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.

Thank you, and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The Company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the Company's periodic reports filed with the Securities and Exchange Commission. And now I'd like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

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…

Thank you, Joel and good afternoon, everyone. This is Hallie Kuhn, SVP of Science and Technology and Capital Markets. Alexandria is at the Vanguard and Heart of the $5 trillion secularly growing life science industry, which translates into numerous demand drivers for Alexandria's mission-critical lab space and we are the go-to partner for the life science industry. Today I am going to review these demand drivers and exciting new areas of life science, research and development all of which translates into a healthy and expanding tenant base and increasing long-term revenue. So first, what do we mean when we say the life science industry is secularly growing? First, massive unmet medical need with over 90% of known diseases having no available treatments drives the life science industry providing a tremendous opportunity for innovation, new company formation and life science industry growth. This opportunity set does not change at the whims of the market. It is non-cyclical and non-discretionary. Second, tenant growth and demand are event and milestone-driven. Important milestones include new biological discoveries, successful advancement of experimental therapies into the clinic and ultimately the demonstration of safety and efficacy of new medicines. Expansion of new therapeutic modalities such as cell, gene and RNA medicines; better diagnostic tools to accurately identify and diagnose patients, and increasingly efficient and predictive clinical trial designs have the potential to increase the number of new medicines over the coming years. Third, multifaceted and differentiated funding sources ensure that life science companies founded on impactful and differentiated technologies with experienced management teams continue to thrive Altogether, we estimate over $400 billion will be deployed to support life science companies in 2023 across venture funding, biopharma R&D, philanthropy, government, grants and public equity financings. Notably, 2023 has already exceeded the previous 10 year average of $360 billion…

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…

Thank you, Peter. Hello and good afternoon. This is Marc Binda, CFO and I'm going to cover some of the key financial metrics for the quarter. We reported very solid operating and financial results for the third quarter and nine months ended 3Q ’23, which was driven by strong core results and reflects the strength of our brand, scale, high quality and well-located campuses and operational excellence. Total revenues for 3Q were up 8.2% over the prior year. NOI was also up 8.2% over the prior quarter and the prior year driven primarily by the commencement of a $120 million of annual NOI related to 1.3 million rentable square feet of development, redevelopment projects, placed into service year-to-date through 3Q ‘23 coupled with strong same-property performance. FFO per shared diluted as adjusted was $2.26, up 6.1% over 3Q ‘22 and we are on track to generate another solid year of growth in FFO per share of 6.7% at the midpoint of our guidance for 2023. Our tenants continue to appreciate our brand, the mega a campus strategy and operational excellence by our team. 49% of our ARR is from investment-grade and publicly traded large cap tenants and we have one of the highest quality client rosters in the REIT industry. Collections remain very high at 99.9%, adjusted EBITDA margins remain very strong at 69%. The weighted average lease terms for leases completed in 2023 has far outpaced our historical averages at 11 years on average. And 96% of our leases contain annual rent escalations approximating 3%. Same-property NOI growth was solid and in line with guidance for 2023. 3Q ‘23 was up 3.1% and 4.6% on a cash basis and for the year-to-date period up 3.7% and 5.6% on a cash basis. Our outlook for 2023 same-property NOI growth remained…

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

All right. Thank you. [Operator Instructions] Our first question today will come from Joshua Dennerlein of Bank of America. Please go ahead.

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?

Yeah. So, Peter thoughts comments?

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.

Yeah, I would say also important to distinguish, we think in Cambridge the impact would be far less than South San Francisco. South San Francisco as you can see from the slide just adds too much stupid supply. The good news is a lot of that supply is in an area that people don't want to be in.

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?

Okay. I think Marc, just answered that question. But Marc, do you want to repeat that?

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.

Okay. Thanks, sorry for missing that. Appreciate that.

Yeah, no problem. Our pleasure.

Our next question, we'll come from Georgi Dinkov of Mizuho. Please go ahead.

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?

Well, I think number one, Marc just went through the details of occupancy and guidance in giving and he just answered the question from the analyst on what we're thinking about occupancy. And we said, for example, on a - we have a signed LOI and negotiating a lease for all that space. I'm not sure what else you referring to.

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?

Well, at the moment they have over $300 million in cash. It gives them a runway out through 2026 as I recall. You have to remember both 270 Bio and Bluebird or both joint and severely liable on the lease. We expect that's a great location. It'll be subleased. And we don't see any challenge to yards successful collection or rent over the coming few years.

