Earnings Call Transcript - ARE Q1 2025

Operator, Operator

Good day and welcome to the Alexandria Real Estate Equities First Quarter 2025 Conference Call. All participants will be in the listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Paula Schwartz. Please go ahead.

Paula Schwartz, Speaker

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.

Joel Marcus, Executive Chairman and Founder

Thank you, Paula. And welcome everybody to our first quarter call. With me today are Hallie, Peter, and Marc. Let me begin with a quote from Robert Browning who once said, 'Great things are made of little things.' Our profound thank you to the entire Alexandria family team. It is the little things each of us do each and every day that create the great things Alexandria is doing day in, day out. We are a unique, one-of-a-kind, mission-driven company. I also want to mention our continued thoughts, prayers, and assistance go to many of our team members impacted by the LA wildfires in January of 2025—a shocking start to this year. Additionally, I think we probably don't say enough about Alexandria being one of the most consequential REITs in the sector's history. We have pioneered the life science real estate sector. We are the first and only pure-play life science REIT and have invented the complex principle of clustering for the life science industry. We own and operate a top-quality portfolio in life science real estate. Almost 40 million rentable square feet with 25-plus mega campus ecosystems in AAA locations with quality assets. Now, 75% of our annual rental revenues generated by the mega campus platform, which is actually a cluster itself within the broader ecosystem cluster. Alexandria is the brand of choice in the life science sector and has built brand loyalty with our sector-leading client base, which has been accomplished through our deep knowledge of our client base's medicines, cures, therapies, and technology that continue to save and improve human life. Innovation is speeding to patients. Alexandria has scale, access to capital, low leverage, and the best-in-class credit rating. Alexandria is best positioned to continue to reinforce the bedrock of the biotech sector, which will celebrate its 50th anniversary next year on the founding of Genentech. The sector is the crown jewel in the broader biomedical sector of the life science industry—not just in this country but globally. The underlying science and technology has never been as advanced as it is today nor held as much promise as it does now. Alexandria's balance sheet is in the top 10% of all REIT credit ratings and has never been as strong. Alexandria has the longest weighted average remaining debt term among all S&P 500 REITs at two times the average. We also have one of the strongest and safest dividends in the REIT sector with a very low payout ratio. Our world-class development expertise coupled with our best-in-class industry leasing capabilities have enabled our near-term development pipeline for '25 and '26 to report 75% leased or negotiating. Alexandria has an industry-leading client base of over 750 tenants, with 89% of our first quarter leasing coming from this cherished tenant base. Our average lease duration is 9.6 years—almost 10 years from our top 20 tenants and over seven and a half years from all of our tenants. Proudly, in the first quarter, we collected 99% of our tenant rents and receivables. Now, moving to the macro issues that have garnered great attention, let me list them and give our take on them. Immigration shows very good progress to date. Deregulation also shows good progress. Regarding tax and budget, based on meetings with key insiders in the Senate and House, I'm told that July 4 is the most likely date for this significant bill to emerge. On the international side, tariffs and wars overseas have created chaos and a focal point for many folks both domestic and foreign. Regarding the Fed and interest rates, the Fed is being stubborn in moving interest rates down when the impact would be very helpful to Main Street. The Center for Medicare Services—with Dr. Oz now at the helm—has stabilized according to insider conversations we've had. The NIH, run by Dr. Bhattacharya, is facing restructuring due to an inefficient structure with many institutions that the head of those institutions have budget and control authority—creating decentralization of control that got out of hand during COVID. My guess is the private sector will pick up some slack in applied research, and under new leadership, the NIH hopefully will emerge leaner, stronger, and more focused. As for the FDA, which is the crown jewel regulatory agency for the U.S. and the world—the bedrock of our best-in-class biomedical industry—we've seen some quality senior people leave, while others are returning. Most staff are in place, and drug reviews are moving forward. We have a company deeply involved with which received review comments this past week, with an industry partner seeing relative normalcy at that level. Dr. Makary, now heading the FDA, will ensure that great science and regulatory skills remain focused on their mission. The life science industry is delivering innovative products, and the demand for innovation is strong. Drug approvals are moving forward. June will see significant approvals, including RSV, hereditary angioedema, COPD, and a rare skin disorder, which may serve as a bellwether for the FDA's continued urgency and vitality in drug approval. However, three things could significantly change the FDA's position: First, curb burdensome regulations to accelerate development. They've lost sight of approving drugs where there are no other choices, which could significantly improve the situation. Second, manufacturing and medical resilience improvements could be beneficial. Lastly, M&A activities continue in the industry, which remain positive. The 15% institutional indirect cost limitation under executive order is currently under judicial stay and causing concerns for institutions. Congress may soften its impact through legislation, but there remain significant inefficiencies. Our history shows that in challenging times such as the dot com bubble burst and the financial crisis, we've emerged stronger. Our fortress balance sheet has developed over the last decade from lessons learned during the crisis. We view this as an important opportunity to strengthen our levers to manage and grow the company. Notably, from the last two severe market corrections emerged our important clients, Alnylam in 2003 and Moderna in 2011. The critical point is that the biggest and most consequential investments—and ultimately gains—arise when investors and operators do the right thing during the worst times, which are perceived by many as the worst of times. Lastly, Alexandria’s brand represents trust. Our brand exceeds a logo; it signifies consistency, reliability, and the expectations we establish each time we deliver space. Mission-critical space that not only performs but endures and elevates the people and science who use it. With that, I will now turn it over to Hallie Kuhn.

