Q2 2025 Earnings Call Transcript

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2025 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Paula Schwartz with Investor Relations. Please go ahead.

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 of Alexandria. Please go ahead, Joel.

Thank you, Paul, and welcome, everybody, to our second quarter earnings call. With me today are Hallie, Peter and Marc. And I'd like to start with a quote from Brad Stevens who coached at Butler and the Celtics as most of you know. There is no more important quality in striving for excellence than true grit, a ferocious determination demonstrating resilience, hard work and passion, clear direction and mission.

This so aptly describes the Alexandria team in pursuit to provide the best environments for the best scientific minds, which in turn enhance human health and extend the quality of life for inhabitants on this planet. A. Profound thank you to this one-of-a-kind team for an impactful second quarter. Disciplined people, disciplined thought, disciplined action built to last.

As I open my first quarter comments, I comment that ARE has been and will continue to be one of the most consequential REITs in the sector's history. Steve Jobs once said, a brand is simply trust. The recent execution of the largest lease in the company's history is a testament to that, and our brand trust, our unique product quality and value to the client. Trust is the light blood of the Alexandria one-of-a-kind brand.

This 466,000 square foot lease represents a seminal moment in the history of Alexandria and demonstrates the resilience of our sector showing long-term commitment, long-term lease with a high credit tenant. A couple of thoughts on the second quarter before I turn it over to Hallie, then Peter, then Marc. Alexandria continues its solid performance across a wide variety of financial and operating metrics in the face of macro and industry headwinds. A key focal point for the company is the 2027 and beyond stabilization pipeline.

We're pleased to report that we're making solid progress on 311 Arsenal, Sylvan Road Asset, 1450 Owens, 269 East Grand and 701 Dexter. Another key focal point is asset sales, and Peter will talk about this in our recycling strategy. We have about $1.1 billion to add to our executable sales pipeline for the next 2 quarters. And we feel that it is doable given we completed $1.1 billion of sales in the fourth quarter of 2024. So in today's current environment, what are we most focused on beside the operating and financial performance.

Over the next several quarters, we expect the Fed to finally lower interest rates, which is desperately needed for the capital markets of our industry. We have not seen or heard any major, if you turn for a moment to the FDA, any major issues from our tenants regarding undue delays but we're monitoring this item very closely. In fact, several of our team members on July 17, attended a meeting with Commissioner Marty Makary and where he essentially elucidated his 100-day agenda that was focused on the impact of better food for children as we know, revamping and rethinking how to modernize the FDA to move more efficiently and nimbly.

And that is something many of us in the industry have certainly advocated for a long period of time. Makary's thoughts were succinct and direct. The FDA is a national treasure. The FDA is strong, we will meet our PDUFA targets.

We will add more AI efficiencies. We will listen and talk to people externally. We'll make sure the staff has what they need. We have a phenomenal talent coming in, which was just announced.

The appointment of George Tidmarsh, to be the Director of the Center for Drug Evaluation and Research, and we will be making, meaning the FDA exciting new announcements on talent who are motivated by the incredible tradition of the FDA. So that's very, very hopeful thinking. When it comes to tariffs, in theory, tariffs should not have huge impact on the innovation biopharma ecosystem, mostly because of the low cost of goods sold relative to other industries like hardcore manufacturing. However, commonly used transfer pricing schemes may more heavily expose large pharma companies to tariffs.

Tariff impacts on biopharma may be muted as many levers exist to reduce the impacts pharma could end up being exempt. IP reshoring, trading companies as manufacturing intermediaries, of course, moving more manufacturing back to the U.S. and increased drug pricing issues. When it comes to -- so we talked about the FDA a moment, tariffs a moment, when it comes to drug pricing in most favorite nations, the so-called MFN, this isn't new. It was introduced during the first Trump term, but ultimately was rescinded by Biden when he came to office following legal challenges.

The impact appears constrained based on currently available details. We know that some manufacturers are moving direct sales to consumers, and this would provide commercial tailwinds, especially in certain segments, such as obesity drugs and the like. Key details remain unclear, and we know there is negotiations going on being, we believe, chaired by Dr. Oz of CMS.

And the market reaction so far suggests limited concern. I think when we think about this in summary, there are reasons to be optimistic, fears of spending cuts and changes at HHS, maybe substantially overblown. Onshoring of R&D can provide a tailwind for life science sector. Public markets move in cycles, macro events will eventually dissipate and the markets will stabilize and M&A consolidation is instrumental for a healthy biopharma ecosystem.

And with that, let me turn it over to Hallie.

Thank you, Joel, and good afternoon, everyone. This is Hallie Kuhn, SVP of Life Science and Capital Markets. Today, we will provide an update on the strength of the Life Science industry, an industry that remains critical to the health and safety of the U.S, driven by a resilient and dogged effort to address the 90% of diseases, that to this day, remain untreated by medicine. Overall, once again, the leasing stats we are about to walk through reflect the importance of the diversity of our tenant base, which drove over 80% of our 2Q leasing by volume.

