Q1 2024 Alexandria Real Estate Equities Inc Earnings Call

things like that are not driving people's decisions. It doesn't work that way.

Speaker Change: All right, that's it for me. Thanks for the time. Yep.

Speaker Change: The next question will come from Vikram Mahhotra with Mazuho. Please go ahead.

Vikram L. Malhotra: Thanks, seeing the questions. I guess just, you know, you sort of painted a picture where things are on track, spreads better, etc. So I guess, Mark, I'm just wondering why adjust the guide...

Vikram L. Malhotra: the FFO guide early on, especially the top end of the guide, given what you just outlined as, you know, likely a good start.

Mark: Yeah, I mean, I think we're on track. You know, it's not unusual for us, you know, as we get out, as we kind of get through the year to shrink the range as we get more and more comfortable. So, you know, we've shrunk the top end and the bottom end with...

Mark: no change to the midpoint of our guidance. So I think we still feel good about very solid growth this year of, you know, 5.6% over 2023.

Mark: Yeah, and that's been pretty consistent as the vickram, how we've done it year by year, year, year over year.

Speaker Change: Okay, fair enough. And remember, you know, this is one of those, you know, years where you've got, you know, you've got macro at home, you've got geopolitical issues, and then you've got an election. So, you know, we wanted to be conservative about what we're doing here.

Speaker Change: Makes sense. I think there were a bunch of shorter term

Speaker Change: renewals or I guess extensions into 25s because we did see the 25 overall explorations move up and I'm just wondering like

Speaker Change: What was the nature of those discussions? Is it kind of tenants are uncertain about space needs or, you know, what drove those relatively higher volume of short-term renewals?

Speaker Change: Well, short-term renewals often happen. Remember what I just said to Michael, in this industry, people are waiting for data, that Hallie said. And if you've got a clinical trial data or some important

Speaker Change: catalyst that's going to drive the business, hopefully positively, but could be negatively.

Speaker Change: And that's coming up. You want to ensure that you're kind of preserving, you know, your strategic optionality as much as possible, and that's why people want to kind of keep where they are until they know, you know, what do we need and where are we going. So that's very typical of this industry over many years.

Speaker Change: that Alexandria can provide in a mega campus are likely going to perform much better, materially better, than some of the supply that's going to be delivered. But certainly,

Speaker Change: supply is going to weigh on rents and but we don't we don't necessarily see a retrenchment outside of you know certainly

Speaker Change: levels that were hit in 2021 and 2022.

Speaker Change: are going to be, you know, back, we're going to back off from that, but the area, the rental areas of 17, 18, 19,

Speaker Change: that our sub-markets were in, I'm certain will be the bottom, and it'll grow from there.

Speaker Change: Okay, thanks for the time.

Speaker Change: Thank you, Tony.

Speaker Change: The next question will come from Jim Camet with Evercore. Please go ahead.

Unknown Attendee: Thank you. Good afternoon. Joel, certainly appreciate your comments that demand can be more event-driven for the lab business, which is understandable, but is it possible for the team to provide just a little bit more context or quantification?

Unknown Attendee: regarding your tenant interest in your development and redevelopment pipeline today, say, versus...

Unknown Attendee: you know, 90 to 180 days ago. And when I say context, I'm thinking, you know, the number of tenants you're holding discussions with,

Unknown Attendee: the range of space requirements they might be seeking and

Unknown Attendee: maybe the timetables for making decisions, just trying to get some more comfort into the visibility of the lease up. Thank you.

Speaker Change: Jim, you know, good question and fair to ask. I don't think we would want to be that transparent, given, you know, the competitive nature of what we're doing these days.

Speaker Change: It just, you know, I'm not sure that would serve our interest or even our tenants' interests. In fact, they may not want us to be talking about.

Speaker Change: something like that in advance. So I'd be, you know, I'd be pretty wary of that kind of thing. I think that, you know, what is happening is,

Speaker Change: and Peter, I think, has talked about this. We kind of hit a low in 23, certainly after, you know, the Silicon Valley Bank episode and, you know, some of the market shutters and so forth. But I think, you know, as Hallie is presented,

Speaker Change: the market since October is really solidified and, you know, more money was flowing into or is flowing into the sector. And I think that's really a better benchmark. And certainly as companies hit milestones, as Halley mentioned,

Speaker Change: intracellular hitting a critical, very high quality milestone, and was able to do, I think, their last financing and then they turn profitable. So that's kind of how we look at it. I think anything more of a

Speaker Change: you know, NORAD early warning system probably wouldn't be in our best interest. I apologize for that.

Speaker Change: That's fine. Call it long in the tooth, I'll leave it there. Thank you.

Speaker Change: The next question will come from Dylan Berzinski with Green Street. Please go ahead.

Dylan Robert Burzinski: Hi, guys.

Dylan Robert Burzinski: Just going back to sort of the development yields coming down versus historical levels. I guess just given as you guys think about things from a holistic capital allocation approach,

Dylan Robert Burzinski: How do you weigh sort of starting in development at a low 6% cap rate versus sort of going out and buying in the open market or buying assets, I guess I should say? Is it simply maybe you guys are willing to sort of accept that lower yield today because

Speaker Change: a lot of these developments are sort of an extension of the mega-campus strategy, or is there something else? Yeah, no, I think that's a really, I'll, you know, ask Peter to comment, but I think that, the last point you raised is really the point.

Speaker Change: you know,

Peter: The mega campuses provide, I mean, we were first mover, we have, by and large, in almost every market, the best, I can't think of any market where we don't have really best locations.

