ARE - NYSE

Good afternoon, everyone, and welcome to the Alexandria Real Estate Equities Fourth Quarter and Year-end 2025 Conference Call. [Operator Instructions] Please also note, today's event is being recorded. At this time, I would like to turn the floor over to Paula Schwartz with Investor Relations. Ma'am, 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. Please go ahead, Joel.

Thank you, Paula, and welcome, everybody, to our Fourth Quarter and Year-end 2025 Conference Call. With me today are Peter, Marc and Hallie. And I want to wish everybody a happy New Year. And remember, most importantly, health is wealth. I want to thank our family team for their exceptional efforts during 2025 and particularly a very busy fourth quarter. In 2025, we witnessed the fifth year of a life science bear market. Our 2025 time line clearly evidences that no one could have predicted with the February 2025 nomination of HHS Secretary, the intense cascade of events from February 2025 on to the numerous key departures toward year-end at the FDA. And in fact, sadly, measles and polio may be back to some extent. We have been navigating a fast-changing life science industry landscape throughout 2025, which has been front and center for our team. Our Investor Day path forward is our North Star for 2026. As the industry begins to adapt to the fast-changing landscape, 2026 is all about timely execution of our plan, heavily focused on dispositions and maintaining a strong and flexible balance sheet, driving occupancy with intense leasing focus on vacant space, rollover space and redevelopment and development space and meeting the marketplace. We also plan to continue to significantly reduce CapEx. And with that, let me turn it over to Marc to highlight 4Q and 2025 briefly, and then we'll turn it over to everybody for questions. Since we had Investor Day less than 60 days ago and we just reported yesterday, we'll try to make our comments brief. So Marc?

