Good day, and welcome to the Alexandria Real Estate Equities Third Quarter 2024 Conference Call. All participants will be in listen-only mode. Please note, today's 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 of Alexandria. Please go ahead, Joel.

Thank you, Paula, and welcome everybody to Alexandria's third quarter earnings call. I'm here today with Hallie, Peter, and Marc. First of all, as I do every quarter, I want to extend a profound thank you and huge congratulations to each and every member of our Alexandria family team for bringing in this third quarter to post an impressive operating and financial performance in a continuing stubborn economic and operating environment. You are an inspiration to me each and every day. The continuing stubborn economic backdrop for commercial real estate and risk-on investments, Peter and Marc will address those, but let me just give you a couple of quick comments driven by the huge and unnecessary federal deficits over the last handful of years, over $9 trillion, plus inflation in many areas remains sticky, stubborn, and structural despite what the Labor Department is reporting. Our cost of capital is also stubbornly high across much of the equity and debt capital markets, again despite the delayed and rather feeble responses of the Fed to date. And Main Street is hurting in the United States, it's pretty clear. Hallie will comment more in-depth on the Life Science Industry, but let me say a couple of things I've said many times in the past. This is one of the remaining crown jewel industries here in the United States and is the great bastion of true and novel innovation. The only real and effective path to solve and address over 90% of human diseases which remain unsolved today is the translation of this innovation. Since the downward spiral of biotech began in early 2021 and reached its bottom around October of 2023, after almost a decade of bull-run from 2014 through 2021, the industry became drug addicted to too much and too free capital flowing in and some of the really outrageous funding both from the Fed and investors, leading to a rocket ship demand for what is not sustainable. Here we are almost four years later since the XBI began to tail-off in February 2021, and we're in a highly disciplined funding market but one in which I personally prefer to operate. As an example, less than half the biotech IPOs from 2013 to 2019 remain standalone companies, with many seeing successful exits or disappearing altogether. My take on the third quarter is that we had truly excellent operationally and financially robust results with strong balance sheet management. Despite the tough environment, we continue delivering increasing FFO per share and dividends per share growth. One of my key takeaways is our strong year-to-date rental rate growth. Collections remained nearly at 100%, and what truly stands out in Q3 is the leasing activity of almost 1.5 million rentable square feet, a 48% increase quarter-over-quarter. We will talk about our very successful capital recycling program. Going forward, as master investor Warren Buffett has said, a truly great business must have an enduring moat. Out of the depths of this bear market, I remain more optimistic than ever about the promise of unprecedented human health innovation from our industry, assuming the government doesn't interfere, with Alexandria continuing at the vanguard of this industry building the future of life-saving and life-changing innovations. Let's turn it over to Hallie.

Thank you, Joel. This afternoon, we will provide an update on the life science industry, starting with FDA approvals and followed by a review of the current funding environment across our diverse life science tenant base. Since 2013, 519 novel medicines have been approved by the FDA. Nearly half, specifically 257 of these approvals, have been developed or commercialized by Alexandria tenants. That's 257 approvals that have improved lives, which inspires Alexandria's mission supporting the leading edge of life science innovation. Looking at the biopharma industry's impact, the FDA created an Accelerated Approval Pathway in the 1990s to expedite access to medicines for diseases with no effective treatments. Over the last 16 years, 69 cancer medicines were approved through this pathway, treating an estimated 911,000 patients and leading to 262,000 additional years of life saved. It's truly remarkable. Regarding life science fundamentals, venture capital deployment to private biotech tenants—which is 10% of our ARR—is tracking to eclipse 2023, potentially marking the third-highest year on record. Investors are focused on rational valuations and de-risk technologies. The demand for space is steady and conservative. Scale and flexibility are core to this growth model, making Alexandria's mega campus strategy extremely well-positioned. For the pre-commercial public biotech companies, follow-on financing is robust, clinching the second highest year on record. The IPO market has also narrowly opened for companies with meaningful assets de-risked with clinical data. Clearance of the IPO market will be a positive indicator for future leasing demand. Large multinational pharma continues to commit substantial dollars to R&D, and they remain well-capitalized with over $200 billion cash on hand. The BIOSECURE Act has passed the House and awaits a Senate vote. This legislation, if passed, will limit the utilization of select Chinese contract research organizations, which we view as largely positive. Biomedical and government institutions are catalysts for early discoveries that contribute to the next generation of medicines. The sale of 1165 Eastlake to the Fred Hutch Cancer Institute exemplifies this, reinforcing deep long-term relationships in prime locations. In conclusion, of the $4.5 trillion annually spent on healthcare in the U.S., less than 15% goes towards medicines. Novel medicines can positively affect health and drive long-term savings by preventing, managing and curing diseases. I'll now turn it over to Peter.

