Earnings Call Transcript - ARE Q1 2024

Operator, Operator

Good day, and welcome to the Alexandria Real Estate Equities First Quarter 2024 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Paula Schwartz with Investor Relations. Please go ahead, ma'am.

Paula Schwartz, Investor Relations

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 would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Joel Marcus, Executive Chairman and Founder

Thanks, Paula, and welcome, everybody to Alexandria's first quarter '24. With me today are Hallie, Peter, and Marc. First of all, thank you and congratulations to our ARE family team for a very solid first quarter against a continuing tough macro environment with stubbornly high interest rates and ongoing non-transitory inflation instigated by the federal government's uncontrolled spending. In fact, our annual debt service now exceeds our defense budget. Huge congratulations to the entire team as Alexandria has once again been named one of the most trustworthy companies in America by Newsweek, nominated as such by our three constituencies: our customers, our investors, and our employees. Guided by Alexandria's core values of integrity, mutual respect, egoless leadership, humility, transparency, teamwork, and trust, we have established ourselves at the forefront of the $5 trillion secularly growing life science industry. We are very honored that Newsweek has again recognized us with this important award, which is a testament to our company's values and to the trust that our tenants, investors, and employees have in our unique brand. As we have said before, Alexandria has achieved the three outputs that define a great company: superior results, distinctive impact, and lasting endurance. We remain unwavering in our efforts to build upon these outputs and to continue to maintain our stellar reputation as the most trusted brand for life science real estate, providing essential infrastructure enabling the development of new safe and effective medicines. Remember, over 90% of diseases have yet to have addressable therapies or cures. The top causes of death in the United States remain cancer, heart disease, and the third is fentanyl and methamphetamine, which is a profoundly sad statement of fact. My quick take on the first quarter is that Alexandria is one of a kind with a great brand, scale, dominance, and our unique cluster strategy together with a robust balance sheet. We posted 7.6% year-over-year NOI growth, which I believe is solid in this environment, 7.3% year-over-year FFO growth, 5% dividend growth, and our collections stand at 99.9%. We had a strong leasing quarter with solid leasing spreads, and we continue to maintain strong occupancy despite recently acquired vacancies. We also posted very solid same-store growth and solid guidance. We are particularly focused on leasing for the 2025 pipeline, as well as redevelopment space to be delivered in 2025, and of course the leasing of vacant space in 2025, which is the quickest space to deliver to our growing tenants. Much like we did during the great financial crisis, we're pushing forward our pipeline due to the need for Alexandria's lab space coupled with solid indicators of a positive rebound for life sciences in 2024, which Hallie will address. Lease expirations for 2024 and 2025 are down, as are unresolved expirations for both years. Peter will discuss capital recycling, but for the quarter thus far, we've sold or have pending approximately $275 million of non-core assets, meaning we are about 20% through our targeted $1.4 billion of capital recycling for our business in 2024, and we feel very comfortable where we are today. Finally, I mentioned in our last earnings call our decision to sell 219 East 42nd Street, New York City, the former Pfizer headquarters building ultimately for residential use. This was a very good decision, reinforced by the continuing concerns I have regarding the state of New York and the City of New York in incentivizing and fostering empty properties for so-called life science use while neglecting the funding needs of startup companies, which are essential to New York City's life science ecosystem. There has been no lab leasing in New York City in the first quarter whatsoever, and yet the state and city are proposing to foster and encourage more developments. While we have a strong position with our campus, it is disconcerting when local and state governments are not prioritizing funding for startups and the health, welfare, and safety of their citizens. With that, I'll turn it over to Hallie for a number of important comments. Hallie?