Thank you, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon, everyone. First, a congratulations to the entire Alexandria team for the outstanding operational execution during the fourth quarter, including the completion of $1.5 billion of dispositions spread across 26 transactions and 1.2 million square feet of total leasing volume for the fourth quarter, which was the highest quarter in the last year. We are focused on taking all the 7 steps to our path forward that we outlined at our recent Investor Day and are also included on Page 4 of the press release. Our team continues to navigate a challenging macro industry and regulatory environment. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.16 for 4Q '25 and $9.01 for the year, which represents the midpoint of our prior guidance provided on our last quarterly call. Leasing volume for the quarter of 1.2 million square feet was up 14% over the prior 4 quarter average and up 10% over the prior 8-quarter average. An important takeaway for the quarter is that the leasing of vacant space completed during the fourth quarter of 393,000 rentable square feet was almost double the quarterly average over the last 5 quarters. Free rent and rental rate changes on renewed and released space were under pressure this quarter, which reflects the market realities and included 2 large deals, 1 in Canada and 1 in our Sorrento Mesa submarket. Lease terms for the quarter of just over 7.5 years were consistent with the prior 3-year average of right around 8 years. Occupancy at the end of 2025 was 90.9%, which was up 30 basis points from the prior quarter and was up 10 basis points over the midpoint of our prior guidance. In addition, we've signed leases of almost 900,000 rentable square feet or about 2.5% of the portfolio that are expected to commence in the third quarter of 2026 on average upon completion of construction and will generate incremental annual rental revenue of $52 million. It's important to emphasize that our asset quality, location, best-in-class operations, sponsorship and brand trust continue to be a major distinguishing factor for tenants, as our Megacampuses, which represent about 78% of our annual rental revenue, outperformed the total market occupancy in our largest 3 markets by 19% for occupancy. We reiterated our year-end 2026 occupancy range of 87.7% to 89.3% that was provided at our Investor Day this past December. A key takeaway on our outlook for 2026 is that we expect occupancy to dip in the first quarter of 2026, and we expect occupancy growth in the second half of 2026. The projected decline in occupancy for the first quarter is primarily driven by the 1.2 million square feet of key lease expirations with expected downtime that we highlighted on Page 22 of our supplemental package, consistent with our outlook from Investor Day. We're making good progress across these spaces with 13% that's either lease negotiating, and we've identified prospects or in early negotiations on another approximately 40% of these spaces. Same-property net operating income was down 6% and 1.7% on a cash basis for the fourth quarter and down 3.5% and up 0.9% on a cash basis for 2025. The results for the year were at or better than the guidance midpoint we provided on our last earnings call. The full year 2025 results were primarily driven by a decline in occupancy which occurred in early 2025, and the cash results had a boost from the burn off of free rent in the first half of 2025. We reiterated our outlook for same-property performance for 2026, up/down 8.5% at the midpoint of our guidance range, which is expected to be driven by lower occupancy. And despite the anticipated decline in occupancy in 1Q '26 I previously mentioned, we continue to benefit from a very high-quality tenant base, with 53% of our annual rental revenue coming from investment-grade or publicly traded large cap tenants, long remaining lease terms of 7.5 years, average rent steps approaching 3% on 97% of our leases and strong adjusted EBITDA margins of 70% for the fourth quarter. We expect same-property NOI performance to be weaker in the first half 2026, driven by lower occupancy and stronger performance in the back half of 2026. Our guidance assumes the delivery of the nearly 900,000 square feet of signed leases commencing in the third quarter of 2026 on average, as well as about a 2% to 3% assumed benefit from a range of assets that could be sold or designated as held for sale in the second half of 2026. We highlighted several considerations for the first quarter of 2026 on Page 5 of our supplemental package, including the following 3 items that we expect to impact same property performance. First, the 1.2 million square feet of key lease expirations with expected downtime, of which around 60% expired in mid-January on average. Second, we terminated 1 lease for nearly 171,000 rentable square feet in South San Francisco in 4Q '25 that had annual rental revenue of $11.4 million. And we are announcing that we re-leased 100% of the space to a new tenant, but the new lease isn't expected to commence until beginning in the second half of 2026. So there will be some additional temporary vacancy in the first half of 2026. And third, our guidance assumes a reduction of rent of approximately $6 million per quarter, starting in the first quarter of 2026 related to potential tenant wind-downs. During 2025, we achieved tremendous general and administrative cost savings of $51.3 million or 30% compared to the prior year. And our G&A cost as a percentage of NOI was about half the average for other S&P 500 REITs at 5.6% for 2025. As we've guided in the past, we expect those annual savings in 2026, relative to 2024, to be cut roughly in half, given the temporary nature of some of the 2025 savings. We reiterated our guidance for capitalized interest for 2026 of $250 million, down 24% from 2025. 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 costs. Part of our strategic path forward includes goals to reduce the size of our pipeline and construction spending needs and to substantially complete our large-scale noncore disposition plan in 2026. During December 2025, we sold or designated for held-for-sale projects with more than $1 billion of basis that had previously been subject to interest capitalization. As a result, we expect a decline in capitalized interest headed into the first quarter of 2026, and we have a number of projects under construction where we are evaluating the business strategy and a number of future pipeline projects undergoing preconstruction activities with milestones in May 2026 on average. To the extent that we decide in the future to either pause or sell any of those projects, capitalization of interest and other costs would cease. While those ultimate decisions have not yet been made, we would like our disposition program for 2026 to include a significant component of land, which will also help us achieve 1 of our strategic objectives to significantly reduce the size of our land bank. During the fourth quarter, realized gains from our venture investments was $21 million, down from the approximate $32 million quarterly average for the preceding 3 quarters. For 2026, we reiterated our guidance range for realized investment gains of $60 million to $90 million or approximately $19 million per quarter at the midpoint. We continue to have 1 of the strongest balance sheets amongst all publicly traded U.S. REITs. Our corporate credit ratings continue to rank in the top 15% of all publicly traded U.S. REITs. We have tremendous liquidity of $5.3 billion, the longest average remaining debt maturity among all S&P 500 REITs at just over 12 years and modest leverage of 5.7x for net debt to adjusted EBITDA for the fourth quarter annualized. We reiterated our guidance range for 4Q '26 net debt to annualized adjusted EBITDA of 5.6x to 6.2x. While we remain on track to achieve our leverage goals for year-end 2026 leverage, we expect leverage in the first quarter of 2026 measured on a quarterly annualized basis to temporarily increase by 1 to 1.5x higher, driven by a reduction in quarterly adjusted EBITDA. Please refer to Page 5 of our supplemental package for detailed assumptions specific to the first quarter. We expect 1Q '26 leverage to significantly improve over the balance of 2026 as we make progress on our dispositions and sales of partial interest. As we announced at our Investor Day, we sold 1 of our campuses in South San Francisco. We expect to sell 2 redevelopment projects in 2026, and we pivoted to office on 1 project in the Fenway. And these changes reduced our future funding needs by more than $300 million. In addition, we are evaluating the go-forward business strategy for 4 additional projects that are currently under construction and have significant remaining capital needs. Again, a huge congratulations to the Alexandria team for the tremendous execution during the fourth quarter with $1.5 billion of dispositions that completed across 26 different transactions, which allowed us to achieve our leverage target of 5.7x for the fourth quarter. Over the course of 2025, we also made significant progress in reducing our investment in nonincome-producing assets as a percentage of gross assets from 20% at the end of 2024 to 17% at the end of 2025, and we expect that ratio to continue to decline by the end of 2026. In connection with our disposition program, we recognized our share of impairments of $1.45 billion in the fourth quarter. Five important items to highlight here. First, approximately 90% of that number was previously announced with our 8-K on December 3, and the remaining 10% was primarily related to 1 land parcel located in Greater Boston, which was designated as held for sale later in December. Second, 50% to 60% of our share of the real estate impairments recognized in the fourth quarter was related to land, which is notable given the oversupply in numerous submarkets. Third, the 2 largest impairments comprised 37% of the total and included our future development project at 88 Bluxome Street in SoMa located in San Francisco and our Gateway campus in South San Francisco, which was owned through a consolidated joint venture. Fourth, we sold our interest in the Gateway campus in South San Francisco in December. Ultimately, we decided to exit this investment given the challenging supply and demand dynamics in South San Francisco and the very significant capital required over time to redevelop the campus. And fifth, we expect to complete the sale of the 88 Bluxome Street, our only asset located in SoMa over the next few quarters. We originally acquired this site in 2017 with the intent to expand the Mission Bay cluster. However, Pinterest terminated their lease with us in 2020 and paid us an $89.5 million fee. And we ultimately decided the sale proceeds from this project would be better recycled into our Megacampus platform and to address our current funding needs We continue to focus on our disciplined strategy to recycle capital from dispositions and partial interest sales to support our funding needs with a focus on the substantial completion of the large-scale non-core asset program in 2026. And we expect non-core assets and land to comprise around 65% to 75% of the $2.9 billion midpoint of our guidance for 2026 dispositions and sales of partial interest. We expect most of our dispositions and partial interest sales to close in the second, third and fourth quarters with a weighted-average closing date in the third quarter. In early December, our Board also authorized a reload and extension of the common stock repurchase program of up to $500 million. And our guidance does not assume any common stock repurchase in 2026 based upon current market conditions. And lastly, we reaffirmed our guidance for 2026 FFO per share diluted as adjusted, as well as the key components of guidance. Now I'll turn it back to Joel.