Starting with private biotechnology companies, which represented 30% of overall leasing for the quarter, Life Science venture funding remained steady with nearly $22 billion deployed in the first half of the year. Financings were predominantly later stage as seed stage financing took the back burner to more derisked technologies closer or already in human studies. The result is fewer, albeit larger financings as investors focus on select but in their minds more certain opportunities. This cohort of companies remains highly disciplined with respect to leasing decisions.

However, the companies that are being funded and are expanding are extremely high quality and form a solid foundation for future growth. Moving on to publicly traded biotechnology companies. This segment represented just under 1/4 of our leasing for the quarter, of which over 95% consisted of new leases. This cohort continues to be dominated by have and have nots, with select companies with high-quality data and teams driving leasing and demand.

The broader picture for public biotech equities remains tough with not a single biotech IPO in the second quarter. Given the broader risk-off environment, we are not likely to see the biotech public equity markets open meaningfully until interest rates subside. Notably, biomedical institutions represented 22% of leasing this quarter. Leasing was driven by a significant new lease from a well- endowed investment-grade public institution demonstrating that lab space remains critical to institutions operations.

Importantly, the budget for the NIH remains the same as last year's levels under a continuing resolution. And while the White House has proposed significant budget cuts, there remains substantial bipartisan support to [indiscernible]1600 mean the current or at least close to current levels of funding. For context, approximately 80% of NIH funding is for external institutions, funding work and supporting local economies in all 50 states. One additional point of clarification.

While NIH funding is of several funding sources for biomedical institutions, few, if any, of our private and public biotech tenants rely on NIH funding. Last, large pharma represented 5% of leasing for the quarter, not including our recently announced long-term lease with a top 20 pharma for 467,000 square feet on our Campus Point Megacampus in San Diego, signed at the beginning of the third quarter. Pharma generally remains buffered from short-term volatility given significant cash flows and a long-term strategic outlook on generating innovative medicines. Their success ultimately comes down to talent and accessing the best innovation.

As the recently announced lease reflects positioning their R&D in an Alexandria Megacampus is highly strategic to these goals. To round out industry stats, 2 tailwinds we are monitoring through the second half of the year. First is an acceleration of M&A with acquisitions through the first half of this year, eclipsing all of M&A in 2024. M&A is a significant positive for the entire biotech industry. Recycling and incentivizing capital back into new companies.

It's a virtuous cycle we have seen occur over and over and over again. Examples include AbbVie's acquisition of a company called Capstone an early clinical stage company developing novel mRNA therapies for autoimmune diseases such as severe lupus, signaling that pharma is ready and willing to buy cutting-edge science. Second is the abundance of biopharma licensing dollars flowing into private and public biotechs. These are deals where by large pharma licenses specific programs from smaller companies as opposed to a full-fledged acquisition.

In the first half of this year, $113 billion in biopharma licensing deals were announced, which compares to $187 billion for the full year 2024. This is an important dynamic to highlight because it enables smaller companies to access additional capital and pharma resources when venture or public equity capital becomes more dilutive or challenging to raise. Both the life science sector and Alexandria remain resilient in the face of an uncertain macroeconomic environment. By retaining and securing high-quality tenants today, we continue to lay the groundwork for long-term growth. It will be underpinned by the robust biopharma ecosystem.

Their tremendous ingenuity we are seeing in science, technology and medicine and the broader need to address the 9 out of 10 diseases and conditions that don't have safe and effective treatments today. With that, I will pass it over to Peter.

Thank you, Hallie. I hope you all saw our recent press releases and I'll discuss the seminal multinational pharma lease in a bit, but I want to first congratulate our team for their superb operational excellence and winning our first international Building of the Year Award for 8 Davis Drive, a 150,000 square foot premier research and development building in the heart of our Alexandria Center for Advanced Technologies Megacampus in the research triangle. This achievement highlights the quality of the workplaces we deliver to our tenants. And while our Megacampus platform is a strategically important strength, it's also important to recognize the high- quality buildings that proliferate throughout the core of our asset base, and life science real estate, a flight to quality means a flight to Alexandria.

I'm going to discuss our development pipeline, leasing and supply and provide an update on the progress of our value harvesting and asset recycling program. In the first quarter, we delivered approximately 218,000 square feet of 90% leased Class A-plus laboratory space into our high barrier-to-entry submarkets, which will contribute approximately $15 million in annual incremental net operating income. The initial weighted average stabilized yield for this quarter's deliveries was 6.6%, which was driven by a 100 basis point improvement in yield at our One Alexandria Square Megacampus in Torrey Pines which was the result of achieving higher rental rates than previously underwritten and a 4.7% reduction in construction costs.