Hallie Kuhn, SVP of Life Science and Capital Markets

Thank you, Joel, and good afternoon, everyone. Today, I'm going to review the fundamentals of the $5 trillion secularly growing life science industry, what these fundamentals mean for the health of our diverse life science base, and how our tenant science dictates the need for Alexandria's lab space infrastructure. In 2008, following the great financial crisis, the size of the public biopharma industry was around $2.5 trillion, and approximately $11 billion in venture capital was invested in private life science companies. Back then, there was no cure for hepatitis C, obesity was considered too complex to treat effectively, and gene and cell therapies were a mere hope. Today, the industry is valued at over $5 trillion, and venture capital investment is on pace to reach four times the levels deployed in 2008. In the last quarter alone, 600 additional novel therapies have been approved by the FDA, significantly improving and prolonging lives. Coming out of this bear cycle, albeit with some fluctuations along the way, the life science industry is fundamentally stronger compared to previous cycles, with a solid framework to accelerate long-term growth and demand for Alexandria Labspace. Let's step through the first quarter trends in the life science industry. First, with respect to life science venture investment, nearly $11 billion of deployed capital was announced in the first quarter, with $100 million-plus mega rounds accounting for 34 deals, the highest number in the last eight quarters and any quarter prior to 2021. These trends bode well for demand from new and existing private biotechnology tenants, which account for 10% of our annual rental revenue. Moving on to our pre-commercial and commercial public biotech tenants, which represent 9% and 16% of our annual rental revenue respectively. Follow-on and PIPE financings achieved one of the highest quarters on record, totaling $15.5 billion, with one in every four dollars raised by an Alexandria tenant. Recently, our long-time tenant, Intracellular Therapies, announced clinical data for their first-in-class therapy, lumateperone, for the treatment of depression, followed by a significant $500 million raise. This illustrates that demand is milestone-based, which allows companies achieving their targets, typically with clinical data, access to crucial capital to accelerate their scientific research. In the multinational pharmaceutical companies segment, which represent 20% of our annual rental revenue, M&A activity has seen a record year, with the first quarter continuing at a strong pace, eclipsing $40 billion in announced deals. This reflects large pharma's strong balance sheets and the necessity to expand their pipelines with innovative therapies to counteract over $200 billion in revenue at risk from patent expirations through 2030. M&A is a robust sign of industry health, as capital recycled back to investors and entrepreneurs will be redeployed into the next generation of life science companies. Lastly, our life science product, service, and device tenants represent 21% of our annual rental revenue. A key trend to monitor is the pressure from Congress to limit the utilization of Chinese CDMOs under the proposed BIOSECURE Act. Regardless of whether this legislation passes, it is positive for our U.S.-based CDMO tenants, as analysts expect to see a substantial increase in demand that will help ensure we maintain our national competitive edge in such a critical industry. Switching gears, let's examine how our tenants' research dictates their lab requirements. For example, consider a private biotech company developing precision oncology medicines that is expanding into 20,000 square feet. Working with Alexandria's in-house lab operations team, they placed 328 pieces of equipment in their lab, ranging from bench-top centrifuges to freezers, cryo tanks, DNA sequencers, and advanced microscopes. Ten pieces of this equipment, including negative 80-degree freezers, require emergency power as it is critical for them to operate 24/7 to safeguard hundreds of thousands of dollars in experimental samples. The placement of this equipment is based not just on the square footage required, but also on the experimental process flow. A single cell biologist utilizes equipment spanning multiple benches, chemical fume hoods, tissue culture suites, and microscopy rooms. Beyond that, they frequently move between the lab and adjacent non-technical spaces throughout the day. Lab space cannot be equated to traditional office space determined solely by worker numbers; it is more aligned with data centers where space needs are driven by physical equipment. While highly trained scientific talent is essential, the scientific workflow and instrumentation used dictate the lab footprint. Notably, due to the immense data volume and complexity required for AI algorithms, many AI-centric tenants have substantial lab equipment needs, necessitating significant laboratory footprint. A prime example is the South San Francisco-based tenant, insitro, with whom we announced a significant early extension this quarter. AI is a powerful tool, but the laboratory remains pivotal. Over the past 15 years, the life science industry has doubled in size, significantly improving lives. Looking 15 years ahead, the growth trajectory of this industry is massive, as companies strive to cure diseases like Alzheimer's, autoimmune diseases, and the nearly 7,000 rare diseases affecting one in ten Americans. As a trusted partner to leading life science companies, our mission is to safeguard our tenants' mission-critical research and catalyze discoveries that will shape the future of medicine. With that, I will pass it to Peter.

