Alexandria Real Estate Equities, Inc. (ARE) Q2 2026 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Alexandria Real Estate Equities Second Quarter 2026 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I'd like to turn the floor 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 the Alexandria Second Quarter Earnings Call. With me today are Peter, Marc and Hallie. And before we start detailed comments, I'd like to start with a quote from Ralph Waldo Emerson, Cultivate the habit of being grateful for every good thing that comes to you, and to give thanks continuously. And because all things have contributed to your advancement, you should include all things in your gratitude. The point being we are very grateful and most proud of our one-of-a-kind team and of our one-of-a-kind mission. Operating in a highly regulated industry within a rapidly changing macro environment is never easy, but we remain steadfastly focused on our path forward. Let me share with you some key observations regarding the second quarter and maybe a good place to start is leasing kind of the lifeblood and the key to stabilization of operating metrics, especially in the life science industry these days. And remember, 75% of our leasing has come from our own tenants, really best-in-class tenant roster. We're seeing steady improvement, which is good. We're winning outsized number of shares of transactions, which is good. We have a very well diversified and strong tenant base. Our Page 18 pie chart is illustrative of that. Very strong leasing in the second quarter from our life science product, service and device sector, really depicts shovels and tools of the industry, almost 40% of the leasing volume. Also a strong second quarter showing from our advanced technology sector in several of our submarkets with almost 30% of the leasing volume. Public biotech, only about 6% as the industry is seeing substantially improving metrics. They are still decoupled from the demand on the ground, and we might have more to say about that in the Q&A. I think the one thing that could make a difference there would be, well, many things could make a difference, but I think stability and truly knowledgeable and expert leadership at HHS, FDA and NIH would certainly go a long way. There's still much work to do on our leasing of our redevelopment, development pipeline with only about 70,000 rentable square feet in the second quarter. And we're very keenly focused on the modest remaining 2026 rollovers that remain unresolved of about 494,000 rentable square feet. 2027 rollovers, unresolved other than those focused either track to leasing or track, we have ongoing discussions of about 2.7 million. This is mission-critical as we go forward to the last half of 2026 and into '27, of course. For third quarter, our pre-read indicates that our best knowledge at this point is about 950,000 rentable square feet of leasing projected in the third quarter, again, based on our current view of that forward pipeline. We have and will continue to meet the market. Moving from leasing to sources of capital, as we did in 2025, we are currently very comfortable that we can and will meet our total target of $2.9 billion. We're always mindful time is of the essence, but timing is never simple. We are making excellent progress and would not let some artificial timing because or be of concern at this juncture. The demand for Alexandria's assets remain strong. And in third quarter, we'll take a bit of a deep dive into the composition of the assets that have been sold or will be sold this year and the disposed NOI analysis. We are very mindful not to unduly tie our hands in any new joint venture transactions and are working hard to make sure those are successful both for capital raising and for operational efficiency. Moving on to allocation of capital. We're laser-focused on trying to reduce our CapEx of the $1.75 billion construction pipeline for this year, which is fortunately highly leased, and we're anxious to continue deliveries, and we're focused on the lease-up of vacant space and making good progress there. On the life science industry itself, I'll refer you to pre-read pages VII and VIII, 7 and 8 of the supplement regarding the core pillars and the key 2026 second quarter events. To say it's greatly nuanced and complex would be a bit of an understatement. Again, we're still very focused on HHS, FDA and NIH. One other comment we see during an election year, a lot of people advocating for Medicare for All. It's been stated by many administrations at both the executive level and the HHS level that -- that would be -- Medicare for All would be kind of a budget buster. It would be almost impossible to administer given the current administration is still tough, and it would be a giant impact on budget. It would also mean taking 2/3 of the population who are covered under private plans and moving them to a government system. And if you go to Canada or any other country that has that system, you wait in line, so not a very desirable outcome. The key factors to watch for the rest of 2026 in the life science industry beyond, obviously, the midterms, there's obviously continuing strong innovation, which is fueling the industry. There's been a very solid financing environment, and we're closely watching interest rates as they move around pretty significantly day-to-day, week-to-week, month-to-month. Sentiment, we're watching closely, has been generally positive. M&A has been very strong this year. Drug pricing and policy has been kind of a mixed bag, but the most favored nations has not derailed the profitability and the go-forward health of the industry. We'll see where some of the IRA implementations come over the coming months and quarter. On the regulatory side, that still is a bit of a mess, and that is of concern, although 23 products were approved year-to-date, and that is pretty well in line with past practice. Patent cliffs continue to be a big bugaboo of the industry. Earnings and growth have been pretty positive and China remains a big negative overhang. Moving quickly to the balance sheet, our North Star and one that we continue to focus on in keeping strong and flexible. Marc will have a lot more to say about it, but we're confident that our year-end target leverage remains we can achieve 5.6x to 6.2x. Medium term, we're looking at mid-5s. We have excellent liquidity, and we successfully are extending our $5 billion line of credit to 2032. And as we've said a number of times, the longest average remaining debt maturity of all S&P 500 REITs, which is good. And Marc will discuss before I just turn it over to him in a moment, guidance. And he and the team have tried to detail the multifaceted set of items impacting '26. and the fourth quarter on Page 6 of the earnings release. Obviously, critical to establishing a solid earnings run rate base beyond 2026 will be a strong and consistent leasing of our development and redevelopment pipeline and successful handling of the 2027 lease rolls. We're laser-focused on continuing to decrease CapEx and manage our funding cost effectively. And with that, let me turn it over to Marc.