So can we go to questions, operator, please?

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

This is Farrell Granath. I want to start off, I know that we spoke about a month ago, but just given the sustained and slightly up quarter-over-quarter leasing that you've seen and recent commentary around better VC funding that we've seen in the broader biotech market, has that changed your outlook at all and expectations into '26? Or are you at least receiving greater inbounds in terms of sentiment as people are potentially making more decisions?

Okay. So Farrell, is your question aimed broadly at leasing? Or is it aimed at venture-backed private? So I'm not sure how broad or narrow your question is.

I want to just connect the dots between what we've seen as positive headlines for broader VC funding and how that may be connecting to leasing and sentiment towards leasing.

Okay, because that's one segment of a very broadened market. So Hallie, maybe take her through a little bit of venture and the private side, but then maybe overall.

Yes. Farrell, this is Hallie. As Joel mentioned, when we think about VC dollars going into this industry, it's very much tied to a specific segment, our private biotechnology segment. And we have seen, over the course of this year, sustained funding and numbers are similar, if not slightly higher to the last couple of years. This is money that is going into new companies. On the other hand, venture funds have raised the lowest amount of dollars in the last decade. So this is LPs investing in these funds. And so we have no kind of interesting dynamic going on here where it's certainly not back to a healthy robust environment that we would fully like to see. And what we see that manifesting in is that VCs and these companies continue to be very conservative. So we certainly are seeing demand. We have -- Peter can talk to tours increasing. There are some great companies out there. I do think by and large, decision-making is still taking longer and companies are very cautious in terms of how they think about taking on new space or expanding. So while we're cautiously optimistic, we are monitoring it closely because we don't necessarily think that we're back to a fully robust environment that we may have been in the past. More broadly speaking on headlines, the other big one is the XBI has certainly performed incredibly well over the past year, outperformed broader indices. As mentioned in the Investor Day, the majority of those companies are commercial or near commercial companies, which don't typically drive lab space needs. So we're not seeing the immediate translation of that activity to leasing. So altogether, while we do feel that we're moving in the right direction in terms of positive sentiment, we still have a lot more work to do. There's still a lot of volatility on the regulatory and pricing side of things. And so we just continue to monitor. And for the demand that is out in the market, meet the market and really capture our outsized share of leasing.

Yes. Let me put 1 footnote on that, Farrell. If you look at the pie chart of our leasing for the year and the fourth quarter, you'll see in the fourth quarter, a notable, a very small amount of leasing for public biotech. That's something that we're hoping turns around in 2026 because that's a critical mainstay of this industry. And much of that has to do with the lack of availability of secondary offerings except on data or the lack of a real, robust open IPO market. Okay?

And I also wanted to ask about your strategy of retaining the Fenway office property and looking to lease as an office. Is -- was that a one-off transaction that you're looking to maintain? Or is that something that you could see doing across other properties as well?

Well, I'll have Peter comment on that. But you have to remember that the Fenway is made up of multiple buildings. The one we're speaking about is, in fact, an office building and in fact, has multiple long-term leases with some of the best institutions in LMA and the Fenway. And so we sometimes you think about would you create lab space or other things out of vacant space or stick with what makes sense and the demand there we think is -- will, on a go-forward basis, be pretty good office-wise. But Peter, do you want to comment on that, I think, 401?

Yes. I mean, I would agree exactly with what you just said, we have seen an increase in demand for office space. And given the availability we have elsewhere in the Fenway for lab, it made more sense to just go ahead and follow a business plan to lease it as office and not create any more lab space in the near future.