So you've already heard the big news in the press release and from Joel and Hallie before me. But I wanted to talk a little bit about the multinational pharmaceutical lease that was the largest in our company's history. What I wanted to point out is that, that opportunity really aligns well with the ongoing development we have going on at the same campus with Bristol-Myers. And it really illustrates that our Megacampus platform is perfectly positioned to capture these opportunities by offering essential expansion space in premium amenities that support the recruitment and retention of key talent required to drive future scientific advancements.

So I'll transition to leasing and supply. In the second quarter, we leased approximately 770,000 square feet with leasing spreads of 5.5% and 6.1% on a cash basis. We were very pleased that tenant improvements and leasing commissions on renewals were down 40% compared to previous 2 quarters and although free rent was elevated, it enabled us to secure a relatively high average duration of 9.4 years. The lease duration was also healthy for developed and redeveloped and previously vacant space at 12.3 years.

One key result of the quarter we'd like to highlight is that our focused effort on development and redevelopment leasing has started to gain traction. With 131,768 square feet leased during the quarter, including the first lease signed at 701 Dexter in Seattle and continued leasing progress at 99 Coolidge in Watertown. Another key leasing item we'd like to update you on is the progress on the 786,000 square feet of lease rolls, we identified in the third quarter 2024 supplemental, which had a weighted average expiration date of January 21, 2025. We've leased 20% of the space and have serious prospects for another 30% plus that would resolve approximately half of it in the near term when we execute on it and we are confident that we will.

Moving to competitive supply. In Greater Boston, 2 competitive projects, one in the Fenway and one in Austin, totaling approximately 565,000 square feet were delivered completely vacant. This reduced the remaining expected for 2025 delivery to 300,000 square feet which is unleased. The 2.5 million square feet expected to deliver in 2026 remains 2/3 pre-leased.

In San Francisco, 2 competitive projects were delivered one in Menlo Park and one in Millbrae reducing the space expected for 2025 delivery to 700,000 square feet, which is 32% pre-leased. No additional supply is expected to be delivered after this year. And in San Diego, Alexandria delivered 119,000 square feet of fully leased space at One Alexandria Square and Torrey Pines as I mentioned, and approximately 120,000 square feet of unleased competitive space remains to be delivered here in the second half of the year. And I want you to note that last quarter, I mistakenly said 700,000 square feet was to be delivered in 2025, but that was actually the total amount to be delivered in '25 and '26. The 400,000 square feet expected to be delivered in 2026 is 100% pre-leased.

I'll conclude with our value harvesting asset recycling program. Our dispositions and sales of partial interest will be heavily weighted towards the fourth quarter. We closed on approximately $84 million in asset sales in the second quarter, included in those sales were 2425 Garcia Avenue and 2400 and 2450 Bayshore Parkway, a set of vacant buildings in our Greater Stanford submarket that were primarily improved as offices and had been highly leased for several years prior to COVID. In addition, we sold an attractive 16.5 acre land site in Texas, we did not anticipate developing in the near to medium term.

To date, dispositions and our share of non-core pending dispositions amount to $785.4 million, approximately 36% and of these dispositions consist of land, 52% are unstabilized improved properties and 12% are stabilized improved properties. The current identified noncore asset pool that is being marketed or will soon be marketed comprises 25% land, 52% on stabilized properties and 24% stabilized properties. We expect to achieve a weighted average cap rate on our non-core projected dispositions and partial interest sales, including non-stabilized operating properties in the range of 7.5% to 8.5%.

The buyer pool for our closed and pending dispositions includes residential developers, municipalities, a health care system, local commercial investor operators, domestic and international private equity, users, universities and domestic core funds. Here are the key takeaways. First, we continue to deliver transformative projects and incremental NOI from our pipeline; second, our focused efforts to catalyze development and redevelopment leasing have gained traction. Third, we are making great progress on resolving the 768,000 square feet of move-outs that rolled at the end of 2024 and in the first quarter of '25. And fourth, further material progress on our asset recycling program will be heavily weighted towards the end of the year.

And with that, I'll pass it over to Marc.

Thank you, Peter. This is Marc Binda, Chief Financial Officer. Hello, and good afternoon to everyone on this call. I plan to walk through our performance and outlook and provide greater detail around the disciplined steps we've taken and will continue to take across the portfolio and the pipeline to bolster our strong balance sheet you manage through this period in order to emerge in a position of strength to support our future.

First, a big congratulations to the entire Alexandria team for outstanding execution during the quarter and for completing the largest lease in the history of the company earlier this month. Second, our team delivered solid per share results for the quarter. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.33 for 2Q '25, up 1.3% compared to the prior quarter and included the positive impact from the recent development deliveries in San Francisco and San Diego.

Occupancy at the end of the quarter was at 90.8%, which was down 90 basis points from the prior quarter. With 75% of our annual rental revenue coming from our highly distinguished Megacampus platform, we continue to outperform the rest of the market on occupancy in our biggest 3 markets. We are reiterating our prior guidance for year-end 2025 occupancy at 90.9% to 92.5%. An important note about our occupancy guidance is that we have 669,000 square feet or about 1.7% occupancy of least but not yet delivered space, which will positively impact our occupancy in early 2026 on average upon delivery.