Thank you, Joel. Good afternoon, everyone. This is Marc. Congratulations to the entire Alexandria team for solid execution during the quarter. First, leasing volume for the quarter was solid and exceeded 1 million square feet. Second, we continue to be focused on improving occupancy with 1.4 million square feet of lease space that is currently vacant and is expected to be delivered to the tenants and positively impact occupancy in November on average. Third, continued outperformance on occupancy relative to the broader markets with average outperformance across our largest three markets ranging from approximately 8% to 12% as of the end of 2Q. Fourth, we delivered a 427,000 square foot build-to-suit to Bristol-Myers at our Campus Point Megacampus under a long-term lease, which will provide significant net operating income and value to our shareholders. Fifth, we remain committed to meeting our funding goals with 46% of our target for dispositions and sales of partial interest and other capital completed or pending subject to nonrefundable deposits signed LOIs or sales agreements under negotiation with another 38% in process. And sixth, we completed an extension of our $5 billion credit facility to 2032, providing tremendous access to liquidity for many years. FFO per share diluted as adjusted was $1.73 for 2Q '26, and we reaffirm the midpoint of our guidance for 2026 FFO per share diluted as adjusted at $6.40, while tightening the range to plus or minus $0.05. Leasing volume for the quarter was solid at 1,039,000 square feet. A few items to highlight here on leasing activity. First, total volume was up 60% over the prior quarter and up 9% over the prior 4-quarter historical average. Second, new leasing comprised of both leasing of our development redevelopment projects and the vacant space aggregated almost 400,000 square feet for the quarter, which was the second largest quarterly total since 2Q '24, excluding the large big pharma build-to-suit lease we signed last year. And then third, leasing from public biotech increased quarter-over-quarter from zero last quarter to 5.8% of the total leasing volume, a positive sign, but still below the representative portion of our overall tenant base based upon annual rents of 21% for biotech. Regional leasing outperformance continued in the San Francisco Bay and San Diego markets where we accounted for 2x and 1.7x the leasing activity compared to our market share during the quarter. Greater Boston lab leasing was approximately in line with our market share for the quarter if we carve out a 0.5 million square foot renewal of a big pharma company in Cambridge executed by another party. But our team was still very active executing 160,000 square foot advanced technology lease during the quarter, among others. With respect to tenants in the market, a positive momentum continued into the second quarter with an overall quarter-over-quarter increase of approximately 10%. Another positive note is that we are starting to see an increase in tenants in the 20,000 to 100,000 square foot size range, which we've defined as the middle of the demand barbell. In the second quarter, 64% of the total requirements we're tracking in the big three markets are in that size range. Many of these tenants are public biotech companies, a segment of demand that has been lagging over the last few quarters. Looking ahead to the next quarter, we currently project solid leasing volume for 3Q '26 in the 950,000 square foot range. One factor to consider for context is that we have very modest lease expirations over the next 2 quarters with only 734,000 square feet of unleased expirations remaining for 2026. And then on concessions, initial free rent concessions remain elevated but came down off the peak from last quarter of two months per year of term to this quarter based on a trailing 12 months of 1.5 months per year of term. Occupancy at the end of 2Q '26 was 86.9%, down 80 basis points from the prior quarter. The key changes in occupancy for the quarter included the following three components: first, a reduction of 80 basis points driven by previously disclosed key known lease expirations, which went vacant during the quarter. Second, we reclassified one 160,000 square foot building in our Andover Megacampus from redevelopment to operating when we leased the building to an advanced technology tenant. When we made this decision to not complete the redevelopment of the building as originally intended for laboratory and/or biomanufacturing use, we reclassified this building back into operating and accordingly, operating occupancy came down by 40 basis points. Importantly, we expect the lease to commence in 2Q '27 and positively impact occupancy at that time. Third, we had occupancy growth of 40 basis points, primarily driven by the commencement of leases and leasing activity. Bolstered by solid new leasing during the quarter, we now have leased 1.4 million square feet, which is expected to commence in November 2026 on average with expected annual rental revenue of $69 million annually. Tenants continue to recognize the importance of Alexandria's strong sponsorship, operational excellence, asset quality location and our Megacampus model, which represents 80% of our annual rent and has led to our continued outperformance by approximately 8% to 12% across our largest three markets compared to market occupancy as of the end of 2Q. Same-property net operating income was down 10.6% and 8.6% on a cash basis for 2Q '26. These percentage changes represent an improvement compared to the prior quarter performance of 1.3% and 3.1% on a cash basis. The overall decline for 2Q ' 26 same-property performance was primarily driven by a reduction in occupancy compared to the prior year. We expect stronger same-property performance in the second half of 2026, which includes the potential benefit related to a range of assets with vacancy that could potentially be sold or designated as held for sale in the second half of 2026 and could be removed from the same-property population. We did not make any changes to our guidance for occupancy, same-property performance or rental rate changes on lease renewals and re-leasing of space. Despite current challenges in the life science real estate market, we continue to benefit from a high-quality tenant base with 57% of our annual rental revenue coming from investment-grade or publicly traded large-cap tenants, long remaining lease terms of 7.7 years, average rent steps approaching 3% on 97% of our leases and strong adjusted EBITDA margins of 67% for 2Q '26. We continue to focus on the successful reduction in management of our general and administrative expenses as well. We remain on track with our guidance range of $134 million to $154 million for 2026, which represents around a 14% savings at the midpoint compared to our 2024 benchmark or about $24 million in annual savings. On a combined basis for 2025 and 2026, we expect G&A expense savings of around $76 million in aggregate relative to 2024. Our trailing 12-month G&A as a percentage of net operating income through 2Q '26 of 6.6% is less than half of the average for all S&P 500 REITs over the last few years of 14.3%. Realized gains included in FFO per share diluted as adjusted from our venture investments were $10.3 million for 2Q '26 or $28.5 million for the first half of 2026. We reiterated our guidance range for realized investment gains of $60 million to $90 million for 2026. Capitalized interest for 2Q '26 of $73.7 million was up slightly from the prior quarter, primarily driven by an increase in our weighted average interest rate on debt. We expect average real estate basis capitalized to reach a bottom for 2026 in the fourth quarter, ranging from $3.4 billion to $4.9 billion, which is a $2.8 billion reduction in basis compared to the first half of 2026. We reduced our guidance for capitalized interest by $5 million at the midpoint of our range due to anticipated earlier completion of certain construction and preconstruction milestones, primarily impacting 4Q, including a potential decline related to projects which we are evaluating business and financial strategy. As of 2Q '26, we have 1.4 million square feet of development and redevelopment projects under construction and expected to stabilize through 2028, which are 71% leased. In addition, we have 1.4 million square feet spread across five projects, which we are evaluating the business and financial strategy for. Overall, the square footage in our pipeline has shrunk by 20% from the beginning of the year as we continue to execute on our plan, which includes completing our development and redevelopment projects or in some cases, pivoting to advanced technology strategies. We continue to make progress in resolving the go-forward strategy for our five projects under evaluation. 