Speaker Change: And, you know, if somebody wants to grow and grow on your campus, that's going to be a lot better for the long-term growth and health of the campus and the company, as opposed to somebody who wants to go into a one-off building somewhere. It's just, you know, even if the yield is.

Peter: potentially higher, I don't think so. And remember, too, with three plus percent bumps each year, you know, the ending rental value on certainly development 10, 15, 20 year leases is pretty substantial. But Peter.

Peter: Yeah, hey, Dylan, I just...

Peter: You know, I'm not, not just me, the team is not necessarily seeing...

Peter: anything we'd want to buy. Again, you know, as I make the commentary about supply,

Peter: Most of

Peter: what probably will be available.

Peter: to buy is not in the areas that we're interested in today. I'm not saying we're not, never say never that an area might not become interesting in the future and as I said, we could put our brand on it and make it work, but

Peter: The opportunities that we will be talking about in the future, and I'd say the near future, are going to be on our mega campuses because of all the things that we talk about with the scale and the vibrancy, our tenants and tenants that are not ours but want to be ours. Notice.

Peter: and understand the value. And so it's going to make, be, it's just going to make more sense long-term.

Peter: for us to put them on these campuses rather than buy a one-off building and put someone in there and, you know, end up wondering in the future why we did that because it doesn't really match our model.

Speaker Change: Thank you.

Speaker Change: That's up, thanks, guys.

Speaker Change: Thank you.

Speaker Change: The next question will come from Michael Correll with RBC Capital Markets. Please go ahead.

Michael Albert Carroll: Yeah, thanks. I learned to circle back on overall leasing activity. It sounds like trends are improving over the past few quarters.

Michael Albert Carroll: But does the recent pushout and interest rate cuts, does that impact, I guess, tenants' ability to raise capital at all, or does that delay their decisions or ability to make these types of decisions?

Speaker Change: No, and you can just look at what's happened as Hallie outlined in the first quarter, Michael. Again, event-driven, it's not, you know, a direct correlation to economic environment or interest rates. That's just how this.

Speaker Change: you know, sector and industry kind of walks the walk. And so, you know, it's not totally, you know,

Speaker Change: shielded by that because if there was to be some, I mean, imagine if China decided to invade Taiwan, the market seized

Speaker Change: and, you know, rates spiked in some crazy fashion or something, obviously that would have an immediate impact on everybody.

Speaker Change: But I think no, the deferral isn't going to change. If somebody hits a great milestone, they're going to be able to finance. Now, maybe there might be a higher concession.

Speaker Change: you know, on the underwriting or the overnight or whatever, you know, method they choose, but that's, you know, that's a rather infinitesimal cost to capital issue for companies.

Speaker Change: Okay, I mean, do tenants make decisions on expanding into two new areas of research based off of their ability to raise capital? So, like, they're, I think, correct me if I'm wrong.

Speaker Change: Of course, and most of that is done at the venture level.

Speaker Change: And so, you know, when somebody's pioneering a new area, that's really done venture, not so much the...

Speaker Change: you know, publicly traded markets, but once you get into the clinic, then if you are fortunate enough get public, then the public markets kind of take hold of that.

Speaker Change: Yeah, and just to, Hallie, just one addition, recall that with venture firms, they're sitting on a lot of dry powder, right, that is already committed capital that they can call on. And, you know, there's a number of larger funds that, you know, we're talking to that are

Speaker Change: raising, closing, multi-billion dollar funds. So they're sitting on capital that's ready to deploy. They're not dependent in the same way that a public company is on the interest rate.

Speaker Change: Okay, and then just last one for me. I know there has been discussions where the board as some of these tenants have been making like veto decisions of companies can leave space or not. I mean, is that are they are the board loosening up? Are they willing to make these decisions now?

Speaker Change: Well, I think historically boards have had, you know, very careful oversight. I think, unfortunately,

Speaker Change: When the markets become very frothy, boards get a little bit lazy and not as astute or disciplined.

Speaker Change: and what they do, but I think you can be certain today, you know, boards are very disciplined and it's been that way now for, you know, a handful of years. So I don't think anything's changing in that regard.

Speaker Change: I mean, the answer is, if somebody needs space to scale and grow because they hit a key milestone or they've...

Speaker Change: turn profitable or whatever it happens to be, those are high quality decisions because the cost of space for most of these companies is a fairly nominal amount of their overall cost of doing business.

Speaker Change: The next question will come from Omoteo Okasanya with Deutsche Bank. Please go ahead.

Omotayo Tejumade Okusanya: Yes, good afternoon, everyone.

Omoteo Okasanya: I appreciate all the comments around supply and also development.

Omoteo Okasanya: If we could go back to this crystal ball type scenario.

Omoteo Okasanya: I'm curious if you'd be willing to offer up when you think you might be able to start a new development, and what potential market could that be given the demand-supply dynamics you see in each of your keys?

Speaker Change: major markets and on the maker campuses. Yeah, I don't think we would announce such a thing on an earnings call willy-nilly. It's based on tenant demand, of course.

Speaker Change: But are markets getting better? Are you seeing, like, more demand? I suggest that could happen sooner rather than later. Well, I think, you know, based on the questions that have been raised on the call right now and Hallie's commentary, I think we've said since October , the markets certainly have gotten better, yes.

Speaker Change: Very nice. All right. Thank you, Joel. Yep. Thank you.

Moderator: 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 S. Marcus: Yep, thank you everybody. Just remember May is Mental Health Month and we'll be very focused on that with our efforts on a number of corporate social fronts. So be safe. Take care. God bless. Thank you.

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

Speaker Change: Thank you. Thank you.

Speaker Change: and and the other,

Speaker Change: and so on. The