Right. Thank you.

Yes. Thank you.

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

Great. Thanks. Maybe just a question on development starts. Kind of how you're thinking about that over the next couple years the funding needs for potential impact on capitalized interest will be helpful.

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

All right. And then just on the pending asset sales I know Marc kind of talked about in a higher cap rates than expected. I was wondering if there's any numbers if you could maybe associate with that? And any color you can give around the buyer pool, their interest there would be helpful.

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.

All right.

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

Hey, thanks. Good afternoon. So I was kind of doing some back reading and I looked at the second quarter of 2022 where it was the comment was beyond 2024 and beyond, we don't see large disruptive projects well underway in our core markets that are preparing to go vertical. Does that comment, I mean, I guess the question is, what change between that comment little bit more than a year ago and today because the market for developing only has gotten worse with that macro environment and all that? Or do you still - would you still agree that this is not disruptive relative to that comment that was made about a year and change ago?

Yep. Peter do you want to maybe address that?

Yeah. Rich, I mean, the comment, the intent of the comment was to express that 2024 was going to be a peak of supply deliveries and that the numbers that I just went through I think illustrated that. There will be some, some things that we thought would deliver in ‘24 that might get pushed into ‘25. But we're not seeing more than less and probably in total in all of our markets like a handful of things that have started in recent times meaning like the last few months. It does appear and the numbers themselves in San Francisco I think were really telling it does appear that developers are finally understanding that the market has plenty of supply underway. And not - there's not more needed on a speculative basis. And so that's good news for the coming years.

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?

Yeah. I think that's a really good question and that'll be a cornerstone of the Investor Day presentation. But I think it's fair to say Rich that the way to think about it is we continue to have, the company owns and operates 40 million square feet and has the capability to double our size and what we own beyond that. So there's a pretty deep pool for partial interest and sales of outright non-core assets, but we do have an approach to self-funding for next year in addition to that, which I think will be pretty, pretty exciting. So let us wait to announce that that at Investor Day.

You got it. Thanks very much, everyone.

Yep. Thank you guys.

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

Thanks and good afternoon, everyone. Maybe Joel or Peter, we always think of your team doing such a great job partnering with tenants understanding their business, helping them solve real estate problems, Peter I think the examples you talked about in San Diego with the developments really speak to that this quarter. When we think of that partnership, how have you seen the needs and maybe the pain points of your tenants changed over the past six to 12 months?

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.

And, remember, I mean, this isn't the first time we've hit hard times as a company. We've been around for, close to 30 years. And we've worked with our tenant base during all of these times. And the goodwill that accumulates and how we're able to help them is why 80% of our leasing comes from these existing tenants. I mean, we have the ability - we have the size, the ability to work with folks that need assistance and it provides great goodwill for future endeavors for those of the - those management teams that are in the buildings that we're helping them out with.

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?

Sure. Happy to. A great example and we had a quote from the CEO, Roger Perlmutter the former CSO of Merck in our press release is icons, which we have a signed lease with a property under development in San Francisco. With AI you have to have data to train the models. And so, when folks kind of – there has been commentary thrown out that oh! AI is going to and, make it so that you don't have to run experiments as extensively in labs. What we see is actually the opposite, because you need such vast datasets to train the AI ML models in order to optimize and drive towards results that we see really large footprints whether it's robotic, high throughput, both chemical, and biological data these companies are generating in order to be able to actually apply AI and ML. It would be like applying generative AI to the internet in 1995, right? You have to have a really vast starting dataset in order to get something that's meaningful on the back end. So we're continuing to see that evolve I think across all of our clusters. There's some really interesting ways that companies are integrating this tool into their toolkit for developing new medicines and that the end results 10, 20 years from now it's hopefully a lot more medicines for patients and additional lab space demand.

Appreciate the color. Thanks everyone.

Yep. Thanks, Tom.

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

Good afternoon. Thanks for having me on the call. I got a question on 2025 deliveries. So correct me if I'm wrong here, but the pre-leasing rate of the 2025 delivery should have a significant impact on how we're looking at capitalized interests in this context. So, assuming the pre-lease rate remains stable as it was reported in the supplemental release last night, can you give us an idea of how this would impact the interest expense on the P&L?

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.