311 Arsenal Street located on our arsenal on the Charles Megacampus in Watertown in our Greater Boston market is the first one. We are seeing very solid activity for this project from advanced technology users, and we executed letters of intent for approximately 109,000 square feet with multiple tenants, which increased the leased negotiating percentage for this project up to 44%. Next, 421 Park located in our Fenway Megacampus. This is a ground-up development project intended for laboratory use, and we have important activity from an institutional user. The outcome for this project will depend on tenant interest, and we have upcoming construction milestones to consider in early 2027. 40 Sylvan Road is the next one located in Waltham. This project will be attractive to advanced technology tenants that may find certain elements of the building attractive and may not require a conversion to lab. This project has critical milestones in the second half of 2026, which we are carefully evaluating. And then finally, 3000 Minuteman Road, which is located in our Andover Megacampus. This site will be attractive to advanced technology tenants as evidenced by the 160,000 square foot lease we executed for one of the buildings on this campus during the quarter. For 311 Arsenal, 40 Sylvan Road and 3000 Minuteman Road, if we complete significant advanced technology leases, we may place all or some portion of these spaces into the operating pool, which may reduce operating occupancy in the near term, but more importantly, will reduce our capital needs and generate near-term revenue upon delivery. We continue our laser focus on our sources of capital with a disciplined multifaceted strategy, which includes dispositions, sales of partial interest and other capital with a focus on the substantial completion of our large-scale noncore asset sale program in 2026, with a guidance midpoint of $2.9 billion and a weighted average projected completion date in September. We continue to refine the projected sale composition ranges as we get more clarity with land dispositions comprising 15% to 35%, noncore asset dispositions of 10% to 20% and sales of partial interest and other capital of 50% to 70%. In addition to traditional joint ventures of core assets included in the 50% to 70% basket within our guidance, we are also evaluating other important cost-efficient capital source alternatives that would help us achieve our desired leverage goals and allocation of capital uses, and we expect to have more information to share soon. To be very clear on this point, our guidance does not assume the issuance of any common equity for 2026. Our team is making good progress with $1.3 billion or 46% of our $2.9 billion guidance midpoint, which is completed or pending subject to nonrefundable deposit, signed LOI or sale agreement negotiations and is spread across about a dozen transactions. We have another $1.1 billion or 38% of the midpoint of our guidance of transactions that is currently in process. and we expect to make decisions on the remaining 16% over the next few months. In connection with our disposition program, we recognized impairments of real estate of $222.5 million during the quarter, of which approximately 85% to 90% of this amount relates to either land or properties that were laboratory conversion opportunities. The two largest impairments made up around 57% of the total balance and included the following: first, a land parcel located in Northern San Diego that was acquired in the last five years with the intent to develop new laboratory buildings. And the submarkets outside of Torrey Pines and UTC have become very oversupplied and this land parcel is now under contract to sell to a residential developer. And then second, an office building located in Toronto that was acquired in the last five years with the intent to convert to laboratory use. Biotech demand in Toronto has been greatly diminished, and this building is now under contract to sell to a user. We have over $450 million of assets that have been designated as held for sale and are expected to be sold within the next 12 months, the majority of which were designated and had impairment charges going back to 4Q '25. Looking forward, we have real estate assets under consideration for potential disposition either by the end of this year or in 2027 that may have estimated market values below their respective carrying values. These assets remain as held-for-use assets at 2Q '26 and remain recoverable under a probability weighted recovery analysis and accordingly, have not been impaired due to a variety of factors necessary to designate these types of assets as held for sale. including the lack of a final decision to proceed as well as our current estimation that it is unlikely that we will complete these individual sales within the next 12 months. We could have impairments over the next couple of quarters if these types of assets subsequently meet the accounting requirements for held-for-sale designation as we refine our approach, make final decisions to proceed, obtain the necessary approvals and commence the disposition marketing process. On the balance sheet, we have a very strong and flexible balance sheet. Our corporate credit ratings continue to rank in the top 20% of all publicly traded U.S. REITs. We have tremendous liquidity of $3.6 billion as of the end of the quarter, and we recently completed an agreement to extend our $5 billion unsecured senior line of credit to 2032, providing significant runway and flexibility. We continue to have the longest average remaining debt term maturity among all S&P 500 REITs with an average term of 9.7 years. And we remain committed, as Joel said, to our leverage goal for 4Q '26 of 5.6x to 6.2x on a net debt to annualized adjusted EBITDA basis. Leverage for 2Q '26 was at 7x on a quarterly annualized basis, and we expect this ratio to come down significantly over the next two quarters as we make progress on our capital plan. Over the medium term, we would like to be around mid-5x. On guidance, we tighten the range of our guidance for 2026 FFO per share diluted as adjusted with no changes to the midpoint of $6.40. Our current outlook has a few moving pieces to highlight. Interest expense is expected to increase by $20 million at the midpoint, driven primarily by two factors: first, later timing on disposition and sales of partial interest, which is now expected to be September on average, which represents about a six-week change. And then second, a reduction of capitalized interest of $5 million related to earlier completion of various milestones across several projects, primarily impacting the fourth quarter. We now expect higher FFO per share results in 3Q '26 caused by the later weighted average completion date on capital sources, and we expect lower FFO per share results in 4Q '26, driven by the lower capitalized interest. We expect 4Q '26 FFO per share diluted as adjusted to be on the lower end of the range of $1.40 to $1.50. But given the benefit in 3Q '26 that I mentioned, there is no change to the full year results, which remain at $6.40. Our earnings release contains several key considerations that could have an impact on our results beyond 2026, which are highlighted on Page 6. Two important takeaways for that page are as follows: First, we have 1.4 million square feet of key lease expirations in 2027 with expiring rent of $100.5 million, which are expected to have downtime ranging from 12 to 24 months on average. And second, we are laser-focused on meeting the market and leasing up vacant space. And accordingly, our very preliminary estimate for construction spending for '27 ranges from $1.15 billion to $1.65 billion and is expected to heavily focus on costs necessary for lease-up of our operating properties. And the increase from our last update of around $1.25 billion is primarily attributable to higher leasing costs associated with current and anticipated leasing for our operating assets. We continue to focus on the execution of the steps for our path forward that we established at our Investor Day. With 10,000 known diseases and limited cures and treatments, the industry is in the early innings of the fight against disease, and we believe Alexandria is well primed to attract the best tenants driven by our world-class Megacampuses in the best locations and operated by our seasoned team, prioritizing operational excellence in everything that we do. Now I'll turn it back to Joel.