Peter Moglia, Executive Vice President

Thanks, Hallie. I appreciate the context you provided. I'm going to discuss our development pipeline, leasing supply, and asset sales, and then I'll hand it over to Marc. In the first quarter, we delivered 343,445 square feet into our high barrier-to-entry submarkets covering five projects. The annual incremental NOI delivered during the quarter was $26 million. Development and redevelopment leasing during the quarter was approximately 100,000 square feet. In addition to the executed leases, we signed 162,000 square feet of LOIs during the quarter which will see future development and redevelopment pipeline leasing. Base leased or under negotiation in our current and near-term projects under construction increased by 3% over last quarter to 63%, and projects delivering in 2024 and 2025 are 80% leased. From the second quarter of 2024 to the end of 2027, we expect to deliver approximately $480 million of stabilized NOI from the current pipeline. Transitioning to leasing and supply, as we noted last quarter, the bottom of demand was reached during the first half of 2023, and it continues to incrementally recover in our core markets. Although the lack of funding activity in early 2023 will likely overhang full recovery for a quarter or two, we are confident that recovery is achievable in the near-term given the key fundamentals highlighted by Hallie. Alexandria is well-positioned to weather these storms thanks to our strong competitive advantages. We leased 1,142,857 square feet during the first quarter, consistent with our pre-pandemic velocity. GAAP and cash rental rate increases were extraordinarily strong at 33% and 19% respectively, while the related tenant improvements and leasing commissions trended down 16% compared to our 2023 leasing costs. Our teams continue to closely track competitive supply building by building in our proprietary databases. As noted in last quarter's call, we expect 2024 to be the peak year for new deliveries, followed by a tapering off in 2025. In Greater Boston, the unleased competitive supply expected to be delivered in 2024 decreased significantly from 7% of market inventory in the fourth quarter to 1.6% due to 3.3 million square feet of competitive projects delivering in the first quarter. Approximately 1.17 million square feet of those projects were shifted from an estimated 2023 delivery to a 2024 delivery last quarter. The unreleased delivered space will be reflected in the direct vacancy numbers I’m going to present. In 2025, the unleased competitive supply in Greater Boston will increase market inventory by an additional 2%, a reduction from 2024 levels. In the San Francisco Bay area, unleased competitive supply expected to be delivered in 2024 is 9.6% of market inventory, which is a 1.1% decrease primarily due to reclassifying a 0.5 million square foot project from a 2024 to a 2025 delivery due to a temporary construction delay. In 2025, unleased competitive supply in San Francisco is projected to increase market inventory by 3.7%, a 1.5% increase over last quarter caused by that reclassification. In San Diego, unleased competitive supply expected for delivery in 2024 is 5.1% of market inventory, a 1.6% decrease from last quarter, moving two projects from an estimated 2024 delivery to 2025. For 2025, the unleased competitive supply will increase market inventory by an additional 3.8%, a 1.1% increase from reclassifications, somewhat offset by first quarter leasing at those projects. To update you on direct and sublease vacancy, direct vacancy in Greater Boston increased 593 basis points to 12.98% due to the aforementioned first quarter deliveries. It climbed more moderately in San Francisco, rising 175 basis points to 14.11%, propelled by a 147,000 square foot speculative delivery in San Carlos. In San Diego, direct vacancy increased by 244 basis points to 10.41%, primarily driven by the inclusion of space not currently vacant, but soon to be known vacancies coming up. Sublease vacancy decreased in Greater Boston by about 0.75% to 5.17%, while it increased in San Francisco Bay by 0.5% to 6.28% and increased by a third of a percent in San Diego to 5.7%. Overall, we believe that 2024 is the peak year of disruption from supply, demonstrating that Alexandria's 94.6% occupancy is indicative of our competitive advantages. I'll conclude with an update on our asset recycling program. After a busy fourth quarter of 2023, where we closed $439 million in asset sales, we spent the first quarter preparing for our disposition and partial interest sales pipeline, which will likely be heavily weighted towards the third and fourth quarters. Early progress is reflected in pending transactions subject to letters of intent or purchase and sale agreements of $258.1 million, with several other active sales efforts ongoing. Buyers of non-core assets generally include private equity firms, family offices, local operators, and institutionally backed real estate partnerships looking to diversify into life science real estate. During the quarter, we closed on assets worth $17.2 million, including 99 A Street in the Seaport, deemed non-strategic, alongside our pivot to 285, 299, 307, and 347 Dorchester Avenue, acquired during the quarter for their proximity and planned mega campus potential. We remain committed to our self-funding strategy, and our offerings remain attractive to investors looking for exposure to life science real estate given the industry's promising outlook, despite near-term supply challenges. With that, I will pass it over to Marc.