Hallie Kuhn, SVP of Life Science and Capital Markets

Thank you, Joel, and good afternoon, everyone. Amid choppy macroeconomic conditions, the fundamental thesis driving the life science industry and Alexandria remains firmly in place. Three key points are essential. First is that the foundation of this industry is a massive unmet medical need. Nine out of ten diseases have no approved therapies, and chronic conditions impact 129 million people in the U.S., nearly 40% of Americans living with diseases like hypertension and heart disease, pushing more than $4.5 trillion in annual healthcare costs. Second is innovation. The life science industry thrives on new discoveries, and the United States along with Alexandria provides the best substrate in the world to continue fueling new discoveries well into the future. U.S.-headquartered companies account for 55% of global biopharmaceutical R&D investment and six out of every ten FDA-approved therapies. Third, biotechnology is crucial for maintaining a safe and secure nation, and we strongly support the recent series of biopharma announcements committing billions to manufacturing in the U.S., as indicated by the bipartisan National Security Commission on Emerging Biotechnology Report published earlier this month. Biotechnology is key for the U.S. to maintain its dominance and ensure future economic growth in this new era of global competition. Now, let's discuss Alexandria's diverse tenant base of 750. The variety of our tenant base is key as each segment draws on diverse funding sources, reducing the possibility of a singular funding shock. Additionally, our tenant base serves as a critical source of embedded demand, with 89% of leasing in Q1 originating from our existing tenants, who remain resilient. A significant 51% of our tenant base consists of investment-grade or large-cap entities. Our top 20 tenants include 17 of the top 20 multinational pharmaceutical companies and four of the largest tech companies globally. Focusing on Q1 '25, we are sharing, for the first time, quarterly leasing by RSF across our life science tenant segments to illustrate how tenant diversity contributed to solid leasing this quarter. Biomedical institutions accounted for 10% of life science leasing by RSF, represented by six different private and public institutions, boasting an average remaining lease term of over seven and a half years, with approximately 80% being investment grade. In private biotech, which accounted for 12% of life science leasing, venture funding remains steady—deployed at a similar rate compared to 2023 and 2024. Capturing well-capitalized private biotech tenants remains a priority, as they represent the next generation of demand and ingenuity. Multinational pharma made up 13% of leasing this quarter. Since pharma requirements tend to be larger and more time-consuming to mature, this number can vary notably from quarter to quarter. However, we continue to see demand across multiple markets. Public biotech had a strong quarter at 27% of life science leasing, highlighted by our significant lease with Intellia, a leading gene therapy company focused on developing the next generation of treatments for rare diseases. This segment shows a stark divide between well-capitalized companies and those struggling. The final segment, life science products, service, and devices, took the lead at 38%, with a notable direct lease to a commercial contract research organization in the Research Triangle. We anticipate this segment might see increasing tailwinds in the U.S. as companies focus on onshore manufacturing due to newly imposed tariffs. Overall, we are actively monitoring the regulatory and economic environments and remain cautiously optimistic regarding announcements involving onshoring, biomanufacturing, a new FDA approval pathway for rare diseases, steady venture funding, and breakthroughs in medicines like Eli Lilly's recent announcement of clinical data regarding a new type of weight-loss pill. Over the last 30 years since Alexandria's founding, the life science industry and our company have shown remarkable resilience through numerous economic cycles, with some of the strongest biotech companies emerging during challenging periods, as Joel mentioned. With that, I will turn the call over to Peter.