So, operator, if you could open it up for questions, please.

At this time we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Farrell Granath from BofA.

I first just wanted to touch on the leasing that has been done, especially for the advanced technology tenants. And thinking about that going forward as potentially a key tenant for your leasing and how the trade-off between the lower CapEx and potentially lower stabilized yield may offset from the tenant improvements or other costs that you would have had upfront for life science tenants.

Yes. Thanks, Farrell, for your question. So, I think, it's fair to say that many of these are not traditional kind of AI office kind of tenants. There are tenants who are looking for critical infrastructure. So the lease rates will vary based on that infrastructure, how much we contribute versus how much they contribute. And obviously, many of these tenants are extremely well funded, have pretty great credit and wish to put a lot of their own money in. So there is that trade-off of lower CapEx and somewhat lower rental rates. But I don't know, Marc, do you want to make any comments generally on that?

Yes. Yes. The other thing I would add to that is incremental yields are generally around the same as lab. But as you said, Farrell, the all-in yields can be lower, but certainly being able to monetize these assets by getting cash flows with a path to get cash flows with better visibility is something we're interested in doing. And it was a big piece of the leasing pipeline or the leasing activity this quarter, and I think it will be a decent size next quarter as well.

Yes. And maybe just thinking historically, if you go back, this generation of advanced tech tenants and technologies is quite varied and quite complicated just given the evolution of technology. But going back to the early days, we never really pitched to tech tenants. But early on, we had Google's first campus. As you know, we had Uber come to us quite surprisingly to build for them in Mission Bay. OpenAI has come into there. So we have by chance, but most of that has been fortunate because of excellent location of the Megacampuses and the amenitization and what goes into those campuses as being a great place to recruit and retain talent for these companies.

And my second question is on your disposition timing. I know that the weighted average disposition time only shifted a few weeks. But one I wanted to see if you could touch on what drove that shift? And if -- what gives you confidence on the continued close of your midpoint of the $2.9 billion?

Yes, I'll ask Peter to comment. But I think it's fair to say that in general, much like we did last year where we closed the vast proportion of our dispositions in the fourth quarter, timing is what it is, and parties are always positioning to make sure they're doing the best job they can on diligence, protecting themselves. We do the same. And so I wouldn't read anything at all whatsoever into any timing issues. Peter, I don't know if you want to make any overarching comments.

Yes. I mean the -- there's a significant amount of sales that are in the JV bucket, and we're progressing on them. One of the JVs is in its final steps, but the other one is less advanced because it's more complicated. We thought we'd be further along by now when we talked at different investor conferences. The other thing is on the noncore bucket is typically reliant on financing and financing is available, but it is taking our buyers longer to obtain it. So that's also pushed the time line out a bit.