Marc Binda, CFO

Thank you, Peter. This is Marc Binda, CFO. We reported very strong operating and financial results for the first quarter, and our team is off to a great start to 2024. Total revenues and NOI for Q1 2024 were up 9.7% and 11.5% respectively over Q1 2023, primarily driven by solid same property performance and the continued execution of our development and redevelopment strategy. FFO per share diluted, as adjusted for the quarter, was $2.35, up 7.3% over Q1 2023, and was ahead of consensus. We also reiterated the midpoint of our full-year 2024 guidance for FFO per share diluted, adjusted to $9.47, which represents a 5.6% increase from 2023. Our strong operating results for the quarter stem from our disciplined execution of our mega campus strategy, tremendous scale, and our differentiated business model. Our tenants continue to value our brand, collaborative mega campuses, and operational excellence. Seventy-four percent of our annual rental revenue comes from our collaborative mega campuses, and we benefit from high-quality cash flows, with 52% of our annual rental revenue coming from investment-grade or publicly traded large-cap tenants. Collections remain high, at 99.9%, and adjusted EBITDA margins were strong at 72%. Leasing volume in the first quarter was robust, reaching 1.1 million square feet, up 30% over the average of the last two quarters, and consistent with our historical quarterly averages from 2013 to 2020. We continue to benefit from our tremendous scale, high-quality tenant roster, and brand loyalty, with 77% of our leasing activity over the last 12 months coming from existing deep tenant relationships. Rental rate growth for lease renewals and releasing space in Q1 2024 was strong, at 33% and 19% on a cash basis. Our outlook for rental rate growth for the full year 2024 remains solid at 11% to 19% and 5% to 13% on a cash basis, reflecting our view that the relatively small renewals for any particular quarter compared to the full year and the mix of lease expirations in any quarter is likely to cause variations in rental rate growth from quarter to quarter. The overall mark-to-market for cash rental rates for our entire portfolio remains strong at 14%, unchanged from the prior quarter, which is impressive given the strong rental rate growth experienced in the first quarter. Our non-revenue enhancing expenses, including tenant improvements on second-generation space, have averaged 15% of net operating income over the last five years and are expected to be below that, at 12% to 13% in 2024, highlighting the durable nature of our laboratory infrastructure. Same property NOI growth for Q1 2024 was solid at 1% and 4.2% on a cash basis, driven by strong rental rate growth and leasing volume. Our outlook for full-year same property growth has remained unchanged at 1.5% and 4% on a cash basis at the midpoint. Occupancy for the quarter was strong at 94.6%, consistent with the previous quarter. During the quarter, we continued to execute on our development and redevelopment strategy by delivering 343,445 square feet from the pipeline, which is expected to generate $26 million of incremental annual net operating income. We anticipate significant future growth in incremental annual net operating income on a cash basis of $101 million from executed leases as the initial free rent from recent deliveries burns off over the next seven months on a weighted average basis. This contractually mandated increase in cash flows will drastically enhance NAV, as these projects will be removed from construction in progress by the end of Q1 2024. As Peter highlighted, we have 5.5 million rentable square feet of development and redevelopment projects projected to generate $480 million of incremental annual net operating income over the next four years, including 2.1 million square feet scheduled to deliver through 2025 that are 81% leased and expected to generate $229 million of additional net operating income. With active construction and pre-construction projects adding