Peter Moglia, Speaker

Thank you, Hallie. The life science industry is a national treasure, critical to a stronger, safer, and healthier country. High interest rates and government disruptions are not tempering and will not temper the demand for a better quality of life, and the life science industry will always be here to meet that demand. Alexandria was created to enable it, and we will always be here to support it. Now, I will discuss our development pipeline, including the potential impact of tariffs, leasing, supply, and update you on our progress with the asset recycling program. In the first quarter, we delivered approximately 309,500 square feet of 100% leased Class A plus laboratory space into our high-barrier entry submarkets, which will contribute approximately $37 million in annual net operating income. An additional 1.6 million square feet, currently 75% leased or under signed letters of intent, is expected to add another $171 million in annual NOI by the end of 2026. The initial weighted average stabilized yield for this quarter’s delivery was 6.6%, driven by the solid stabilized yield of 7.5% from our key delivery of 285,000 square feet at 230 Harriet Tubman Way in Millbrae, located in the San Francisco Bay Market. This high-quality project with adjacent access to both Caltrain and BART is fully leased to Eikon Therapeutics, a highly disruptive company at the intersection of science and technology, founded by prolific drug hunter Roger Perlmutter, who has been a strategic Alexandria relationship for decades. Roger is a highly regarded industry and academic leader who has directed foundational research at Amgen and Merck and served as a professor at the University of Washington and Caltech. Under Roger's leadership, Eikon is integrating data science, engineering, chemistry, and biology to discover the next generation of drug candidates, utilizing ultra-high-resolution microscopes, living cells, algorithms, and robotics to observe therapeutically relevant biology in unprecedented ways. Roger recognized the necessity of robust building infrastructure paired with operational excellence to house Eikon, wanting Alexandria to develop it through a closely coordinated approach. Now, transitioning to the impact of tariffs on our active development and redevelopment pipeline, spoiler alert—they are not expected to materially influence our yields. At the end of Q1, we had approximately $2.4 billion remaining cost to complete, of which $1.3 billion is not subject to a fixed price contract as of the end of the quarter. We estimate that 30% to 40% of those costs are for construction materials like steel, drywall, and HVAC equipment. Assuming 100% of those materials were subjected to tariffs, we estimate that for every 10% tariff on these materials, our yields would decline by 2.5 to 3.5 basis points. Now, regarding leasing and supply, Alexandria’s superior quality, location, scale, and sponsorship allowed us to lease 1,030,553 square feet in Q1, achieving solid rental rate increases of 18.5% for renewed space and 7.5% on a cash basis. The weighted average lease term was very strong at 10.1 years. This marks the fifth consecutive quarter of exceeding one million square feet leased. Despite elevated concessions, net effective rents on renewing and releasing space remain positive. We have a strong list of prospects for our development and redevelopment projects. However, activity in this leasing segment is currently muted due to the conservative approaches of life science company management teams and boards. Concerning competitive supply, it peaked in 2024, and we expect far fewer additions in 2025 and 2026. Specifically, in Greater Boston, we anticipate 900,000 square feet to be delivered in 2025, currently at 0% pre-leased, anticipating 2.4 million square feet in 2026, which is 46% pre-leased. San Francisco expects 1.1 million square feet of competitive supply scheduled for 2025, 21% pre-leased, with no scheduled deliveries in 2026. San Diego anticipates 700,000 square feet in 2025, currently 80% pre-leased, and 400,000 square feet in 2026, completely pre-leased. Availability across these markets ranges from 20% to 30%, with a significant portion classified as 'zombie buildings' in JLL's overview of Greater Boston, described as undesirable office conversions built by inexperienced owners, likely un-leasable as laboratory space. Location, quality, and sponsorship are vital for tenants regarding mission-critical infrastructure, thus warranting discounts on those figures. To conclude, we report a lease in Cambridge reinforcing the importance of quality, location, scale, and sponsorship for tenants. In Q1, Matimco secured a 580,000 square foot, 15-year laboratory office lease with Biogen at their large-scale Volpe site in East Cambridge, with reported rental rates of $136 triple net with 3% annual increases and a tenant improvement allowance of $310 per square foot, reminiscent of pricing during the peak cycle and demonstrating high-quality tenants' willingness to pay substantial rents for premium buildings in prime locations. In summary, we continue to deliver transformative projects and incremental NOI from our pipeline; tariffs will not materially dilute our current pipeline projects; solid leasing is being executed; competitive supply deliveries are winding down; and we are making good progress on our asset recycling program. With that, I'll turn the call over to Marc.