Our next question comes from Ronald Kamdem from Morgan Stanley.

Great. My first one is just thinking on the dispositions. Just thinking about from the Investor Day where you sort of announced a $2.9 billion plan and sort of what you've seen so far. If you sort of marry the comments you made about the CapEx spending next year and the NOI or the rents that are coming out, presumably, there could be more dispositions next year. And I guess I'm just curious, are there any sort of lessons learned sort of in this year's experience on trying to get these dispositions through that presumably as we flip the calendar, if you have to put in another sort of big program that you think could sort of be helpful.

Yes. I don't think we have any lessons learned that we haven't learned previously. I think that our experience last year is pretty reflective, I think, as we've shared of this year. I think the level of interest and the momentum has been greater this year. And certainly, the industry has made a much better recovery than where it was last year. So I think we're on track this year. We feel good, and we'll see about next year. We're trying to manage CapEx. We're trying to manage spend and sources. And we'll give further framework, if we will, to that in the third quarter and certainly specific guidance in the fourth quarter. But I think we feel very comfortable where we are.

Great. And then my second question, I know the occupancy guide includes 1% or 2% benefit from the dispositions and so forth. Maybe can you talk about just high level, marry the leasing with sort of the occupancy and how you're seeing sort of the tenant health and their access to funding?

Yes. So, maybe, Marc, do you want to comment and then maybe I'll ask Hallie on tenant health overall.

Sure. Yes. In terms of the occupancy guide, the big moving pieces between the end of 2Q and the end of the year is -- well, I should say this, at the end of 2Q, we're right around where the midpoint is for year-end occupancy. And as you think about between now and the end of the year, we've got some lease expirations that we've identified that we expect to have some downtime. That's about 450,000 feet. And then there's a good chunk of the 1.4 million square feet of stuff that's leased that hasn't yet hit occupancy, about 60% -- I think 64% of that is expected to deliver by the end of this year. So those are the two kind of offsetting items between now and the end of the year. And then obviously, we've got lease -- other lease expirations that are pretty manageable. We've got 500,000 beyond that to deal with as well as if there's any surprises on the -- on tenant health. But I think we feel -- still feel very good about where we're going to end up on occupancy.

Great. And Hallie here, happy to take the second part of the question on tenant health and general sentiment on the ground. So we continue to monitor all of our tenants individually. And just as a reminder, even irrespective of the funding environment, biotech is hard, and there certainly are clinical failures and things that are going to happen irrespective of what the macro market looks like. And so our team across the country is incredibly diligent on getting ahead of those issues and trying to swap out tenants or find replacements before we do have an issue. One thing that I would say in terms of positive momentum on the funding side is private venture funding was very strong this past quarter, one of the strongest quarters since 2021. IPOs have continued to pick up this year. Secondary financings have been strong as well. We continue to see conservatism from companies in making space decisions, but I think line of sight into funding is positive, and we're seeing that in the tenants in the market.

Our next question comes from Seth Bergey from Citi.

I just kind of wanted to follow up on some of the key expirations. And what kind of increased the downtime from 6 to 24 months to 12 to 24 months? And then I know you kind of included some of the disclosure around the 67% of early discussions and 33% marketing around the 2027 key expirations. But just what are your expectations around retention broadly for those leases?

Yes. So maybe I'll have Marc comment maybe Peter as well. But I think the movement from 6% to 24% to 12% to 24%, 6% to 18% to 12% to 24% is really done out of an abundance of conservatism and caution. Again, until we see the mainstay tenant base of public biotech really come back in a meaningful way, we just want to be cautious. We've got other -- as you saw this quarter, the picks and shovels and tools sector picked up substantially. We had good activity, as we just talked about from advanced technology companies, which also have, by and large, longer lease terms, and they're positive for both occupancy and obviously, weighted average lease terms. But I think out of an abundance of caution, we just want to be careful with that, but we hope we can do better. I don't know, Marc, a couple of comments. And then, Peter, any thoughts on the leasing side.

Yes. Seth, yes, on the 1.4 million square feet, I think you were referring to as part of the key lease expirations that have downtime. Those are things that we've identified that we don't expect to retain those existing tenants. So we do expect downtime that 12 to 24 months does reflect both lease-up time and time to put capital in because those are spaces that we expect on average will require some capital. And then I know you asked also about -- or I think you meant to ask more about retention broadly. I don't know that we're ready to get into where retention will land on the rest of the expirations for next year. But -- in terms of where we ended up or started the year for '26, we -- outside of the known vacates, we were somewhere in the 60% to 70% range for 2026 is what we've been modeling.

Yes. And keep in mind, if you look at Page 23, we've tried to -- Marc and his team have tried to layer on a couple of visuals regarding downtime and obviously, where those tenants are going, relocation to other ARE properties or they're moving or doing something different. So we've tried to add that to disclosure. Peter, anything else, Hallie, on leasing, guys?