value, we are also focused on minimizing the time from lease execution to delivery and must capitalize a significant portion of our gross interest cost. Last year, we observed peak capitalization in the quarter preceding our record deliveries in Q4 2023, generating $265 million of incremental annual net operating income. These record deliveries have led to a decline in the average real estate basis subject to capitalization of $1.3 billion, or 14%, from all of 2023 to Q1 2024. Capitalized interest as a percentage of gross interest has similarly declined from 83% for the entire year of 2023 to 67% for Q1 2024, marking an overall decline over two consecutive quarters coming off the peak of Q3 2022. Our outlook for capitalized interest for 2024 is consistent with our prior guidance, anticipating a double-digit decline in average basis subject to capitalization for the full year. Transitioning to the balance sheet, we maintain one of the strongest balance sheets among publicly traded U.S. REITs. Our corporate credit ratings rank in the top 10% of all publicly traded U.S. REITs. Our leverage remains low at 5.2 times net debt to adjusted EBITDA on a quarterly annualized basis. We hold significant liquidity of $6 billion in fixed-rate debt comprising 98.9% of our total debt, with a weighted average remaining debt term of 13.4 years. Furthermore, nearly a third of our total debt has at least 25 years to maturity, boasting a very favorable blended rate of 3.86%. We remain disciplined with our long-term funding strategy, focusing on maximizing bottom-line growth, maintaining our solid balance sheet, and recycling capital from dispositions and partial interest sales to minimize common stock issuance. We are pleased with the execution of our bond deal, completed during the quarter, aggregating $1 billion with a weighted average interest rate of 5.48% and a weighted average maturity of 23.1 years. Similar to the self-funding strategy executed in 2023, we plan to recycle capital into our highly leased development and redevelopment pipeline through outright dispositions and partial interest sales, concentrating on assets that are not integral to our mega campus strategy to enhance our asset base quality. As Peter mentioned, we completed $17 million in asset dispositions during the quarter. We have $258 million of pending transactions at various stages of negotiation, and significant further targets for both dispositions and partial interest sales are in progress. Regarding dividends, we expect to continue funding a substantial portion of our equity needs with retained cash flows from operating activities, estimated at $450 million at the midpoint for 2024 or a projected $2.1 billion over the five-year span through 2024. Our high-quality cash flows have accordingly supported annual common stock dividend growth, with an average annual rise of 5% since 2020, while our first quarter FFO payout ratio stands at a conservative 54%. Realized gains from venture investments included in FFO per share as adjusted for the quarter were $28.8 million, relatively consistent with our historical average of $24 million per quarter since 2021. Gross unrealized gains in our venture investment portfolio as of Q1 2024 amounted to $320 million on a cost basis just under $1.2 billion. We have updated our guidance for 2024, projecting earnings per share of $3.60 to $3.72 and tightening the range for adjusted diluted FFO per share to $9.41 to $9.53 with no change to the midpoint of $9.47, reflecting a solid 5.6% growth over 2023. With that, I will turn it back to Joel.

Joel Marcus, Executive Chairman and Founder

So operator, let's go to Q&A, kindly.

Operator, Operator

The first question will come from Josh Dennerlein with Bank of America Merrill Lynch.

Josh Dennerlein, Analyst

Peter, just wanted to follow up on your comments regarding asset recycling. Could you explain more about it? It seems like you're pausing or re-evaluating your sales, so is there anything influencing that, and how is the potential pool changing?