Marc Binda, Chief Financial Officer

Thank you, Peter, and good afternoon to everyone on this call. First, congratulations to the entire Alexandria team for outstanding execution during the quarter and for delivering solid operating and financial results for Q1 of 2025. Total revenues were up 4%, and adjusted EBITDA increased by 5% for Q1 '25 over Q1 '24 after excluding impacts from dispositions completed since the beginning of 2024. FFO per share diluted adjusted was $2.30 for Q1 '25, affected short-term by our non-core asset sales necessary to fund our development and redevelopment pipeline and our investment in the long-term ground lease at our Alexandria Technology Square campus. Both actions are anticipated to generate significant long-term value for our tenants and shareholders. Our strong operating results for the quarter are driven by our disciplined mega campus strategy, enormous scale, long-standing tenant relationships, and exceptional operational excellence. Seventy-five percent of our annual rental revenue derives from our collaborative mega campuses, and we aim to steadily increase this percentage. We maintain high-quality cash flows, with 51% of our annual rental revenue coming from investment-grade and large-cap tenants. Collections remain exceptionally high at 99.9%, and our adjusted EBITDA margins were robust at 71% in this quarter, representing the third-highest quarterly margins reported since 2019. As highlighted by Peter, our leasing volume remains solid, with over one million square feet leased this quarter, marking the fifth consecutive quarter of exceeding one million square feet. The benefits of our scale, high-quality tenant roster, and brand loyalty are apparent, with 89% of our leasing activity in the quarter emanating from our existing deep well of approximately 750 tenant relationships. We continue to dominate core submarkets, securing more deals in many of our areas than our competitors combined. Rental rate growth for lease renewals and releases this quarter was robust at 18.5% and 7.5% on a cash basis—at or above the high end of our guidance for the year. We continue to achieve healthy lease terms on completed leases, averaging ten years for the quarter, which exceeds our historical ten-year average. Tenant improvement and leasing commission costs on renewals and releases for this quarter were elevated on a per-square-foot basis due to one major long-term lease executed at our Alexandria Technology Square Mega campus in Cambridge. Excluding this particular lease, leasing costs on a gross basis as a percentage of total rent over the lease term align with our five-year quarterly averages. Our occupancy at the end of the quarter stood at 91.7%, reflecting a 2.9% decrease from the prior quarter. Approximately two-thirds of this decline is attributed to the 768,000 square feet of lease expirations known to vacate across four submarkets, which we previously discussed at our investor day last year, including Moderna's relocation to their new HQ R&D campus at 325 Binney and our single-tenant building at 49 Illinois in Mission Bay, San Francisco. The remaining third comprises several smaller spaces distributed across multiple markets, with the two largest having been released and expected to be delivered later in 2025. Overall, for the full 2.9% reduction in occupancy, we are making substantial progress with around a quarter of this amount leased with a future delivery date anticipated by year's end. Based on our current outlook, we adjusted the midpoint of our guidance for year-end 2025 occupancy, reducing it by 70 basis points from 92.4% to 91.7%, driven by lower than anticipated re-leasing and lease-up of space. Same-property NOI is down 3.1%, reflecting a 5.1% increase on a cash basis for the quarter. As detailed in previous earnings calls, our Q1 '25 same-property results were impacted by key lease expirations aggregating 768,000 square feet across four submarkets. Excluding these properties, our same-property results would have been flat and up 9% on a cash basis. It's significant to note that these spaces expired at January's end, so a further decline in quarterly results is expected next quarter as the impact becomes fully integrated. The strong cash same-property performance this quarter included some free rent from development and redevelopment projects completed in 2023, which we expect to diminish over the next one or two quarters. Our outlook for full-year '25 same-property growth has been adjusted downward by 70 basis points and 20 basis points on a cash basis due to the occupancy impact over the remainder of the year. Moving on to general and administrative expenses: At our investor day, we outlined plans to achieve significant G&A cost savings throughout 2025. Over the last two quarters, G&A costs have averaged around $32 million per quarter, representing a 