Yes. I will say that if you look at the 2026 key expirations at the bottom of Page 23, 50% of that, as we pointed out, is leased and negotiating and that -- that's going really well. The other half of it, we do have activity, as you can see in the early discussions bucket. But there is a big chunk of that as well that is still leased and is just going to become available in the next quarter. And until the -- usually until the tenants move out, it's really tough to get a lot of activity going. So I'm pretty pleased with the fact that we've got almost half of that remaining 50% already under discussions and then that other half, we should start seeing some activity on. And then the other thing I'd like to point out is the '27 expirations, we noted that 67% has early discussions. I did some analysis, and we've actually got 85% of that space as active prospects, meaning people that we are talking to specifically about the space. So that -- I think that bodes well for starting to make good progress on that towards the latter half of this year. I don't know if Hallie wants to say anything about that.

Nothing else here. You guys covered it well.

And maybe just a second one on the 10% increase in tenants in the market. Were there any kind of main kind of food groups of leasing activity that really drove that improvement?

Yes. Again, this is Peter. I walked through this with Marc, and he had it in his comments, but there was a significant increase in tenants between 20,000 square feet and 100,000 square feet. That's the middle of the barbell that we've been talking about being missing for quite a while. That's why we have a barbell. So I would say that, that was a positive this quarter that we started seeing that size tenant come in. And as Marc mentioned, those -- that size tenant is typically public biotech. So if you marry it with what Hallie just talked about with secondaries and IPOs starting to come into the market and people having line of sight on financing, I think that's why we're starting to see that tenant size, which is very welcome.

This is Hallie. I would just add, while we are seeing that demand increase, we are also seeing those sizes, the requirements, I would say, more broadly across the different sectors of life science tools, which Joel mentioned, continues to be strong, and that's driven by lots of leases. We had quite a few that contributed to those numbers this quarter. So I do think public biotech is still slow and lagging compared to the other sectors. But I think broadly across all of the other ones, we're seeing pretty widespread tenants in the market, which is great to see.

And this is Peter again. I also just want to emphasize what we talked about at the investor conferences when we revealed the increases in tenants in the market. It takes a while for this activity to land in leasing. So I just want to just give you guys a reminder. I mean, it's typically 9 to 12 months for significant activity or significant increases in tenants in the market to start showing up in leasing.

Our next question comes from John Kim from BMO Capital Markets.

A couple of times in this call, you mentioned meeting the market on leasing, and I just wanted to get more clarity on whether that meant just being more aggressive on the face rents or TIs? Or is that -- when you say meeting the market, that's where the demand is in terms of advanced technology or other non-biopharma tenants?

Yes. I mean I view it as both, but Peter?

Yes, I was going to say exactly it's both. But in the traditional sense of, hey, look, there's been disruption in the market. You have a choice. You can hold firm on the economics that you underwrote or you can be flexible. And we've chosen to be flexible. I think the market in general has done a good job of keeping base rates above where they were pre-COVID rocket ship, but they have come down. And then obviously, meeting the market also means you have to meet what the tenant is requiring today, which is much larger TI packages, if not full build-out and free rent concessions. But I'll note, as Marc mentioned on his commentary that we think the free rent concession is starting to bottom and we're starting to see improvement there. But yes, we're meeting the market two ways: one, by getting to the economics that we need to get to, to make the deal and also opening ourselves up for an alternative tenant class that can utilize our infrastructure. It may mean that we have lower rents, but it also means that we'll have lower capital requirements. And given the cost of capital today, that's a great trade-off.

And also helps plug the operations, any leakage there, which is important to keep in mind.

Yes. On your disposition plan, it sounds like you have good visibility on the $1.2 billion under LOI or with deposits. Of the remaining $1.6 billion that you plan to sell this year. I was wondering if you could talk about either the confidence you have on that? Or if that -- if those sales don't happen this year, what is plan B in terms of either other sources or delaying some of the uses to maintain your leverage?

Yes. So I'll ask Peter to answer, but let me give you my view is very high confidence in that category that you talked about. And there is no plan B in the sense that we're adjusting each and every day how we think about both saving CapEx and then raising capital to fund the necessary CapEx, especially for the well-leased pipeline, et cetera. So it's not like we're changing plans. We're pivoting and shifting and working every day to get through a highly nuanced set of assets. And I think we feel very, very good about where we are. But Peter?

Yes. I referenced it on an earlier question. One of the larger transactions in that bucket is joint venture that's just taking longer than we anticipated. So that's driving that number. But that number has come down 50% from last quarter, if you compare. So there is progress happening. It's not as fast as we would like. And again, there's other things that I mentioned in answering that last question such as we've got a lot of land sales. We've got a lot of noncore sales. And today's buyer for those things wants to leverage it. And it's -- that financing is available, which is key because if it wasn't, we'd have to pivot to a different solution, but it just takes a lot longer than we were expecting.

Our next question comes from Anthony Paolone from JPMorgan.

On the 1.4 million square feet of vacates for next year, do you have a sense as to what the lease economics are going to look like versus prior leases, just either in face or just total net effective rents and what those roll ups or downs or what they may be?

I don't know, Marc, if you want to think about that comment.

Yes. Yes, Tony. Look, we haven't -- that's not baked into this year's guidance in terms of the rent roll downs or roll-ups just given that those expirations are a little bit further out. And as Peter said, we tend to get more traction as those spaces come back. But if you look across the portfolio, the spot mark-to-market is, call it, around 6% above market. So, on average, that's kind of where we're at today. And we're seeing some -- we're seeing pressure on rents relative to expiring on average for this year that's baked into our guidance. So I don't have a whole lot to add beyond that.

Okay. And then just second one, in terms of the development and CIP, you have the various buckets where there's milestones that you'll evaluate. I mean what would you need to have to continue to move forward with those outside of, say, like a pre-lease to kind of do an incremental deal?