Thank you, Hallie. Before I get into my update on the development pipeline, leasing, supply, and asset sales, I wanted to comment on the improving health of the office market. A healthy office market can create competition for life science tenants, as tech firms have historically been attracted to our locations and centers of innovation. We're witnessing demand from tech tenants right now; OpenAI recently completed a 490,000 square-foot sublease at our properties, which shows positive leasing trends. In the third quarter, we delivered 316,000 square feet of development, 100% leased within mega campuses in high barrier-to-entry submarkets, equating to $21 million annualized net operating income. While development leasing was light at 39,121 square feet, overall leasing volume was robust at 1.49 million square feet, up 33% quarter-over-quarter. This was mainly driven by renewals, showing the strength of our mega campus platform with a strong 84% retention rate. Rental increases were modest but significant, and we expect continued positive rental rate growth. Looking at competitive supply, 2024 will peak for new deliveries. In Greater Boston, we anticipate delivering 2.4 million square feet in 2025, which is 65% pre-leased. We also expect substantial activity in San Francisco and San Diego regions. I'll conclude with an update on our asset recycling program, where we closed over $300 million in asset sales, including the sale of 1165 Eastlake. We are approaching the end of the year strongly with further value harvesting expected. I'll pass it over to Marc.

Thank you, Peter. We reported solid operating and financial results for Q3. Total revenues and NOI increased by 10.9% and 12.5%, respectively, over Q3 '23. FFO per share diluted as adjusted was $2.37, up 4.9% over Q3 '23. Our disciplined execution led to favorable operating results, with 76% of our annual rental revenue stemming from our collaborative mega campuses. Collections were extremely high at 99.9%, and adjusted EBITDA margins were strong at 70%. Notably, leasing volume was 1.5 million square feet, the highest quarterly volume since Q4 '22, benefiting from our tenant relationships and retention strategies. Rental rate growth remains solid, with expectations for 11% to 19% growth for the full year 2024. Occupancy levels for the quarter were also strong at 94.7%. We anticipate some pressure on fourth quarter results due to a lease termination; however, we remain optimistic about our long-term growth through our development pipeline, which has 5.5 million rentable square feet projected to generate significant incremental net operating income over the coming years. Our balance sheet remains robust with considerable liquidity and disciplined funding strategy to support our growth. As we look ahead, our outlook for 2024 remains solid with projected EPS and FFO guidance. We will continue to focus on enhancing our asset quality through strategic dispositions.

Today's first question comes from Joshua Dennerlein with BofA Merrill Lynch.

Yes. Hey, guys. I appreciate the time. I appreciated the comments on the Seattle asset sale to 4.9% and the pending sales that are stabilized at like a 7.5% cash cap rate. Is there any additional color you can provide on what's driving the gap between those two? And should we assume that non-mega campus assets will be stabilized at around that 7.5% cash cap rate?

Yes, I don't think that's a reasonable assumption, but Marc, do you want to address Seattle and how to think about it?

Yes, Josh, the stabilized cap rate for some assets was about 7% cash and 8.5% GAAP. The delta is influenced by some long lease terms in the suburban Greater Boston market. If you think about stabilized asset sales, we've given you the numbers to date, and they are generally non-core. So, we expect them to be wider than what we sold in Seattle.

Thanks. And on the pending dispositions for $1.2 billion, the $96 million GAAP NOI reflects an 8.1% cap rate. Do you have the cash number for there, how much cash NOI should we expect to go away once those sales are completed?

Yes, that number is around $91 million.

Thanks. Just on the 5-year lease extension with the tech tenant in Texas, can you provide some color on what your long-term plans are and whether you still plan to convert this to lab space?

We’re under confidentiality regarding this tech tenant. This renewal was integral to their campus, which is adjacent to our site. These buildings are highly improved and valuable. So while we may convert them to lab space in the future, for now, having the cash flow is preferable given market conditions.

On leasing broadly, have you started to see larger space requirements, or is it still more of the medium-sized tenants?

The early revenue-generating side has been solid; however, the middle still remains a challenge. Good clinical data leads to success, while the opposite experiences sluggish demand.

Where are the better pockets of demand for new space, specifically in the development and redevelopment areas?

The earlier-stage companies tend to be where we find strong demand, especially from clinical-stage companies that have positive news.

On transaction markets, what's the appetite from traditional real estate investors for life science investments today?

Investor interest depends on the financing market. Although it’s starting to improve, it’s not yet robust enough for significant transactions. However, we believe that as rates hopefully decrease, investor participation will increase.

Thank you, everyone. Be safe and God bless.

This concludes today's conference call. Thank you for attending. You may now disconnect your lines.