Yes. So that's more building and submarket specific as opposed to something much broader.

And our next question comes from Ronald Kamdem from Morgan Stanley.

Two quick ones. Just on -- starting with the dispositions. I saw some of the cap rates on the stabilized assets in the supplemental, which was helpful. But as you're sort of thinking about that $2.9 billion, I appreciate a lot of it is going to be land, but any sort of commentary on cap rate trends, sort of the interest, price discovery, how that's been going relative to your expectations?

Yes. Peter?

Yes. I mean there's still going to be a considerable amount of non-core assets that we're selling, and you've seen cap rates for those in the mid 6s, all the way up to the mid-9s. A lot has to do with what markets they're in, how much leasing or what the WALT is, the lower the WALT, the higher the cap rate. We do plan on a couple of executions during the year that would involve more core assets. So you should be able to get more discovery on what our NAV could be for what we're holding on to. But I'm not going to speculate on those cap rates yet. We have talked in the past and mentioned at Investor Day, and we do think our top end properties should have a 5 handle. And 1 or 2 of those types of properties could be involved in this execution, and we'll report on that when it happens.

Great. Just my follow-up, I had sort of a similar question on the leasing chart, but maybe asking it a different way. Can you just comment on the leasing pipeline in terms of how it's rebuild after the quarter? And if any sort of notable groups are in the pipeline or not in the pipeline? That would be helpful.

Yes. That's kind of a secret sauce. I'm not sure I want to say much. But Peter, do you have any overall comments?

Yes. Look -- in practically all of our markets, the smaller space is under 50,000 square feet are still what is moving most of the tours or in that range. There is, as Joel mentioned and Hallie mentioned, there is a bit of a dearth of biotech, public biotech type of companies, which are usually the middle of the barbell, 50,000 to 150,000 square feet. We're not seeing a lot of that, but we do have, in certain markets, some good activity in the 100,000 square foot plus range. So we're pleased to see that. But as Joel mentioned, we really need to see the public biotech sector contribute to the leasing pipeline in order for it to really start to turn around. There is some good green shoots, we're very cautiously optimistic. But 1 example is that the Greater Boston region did see an 11% increase in tenants in the market, and that was really the first time we've seen an increase in a number of quarters. So we're happy to see that. And we'll keep you informed as we go.

Our next question comes from John Kim from BMO Capital Markets.

I was wondering if you still felt comfortable with the previous guidance you gave for the fourth quarter '26 FFO of $1.40 to $1.60 stated at your Investor Day? And whether or not you believe this would represent trough earnings? I think in the presentation, you mentioned that earnings will be flattening out in the second half of the year. But there are some dispositions that looks like that's falling into the fourth quarter.

Yes. So Marc?

Yes. John, yes, we're still tracking within that range that we gave for the fourth quarter of '26, which I think was $1.40 to $1.60. And that does represent kind of the trough for the year, at least for 2026. But as far as '27, I know you don't want to give guidance for that, but...

Yes, we haven't and can't give guidance at this point for '27. But that was the point of saying that's a good run rate to think about as a base.

And then can you comment on dispositions you've completed year-to-date and what you planned for the year in terms of the type of buyers you're talking to as far as owner/users, other REITs, developers looking to convert some of that space potentially or other buyers?

Yes. So maybe, Marc, do you want to just talk about the percentages of dispositions through the year? And then maybe ask Peter to comment on the buyer pool.

Yes, sure. Yes, the mix of dispositions was pretty consistent with what we kind of set out at Investor Day. So about 20% stabilized, 21% land and then 59% non-stabilized. So I mean, the biggest -- obviously, the biggest pot or portion was the non-stabilized properties, which is going to attract a certain type of buyer. Maybe I'll hand it over to Peter to go over it [indiscernible].

Yes. Before you do, talk about timing, quarter-by-quarter because I think that's...

Oh, sure. So as we look forward to 2026, we've got just under $200 million of stuff that were under contract or under PSA negotiations. We've got about $580 million of assets on balance sheet today that have been designated as held for sale. And so I think that the first quarter closings will be pretty small. We expect the bulk of the closings to occur over 2Q, 3Q, 4Q. And again, I think if you -- on a weighted-average basis is probably closer to third quarter as a kind of a blended average for the closings for 2026.

Yes, Peter. Buyer?

Yes. So on our guidance page, we did indicate that we've got about $180 million under contract or in negotiations that we expect to close in the near term. That's essentially 3 assets. One is a portfolio that is being purchased by what we would classify as an investment fund. Investment fund buyers have been our fourth largest over the last couple of years, taking down about 12% to 15% of our inventory. That's the -- an investment fund as someone is buying it to hold long term and is usually private capital. The other 2 assets are residential conversions. They're land or assets that are at the end of their useful life that will be demolished and turned into a residential type of use. And that was another one of our largest segments of buyers last year and we anticipate that will continue this year. More than 55% of our available land is either zoned or could have an allowable residential use and is in urban environments that could use the housing. So we expect that out of the $2.9 billion midpoint this year, although as Marc said, there'll be a considerable amount of land, 25% to 35%, and we do expect the majority of that to go to residential developers. But there has not been a problem getting assets sold. There's a number of buyers. The biggest issue is just the yields that these buyers are looking for and that has created some impairments, and -- but the good news is when we need to get things sold, we do. And we fully are confident we'll do the same thing this year, even though it's a larger amount that we have to execute on.

