Alexandria Real Estate Equities Inc (ARE)

• Alexandria is intensifying its focus on highly valuable core mega campus assets, selling non-core properties to fund their development pipeline without issuing new equity, which enhances their portfolio quality and maintains a strong balance sheet - .
• Tenant demand remains strong, with 80% of leasing activity over the last year coming from existing tenants, demonstrating high tenant retention and demand for their lab spaces - .
• Sublease space in key markets like Boston and the Bay Area has stabilized, with high-quality sublease space being quickly absorbed, indicating positive market dynamics for Alexandria's properties - .

• Alexandria is selling non-core assets to fund its development pipeline, which may indicate potential challenges in capital funding and could impact future revenue. [Indices: [5], - , - ]
• Demand for lab space is currently conservative due to a disciplined funding environment, potentially affecting leasing demand and revenue growth. [Index: [8]]
• The company is focusing on its mega campus strategy to mitigate increased supply in core markets, which may require significant capital investment and could strain resources. [Indices: [5], - ]

1. Cap Rates on Asset Sales Gap
   Q: What's causing the gap between asset sales at 4.9% and 7.5% cap rates?
   A: The gap is due to the nature of assets sold. The 4.9% cap rate sale in Seattle was a core asset sold to a user, while the assets sold at a 7.5% cash cap rate are stabilized, non-core properties with longer lease terms, particularly in suburban Greater Boston. The wider gap between cash and GAAP cap rates is because of these long-term leases in non-core assets. - -

2. Selling at Higher Cap Rates Than Development Yields
   Q: Is selling at a 7.5% cap rate to fund developments at a 6.4% yield dilutive to FFO?
   A: Although assets are sold at higher cap rates like 7.5%, they often require significant capital to re-tenant. By selling these non-core assets, we redeploy proceeds into developing mega campuses with yields around 6.4%, which aligns with our strategy and reduces future capital expenditures. This approach strengthens long-term growth and value. - -

3. Non-Core Asset Sales and Portfolio Strategy
   Q: What's the dollar value of non-core assets that can still be sold?
   A: Approximately 24% of our Annual Rental Revenue comes from non-mega campus assets. Some of these may be sold over time to focus on mega campuses, but others are high-quality assets we'll keep. We also have land not in mega campuses that could be a capital source. The exact dollar value isn't specified. - -

4. Straight-Line Rent Write-Offs
   Q: Could we see more straight-line rent write-offs like the recent reduction in guidance?
   A: The recent write-off was a one-time event with a specific tenant winding down operations after nearly 20 years. We consider this an isolated incident and don't expect similar occurrences. Our portfolio remains strong due to our disciplined underwriting and tenant selection. -

5. Leasing Trends and Demand
   Q: Are you seeing larger space requirements pick up?
   A: Demand is strong among early-stage and revenue-generating companies, while the middle market remains challenging. Companies with good clinical data and approvals are driving leasing activity. - -

6. Sublease Space Stabilization
   Q: Has sublease space in Boston and the Bay Area stabilized?
   A: Yes, sublease space has stabilized. Quality sublease space doesn't stay on the market long, and we're not seeing significant new additions. Tenants prefer direct leases when possible. -

7. Lengthening Deal Cycles
   Q: How have leasing deal cycles changed?
   A: Leasing cycles are taking longer as tenants' boards closely scrutinize growth and expenses. Tenants are thorough in evaluating market options, leading to extended timelines for deal completion. -

8. Impact of AI on Future Demand
   Q: How will AI affect lab space demand?
   A: AI is in early stages but is expected to enhance drug development, particularly in clinical trials. This will increase opportunities for new targets and medicines, positively impacting lab space demand over the long term. - -

9. Disposition Guidance and Capital Use
   Q: Could you exceed the midpoint of disposition guidance, and what's the use of proceeds?
   A: Given the time of year, we don't expect to exceed the guidance midpoint. Proceeds from asset sales are primarily used to fund our development pipeline, reduce debt, and support our mega campus strategy. -

10. Transaction Market and Investor Appetite
    Q: Is there appetite from traditional real estate investors for life science assets?
    A: While user sales have been common, investor activity depends on financing conditions. As lending markets improve, we expect increased investor interest and transaction activity in life science real estate. -

11. Realized Gains Guidance
    Q: Does the full-year realized gains guidance imply significant gains in Q4?
    A: Realized gains for the nine months are $85.2 million, aligning with our full-year guidance of $95 million to $125 million. We don't expect significant additional gains in Q4 beyond this range. -

12. Texas Tech Tenant Lease Extension
    Q: What are your long-term plans for the Texas tech tenant space you extended for five years?
    A: Due to confidentiality, we can share that the renewal is integral to the tenant's adjacent campus. The buildings are highly improved for their use. While converting to lab space is an option, the current cash flow and potential future opportunities make this extension prudent. -

13. 99 Coolidge Stabilization Delay
    Q: Why was the stabilization of 99 Coolidge pushed out by a year?
    A: As a brand-new building, it's taking more time to build out space and deliver to tenants in the current market. We recently signed a new lease there, ensuring space is available when tenants need it. -

14. Pockets of Demand for New Space
    Q: Where are the better pockets of demand for new space?
    A: Demand is strongest among early-stage companies and clinical-stage companies with positive developments. These segments are the most common drivers of new leasing activity. - -

15. Use of Capital from Asset Sales
    Q: What's the best use of capital from asset sales?
    A: Proceeds are primarily used to fund construction of our development pipeline, reduce debt, and support our mega campus strategy. This reduces the need to issue common equity and strengthens our balance sheet. - -

16. Impact of AI on Lab Space Demand
    Q: Does AI help or hinder demand for lab space?
    A: AI is expected to positively impact demand by accelerating drug development and increasing opportunities for new medicines. It should lead to more targets and improved outcomes, benefiting our industry. - -

17. Demand Evolution as Funding Improves
    Q: How do you see demand evolving as funding improves?
    A: While the current environment is conservative, innovation continues, and the industry's long-term outlook is positive. As funding improves, we expect demand to grow, driven by ongoing scientific advancements and unmet medical needs. -

Annual guidance for FY 2024:

• EPS: $2.60 to $2.64 - (lowered from $2.98 to $3.10 - )
• FFO Per Share: Midpoint of $9.47, 5.6% growth - (no change from prior guidance - )
• Rental Rate Growth: 11% to 19%, 5% to 13% on a cash basis - (no change from prior guidance - )
• Same-Property NOI Growth: 1.5% to 4% on a cash basis - (no change from prior guidance - )
• Occupancy: 94.6% to 95.6% - (no prior guidance)
• Realized Gains: $95 million to $125 million - (no prior guidance)