In addition, our year-end occupancy guidance assumes around a 2% benefit from assets with vacancy, which are expected to be sold of which about 1/3 of that is subject to a signed purchase and sale agreement. Next on same property. Same property NOI was down 5.4% and up 2% on a cash basis for the quarter. Included in 2Q '25 same- property results is the full impact from the 768,000 square feet of leases spread across 4 projects that expired on average in late January 2025 that are now fully included in the 2Q results.

We continue to make good progress with these 4 projects, as Peter just highlighted, with 20% leased with some of that expected to be delivered in late 2025, and we have a user very focused on another 234,000 square feet. We are reiterating our prior guidance for same-property performance for 2025. Three items to note here. First, we expect continued pressure on same property results in the second half of 2025, driven by the recent decline in occupancy. Second, we also expect second half 2025 cash same-property results to decline from the first half results given the burn off of initial free rent from last year.

And third, our guidance for the full year 2025 same-property results also assumes that the same property pool in the back half of the year will change from the first half 2025 pool as we make progress on our disposition program and those assets subsequently become excluded from the pool later in the year. In the meantime, we continue to benefit from a very high-quality tenant base with 53% of our ARR coming from investment-grade or publicly traded large cap tenants, long remaining average lease terms of 7.4 years, average rent steps approaching 3% and 97% of our leases and our adjusted EBITDA margin remained strong at 71% for the most recent quarter, consistent with our 5-year average.

Turning next to general and administrative expenses. We continue to make great progress toward our goal of annual savings for 2025 of approximately $49 million compared to 2024 through a number of strategic cost savings initiatives. Our trailing 12 months G&A cost as a percentage of NOI was 6.3% and represents our lowest level in the past 10 years. Our best estimate at this point is that around half of the 2025 G&A savings for 2025 will recur into 2026. Next on the development pipeline.

With projects under construction and expected to generate significant NOI over the next few years and other earlier-stage projects undergoing important entitlement, design and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest cost. The 466,000 square foot build-to-suit historical win that was recently announced is a great example of the value created by our important preconstruction activities associated with our future pipeline projects, which allowed us to meet the tenant's time line for delivery in this case. We remain focused on continuing these important preconstruction activities for our future pipeline where it makes good financial sense to continue.

On Page 45 of our supplemental package, we highlighted that we have a $3 billion investment in various future pipeline projects that required interest to be capitalized in the first half of 2025 while we pursue preconstruction activities but have future project milestones over the next 18 months ending in April 2026 on a weighted average basis. We will continue to routinely evaluate these projects to determine on a project-by-project basis, whether to continue progress beyond the current milestones and those decisions will be subject to future market conditions. If we decide to pause on a project as it reaches the next milestone, capitalization of interest and other required costs would cease on that project.

For 2025, we are reiterating our guidance for capitalization of interest. In addition, we expect steady to slightly higher capitalized interest in the back half of the year, mostly driven by spending on the active pipeline coupled with continued high interest rates. Now on to venture investments. For the first half of 2025, we realized $60 million of gains from our venture investments, which are included in FFO per share as adjusted or about $30 million per quarter, consistent with our last 6 quarters.

Our outlook for the full year 2025 remains unchanged with a range of $100 million to $130 million. Next on other income. This balance primarily includes interest income, leasing and other types of management fees. Fee recognition, for example, can bounce around from quarter-to-quarter.

For the first half of 2025, other income was $39.7 million or less than 3% of total revenues. This represents a quarterly average of about $20 million per quarter, which is pretty close to the quarterly average over the last 6 quarters of around $18 million per quarter. Turning next to the balance sheet and funding. We continue to stand out as our corporate credit ratings rank in the top 10% of all publicly traded U.S.

REITs. We have the longest average remaining debt maturity among all S&P 500 REITs at 12 years and tremendous liquidity of $4.6 billion. We remain focused on achieving our year-end leverage target of 5.2x for net debt to adjusted EBITDA by executing on our disposition program, which Peter covered. In connection with our disposition program, we recognized impairments of real estate of $129.6 million during the quarter, with around 2/3 of that coming from one land parcel in a non-cluster market, which is expected to be sold to residential user and an office property located in Northern San Diego.

Importantly, these sales will raise significant equity-light capital and continue the trend of enhancing the quality of our asset base with an increased focus on our Megacampus platform. We are carefully managing our capital allocation given a high cost of capital environment. For construction spending, we are evaluating some of our 2027 redevelopment projects for alternative lower cost investment opportunities and hope to have more to report over the coming quarters. We did not execute any common stock buybacks during the quarter, and we don't have any current plans as of right now as we remain focused on the execution of our disposition program to fund our existing capital needs.