And our next question comes from Vikram Malhotra from Mizuho.

I just wanted to clarify kind of the earnings, I guess, trajectory through the year. With the vacancy or the move-outs you mentioned, some of the fees, et cetera, onetime items in 4Q '25, I'm just wondering sort of the cadence that you showed at Investor Day trending down to that $1.40 to $1.60, is that cadence still intact?

Yes, Vikram. Yes, we still expect the fourth quarter to kind of be the low point in earnings for the year, for 2026. We did -- I think there was some question around where the first quarter goes and how steep of a decline that is coming off the fourth quarter. And so we tried to give a lot of color about the components that go in there, but the general trajectory that fourth quarter, things will even out in the back half of the year. And the fourth quarter being in that $1.40 to $1.60 range still holds.

Okay. Great. And then I guess maybe Joel or Hallie. If -- from a broader perspective, I understand like it takes a while for all the changes on the macro front to translate to leasing. But I don't know if you've had any like recent conversations with FDA officials or any larger VCs in terms of the shifts that you may be hearing as a precursor to new company formation and hopefully then leaving down the pike. So maybe if you can update us on any thoughts around the FDA and like early-stage Series A, B type funding?

Yes. So maybe let me make a couple of comments and ask Hallie to fill in the blanks. So I think it's fair to say that the FDA Commissioner has been active. He's out a lot. He's certainly trying to hit in the right direction and do the right things, given speed of approvals, looking at trying to get products into the clinic much quicker than otherwise. Remember, we talked about it at Investor Day, the things that the market really wants to see is a substantial compression of the 10- to 12-year billion-plus cycle of bringing up a compound from discovery to the market. And he's, I think, very much focused on that. Now have defections, DOGE firings, resignations and all that stuff at the FDA, how much does that practically impede the ability of the agency to do what they want to do, which I think they've got their mindset in the right place I think is a big question for this year. Last year, they did end up approvals at 46, which was a very, very respectable number, but a lot of that was in the pipeline. This year is going to be a much more telling result. But Hallie, other thoughts, comments?

Sure. So maybe Vikram to take a step back on this question as it continues to come up. On Page 21 of the sup, we break out our leasing volume by business type, both for the fourth quarter and for the full year '25. And if you look at private biotechnology, in the last quarter, it made up about 1/5 of all leasing volume. So to be clear, we still continue to see demand from this segment. Whether that's going to pick up and how long that takes, I wish we could give you a specific time frame. These things take a while, right? And I think generally, we need a lot more confidence in terms of the broader landscape, being able to return capital to LPs, the IPO window opening up, which is a really important source of capital for private companies. But where we've really seen the drop off, as Joel mentioned, is in that public biotechnology cohort. So in terms of overall impact to our leasing going forward, we think that segment in particular is critical. And we are seeing some demand out there from some really good companies. They still are tending to be more capital conservative, more commercial, near commercial. And without that next bolus of new companies that are IPO-ing that tend to be earlier stage, they still seem to be on the back burner right now. At JPMorgan, there was a lot of, I would say, positive sentiment around the potential for some really strong companies to go public and raise capital. We haven't seen that yet. But that is really top of mind as we think about the next, I would say, 12 to 18 months.

Okay. Great. And then can I just clarify? Like, the new leasing was really good this quarter and hopefully, the pipeline supports sort of that continuation. But where are we today in terms of like incentive packages, TIs, free rents to achieve that leasing? And I asked just because there have been a couple of leases in South San Francisco where we've heard like very big TI numbers. So I'm just wondering if you can give us a bit more granular color on the TI and free rents?

Yes, Peter?

Yes. I mean, tenant improvements haven't changed. They're still elevated for anything that's from shell. It's got to really be -- it's either you get an allowance to build the whole thing out or you have to spec build it. So on renewals and re-leasing, the TIs are also stable. The fact that the space is already built out and the fact that people tend not to change much in the generic labs that we build, that's an advantage to us. So really, where we continue to see weakening in fundamentals is in the free rent category, and it's continued to elevate. We did have a couple of leases this quarter that really had significant amount of free rent in order to win the deal. And Joel mentioned in the very -- in his comments that we're meeting the market. It's in our best interest to meet the market, but keep rental rates as stable as possible, because as free rent burns off, then you get the income that you can build upon and hopefully, the next generation of leasing, you can increase it from there. When you start taking rents down, then you're starting to destruct value. So Alexandria and others that are competing in the market, free rent is the tool that we're using. Tenants really appreciate it because obviously, it's good for their cash flow. And as long as we continue to have availability in the mid-20s to low 30s in the major markets, free rent is going to be the tool that people need to use in order to execute on deals. But outside of that, we are pretty happy to see that rental rates are stable, in certain cases, growing. And we just got to get the net effect is to improve, but that will take a decrease in supply over time in order to start seeing that.