Peter Moglia, Executive Vice President

Yes, I think you misinterpreted my comments. There is no pause. I was just trying to highlight that we tend to close many sales in the latter half of the year, like last year. So, yes, no pause; activity remains brisk.

Josh Dennerlein, Analyst

Okay. Because it looks like the number of pending transactions seems to have decreased since Q4. Is there a particular fallout?

Peter Moglia, Executive Vice President

It's about 20% of our goal which again, given how we're heavily weighted towards Q3 and Q4, I think is on target.

Josh Dennerlein, Analyst

Then Marc, I wanted to follow up on your comment about leasing spreads in Q1 and any slowing rental rate increases for the rest of the year. Can you share how we should expect the cadence to change over the year?

Marc Binda, CFO

Yes. It really depends market by market, lease by lease based on what we renew in each quarter. So there can definitely be some variation quarter-to-quarter. Q1 was very strong, which we are pleased with, and we believe the year will remain strong. We still feel good about our guidance for both GAAP and cash rental rate increases for the year.

Operator, Operator

The next question will come from Michael Griffin with Citi.

Michael Griffin, Analyst

Peter, I want to revisit your comments concerning the competitive supply. You've indicated that several properties have been postponed in your development pipeline. What gives you confidence that we are approaching the peak of this supply scenario and not staying in a similar predicament a year from now?

Joel Marcus, Executive Chairman and Founder

Yes, Joel here. I'll let Peter answer that, but I think the terms you used are quite inaccurate. One project in San Diego was postponed to the following year—not delayed several years—because there's a major credit tenant lease they're working on that complicates the delivery process. So I think your perception is incorrect. Peter?

Peter Moglia, Executive Vice President

Yes. I believe Michael was also referring to the general market data I discussed. There were around three to four projects in the three markets I mentioned that got delayed, which is typical because sometimes a project that was supposed to deliver in one year gets bumped to a later quarter. But we are fairly confident that we are not going to see much more after 2025 because we're not observing any significant new starts, perhaps only one project that began in San Diego in Q3 2023. Thus, the supply situation should stabilize post-2025.

Michael Griffin, Analyst

That makes sense, thanks for clarifying that, Joel. Regarding the leasing environment specifically in relation to the development pipeline, would we need to offer more concessions to tenants to sign leases, or would you be open to leaving some vacancies in the developments for better rents if the environment improves?

Joel Marcus, Executive Chairman and Founder

It doesn't quite operate that way in this industry. As Hallie noted, demand in this sector is event-driven, which means that it's more about key factors such as the recruitment of talent and immediate need for space based on major clinical milestones rather than rental rates or concessions. The market will dictate prices, but concessions don't determine decisions in this context.

Operator, Operator

The next question will come from Vikram Malhotra with Mizuho.

Vikram Malhotra, Analyst

It seems like you painted a positive picture regarding the market trends, so Marc, I'm curious why the early adjustment in your FFO guidance, particularly at the high end, given the promising start?

Marc Binda, CFO

We believe we are on track. It's not uncommon for us to narrow the range while progressing through the year as we gather more comfort with our performance. We narrowed both the top and the bottom ends with no change to the midpoint of our guidance. We remain optimistic about solid growth this year at 5.6% over 2023.

Joel Marcus, Executive Chairman and Founder

Yes, that aligns with how we've consistently approached guidance year-over-year, Vikram. Remember, this year brings macro challenges, geopolitical issues, and an election, hence our aim for a conservative approach.

Vikram Malhotra, Analyst

Understood. I believe you have a number of shorter-term renewals extending into 2025, and I'd like to know about the nature of those discussions. Are tenants uncertain about their space needs?

Joel Marcus, Executive Chairman and Founder

Short-term renewals are common in this industry when companies are awaiting critical clinical trial data or other significant catalysts that could affect their operations. This allows them to maintain strategic flexibility as they assess their needs moving forward.