Next, on dividend policy. The Board's approach has been to share cash flows from operating activities with investors and to retain a meaningful amount for reinvestment which has allowed us to retain $475 million at the midpoint of our guidance for 2025. For the second quarter, our Board elected to maintain the dividend at its current level of $1.32 per quarter or a dividend yield of 7.3% as of quarter end. Turning next to guidance. We are holding firm on our guidance for FFO per share diluted for '25 at $9.26 per share at the midpoint of our guidance range.

Next, I'll turn it back to Joel.

Can we open it up for questions, please?

[Operator Instructions] Our first question today comes from Farrell Granath with Bank of America.

I first wanted to congratulate you on the California Campus Point lease but also digging in a little bit deeper to that, can you share any possible trends or catalysts that led up to this deal being able to close. I'm curious if there is any initiatives on either reshoring or having larger investments stateside that would also be a tailwind for further leasing like this?

Well, first of all, thank you for the compliment. No, that didn't have anything to do with the onshoring issues that are currently underway with respect to administration policies. It was more an effort by a notable big pharma to bring together its core R&D hub on the West Coast and put them in a world-class location where they could continue to recruit and retain great talent. And much like Bristol-Myers, they chose Campus Point -- as I said, we had a great team, great solution and great execution.

Okay. And also just in terms of free rent, I know you made a comment about it upticking slightly. What are your thoughts around that? I guess, thinking and going forward, if it's viewed on a trailing basis, will we see that starting to peak anytime soon or any insights?

Yes. So Marc?

Yes. Hard to tell. Thanks for your question. Yes, it did go up a little bit this quarter. That trend has been relatively consistent for the -- up until this quarter for the last 3 or 4 quarters. So it did peak this quarter given one particular lease that had quite a bit of free rent. So yes, TBD, what that looks like in the future.

And our next question today comes from Seth Bergey with Citi.

It's Nick Joseph here with Seth. Just maybe following up on Campus Point. Just curious if you can give a little more detail kind of from the tenant perspective of what drew them to build-to-suit versus some of the vacant space in that market available today.

I think when you are big and powerful and you have a very robust R&D effort going on, you want really a location that provides you everything rather than just going to a bunch of random buildings in random locations that really are disaggregated. So I think the power of Campus Point, ultimately, it will be almost 3 million square feet. So we kind of think of it as almost like city like with every possible amenity. You could imagine the greatest place to work, to retain and recruit people, it was pretty obvious that if somebody wants -- yes, operator, you're getting feedback there.

If somebody wants a world-class location, then that was the place to be. I think that was the driver. And I think the unique design, placemaking and solution clearly made a huge impact on this tenant.

That's very helpful.

Can I just jump in here, this is Hallie. One additional add there. I mean, Joel talked about the amenities. But the other really crucial thing is just the robustness of the infrastructure for these buildings.

So these types of requirements can't go to just kind of prefab building and an operator who hasn't been doing this for a long time, given the vibration requirements, live loads, power capacity, these requirements are really build-to-suit needs that can't be accommodated by a building down the street.

Yes. And remember they put in sizable amounts of their own capital in much like Bristol-Myers as well.

And then just as you look at your leasing pipeline today, what trends are you seeing? Is it larger space takers? Is it smaller? Is it -- are there any kind of common threads that you're seeing across the current pipeline?

Yes. I think it's clearly different situations in each submarket. Each submarket has its own dynamics, whether it's a headwind or tailwind and that it's hard to generalize at all.

And our next question today comes from Anthony Paolone with JPMorgan.

First question is I just wanted to follow up on some of the occupancy comments you made. And so I guess, if I'm understanding the dispositions, right, if we were to put those aside and think about sort of the remaining portfolio over the course of the year. Did you mention that occupancy will be down 2% then in the second half, like kind of if you ignore sort of the dispositions?

Yes. Tony, in terms of kind of the bridge to year-end occupancy were at 90.8% today, so kind of right at the -- or just below the bottom end of our range. We're expecting a pickup in occupancy given as Peter said, a big chunk of the assets that we've identified for sale are non-stabilized, so they have some vacancy. So we're expecting some pickup as those assets get sold and then you've got the normal kind of leasing to do on the back half of the year.

So you put all those pieces together, that's how we get to our year-end number.

Okay. And then -- got it. And then -- because then you mentioned you also have a bunch of signed but not yet commenced stuff that sounds like that kind of picks up a couple of points early next year? And I guess where I was going with that is you also added this disclosure around the 2026 expirations and it seems like there's a couple of points that might come out early next year there as well.

And so just trying to get the next few quarters kind of understand the trajectory and because you laid out a lot of good pieces.

Yes. There's a lot of moving pieces. We've got the 600-and-change or the 1.7% benefit to occupancy. And then we've also got some work to do on some of these '26 expirations. A little too early to give you a clear guidance in terms of what downtime looks like on that as we're really still working through the business plans and the re-leasing strategy on those things.