Our next question comes from Jim Kammert from Evercore.

Just trying to triangulate on Peter and Hallie's comments regarding the public biotech. Is there any concern? I mean, you said they're both critical to sort of kick starting demand again. But is it possible that some of these public biotechs, if they raise more capital, already have sufficient space? Or do you really think there's expansion space need there?

Well, yes, let me maybe give you an overarching comment, Jim. I think number one, historically, public biotech has been the mainstay of -- I mean, the broader industry is obviously institutional pharma product tools, services, all that. But when you get to biotech itself, the public market has been the mainstay of this industry, going back 50 years this year to Genentech. And one would assume that it would continue to be the mainstay and it's made up of really, 3 things. One, you get a good start at the venture level. You can get public through an IPO window that's reasonable, and you can continue to finance the company even if you don't have immediately actionable data. That's how it's worked over the last several decades, and that's what we're hoping to see a return to. Now in any given case, it's hard to say. Some will need more space, some will need less space. Some will be able to keep the same. But I don't know, Hallie, thoughts there?

Yes, Jim, I think that is in a way what we have been seeing. If you look at the XBI this past year and follow-on financings, which on an absolute numbers basis have been pretty strong, most of those have been for particularly commercial stage companies, which is great in terms of sentiment for the industry, but these are by and large, not companies that are driving a lot of R&D expansion. So to Joel's point, we need to see that earlier funnel fill up. We need to see the venture stage companies go public, gain more liquidity, expand their investor base. Those are more likely at that stage to drive additional R&D needs, which is what we've seen historically. I think Peter did mention we have seen some requirements hit the market. Things take a while, but not to say that it's a complete desert, but it is further and fewer between than it has been in years past.

That's very great color. And then 1 quick clarification. Peter, you also, I think, said that it's possible you might see a 5 handle on some of the core asset capital recycling in ' 26. Would that be potentially -- I mean, if it happens, on a JV? Or would that also be for an outright sale? I'm just trying to think about NAV implication sale versus JV.

Yes, very likely a JV that would happen. We are not planning on selling any core assets outright unless there's a special situation.

Our next question comes from [ Ray

My first 1 is on the capital allocation side, it seems like you guys did above midpoint of the guidance on dispo this year. And you guys -- I think Marc mentioned, buyback is still not on the table at this point. But with the excess cash, is the thinking that the priority is on the debt side? Or how should we think about that? And when would buyback be on the table with the excess cash?

Yes. So Marc?

Yes. Ray, I think in terms of the buyback, we'd like to get farther along on the disposition program, which is going to involve paying down debt to keep the balance sheet in check before we consider buybacks. Now I say that given the current market conditions and -- will remain flexible. But as we sit here today, that's kind of our current thinking.

Got it. And a follow-up question on uses of funding then. You guys disclosed how much you historically spend on the non-real estate investments in the [ K ]. If I'm looking at it correctly, I think between $200 million to $250 million a year. How should we think about that moving forward? Anything -- any help on that front would be appreciated.

Yes, sure. So we really look at the fund kind of net of the inflows and outflows. So I think if you -- if you look at the cash that came in, it was maybe a net outflow of somewhere between $60 million to $70 million for the year. And that's been -- I mean, I think it was a similar number in the prior year. So I think we'd like to see that the fund be as close to neutral as possible so that we're not putting a ton of capital in there, but still continue to be very active in the space.

Got it. So the net will -- the expectation is hopefully get to net neutral on that front?

That's right. Or at least a small number. Like I said, it's been $60 million to $70 million in the last couple of years.

And our next question comes from Rich Anderson from Cantor Fitzgerald.

The elephant in the room is, I guess, stock is up 20% this year. It's great, or 19%. And yet, it still feels like pricing power is quite a ways off still with everything that's going on. Do you have any sense on the people that you're talking to, a different type of investor that's showing interest in the stock? Do you think it's just pure rotation, people sort of profit taking, looking for a bottom in life science? Do you have any sense of what's driving stock performance so far this year?

