ARE - NYSE

Good day, and welcome to the Alexandria Real Estate Equities' First Quarter 2026 Conference Call. [Operator Instructions] Please note, today's event is being recorded. I'd 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. Please go ahead, Joel.

Thank you, Paula, and welcome, everybody, to our first quarter earnings call. With me today are Marc, Peter and Jenna. First of all, as I always do, I want to say a thank you to our remarkable family team for their awesome efforts during a tough first quarter operating environment. And as they know well, we are motivated each and every day by our solemn mission to enable this precious life science industry, one of the most treasured and innovative industries on the face of the planet to discover and bring to patients life-saving and life-changing therapies. And how many of us, friends, loved ones still suffer from the likes of Parkinson's, ALS, pancreatic, colon, breast, et cetera, cancers, dementia to name a few. 2026, we celebrate the 50th anniversary of the DNA and biotech revolution, and we still have addressed less than 10% of human disease. The life science industry is a highly regulated industry dependent upon proper functioning of the 4 key pillars. As we've said before, strong and basic translational research is critical. There remains strong bipartisan support in Washington to fully fund the NIH. There was a great victory this quarter in the defeat of the 15% limitation on reimbursement of institutional indirect costs, which I think will be very, very well both received and implemented over the coming quarters and years. Unfortunately, August 24 (sic) [ April 24 ], the entire NSF, National Science Foundation Advisory Board was fired. Their role is science and engineering advice, kind of a shock. Leadership challenges remain at the NIH and HHS and FDA. Number two, strong innovation, coupled with open and vibrant capital markets. Obviously, we're in one of the -- maybe the greatest innovation time in the history of humankind. On the capital markets, they've been very selective. Private funding has been very solid, but deliberate and discriminating. On the public side, the markets have been open for good data and key milestones, but for most public biotechs in preclinical or in the clinic, which don't have data or milestones to finance off of, it's been a very tough slog. Number three, reliable and efficient regulatory framework, continuing effort to need to reduce time and cost into and through the clinic. The FDA progress has been sluggish. Leadership and staffing pressures have been abundant, and China continues to pressure the industry here at home. Number four, health payment and reimbursement environment for innovative medicines. CMS is actually operating quite well under the leadership of Dr. Oz, but both sides of the aisle are focused on drug pricing. And it's hard to imagine that they haven't figured out an approach to cut out the middleman, which takes 40% to 60% of medicine pricing, which would ease the burden both on the recipients of care and on the innovative drug discoverers. We get often asked about AI in all realms of all industries. And I think it's fair to say that most of you know by now, we've got 37 trillion cells in each of our bodies and AI can support but not replace physical experimentation. Biology is just way too complex at this stage. R&D cannot go fully in silico given the massive complexity of biology. And giving an example, Novartis' CEO, who just joined the Board of Anthropic said, we only understand less than 5% of human -- the functioning of the human body today. And as you know, drug development is very complex from target discovery to hit generation to lead identification to optimization to clinical trials and on to commercialization. And it's pretty clear that the authorities in this area believe AI cannot replace physical experimentation. Most current usage is still document-centric, not biology breaking. Push button drug discovery is overhyped and even native AI companies in this sector haven't proven dominance whatsoever. It's pretty clear that AI is not fully autonomous discovery, but is aimed at compressing time lines and increasing throughput and recovering lost institutional knowledge, and that is all really good. I think most experts believe that AI will have a small impact on real estate requirements and could even see the need for additional dry and wet space as they run experiments designed by AI. Moving to the first quarter, as all of you know, it was a very tough operating environment, but we made very solid progress on our path forward laid out in detail at our Investor Day. Number one was to maintain a strong and flexible balance sheet, and Marc will talk more about that. Number two is to reduce capital spend and funding needs going forward. And I think we're well on our way to refining -- or refining and reducing CapEx in our pipeline. And we've also been fortunate to sign quite a number of LOIs leading to leases, which will reduce the CapEx into the lease statistics as we go forward. Something that is a cornerstone to this year in this reset is to substantially complete a large-scale core, noncore and sales of partial interest disposition plan. We are on track even though the first quarter was relatively quiet, but we fully intend like last year to meet our goal. And I think it's fair to say, and Peter can expound on this when -- during Q&A, the transaction market for life science assets is even better this year than it was last year, and we have a high level of confidence. Four, we want to steadily improve occupancy and increase NOI focused on leasing. The pinch point in leasing has been -- this is one of our lower quarters, but we look to bounce back nicely next quarter. This is maybe the first quarter in the history of the company that I can remember where we didn't sign a single public biotech lease. So that gives you a sense of what the environment is out there. I think it's fair to say in our pre-read, we highlighted the sale, which closed during the fourth quarter, but it's emblematic of the quality and value of the underlying life science assets that we continue to hold, especially on the mega campus. Our disposition of 409/499 Illinois Street in Mission Bay received a record pricing of $1,645 per square foot, the highest ever achieved for lab asset in San Francisco. And by the way, it was 40% occupied. Fair to say that this year, what is critical for us is to continue our path forward. The mega campuses will continue to differentiate us. Our balance sheet will remain strong and flexible. We've worked on continuing to lower G&A. The quality of our assets continues to be outstanding as recognized by our tenants as well as our operational excellence and clearly a best-in-class team throughout. I think finally, fair to say that if you look at our top 20 tenants, 80% of the top 20 tenants are investment grade and -- or large-cap companies, and that's very reassuring. 55% of our total ARR comes from that. And of the top 20, we have almost a 10-year WALT, which is really great. And we have one -- I think, the longest of WALT of -- not WALT, but duration of our debt, and Marc will talk about that. And then finally, 78% of our ARR comes from our mega campus platform, which we've been working hard on. So with that kind of intro to the quarter, let me turn it over to Marc for his detailed comments.

Thank you, Joel. This is Marc Binda, Chief Financial Officer. Good afternoon, everybody. First, congratulations to the entire Alexandria team for the outstanding operational execution of the steps of our path forward set forth at our December Investor Day despite a very challenging industry backdrop, including, first, outperformance on capturing leasing demand in our largest markets relative to our market share. I'll get to that later. Second, positive development and redevelopment leasing momentum with the execution of development and redevelopment leases and letters of intent aggregating 394,000 square feet. Third, focus on improving occupancy with cumulative leasing of vacant space of 1.1 million square feet that we will deliver in September on average. Fourth, continued general and administrative expense savings of $7.4 million compared to the 2024 quarterly average. Fifth, a $366 million gain associated with our unsecured bond tender, which reduced our overall debt; and sixth, significant fundraising efforts with $2.2 billion of dispositions and sales partial interest pending or identified and in process. FFO per share diluted as adjusted was $1.73 for 1Q '26, and we reaffirm the midpoint of our guidance for FFO per share diluted as adjusted for 2026 at $6.40 while tightening the range. Leasing volume for the quarter was 647,000 square feet. The decline in total lease volume was driven by the following: first, as expected, lower renewals and re-leasing space given the 657,000 square feet of key known lease expirations that we anticipated would become vacant during the quarter; and second, limited demand from public biotech with 0 leasing volume in the first quarter a segment of our tenant base, which accounts for 24% of our annual rental revenue. A bright spot for the quarter includes the positive momentum on development leasing with 118,000 square feet executed and another 276,000 square feet of signed letters of intent for existing development and redevelopment space. Looking ahead to the second quarter, we do expect an uptick in total leasing volume of around 900,000 square feet, given the early activity to date. Free rent and rental rate changes on renewed and re-leased space were under pressure in 1Q '26, which reflects the market realities and includes a 48,000 square foot lease at 40 Arsenal Watertown for a 12-year term, which was a significant contributor to the rental rate reduction of about 15% and 15.8% on a cash basis for the quarter. Alexandria continues to dominate in our largest markets. This is a really important takeaway. In our largest 3 markets during 1Q '26, we captured on average around twice the leasing volume compared with our market share of life science real estate. For Greater Boston, we captured approximately 20% of the total leases in the market, which is 153% of our market share. For San Francisco Bay, we captured 30% of the total leases in the market, which is 253% of our market share. And for San Diego, we captured approximately 67% of the total leases in the market, which is 208% of our market share. These stats highlight Alexandria's dominant brand, sponsorship, mega campus quality location and the best team in the business. Occupancy at the end of 1Q '26 was 87.7%, down 320 basis points from the prior quarter, primarily driven by the 657,000 square feet of key known lease expirations, which went vacant during the quarter. We have an additional 