30% reduction compared to previous three quarters. Additionally, our trailing 12-month G&A costs, as a percentage of NOI, were 6.9% in Q1 '25, marking the best ratio in the last decade for Alexandria and significantly better than the healthcare index average of around 10% last year. Given the progress made over the last two quarters and our current outlook, we have updated the midpoint of our 2025 guidance for G&A costs to reflect an additional $17 million in cost savings, totaling an expected $49 million in overall G&A savings for 2025 compared to 2024. Our updated guidance also implies a run rate for G&A expenses similar to that of the first quarter for the rest of the year. With projects currently under construction anticipated to generate significant NOI in the coming years, alongside future pipeline projects undergoing essential pre-construction activities focused on minimizing delivery time from lease execution, we find ourselves required to capitalize a notable portion of our gross interest costs. Capitalized interest as a percentage of gross interest costs stood at 69% for Q1 '25, representing a decline from the two-year average of 74% for 2024 and 2023, driven by the completion of our in-process development and redevelopment projects. Our outlook for capitalized interest for 2025 has been reduced by $20 million, primarily related to future development projects expected to cease capitalization in the latter half of the year. A few ongoing construction projects may no longer qualify for capitalization as they reach critical milestones, needing to resume in the future when final construction work re-commences to deliver space to prospective tenants. In total, this alteration to capitalized interest accounts for roughly $1.4 billion in basis for approximately four months. Transitioning to share repurchases: We have updated our sources and uses guidance for acquisitions and other opportunistic capital uses, including share buybacks, to $250 million at the midpoint, reflecting the $208 million purchases completed in Q1, with potential for further actions under favorable market conditions. As of today, approximately $242 million remain under the plan authorized by the Board of Directors. An essential aspect covered this quarter is our disciplined efforts in shaping and refining our strong balance sheet to provide flexibility in challenging macroeconomic times. Our balance sheet distinguishes itself among publicly traded U.S. REITs, with our corporate credit ratings ranking in the top 10% of all U.S. REITs. Our balance sheet remains solid, with a year-end leverage target of 5.2 times net debt to adjusted EBITDA, consistent with the average of our year-end leverage over the past five years. We hold a robust liquidity of $5.3 billion and possess the longest debt maturity profile among all S&P 500 REITs, with the average remaining debt term standing at 12.2 years and very little debt maturing in the next three years. Regarding funding, we are content with the execution of our bond deal in February for $550 million of 10-year unsecured bonds at an attractive price of 5.5%. We will maintain a focused and disciplined funding strategy that recycles capital from dispositions, aiming to minimize common stock issuance. Since 2019, we've completed over $9.6 billion in dispositions and partial interest sales. As Peter noted, we're progressing well in 2025, with $609 million completed or in process, amounting to 31% of our guidance midpoint for dispositions and sales of partial interests of $1.95 billion. Land sales and user sales continue as vital components of our transactions. We expect a significant portion of equity needs in 2025 will come from retained cash flows from operating activities after dividends, estimated at $475 million at the guidance midpoint for '25. Our high-quality cash flows support our common stock dividends, with a conservative payout ratio of 57% for Q1 '25 and an attractive dividend yield of 5.7% as of the end of Q1. Over the last five years, realized gains from venture investments contributing to FFO per share as adjusted have averaged roughly $29 million per quarter. Our outlook for '25 remains steady, with a range of $100 million to $130 million, implying about $29 million per quarter at the midpoint. Concerning guidance, details are included on page four of our supplemental package. Our guidance for FFO per share diluted as adjusted has been revised downward by $0.7, with a new midpoint of $9.26, reflecting the low end of our initial range for FFO per share results, representing a change of 75 basis points from our initial guidance. Even despite this change, we estimate a five-year growth rate in FFO per share diluted adjusted through 2025 at 27%, placing us near the top end of the range among the peers in the NAREIT Equity Health Care REIT index. Now I'll turn the call back to Joel.