Well, I think it's all of the above. And I think it's pretty clear that the slide that we showed at Investor Day, when you looked at stock price versus consensus NAV certainly tells the story in many respects. I think if one believes in this industry, 50 years after Genentech was founded this year back in 1976. Again, we've only addressed 10% of diseases, 90% are left. And if the public is willing to pay for therapies and addressable cures to the extent we can have that, that's -- one has to believe the industry has a promising future. We are making some, we're slipping back. As I said, when you look at some of the vaccine policy stuff, which is a little distressing to a lot of people. But I think if you set that kind of mentality aside and you look at what the FDA is trying to do, I think they're trying to do exactly the right thing to compress the time to go from discovery into the clinic, through the clinic and out of the clinic into the commercial side and assuming the policymakers and executive and legislative branches don't get too crazy to pay a fair return on these innovative therapies. I mean, just look at anybody who's been the beneficiary of any real therapy that saves somebody's life and made that more an ongoing chronic condition as opposed to life threatening, if you will. I think that's where the great promise is here, Rich. And -- so I think that when you look at our locations, quality of assets, quality of sponsorship, I mean it's not surprising that the sell-off after the third quarter was, I think, pretty radical.

And -- but those are all good color, but do you think you're attracting a different investor? I think you're attracting a non-REIT investor, a biotech investor, a generalist investor to the name?

I think the nature of investors change over time. I mean, think about when we went public, there are a lot of long-term investors today. There's very few long-term investors, a lot of ETF investors. But there's a large cohort of value-driven investors that don't look at quarterly day-to-day, monthly, year-to-year earnings, they look at quality of assets generating quality of cash flows. Obviously, people interested in the industry. So I think it's a whole bunch of sets of different interests that have come to bear because the sell-off just was, I think, foolishness.

Thought Hallie was going to jump in there, but maybe I misheard that. So okay.

No problem. Keep going. Joel covered it really well.

Okay. Perfect. Okay. Second question for me is, let's say, your development exposure as a percentage just to use a simple way of looking at as a percentage of total assets goes from 20%-ish to 15% this year. I'm assuming that sort of a step in the process. And I'm curious, Joel, Peter, whoever, what do you think the appropriate run rate is for development exposure, financing risk, need to access capital, all those things? Like what is new Alexandria going to look like from a development exposure point of view, call it, 2, 3 years from now in your mind?

Yes. I think we kind of articulated that at Investor Day, and there's a slide there that talked about. We think -- we don't know precisely because we're still in a -- I think, a -- how shall I say, a phase of trying to get used to a new reality with the industry. But I think we've hypothesized that we think 10%, somewhere 10-plus percent as a percentage of nonproductive or non-income-producing land as a percentage of overall gross assets is probably where we want to be very different than GFC, where there were no supply issues. The prospects were kind of unlimited because there was no supply constraint issue -- oversupply issue, if you will. So I think this is just a new reality. But yes, we've got great opportunities on many or most of our Megacampuses. And so those will be the instruments of future development and external growth, and we're excited about that. And there isn't just biotech. There is a whole host of other interested parties, both in our current pie charts and pie charts beyond that view those locations as top of mind.

Our next question comes from Seth Bergey from Citi.

It's Nick Joseph here with Seth. I guess, last month at the Investor Day, you talked about a 4- to 5-year recovery for life science broadly. And I recognize it's only been about 2 months, but you've been busy over those 2 months. So has anything changed that time line, either moving it up or delaying it from what you see?

Yes. So that's actually -- I'm glad you teed this up because Peter, I think, addressed this, but a lot of people came away reporting it a little bit unclear. And he basically said that he thought that the time frame for recovery in our markets where we were very active would be in the 2- to 3-year range and that it may be as much as 4 to 5 in submarkets where we were not particularly involved or active. But Peter, do you want to comment on that?

Yes. Thanks for clarifying that exactly. Like if you look at Greater Boston, for example, there's a significant amount of inventory in an area like Somerville and other tertiary areas and Alewife that -- where we're not at, which -- that's where we think that it's going to take 4 to 5 years for that to resolve. But Cambridge and Watertown, Seaport, where we're heavily invested, those -- that's probably more like 2 to 3 years and maybe even less depending on the trend of -- a lot of people are starting to realize that they should probably go a different path in life science, and we're hoping to continue to see that. So if we -- obviously, demand is going to be needed to take a lot of the lab space, but as a lot of it decides to change -- use that -- even that 4 to 5 estimate would be reduced. But Joel is exactly on point. 4 to 5 years for the areas that are the new markets that really didn't ever need to be lab markets, those will need a long time to resolve because it's not going to get resolved through lab demand, it's going to get resolved by changing use. But the lab markets that we're in that have been functional lab markets for decades, there has been some oversupply, and it will take 2 to 3 years for that to resolve.

Our next question comes from Tayo Okusanya from Deutsche Bank.

Yes. In terms of the guidance, you talked a little bit about $6 million a quarter revenue headwinds from tenant wind down. Could you talk a little bit just about what's happening with that pool of tenants? Is it just they're not -- they didn't -- the drug trail failed or they ran out of cash? So just kind of thematically, what's happening with that group to just kind of understand what that headwind is?