Vikram Malhotra, Analyst

Can you elaborate on the point about 2024 being expected as the bottom year? What factors indicate demand recovery into 2025?

Joel Marcus, Executive Chairman and Founder

Certainly, Hallie can provide insights again.

Hallie Kuhn, SVP of Life Science and Capital Markets

As I mentioned earlier, we have a very diverse tenant demand, spanning small private biotechs, public biotechs, large pharma institutions, and life science tools. Each segment shows strength. We are coming down from 2021, but performance is still robust compared to previous years. Venture capital remains strong, as evidenced by the recent spike in mega rounds, and public biotech follow-on financing continues to perform at historic levels. Additionally, major pharma continues to pursue large requirements across our regions driven by the need to attract top talent and foster innovation. All segments indicate continued strength amidst macro challenges.

Operator, Operator

Your next question will come from Rich Anderson with Wedbush.

Rich Anderson, Analyst

Peter, what is your take on the tail of supply? For instance, if we expect peak deliveries this year, it won't directly lead to an immediate turnaround. How long do you see it before we see cash flow stabilization for Alexandria?

Peter Moglia, Executive Vice President

That's an intricate question. Typically, the lag between supply peaks and cash flow stabilization can vary, but our belief is that the demand we anticipate will reduce the tail length of supply. The current drop in funding in 2023 is a contributing factor, which is why we think 2024 will be a low point, with a rebound as investments kick in the need for expanded capacity increases.

Rich Anderson, Analyst

Will this lead you to maintain the current pace of development funded primarily through asset disposals, or might you need to moderate development if dispositions slow?

Joel Marcus, Executive Chairman and Founder

As you've seen, we've been disciplined in managing our development pipeline post-COVID, so our focus remains on tenant needs rather than overall volume throughput. We decide based on demand and evaluate the cost of capital and yield to guide our decisions.

Operator, Operator

The next question will come from Wes Golladay with Baird.

Wes Golladay, Analyst

Hi everyone. It appears Q1 started strong with same-store NOI growth. Was it initially expected that this growth would be more weighted towards the second half of the year?

Marc Binda, CFO

Yes. Hi, Wes. We thought the second half would see some acceleration. However, given Q1's performance, we still expect the second half to show strength consistent with our guidance.

Wes Golladay, Analyst

You mentioned CDMO and AI as potential demand drivers. Do you expect them to have a more significant impact this year or in 2025 and beyond?

Joel Marcus, Executive Chairman and Founder

Hallie, do you want to expand on that? I think both are ongoing considerations.

Hallie Kuhn, SVP of Life Science and Capital Markets

Sure. These topics generate a lot of attention. While they are critical components of the larger demand pool we see among our tenants, I wouldn't characterize them as the sole drivers. Nonetheless, certain tenants within our portfolio are seeking significant lab requirements due to data generation, and CDMO demand trends signal a positive outlook for the industry.

Operator, Operator

Your next question will come from Tom Catherwood with BTIG.

Tom Catherwood, Analyst

Peter, transitioning to this quarter's leasing activity, we see that costs have decreased while unleased new supply continues to enter the market. How is this affecting competition with your operating portfolio's expiring leases?

Peter Moglia, Executive Vice President

I don't believe it's creating a strong competition at all, based on our occupancy and the strong cash and GAAP rent spreads reported today. Our brand and platform of mega campuses significantly support our tenants' needs, with particular focus on high demand areas. There is minimal movement outside our operations apart from isolated leasing.

Tom Catherwood, Analyst

Considering the unleased competitive supply, what's the potential for distress in the life science real estate market and could that present opportunities for Alexandria?

Peter Moglia, Executive Vice President

It's a pertinent question. We anticipate some opportunities may arise in the future, but the current supply does not exhibit the profile we target. Many of these spaces may convert to office use, especially older buildings, but we are also seeing some potential opportunities arise.

Operator, Operator

The next question will come from Anthony Paolone with JPMorgan.