Okay. And then just a second one for me. Appreciate the added disclosure around the cap interest that's helpful. The $1.4 billion, I think you mentioned last quarter that you were going to stop on, I think, later this year, which -- I mean, I guess, one, is that still planned to be the case? And two, which bucket in your disclosure does that come out of?

Yes, that's a part of the $3 billion, Tony. So we kind of -- we tried to pull it together really with everything that we're looking at really the entire future land bank and give some sense of the things that we're pretty highly confident will continue through the end of '26 versus those things that are either known to be stopping or those things that we're evaluating based upon the milestones that are in place. And we're -- that will go on a project-by-project basis. There's a ton of projects in there, but that April date is kind of the weighted average date of those milestones.

Okay. But as we know right now, that $3 billion bucket will be like $1.6 billion at year-end, roughly?

Yes. I would expect it to burn down for those projects that we already identified, the $1.4 billion that is turning off close to the end of the year.

And our next question today comes from Michael Carroll of RBC Capital Markets.

Joel, can you provide some color on what tenants are telling you today? I mean, how big of an issue is this FDA leadership change in the most favored nations having on their mindset. I mean, is that what holding them back on making decisions? Or is it really driven by the macro uncertainty in interest rates, I guess, which bucket is more concerning to most tenants right now?

Well, of course, it depends on the nature of the tenant. You've got private biotech, they have -- and Hallie has given a bit of chapter and verse on each of the buckets. So each one has its own concerns. Institutional folks, they're clearly focused on NIH reimbursement.

Public biotechs are focused on the health of the market to finance should they hit clinical milestones. Ventures looking at how do we put together a company or grow a company and what's our exit? Is it M&A? Is it IPO?

So everybody is a bit different at this point. But obviously, conservation of cash is critical and interest rates are, I think, overall, a big -- have been a big negative for this industry in a lot of different focal points. And when you look at the FDA at the moment, as I said, we've seen no tangible evidence of delays of responses, meaningful responses and detailed issues with the FDA, but people are always vary of that because any delay means you're just burning more capital. So that's a key issue in people's minds.

So how long does it take for them to get comfortable with the FDA situation? Is it just like time, like just kind of proving out over the next 1 to 2 quarters, then having no issues and then are turning to be comfortable with that.

Well, when you say they you have to be specific. If somebody is -- if somebody is at the R stage, they're not so focused on FDA approvals. If somebody is in clinical trials, they're hyper focused on it. So it totally depends on the nature of the -- the nature of the entity that's looking that you're talking about and the nature of their product or technology.

So you just can't globalize that comment.

Okay. And then -- and just lastly, on the NIH issue, I guess, with the budget holding steady, is there issues with NIH or the HHS not doling out the capital? Or is that behind them?

Yes. I mean that is, I think, Hallie mentioned, that is a problem. They're worried about will the 15% limitation on indirect cost be held up, and that will be the lay of the land going forward. They're also worried about the NIH not issuing grants, which they've cut back a lot of -- they've appropriated capital, but they haven't issued it.

And so that creates a capital supply to institutions that is disruptive. And that we've clearly seen as a force of holdback from the institutional side, although we're still making some deals as we said.

And our next question today comes from Vikram Malhotra with Mizuho.

I guess, Joel, and Peter, I just wanted to get a sense of you've got good build-to-suit opportunity, hopefully more down the road. I'm just wondering is there some thought about dealing with capital needs in a faster, bigger way than sort of every quarter sort of waiting for transactions. And I guess my point being, there's still a very robust private capital market. You laid out a lot of interested parties.

So I'm wondering if there's a bigger JV of a core asset or a core asset in the offering that you're contemplating?

Well, I'll let Peter comment. But I think from the top side, I think it's important that what we're trying to do, as you know, is focus our asset base heavily on the Megacampus asset base, and we've made great progress on that because we think at the end of the day, it's those destinations for the reasons that we've mentioned. Hallie mentioned some of the specific attributes of why people would want to do a build-to-suit versus just an existing building. But clearly, it's the quality of the asset, the quality of the operation and obviously the quality of the brand and the financial capability that we have compared to operators who are just have maybe a vacant building and are capital challenged.

I think it's important as we go forward, we're just going to be very careful. We think owning more of our Megacampus is actually a good idea as opposed to not owning as much. So that's why we're continuing to pair our landholdings, our non-core assets and even some key assets that may not be integrated with our Megacampus. So at the moment, that's the strategy we're going to follow.

But Peter, I don't know if you have any comments.

Yes. I mean I agree with everything you just said. I guess I would just let everybody know that we have a tremendous amount of equity in our Megacampuses. And if we hadn't make a strategic transaction to monetize some of it to pay for an opportunity like what we have in front of us in San Diego, we could do so.