Joel Marcus, Executive Chairman and Founder

Thank you, and operator, can we go to questions, please?

Operator, Operator

Certainly. We will now begin the question-and-answer session. The first question comes from Farrell Granath with Bank of America. Please go ahead.

Farrell Granath, Analyst

Hi, good afternoon. Thank you for taking my question. I was wondering if you could walk us through the new guidance. Does this encompass a worst-case scenario, especially regarding what could happen in the biotech market? Specifically, is there a worst and best-case scenario baked in?

Joel Marcus, Executive Chairman and Founder

Before I direct that question to Marc, I'm not sure I fully understand it. What do you mean by worst-case scenario and what in guidance are you looking to discuss?

Farrell Granath, Analyst

Specifically, regarding leasing going forward, the demand, and potential further cuts to NIH funding or even more reductions.

Joel Marcus, Executive Chairman and Founder

So just overall leasing demand?

Farrell Granath, Analyst

Yes.

Joel Marcus, Executive Chairman and Founder

Okay. Marc?

Marc Binda, Chief Financial Officer

Yes, look, I think the estimate we put out there is our best estimate with the facts that we know today. So, it's not the best case and it's not the worst case. It's really our estimate with the facts we know now.

Farrell Granath, Analyst

Okay, thank you. And you mentioned quarterly leasing from private biotech, with venture funding deploying around the same rate as in 2023 and 2024. Given the macro environment, do you believe that this pace of leasing within private biotech is sustainable going forward into '25?

Joel Marcus, Executive Chairman and Founder

Yes, I mean, I'll ask Hallie to comment, but I think you have to consider venture funds that have raised large amounts of capital in the past couple of years. These funds generally act as long-term investments, now deploying capital more judiciously compared to during the booming period of COVID. They're focusing on companies with significant near-term value inflection milestones. Hallie, do you have any comments?

Hallie Kuhn, SVP of Life Science and Capital Markets

Thanks for the question. As I mentioned, quarterly venture capital deployment is on par with 2023 and 2024. Venture funds still hold a significant amount of dry capital and are positioned to deploy it. As we've discussed for several quarters now, both venture funds and companies have maintained a conservative approach to space decisions. This quarter hasn't changed that mindset, primarily from last year, with strong companies and management teams still obtaining funding, maintaining a healthy rationalism in their capital allocation.

Farrell Granath, Analyst

Thank you so much.

Operator, Operator

Our next question comes from Seth Bergey with Citi. Please go ahead.

Nick Joseph, Analyst

Thanks, it's Nick Joseph here with Seth. Joel, in your opening remarks, you discussed Alexandria's history and mentioned that sometimes doing the right thing occurs at the worst time. I’m curious what that means for Alexandria now given your experience and where we currently stand. What is the right thing to do, and when do you expect to see the payoff?

Joel Marcus, Executive Chairman and Founder

I think that can be thought of regarding the industry's current cycle. We're in the fifth year of a bear market, having started the biotech indices’ decline back in February of 2021. This represents a lengthy downturn, although we've encountered longer durations. Negative sentiment toward the industry seems to be very high at this point. However, the underlying reality supports a different narrative, as we've discussed regarding agency activities and the pace of innovation delivering new therapies to patients. If you reflect on lessons learned during the dot-com bubble burst and the GFC, relationships with companies like Alnylam since 2003 and Moderna since 2011 have proven essential, emerging as significant clients as they scaled. The strategy focuses on collaboration with innovative and disruptive companies that create value by delivering biomedical products to patients. Instead of pulling back, we need to double down and develop our asset base into mega campuses, which can greatly attract any company needing those facilities. Next year, for example, we will deliver the R&D headquarters for Crystal Myers Squibb within our campus point. Should opportunities arise to enter new markets or explore intriguing acquisitions while continuing to divest non-core assets, we are prepared to act.

Nick Joseph, Analyst

That was helpful, thanks. Also, regarding capitalized interest, you noted it declining from 75% to 61%. What is the potential this year for further adjustments between capitalized and expensed interest? Or do you think this contains the potential for adjustments this year?