Yes. It really depends on the category. On the land, we've got pretty good visibility on the stuff in the '28 bucket. I think you're referring to the stuff that's in the '26, '27 categories with milestones coming up. That will really depend on opportunities to add value on those land parcels. And if there -- if we don't see the trade-off between being able to add value in the near term, particularly given where demand is, we may choose to pause on some of those things or we may choose to flip that into the disposition program and land is going to be a pretty sizable piece of the overall disposition plan for this year.

Our next question comes from Jim Kammert from Evercore.

In the capital recycling for the balance of '26, I think Peter and others on the call have mentioned there's a fair bit of JV component. Would Alexandria contemplate JV-ing an entire Megacampus?

Well, we have JVs on a number of Megacampuses already. So the answer would be, yes, there could be varying degrees of joint ventures, but we already have some of that historically. So that would not be a different strategy than we've had in the past.

And then a small question, Marc, I think you mentioned at 421 Park, you had an institutional user, I think, as you described it. Was that maybe for the entire, was it 392,000 square feet or so? Or is that a portion of the building?

Yes. I think we can make no comment because we've got ongoing pretty detailed negotiations. So let us -- sorry to do that, but let us punt on that because it's an important transaction.

Our next question comes from Vikram Malhotra from Mizuho.

I guess just maybe, first of all, a higher level, if you can give us a sense of like where do you see occupancy bottoming? You've had maybe two years of step downs now. And related to that, just I wanted to clarify, how should we think about occupancy falling or rent falling from, say, like the move-outs you outlined, the $100 million of impact and what that means for margin? Like how much is the NOI hit if, say, it's $100 million of revenue loss?

Yes. So, Marc, do you want to respond?

Yes, sure. So we're kind of right around 87% today. We think that's right around where we'll end up by the end of this year. We've got the 1.4 million square feet that comes back to us in March kind of on average. It's really going to depend on how quickly we can get ahead of leasing up vacant space to backfill that. Some of the stuff we've already leased today is going to, I think 2/3 of it lands this year and about 1/3 of it next year. So that will help soften some of that space coming back to us next year. But we obviously still have work to do in terms of backfilling and leasing vacant space, and that will be largely dependent on the market. I think we feel good that when there are opportunities where our asset can meet the size requirements and the timing requirements, we're often winning those deals. I think the times when we can't meet those time lines, et cetera, are the ones that may look to go elsewhere given the amount of supply that's out there. In terms of the actual P&L impact to the $100 million, yes, there would be OpEx that would hit the income statement in addition to the rent, that $100 million is the rent -- the base rent number, Vikram. So some of that will hit the P&L. And I mean, you can do the math, but those -- it really depends on the market, but it's generally property taxes and insurance that when the buildings come back to us, that's hitting the P&L.

Yes. And then remember, Peter did say that we've got some pretty interesting discussions going on, on the 27 roles at a number that's not insignificant. So that's a good thing. Go ahead, sorry.

Okay. No, that's helpful. And then just two things I want to clarify the comments you made. So, I guess, one in the guide, in the capitalized interest guide, you talk about, I guess, 3% in total of capitalized G&A and OpEx. And I just want to -- I want to make sure we're clear. So like as you sell these assets and the capitalized interest, the interest piece steps down, is there an additional G&A and OpEx hit that we need to bake in as we kind of factor in these sales into 2027, meaning you would typically capitalize at whatever total cost of debt at 4%, let's say. But do we need to then tack on 3% to that?

Yes. Vikram, so on the capitalized operating expenses, if you just look back over the six months, it's averaged about 2% of the basis that's been subject to capitalization. So I think that's what you're getting at. If we sell the asset, the OpEx will go away, right, because the buyer will assume those operating expenses. So that 2% shouldn't hit the P&L. On the payroll side, like the internal payroll that generally gets capitalized to these projects that I think we've identified, it's averaged about 1% for the first half of the year. That will really depend. It's -- that is mathematically the amount that's been capitalized, but it will ultimately depend on what -- where those folks that are working on those projects spend their time. So it's possible some of that hits the P&L, but we've got a great group of development people, and I'm pretty sure they're not going to be doing nothing. So they're likely to be working on a variety of other projects. And we do have -- we still have a fair amount of construction tied into TI projects, et cetera, fitting up space. So I expect that they'll be very busy. So I wouldn't expect all that to hit the P&L.

Okay. Yes, I can maybe follow up on that. I just want to make sure there's not like an incremental hit to the FFO that would happen next year because of that? And maybe just last one, if I can sneak in. Just can you -- you mind us just giving the ins and out of the debt paydown as you go through the year? Just it's a bit confusing because the revolver balance, the commercial paper balance has gone up pretty significantly. And depending on what you're selling and then paying down debt, doesn't seem like overall debt is going down. So do you mind just giving us the ins and outs and how we should think about the debt balance at year-end '25 versus projected year-end '26?

Sure. Yes. So we had a pretty small balance on the line or really on the commercial paper at the beginning of this year. I expect that to be the same case at the end of '26. I think we said we'd expect it to be under, call it, $350 million or so. So that -- the lion's share of that $1.6 billion of debt paydown should come in the way of really unsecured bonds. So we had a couple of maturities. I think it was $750 million that was in the first part of -- or I guess, in the first quarter and the second quarter. We also did the tender on top of that. We financed some of that with new bonds, but there was a couple of hundred million on top of that, that was a reduction of debt. So -- and then from here to the end of the year, we expect to have essentially almost all of the commercial paper that's outstanding today, close to $2 billion. We expect that to really be paid off by the end of this year with the disposition and the inflows of capital that we expect to execute on for the disposition program between now and the end of the year.