But as Joel said, we would prefer to own more of that than less of it. So we are going down the road of selling things like land and unstabilized properties. And then if that isn't enough, then we have the backstop of a bigger transaction monetizing some of that equity.

Okay. And then just second one, I guess, you laid out a part about occupancy headwinds near term. But maybe if we can step back, can you give us a sense of how you see this playing out call it, over the next 18 months. So when are we going to trough for ARE specifically? And maybe if you can embellish that a little bit of like how strong is the potential build-to-suit pipeline for you guys?

Okay. Well, I'll ask Marc to maybe comment on occupancy, but let me just give you a couple of thoughts there. There are a couple of things you asked, one on when does maybe leasing become more robust. Obviously, I think the capital markets are going to have a huge amount to do with that.

And hopefully, Powell has got what 8 months left on his term. He's going. It's pretty clear that the Fed has got to move in the direction of lowering rates, which is good for everybody, including servicing the national debt. And so that's going to be super helpful.

And I think as Makary and Bhattacharya at the NIH and Dr. Oz who we understand is doing a great job over at CMS as those agencies become more stabilized from the transition and really operating at a much more peak performance effort and people get very comfortable with what's going on. I think it's moving in that direction. There's some really good signs of that after a lot of turmoil.

I think you'll start to see those combinations of both policy and interest rates impacting the capital markets. And I think you'll see decisions moving faster than they have and positive decision-making regarding leasing. But Marc, on occupancy.

Yes. I would just refer you, Vikram, to the discussion we had with Tony earlier in the call, where we held our occupancy guidance where it was at. we're right just below the low end of the guidance range right now at 90.8%. We've got a good head start in terms of what that looks like for next year with the space that's leased that is going to be delivering. But at the same time, we've got the lease rolls that we highlighted that we need to deal with as well, and we'll have kind of more to come on those as we flesh out the re-leasing strategies, hopefully, in the coming quarters.

And your next question is from Tom Catherwood with BTIG.

Joel, you mentioned in the prepared remarks, 5 developments where you're making progress and some of these saw a boost in 2Q leasing like 701 Dexter and the Sylvan Road buildings, but a few others like 269 East Grand didn't show a change. Are you seeing an uplift in prospects for space, but they haven't reached the in negotiation stage yet? And if so, what's driving that change?

That's correct. Again, somebody asked that question before, it really is submarket and building or campus specific as to why a particular space or location is being looked at. It's just -- it's hard to generalize beyond building a campus, a submarket, it just -- you just can't do that. So they are very, very case specific.

And remember, the majority of our leases come from existing tenants. So we have a line of sight that most people don't have on future tenancies that just a lot of people would be flying blind just waiting for brokers to bring people by on tours. But I think we have a much more in-depth pipeline opportunity with existing clients who are looking for expansion, et cetera.

So just to clarify. So the -- that pipeline of prospects then is larger and kind of increasing compared to what it would have been a quarter or a year ago. Is that how we should read through on that?

Yes, go ahead.

Joe, I can verify that. I mean I track along with the regions company-by-company prospects and it has grown as we have put significant effort into focusing on this leasing, as I mentioned in my comments. So I can tell you it has gotten -- it has increased -- the pool of prospects has increased. Now the time to make decisions remains elongated.

So you can't translate that comment to, we're going to have more leasing next quarter, but we are pleased with the amount of prospects we're seeing for these development -- for our development pipeline.

But remember, too, I think if you take what Peter just said, so many specific, these are very case specific, a new initiative, a new partnership financing, a milestone. Those are things that drive decisions beyond just people who are in the market compared one quarter to another year-to-year. And that's what makes the big difference. And that's very hard to generalize quarter-to-quarter.

Got it. Really appreciate all that color. And then, Peter, just a small one here. Just wanted to understand how you classify certain leasing.

So in the quarter, you did roughly 286,000 square feet of development, redevelopment and kind of previously vacant space leasing and you mentioned 131,000 square feet of development and redevelopment leasing. On the gap between those 2, roughly 155,000 square feet, I assume that's previously vacant space. Is that first-gen space that was previously delivered vacant? Or is that second-gen space that's just been vacant over a set period of time?

How do we think about the classification of that?

Marc, you can tell -- you can correct me if I'm wrong, but that is vacant space of the existing properties.

That's right. That's right, Peter.

So that goes right into sign not commenced leases that's not part of the development pipeline, redevelopment pipeline, nothing like that?

Correct. Correct. It's just our general operating portfolio vacancy.

Next question today comes from Omotayo Okusanya with Deutsche Bank.

Joel, again, I wanted to add my own congrats on the large build-to-suit lease. It's just good to see that as a nice proof of concept there. In terms of that project, have you discussed at all what the building costs could look at and what potential yields could look like?

Yes. Stay tuned on those. We haven't really put those into the sub at this point, but they'll be forthcoming.

Okay. Sounds good. And then the 2027 redevelopment project, just wanted to visit some of the commentary around looking at alternatives around some of those projects, whether you could give a couple of examples of kind of what else you're kind of considering at this point to kind of create shareholder value from them?