Anthony Paolone, Analyst

Your development yields appear to have remained around 7% for some time now. Considering stubbornly high interest rates, is 7% an apt yield moving forward, or do you believe adjustments need to be made?

Joel Marcus, Executive Chairman and Founder

Peter, any thoughts on that?

Peter Moglia, Executive Vice President

Absolutely. Decisions on development must consider long-term trends such as anticipated fundamentals, and while you can use a short-term yield for evaluation, we must also be aware of macroeconomic changes and how they influence our returns over time.

Anthony Paolone, Analyst

What about the funding strategy? You mentioned a preference for dispositions over stake sales. Is that completely off the table or could it be a consideration based on what you have lined up?

Joel Marcus, Executive Chairman and Founder

As noted, our guidance assumes no equity issuance, similar to 2023. Our focus remains on recycling non-core assets outside our mega campus strategy. However, we will continually evaluate our options.

Anthony Paolone, Analyst

If you look a year ahead when the supply situation stabilizes, what trends do you forecast for market rents during that period?

Peter Moglia, Executive Vice President

We anticipate a relatively flat environment for rents. Each market should react differently, but expectations are that our mega campus locations will perform considerably better than general supply, owing to their established demand and quality.

Operator, Operator

The next question will come from Jim Kammert with Evercore.

Jim Kammert, Analyst

Joel, could you offer additional context on tenant interest levels in your development and redevelopment pipeline now versus the previous few months? How many tenants are in discussions, the range of space they require, and the timeframes for decisions?

Joel Marcus, Executive Chairman and Founder

I don't want to divulge specific details, considering the competitive landscape, as it wouldn't serve our or our tenants' interests. However, we have seen solidification in tenant interest since late 2022, reflecting generally favorable capital conditions and the successful milestones achieved by many tenants.

Operator, Operator

The next question will come from Dylan Burzinski with Green Street.

Dylan Burzinski, Analyst

Just in terms of development yields decreasing against historical levels, how does your investment strategy weigh developing at a low 6% cap versus acquiring assets in the market? Is this yield accepted given the connection to the mega campus strategy?

Joel Marcus, Executive Chairman and Founder

That's a pertinent question. The attributes of our mega campuses often provide better options compared to standalone purchases. You gain substantial long-term value by developing within our existing real estate, primarily focusing on those campus dynamics.

Peter Moglia, Executive Vice President

We haven't seen compelling acquisition opportunities recently that match our strategic interests. Hence, our focus remains on maximizing our existing campuses rather than broadening acquisitions that don't align with our model.

Operator, Operator

The next question will come from Michael Carroll with RBC Capital Markets.

Michael Carroll, Analyst

Leasing activity appears to be improving. Given the recent interest rate push and its effects, do you anticipate tenants facing challenges in their capital raises?

Joel Marcus, Executive Chairman and Founder

The environment is influenced by events; however, a key milestone should allow companies to access capital regardless of fluctuations in economic areas. Companies that hit significant milestones can still finance their needs effectively.

Michael Carroll, Analyst

Understanding that some tenants are more cautious, are boards of those firms becoming more amenable to leasing space?

Joel Marcus, Executive Chairman and Founder

Historically boards are mindful of their operations, and given current conditions, they remain more disciplined as they evaluate strategic growth opportunities. This aids in better decision-making, particularly when companies signal readiness for expansion.

Operator, Operator

Your next question will come from Omotayo Okusanya with Deutsche Bank.

Omotayo Okusanya, Analyst

Are markets improving? What do you see ahead in terms of tenant demand for your mega campus and development projects?

Joel Marcus, Executive Chairman and Founder

We certainly see improvements in various markets. The interest has solidified since October, further fostering positive conditions for future demand.

Operator, Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Joel Marcus for any closing remarks. Please go ahead.

Joel Marcus, Executive Chairman and Founder

Thank you, everybody. Remember, May is Mental Health Month, and we will be focusing on our corporate social responsibilities. Please stay safe, take care, and God bless. Thank you.

Operator, Operator

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