Yes. So I'll ask Marc to comment there, but I would say in this environment over the last handful of years, again, we're in the fifth year of a bear market, hopefully turning that around. And when you find that happening, obviously, more companies at the earlier stage or less companies are formed and more companies may be wound down. Some companies merged in the public markets. The bankers, certainly during the heyday of the last decade, led too many companies go public. So there has been a shake out there over the last handful of years of companies that probably shouldn't have gone public. So this is a natural outgrowth of that given where we are today. But Marc, you could comment more specifically.

Yes. The thing I would add is it's -- public and private biotech comprises the majority of it for the reasons that Joel and Hallie have mentioned. And some of it is kind of failure, which in their clinical milestones, which is normal in any market that will happen, but a lot of it is also ability to attract capital and just the kind of shorter runway that investors have given these companies that has caused part of the issue.

That's helpful. And if I may ask 1 more, the 4 development assets that is still under strategic evaluation. Could you -- does it all basically boil down to just leasing around these assets to determine whether you kind of proceed or you go through strategic alternatives?

No. I think it's much more granular than that. It's what is the prospect broadly in the submarket, the nature of the asset, any competitive product that we may have with that asset. I mean there's a whole set of variability or analysis that you go through. Leasing is clearly important, but it's not the sole determinant.

Our next question comes from Michael Carroll from RBC Capital Markets.

Joel or Peter, can you guys provide some color on the 400,000 square feet of leases that were signed at previously vacant space? I mean, I would imagine a good chunk of that relates to the backfill at 259 East Grand Avenue? I guess if that's true, where were the other leases signed within that bucket?

Yes. Peter, I don't know if you want to give any color there?

I don't have the specific leases, but you are right that a significant amount of leasing was done at East Grand. I will say that one thing that we were asked about and did some investigation on is that a significant amount of that leasing was absolute new tenancy, not tenants relocating from one place to another, but new tenants actually coming in into our portfolio, which we really love to see.

This is Hallie. I do have that list in front of me. And so just to say it was a pretty diverse from a regional perspective, leasing in Cambridge. We have RT, Seattle, some in San Francisco. So in terms of just generally seeing positive momentum backfilling the vacant space across the board. We think that diversity across the region is healthy.

Yes, and broader base than you might otherwise guess.

And that's -- is there any common themes on why those tenants were willing to lease space, I guess, in the fourth quarter?

Yes, because we're great sponsors.

Do they have like funding agreements where they just got funding? Or is there...

It is so -- Yes, Mike, it's so episodical in a sense because if a company has a clinical milestone, a data milestone and they need to do something, I mean that's -- I mean, we've seen that with a couple of companies where they've doubled their space just on that 1 event. So it is very episodically-driven. And I'm not sure I'd read anything into -- was the fourth quarter substantially different than the second quarter vis-a-vis leasing trends because it tends to be very case specific.

Okay. Great. That's helpful. And then just 1 last 1 for me. On 401 Park -- and I think I caught this earlier in the call. I just wanted to confirm to make sure I'm right. It's not necessarily that you have office tenants ready to lease that space. I don't know what type of interest. It's just that you had lab space available in that marketplace that you didn't need, you decide, okay, we have this building that could be lab or could be office, let's kind of diversify our approach and kind of go office with this specific property. Is that the right way to think about it? Or is there like a vibrant office market ready for that asset?

Yes. I think that is the answer. It's an iconic office building that's been known for a long time. The mainstay is primarily anchor Boston institutions, brand names that you would know that have very, very specific uses there. Some are pure office, some are more clinical like or whatever. But in fundamental, this is part of and kind of adjacent to the LMA along with medical center. So this is a big, big market for those institutions and their office and other adjacent or other kinds of uses other than, say, traditional wet lab space. So it's not so much that it's a hard call. It's -- the call was, given the NIH's move on the 15% limitation on indirect costs in a variety of ways, we saw a big decline of demand and immediate decision-making by a lot of medical institutions, and we've seen that across the country. We did put in the [indiscernible]. There is a court decision that is -- has overruled that. That may start to move institutions in a different direction. But at some point, institutions still need to get space, and both Fenway and the LMA are the best locations for that. So it actually is a pretty easy decision.

And our final question today comes from Mason Guell from Baird.

You had previously talked about San Carlos, San Bruno, Seattle and Campus Point as Megacampuses with large shadow pipeline and that you may look to reevaluate some of these in the future. I guess, do you have any updates? Or do you expect to have any updates any of these over the next few quarters?

Are -- you're talking about the expansion?

Yes, [ large ] future shadow pipeline for [indiscernible].

Yes. I think those are all under pretty deep study in each market. And probably, at this point, don't want to get into that. But we clearly are looking to reduce our non-income producing assets, as we've said, as a percentage of the gross assets and where we can carve off land that we have for other uses or move into a monetization path at a much faster rate. We're trying to do that. And so I would stay -- say, stay tuned there. Certainly, for the Bay Area ones and Seattle.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Joel Marcus for closing remarks.

Okay. Well, thank you, everybody. We appreciate it and look forward to talking to everybody next quarter. Thank you, and stay safe.