Yeah. Hi Connor. So, yeah, so capitalized interest is really determined based upon the size and magnitude of the assets under construction activities or under broadly all types of activities to get that asset ready for its intended use. So, to the extent that deliveries outpace construction spending and assets that are going through, either redevelopment or development, then capitalized interest would go down and the opposite is true if construction costs exceed the pace of deliveries. What I'd say on 2025, if you're looking at the leasing percentages is, we've got some time on some of those and we've seen that that pre-leasing percentage pick up. Definitely, if those assets, we get to ‘25 and those assets seize activities and yeah, then capitalized interest would turn off. But we're, we got a long headway there. We got a long time and we've done - we've definitely done studies to look at the timing of pre-leasing and we're not quite in that sweet spot for some of these assets that are out in ‘25 and beyond in terms of when tenants are ready to make decisions. So, I guess, stay tuned.

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?

I'm not sure I understand your question, Connor.

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?

Yeah. I guess the way to look at that, Connor is this, if you're looking at projects that has say just to make the math easy 7% yield and capitalization is in the high 3% range that that would, that would kind of tell you that, if half the building turned got delivered and half the building got turned off, you'd be neutral, but that's really, it's really not typically the case. I mean, that the pre-leasing on all the, all the assets that we have for ‘23 and ‘24 is extremely high. So, we'll have to wait and see, but like I said before, we've seen the pre-leasing on ‘25 pickup as we get closer and closer to delivery, which is, which is pretty typical for tenants that of smaller size that make decisions much closer to the point at which they can see the building coming out of the ground and can visualize it.

Got it. Understood. Thank you.

The next question will come from Steve Sakwa of Evercore ISI. Please go ahead.

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?

Well. Yeah, hey Steve. So I think the way to think about that is other landlords who may have laboratory assets. If they're in - if you're in Cambridge or you're in other key markets that are directly competitive of ours, it always depends on their financial capability and also the needs of the tenant. I mean, it's really hard to say. I think at the moment we feel very good about our positioning because if you're a tenant and you need especially now just in time space and you need a path for future growth, you hit a valuation milestone, value inflection milestone, which is very typical today. A one-off building, no matter whether it's fitted out or not fitted out, doesn't really offer you that opportunity. You need a campus. You need a campus and generally you want one run by Alexandria because you want the best operator because a one-off building may get you some space, but oftentimes there's no path to future growth or expansion. And so that that's how we kind of see things. So we think we have an enormous competitive advantage and moat against one-off buildings by whether they be landlords who know what they're doing or landlords, who have no idea of what they're doing.

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.

Great. Thanks, guys. That's it for me.

Okay. Thanks, Peter.

The next question will come from Dylan Burzinski of Green Street. Please go ahead.

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?

Yeah. So, first of all I think you noted we had a slow quarter. I don't think any quarter is slow. So you might rethink about that commentary. Second, yes, just remember the quote that I gave regarding Warren Buffett. So we think there may be some opportunities, but we certainly won't comment on them.

Thanks. That's all I had.

And our final questions today will come from Aditi Balachandran of RBC Capital Markets. Please go ahead.

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?

Well, most of it. Hallie can comment. We see as a big, big opportunity as, if you look at these schedules of drugs coming off patent for the balance of the decade, it’s pretty large and virtually the only way to fill pipeline in that shorter time is to acquire technologies and pipelines that are available. And so we see it as a big opportunity, number one. And by and large most of that is R&D related. We're not so focused. Sometimes you have the new modalities that are you've got intimate manufacturing with the new modalities as part of the R&D Center, but kind of classic manufacturing. We don't really deal with that. And we don't see that as an opportunity for us. But Hallie, I don't know if you have any other comments.

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.

Great. That’s really Helpful. Thank you.

Yeah. Thank you.

And we did have an additional question coming from Wes Golladay of Baird. Please go ahead.

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?

Yeah, that's a kind of an unusual circumstance where we felt we had a robust client that needed space even a little more quickly than we anticipated. We had another client. We saw that maybe had taken on too much space. So it was actually an ideal mix and marriage of putting the two together. They come up from time to time. I'm not sure I'd read anything into that, but that's kind of normal, but that's how it happened.

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?

The answer to that is yes. And but that tends to be more like Cambridge-centric. Maybe our San Carlos campus, not quite a mega campus yet. It's about 600,000 feet, but to grow much larger. So, Alexandria Center for Life Science in York City is another example. So, yes, some places we see that there are multiple tenants we're having to kind of juggle.

Thanks for paying attention to.

Yeah.

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.

Okay, thank you very much for taking time to listen. And god bless everybody.

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