Alexandria Real Estate Equities, Inc. 2026 Q2 Earnings Call

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. Now I'd like to turn the call over to Joel Marcus, Executive Chairman, and Founder. Please go ahead, Joel. Thank you, Paula.

Welcome everybody to the Alexandria second quarter earnings call. With me today are Peter, Marc, and Hallie. Before we start detailed comments, I'd like to start with a quote from Ralph Waldo Emerson. "Cultivate the habit of being grateful for every good thing that comes to you and to give thanks continuously. Because all things have contributed to your advancement, you should include all things in your gratitude." The point being, we're very grateful and most proud of our one of a kind team and of our one of a kind mission. Operating in a highly regulated industry within a rapidly changing macro environment is never easy, but we remain steadfastly focused on our path forward.

Let me share with you some key observations regarding the second quarter. Maybe a good place to start is leasing kind of the lifeblood and the key to stabilization of operating metrics, especially in the life science industry these days. Remember, 75% of our leasing has come from our own tenants, really best in class tenant roster. We're seeing steady improvement, which is good. We're winning outsized number of shares of transactions, which is good. We have a very well diversified and strong tenant base. Our page 18 pie chart is illustrative of that. Very strong leasing in the second quarter from our life science product service and device sector really depicts shovels and tools of the industry. Almost 40% of the leasing volume. Also a strong second quarter showing from our advanced technology sector in several of our sub-markets with almost 30% of the leasing volume.

Public biotech, only about 6%. As the industry is seeing substantially improving metrics, they are still decoupled from the demand on the ground, and we might have more to say about that in the Q&A. I think the one thing that could make a difference there would be, well, many things could make a difference, but I think stability and truly knowledgeable and expert leadership at HHS, FDA, and NIH would certainly go a long way. There's still much work to do on our leasing of our redevelopment, development pipeline, with only about 70,000 rentable square feet in the second quarter. We're very keenly focused on the modest remaining 2026 rollovers that remain unresolved of about 494,000 rentable square feet. 2027 rollovers unresolved other than those focused either track to leasing or track we have ongoing discussions of about 2.7 million.

This is mission critical as we go forward to the last half of 2026 and into 2027, of course. For third quarter, our pre-read indicates that our best knowledge at this point is about 950,000 rentable square feet of leasing projected in the third quarter, again based on our current view of that forward pipeline. We have and will continue to meet the market. Moving from leasing to sources of capital, as we did in 2025, we are currently very comfortable that we can and will meet our total target of $2.9 billion. We're always mindful time is of the essence, but timing is never simple. We are making excellent progress and would not let some artificial timing because or be of concern at this juncture. The demand for Alexandria's assets remains strong.

In third quarter, we'll take a bit of a deep dive into the composition of the assets that have been sold or will be sold this year and the disposed NOI analysis. We are very mindful not to unduly tie our hands in any new joint venture transactions and are working hard to make sure those are successful, both for capital raising and for operational efficiency. Moving on to allocation of capital. We're laser focused on trying to reduce our CapEx of the $1.75 billion construction pipeline for this year, which is fortunately highly leased, and we're anxious to continue deliveries, and we're focused on the lease-up of vacant space and making good progress there. On the life science industry itself, I'll refer you to pre-read pages VII and VIII, seven and eight of the supplement, regarding the core pillars and the key 2026 second quarter events.

To say it's greatly nuanced and complex would be a bit of an understatement. Again, we're still very focused on HHS, FDA, and NIH. One other comment, we see during an election year, a lot of people advocating for Medicare for All. It's been stated by many administrations at both the executive level and the HHS level that Medicare for All would be kind of a budget buster. It would be almost impossible to administer, given the current administration is still tough, and it would be a giant impact on budget. It would also mean taking two-thirds of the population who are covered under private plans and moving them to a government system. If you go to Canada or any other country that has that system, you wait in line, so not a very desirable outcome.

The key factors to watch for the rest of 2026 in the life science industry beyond, obviously, the midterms, there's obviously continuing strong innovation, which is fueling the industry. There's been a very solid financing environment, and we're closely watching interest rates as they move around pretty significantly day to day, week to week, month to month. Sentiment, we're watching closely, has been generally positive. M&A has been very strong this year. Drug pricing and policy has been kind of a mixed bag, but the Most Favored Nation has not derailed the profitability and the go-forward health of the industry. We'll see where some of the IRA implementations come over the coming months and quarter. On the regulatory side, that still is a bit of a mess, and that is of concern, although 23 products were approved year to date, and that is pretty well in line with past practice.

Patent cliffs continue to be a big bugaboo in the industry. Earnings and growth have been pretty positive, China remains a big negative overhang. Moving quickly to the balance sheet, our North Star, and one that we continue to focus on in keeping strong and flexible. Marc will have a lot more to say about it, but we're confident that our year-end target leverage remains we can achieve 5.6%-6.2% medium-term. We're looking at mid-5s. We have excellent liquidity, and we successfully are extending our $5 billion line of credit to 2032. As we've said a number of times, the longest average remaining debt maturity of all S&P 500 REITs, which is good. Marc will discuss, before I just turn it over to him in a moment, guidance.

He and the team have tried to detail the multifaceted set of items impacting 2026 and the fourth quarter on page six of the earnings release. Obviously, critical to establishing a solid earnings run rate base beyond 2026 will be a strong and consistent leasing of our development and redevelopment pipeline and successful handling of the 2027 lease rolls. We're laser focused on continuing to decrease CapEx and manage our funding cost effectively. With that, let me turn it over to Marc.

Thank you, Joel. Good afternoon, everyone. This is Marc. Congratulations to the entire Alexandria team for solid execution during the quarter. First, leasing volume for the quarter was solid and exceeded 1 million sq ft. Second, we continue to be focused on improving occupancy with 1.4 million sq ft of leased space that is currently vacant and is expected to be delivered to the tenants and positively impact occupancy in November on average. Third, continued outperformance on occupancy relative to the broader markets, with average outperformance across our largest three markets ranging from approximately 8%-12% as of the end of 2Q. Fourth, we delivered a 427,000 sq ft build-to-suit to Bristol Myers at our CampusPoint Megacampus under a long-term lease, which will provide significant net operating income and value to our shareholders.

Fifth, we remain committed to meeting our funding goals with 46% of our target for dispositions and sales of partial interests and other capital completed or pending, subject to non-refundable deposits, signed LOIs, or sales agreements under negotiation with another 38% in process. Sixth, we completed an extension of our $5 billion credit facility to 2032, providing tremendous access to liquidity for many years. FFO per share diluted as adjusted was $1.73 for 2Q26, and we reaffirm the midpoint of our guidance for 2026 FFO per share diluted as adjusted at $6.40, while tightening the range to ±$0.05. Leasing volume for the quarter was solid at 1,039,000 sq ft. A few items to highlight here on leasing activity. First, total volume was up 60% over the prior quarter and up 9% over the prior four quarter historical average.

Second, new leasing comprised of both leasing of our development, redevelopment projects, and a vacant space aggregated almost 400,000 sq ft for the quarter, which was the second largest quarterly total since 2Q24, excluding the large big pharma build to suit lease we signed last year. Third, leasing from public biotech increased quarter-over-quarter from 0 last quarter to 5.8% of the total leasing volume. A positive sign, but still below the representative portion of our overall tenant base based upon annual rents of 21% for biotech. Regional leasing outperformance continued in the San Francisco Bay and San Diego markets, where we accounted for two times and 1.7 times the leasing activity compared to our market share during the quarter.