Well, I mean, it's obvious in today's market in some of these locations, and we've seen this phenomena happen before in a kind of a different era where 2015 to 2020 we were inundated by big tech and large tech users wanting to come into our campuses and even in the lab buildings for their own use for security purposes or quality of buildings, quality of sponsorship, of course. And we're seeing some of that in some of our locations now with the new generation of tech companies. And I think Peter and others have mentioned Mission Bay is a great example where AI has been on a tear in gobbling up space some buildings that were destined to be lab buildings and others that were office.

So I think we're seeing some of that in some of our submarkets.

And our next question today comes from Peter Abramowitz with Jefferies.

Just wanted to dig in a little bit more on the '26 known vacates. Any sense of kind of timing and how long you would expect it will take to release those?

Yes. I think I'll let Marc comment but on our assumptions. But again, they're very, very -- like I've said a couple of times on the call, Peter, is very case-specific to buildings, to campuses and things like that. But Marc, you can comment on our assumptions.

Yes. It will really depend, Peter, on the amount of capital that we put into those sites. The biggest one is a project in Greater Stanford that we acquired with the intent to redevelop a number of years ago. And as that lease is starting to burn off, we're evaluating other opportunities, whether it should go to lab or that market has had interest from other types of advanced technology users.

So there may be opportunities to do other things there. So really hard to kind of give you a sense for where we're going to end up in terms of downtime, but there's a good chance that those properties will require some capital to lease.

All right. And then my other question, you called out specifically yields coming in above your underwriting at some of the deliveries in Torrey Pines. Would you say those improvements on rents are kind of specific to those projects or that submarket? Or generally, is there a sense that things are accelerating in the market overall?

Yes, Peter?

Well, that particular project is just very high quality. And once it opened and first tenant started moving in there was a lot of buzz in the market. We've just been able to push. So it's specific to the project, but it's also I guess, something that you -- we're not surprised because we do play in the high-quality asset gain and tenants are willing to pay for value.

So I think it's a good takeaway that happened that there's certainly still supply overlap in the markets. But with the build-to-suit lease we signed and with the above underwriting rents we achieved at One Alexandria Square, I think it proves that the tenants are willing to pay for quality.

Yes. And remember, just one kind of footnote, the reconciliation bill provided a variety of incentives, including things like permanent expensing for domestic R&D, bonus depreciation, expensing of qualified production properties, all of which bode well for onshoring supply line kinds of issues. So there's a lot of thinking that's going on with a bunch of different users as to when, how and what they may do with space that we're having conversations about.

And our next question then comes from Dylan Burzinski, with Green Street.

Most of mine have been asked, but I just wanted to sort of if you can discuss sort of the reasoning why you guys raised cap rates on the dispositions, is that more representative of change in cap rates across the property sector or more so related to just the types of assets you guys are selling and that being sort of non-core potentially with some near-term lease roll here on it.

Yes, Peter?

Yes. I mean I think it's just reflective of the fact that a lot of these assets are in transition. So we're always trying to be very measured on even commenting on cap rates for these sales because they don't really represent the core of what Alexandria is going to look like in the future. So a lot of these assets have a little bit of a wall.

So the cap rate gets increased because the buyers taking the chance on the renewals. So it's really asset specific and we just have a lot of assets in transition in what we're trying to sell. And one of the reasons that they're non-core, and they're not on Megacampuses.

Our final question today is from Jim Kammert with Evercore.

Thinking about the $3 billion potentially go or no go projects on Page 45. In addition to interest expense, what would the order of magnitude, sort of overhead and other predevelopment costs in dollar terms are you're capitalizing on that cohort?

Yes. Jim, it's Marc. If you look at our 10-Q, we do disclose capitalized operating expenses, really property taxes, insurance and other direct costs as well as overhead. That number, if you do the math, is around 3%. So that should give you a sense for what could come with that if some of that stuff turns off capitalization.

So 3% basically at a run rate balances or basis is a good guestimate?

That's right. Based upon -- if you just look at the first 6 months, that's what it translates to as a percentage of the basis being capitalized.

Perfect. And then second related question, would not a fair percentage of those $3 billion or that $3 billion of assets, if it's a no-go decision? Would they not likely be sales? I mean Alexandria is probably not going to hold on to them for indefinite time or maybe I'm thinking about it the wrong way?

No, for sure, there is a chunk of the $3 billion that we are evaluating for sale. We've got, I think, Peter highlighted or it's in the sub 20% to 25% of our -- or sorry, 20% to 30% of our sales for the year expected to come from land. So part of that $3 billion will be from things that we expect to execute on that will naturally roll off a capitalization if we sell the asset.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Marcus for any closing remarks.

Thank you, everybody, and have a very safe and good summer. Thank you.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may disconnect your lines, and have a wonderful day.