Marc Binda, Chief Financial Officer

Hi Nick, yes. The adjustments we made are our best estimate at this point. Of course, we will provide further insights at the investor day. For this year, we've got good visibility, and that represents our most informed guess.

Operator, Operator

Our next question comes from Anthony Paolone with JP Morgan. Please go ahead.

Anthony Paolone, Analyst

Thank you, Joel. Last quarter, you talked about certain pockets of demand possibly starting to surface and expressed optimism for messaging in this call based on those observations. Do you feel demand has emerged, or have circumstances shifted over the last few months?

Joel Marcus, Executive Chairman and Founder

I would say things haven't changed, and stay tuned. We continue to observe the multifaceted demand discussed during Hallie’s presentation, especially in our pie chart this quarter. I believe over the coming weeks we may have positive developments to share. However, nothing indicates a negative shift.

Anthony Paolone, Analyst

Understood. Transitioning to disposition, you have $400 million lined up, plus more to complete over the remaining year. How are you feeling about capital markets? How do you ensure the success of those in-process transactions and what does the buyer pool look like? You mentioned much land, and if it’s not suitable for you, how might it appeal to others?

Joel Marcus, Executive Chairman and Founder

Let me address that before Peter adds some input. Remember that we have directed several of our asset sales recently towards reducing our land holdings and pivoting those into residential formats, which we're looking to minimize. The demand remains healthy for land in desirable locations for residential development, thus the buyer pool has grown rather than shrunk. There are still good opportunities, and we've also sold non-core, workhorse assets. However, we’re observing buyer engagement from private equity firms focused on our assets and are eager to acquire life science properties. We've also encountered interest from industrial users for a few of our properties, which bodes well for our negotiations.

Peter Moglia, Speaker

To reiterate Joel's remarks, selling to residential developers has helped us fund our mega campus model while effectively reducing competitiveness. There's an insatiable appetite for development in workable locations, and we’ll keep teeing up more land sales. The buyer pool for non-core, workhorse assets remains strong, and we’re engaging actively with prospective buyers who are open to tackling repositioning projects, revealing a lucrative avenue.

Joel Marcus, Executive Chairman and Founder

Additionally, we've received interest from developers concerning around our mega campuses, with inquiries for ground leasing or partnerships to make several of our campuses vibrant work-live-play environments. A few of our mega campuses represent nearly three million square feet, akin to mini-cities that will enhance both vibrancy and funding sources for amenities.

Richard Anderson, Analyst

Thank you. Good afternoon. Reflecting on the challenging backdrop for the business, do you see rightsizing your land bank impacting the endgame? Would development take on a lesser share of your asset base, especially considering current land sales?

Joel Marcus, Executive Chairman and Founder

The determining factors are primarily location. We seek to retain locations on or adjacent to our mega campuses. These assets, accumulated over time, are in AAA locations that best suit biotech and life science. In contrast, we sold land that wasn’t integrated with any mega campus. In boom cycles, I would hold land longer to build but in current markets, the strategy focuses on monetizing assets with accretive proceeds rather than preserving them; hence, we'll use discretion in our asset management.

Richard Anderson, Analyst

Lastly, regarding the disposition program, what percentage of seller financing do you expect to engage in? Is that increasing or decreasing as you advance through this year?

Joel Marcus, Executive Chairman and Founder

Peter?

Peter Moglia, Speaker

That's correct. While we had a few seller-financed deals last year, we currently don't have any investor sales lined up that aren’t land or user sales, but we will be open to it if favorable terms arise.

Omotayo Okusanya, Analyst

Good afternoon. I'm curious if you could provide some insights concerning the ad-tech side of your business and what’s notable in Research Triangle?

Joel Marcus, Executive Chairman and Founder

That's a good question. Private capital investments into ad-tech surged from the mid part of the last decade through the COVID period but have since seen a substantial decline. In Research Triangle, numerous companies have relocated from Boston, capitalizing on talent and venture availability. However, challenges like the lack of exits and an incumbent strain in distribution sales present obstacles for our ad-tech tenant base.

Hallie Kuhn, SVP of Life Science and Capital Markets

To build on that, while not in ad-tech, Research Triangle has rich biomanufacturing history, proving vital as pharma companies strategize around onshoring and biomanufacturing activities. The region is well-suited for ongoing onshoring initiatives.

