CapEx for this is relatively small over a long period of time. Apple is negotiating a renewal for the majority of buildings, but is giving back two buildings that could be used for R&D, warehouse, or data center purposes. The company had assumed this scenario in their forward model. There was 341,000 square feet of leasing activity in the development and redevelopment pipeline.

The speaker is asking a question about the net change in lease square footage percentages in the second quarter. The CEO responds, explaining that there was a project in San Diego where the tenant added additional term, resulting in a larger square footage. The speaker thanks the CEO and asks about the leasing spreads, to which the CEO responds that there was nothing notable that dragged them down this quarter.

The speaker explains that the current market conditions are similar to a barbell, with a strong first quarter followed by a more muted second quarter. They also mention an increase in activity from small to midsize tenants, but note that larger tenants may become more active if the IPO market opens up. The speaker also mentions that requirements from public biotechnology tenants are milestone-based and not affected by the macro environment.

The speaker discusses the expansion of companies due to positive data and how demand is driven by the value of their pipelines. The next question is about retention rates, which have been trending down over the last six quarters. The speaker clarifies that this is not solely due to supply, as some large tenants have signed new leases at other developments. They also mention that for life science facilities, moving to a new landlord may not be worth the downtime and risk associated.

Marcus and the others on the call discuss the complexities of leasing in the industry, stating that people don't move for small differences in rent and that the sponsorship of who they lease from is critical. They also mention their mega campus strategy and how supply impacts leasing. The last question focuses on Boston and potential mark-to-market rent increases.

The company's in-place mark-to-market for their entire portfolio is 12%, with a significant amount of space rolling in Cambridge. Market rents in Boston and other large markets have come off their peaks but are still above pre-pandemic levels. The company is happy with the current rental rates considering the supply dynamic. The speaker wishes everyone a safe and healthy summer and looks forward to the third quarter call.

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