Our next question comes from Rich Anderson from Cantor Fitzgerald.

I'll keep it short, getting long on the call here. Just one topic for me, back to tenants in the market. I just want to make sure that this is -- first of all, I want to make sure this is exactly apples-to-apples to what was discussed at NAREIT, which was up 30% sequentially and really was just your three markets of San Diego, San Francisco and Boston. Is that the equivalent number of the 10%?

Rich, it's Peter. I'll just correct you if it was -- if I didn't communicate well NAREIT. The 30% quarter-over-quarter increase was all markets, not just the big three. And it's the same this time, and it is a sequential 10% increase over last quarter.

Okay. And I'm sure it was my fault, Peter.

And Rich, just to jump in there, that's just life science. That does not include technology tenants.

Okay. And so then glad you jumped in there because then I was going to ask if you have any sort of early read on the third quarter. We had the overhead cap taken away for the NIH. So perhaps that caused some activity in the first quarter into the second quarter. Do you feel like it's still trending in a similar direction as we get into the back half of 2026?

I mean that particular issue was a driver for the outsized growth last quarter. I don't -- I didn't see anything in particular institutional that was meaningful outside of what happened last quarter. But obviously, there was no pullback, and that's ultimately going to be helpful driving institutional demand. But as I mentioned in a previous answer, what we're really happy to see is just more midsized tenants. And as Hallie pointed out, it's kind of across the board in the types of tenants. But I will say there are some public biotechs in there, which is nice to see.

And again, any insight into present quarter, third quarter?

As far as tenants in the market, we do the full accumulation of that before earnings. So I don't have any visibility of how that might look next quarter. We'll talk about it next call.

Our next question comes from Julien Blouin from Goldman Sachs.

So if dispositions were -- disposition timing were to slip into next year, what would be the impact on your FFO in the back half of this year? Would the additional NOI from holding those assets longer be washed out by the additional interest expense? And I think you mentioned other cost-efficient sources of capital you're considering. Not sure if you can sort of elaborate on what's being...

Yes. So let me maybe just give you one simple answer. And the answer is we don't expect them to slip into next year. We, I think, well managed and concluded our disposition program last year on target. We expect that to happen this year. So no further comment on that.

Got it. And then on 311 Arsenal, 40 Sylvan and then 3000 Minuteman, I just want to make sure I'm getting this right. Conversions to the operating floor not currently anticipated in your capitalized basis guidance that you gave for the fourth quarter of '26. Is that right? And then if those were to happen, that would sort of lead to additional capitalized interest burn off into next year?

Yes. Julien, I can take that one. So I kind of think of them as separate issues. We -- right now, our guidance does not assume at least for occupancy in same property and such, like the operating statistics, it doesn't assume that those come back into the operating pool. So if that does happen, that will be -- that will impact occupancy in same property. But in reality, it's just a shift in classification. In terms of capitalized interest, our guidance does assume that some of those projects may have to pause, and that was baked into our guidance for capitalized interest.

And our next question comes from Dylan Burzinski from Green Street.

Just a quick one for me. On Page 23 of the supp when you sort of outlined the reason for expected downtime on the '27 key lease expirations. So you talked about 1/3 being related to leases that assets originally acquired for redevelopment. Can you sort of talk about the plan for those assets? I assume they're no longer slated for redevelopment, but maybe if you can talk about sort of the plan there in order to get those leased up. Are they competitive in their current state? And then as we look at the other 1/3 that you sort of label as other, is there any noticeable trend as to what is causing these move-outs? Is it sort of moving to other properties? Is it downsizing? Just any commentary there, I think, would be helpful.

Yes. So, Marc?

Yes, sure. So on the 1/3 or so of the assets originally acquired for redevelopment, those are assets that we've been very interested to see if there are advanced technology type tenants interested in those buildings, and we have seen quite a bit of activity. We had a big lease this quarter. It was 160,000 up in Andover. That was exactly what we're talking about, something we thought we were going to convert to either lab or biomanufacturing. But because of the nature of those assets, the ceiling heights, the ability to access power, they were very attractive to some of these other types of users. And it's an interesting swath of types of tenants that need those requirements. But we are tracking that, that is -- there are a lot of tenants out there, I guess, is what I would say that interested in those things, particularly in places like Boston and San Francisco and also in Seattle. So that -- I mean, those are the opportunities we're looking at for those as well as trying to lease them as is, but less likely that we convert some of that stuff to lab unless we've got tenants in hand. On the last 1/3 that you asked about the other bucket, I mean, those are -- in some cases, those are assets that may need just may need capital. As an example, our Tech Square 200 campus, great location, great asset, but we really haven't invested money in that asset for many, many years, I think, since we really -- since we bought the asset back in 2006. So there's a little bit of that where there's some time that needs to go in there to upgrade those facilities before we can get tenants in there.

And ladies and gentlemen, with that, we'll conclude today's question-and-answer session. I'd like to turn the floor back over to Joel Marcus for any closing remarks.

Okay. Thank you very much, everybody. Wishing everybody well and look forward to talking on the third quarter call. Thank you.

And with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.