Omotayo Okusanya, Analyst

Thanks for the clarification. Regarding the capitalized interest statement you made, are these sites undergoing predevelopment work? Is the pausing of capitalization due to a tendency to go vertical previously?

Joel Marcus, Executive Chairman and Founder

Yes, Marc?

Marc Binda, Chief Financial Officer

Yes, that's correct. The adjustments relate to situations where we’ve added maximum value based on our estimates, pausing to assess whether to resume builds or consider other strategies. As we approach these milestones, we will recalibrate our construction decisions accordingly.

Michael Carroll, Analyst

Thank you. Marc, following up on your comments about capitalized interest, could you clarify the $20 million revision for '25 being correlated to $1.4 billion over four months? Would that suggest an annualized increase of $56 million to $65 million in '26?

Marc Binda, Chief Financial Officer

Yes. If the assumption is that we won't make progress on any of that over a year, the $20 million translates into a threefold annual amount. However, it's hard to forecast what '26 could entail, especially with a majority of the land being in prime locations.

James Kammert, Analyst

I want to circle back to Hallie's comments about onshoring pharma manufacturing. Have you observed a correlation between manufacturing relocation and R&D activity? Does concentrated manufacturing stimulate the need for more R&D space?

Joel Marcus, Executive Chairman and Founder

Yes. Hallie?

Hallie Kuhn, SVP of Life Science and Capital Markets

It largely depends on the manufacturing type. For chemical ATIs that are more chemical refinery projects, those typically don’t align with our clusters. However, advanced manufacturing, particularly in cell and gene therapies, overlaps significantly with R&D talent. Research Triangle is a good example where many employees may be involved in both manufacturing and R&D roles. Overall, stimulating broader investments in U.S. capabilities is a positive trend for our industry.

Operator, Operator

Thank you. The next question is from Peter Abramowitz with Jefferies. Please go ahead.

Peter Abramowitz, Analyst

Thank you for taking my question. I'm curious about your internal conversations regarding guidance—given a significant occupancy loss, do you have a sense of where occupancy could bottom out, and what might be necessary to initiate an inflection point?

Marc Binda, Chief Financial Officer

Yes, we analyze on a granular basis. We had an unusual volume of expirations this quarter. The impact of the 768,000 square feet, much of which will take time to re-lease, may not have significant leases until '26. However, we are clearing out smaller spaces elsewhere that will take time to finalize.

Joel Marcus, Executive Chairman and Founder

We're witnessing a concerning trend very different from before, but we’re observing diverse requests for re-utilization of laboratory spaces for alternative uses across various sectors. This potential may accelerate leases quicker than anticipated, particularly considering trends we’d see with tech, which recently began occupying laboratory developments.

Operator, Operator

The next question is from Dylan Burzinski with Green Street Advisors. Please proceed.

Dylan Burzinski, Analyst

Thanks for taking my question. You mentioned presently negative sentiment in the space. Is this conservatism attributed to specific industry issues or is this a broader macroeconomic concern?

Joel Marcus, Executive Chairman and Founder

I think both aspects are at play. Clients are worried about macro factors exacerbated by many broad issues outlined, and concerns around funding cuts, especially NIH and FDA uncertainties regarding evolving leadership are contributing to sentiment shifts. Our insights reveal key agency leadership making vital decisions aimed at ensuring progress and innovation.

Hallie Kuhn, SVP of Life Science and Capital Markets

Indeed, historically, the NIH's focus on large national projects produced incredibly high economic output as seen with the Human Genome Project. Funding for innovation remains paramount in maintaining our global leadership status.

Joel Marcus, Executive Chairman and Founder

Remember, regardless of individuals’ perceptions of the current administration, their focus on preserving this industry as one of our crown jewels is critical. Whether responding to tariffs or aiming to protect our biotech dominance, this industry holds substantial national importance.

Peter Abramowitz, Analyst

Thanks for clarity. Appreciate the insights.

Operator, Operator

There are no further questions at this time. I would now like to turn the conference back to Joel Marcus for any closing remarks.

Joel Marcus, Executive Chairman and Founder

Thank you very much, and we look forward to speaking with you on the second quarter call. Take care.

Operator, Operator

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