747,000 square feet of key lease expirations expected to go vacant in 2026 with approximately 45% of that expected to expire in the second quarter, which should put pressure on occupancy for 2Q '26. For the second half of '26, we expect occupancy to benefit from the 1.1 million square feet of vacant space that has been leased and is expected to deliver in September on a weighted average basis. We updated the midpoint of our guidance range for year-end 2026 occupancy from 88.5% to 87% or a reduction of 1.5%, which was primarily due to a reduction in the anticipated benefit from a range of several potential disposition properties, which have vacant space. Our initial guidance assumed a 2% benefit, and we now assume around a 1% benefit as we no longer expect to sell as many assets with significant vacant space. It's important to highlight that we've had good leasing interest on some of these types of properties with vacant space. Tenants continue to prioritize asset quality, location, best-in-class operations, sponsorship and brand trust, which distinguishes Alexandria as well as our mega campuses, which represent 78% of our total annual rental revenue at 1Q '26. Importantly, this has led to significant occupancy outperformance by Alexandria in the mid to high 80% range across our largest 3 markets compared to market occupancy in the mid to high 70% range for these same markets at the end of 1Q '26. Same-property net operating income was down 11.9% and 11.7% on a cash basis for 1Q '26, which was primarily driven by a reduction in occupancy. Consistent with my commentary on our last earnings call, we expect stronger performance in the second half of 2026, primarily driven by improved occupancy compared with the corresponding prior year period. It's important to also highlight that our anticipated same-property pool also had lower occupancy in the second half of 2025 compared with the first half of 2025, which all things being equal, should help same-property performance in the second half of 2026. We updated the midpoint of our guidance range for same-property net operating income from down 8.5% to down 9.5% or a 1% reduction due to a decrease in the anticipated benefit from a range of several disposition properties, which have vacant space similar to the dynamics I described for the change in occupancy guidance. Despite the current challenges in the life science real estate market, we continue to benefit from a very high-quality tenant base with 55% 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 66% for 1Q '26. We continue to focus on one of the pillars of our path forward, which includes the continuing successful reduction in management of general and administrative expenses. We remain on track with our guidance range of $134 million to $154 million for 2026, which represents around a 14% savings at the midpoint compared to our 2024 benchmark or about $24 million in annual savings. On a combined basis for 2025 and 2026, we expect G&A expense savings of around $76 million in aggregate relative to 2024. And our trailing 12-month G&A as a percentage of net operating income through 1Q '26 of 6% is less than half the average of all S&P 500 REITs over the last 3 years at around 14.3%. For 1Q '26, realized gains included in FFO per share diluted as adjusted from our venture investments were $18 million, and we reiterated our guidance range for realized investment gains of $60 million to $90 million for 2026. Capitalized interest for 1Q '26 was $70 million, which was down around $12 million from the prior quarter. The decline was primarily driven by a pause on construction and preconstruction activities on assets that were sold or designated for sale in 4Q '25. We expect capitalized interest to decline in the second half of 2026 due to a combination of factors, including, first, the completion and delivery of some of our current development and redevelopment projects under construction; and second, the potential for pauses or ultimate dispositions related to land, including some portion of the land with real estate basis averaging $1.2 billion with preconstruction milestones in August of 2026 on a weighted average basis. We reduced our guidance for capitalized interest by $5 million at the midpoint of our range with a corresponding increase to interest expense due to anticipated earlier completion of certain construction and preconstruction milestones and pauses related to several projects in the second half of 2026. We enhanced our disclosures for capitalized interest to highlight construction and preconstruction milestones broken down by year, including the following: first, land with $567 million of real estate basis with preconstruction milestones in April 2027 on a weighted average basis; and second, development and redevelopment projects under evaluation for business and financial strategy of $1.3 billion spread across 5 projects with construction milestones in March of 2027 on a weighted average basis. We continue to evaluate each project individually. If in the future, we decide not to move forward with these projects beyond these construction milestones, capitalization of interest for these projects would cease along with other related project costs, including payroll, which are highlighted on Page 42 of our supplemental package. We have 1.9 million square feet of projects under construction and expect it to stabilize through 2028, which are 77% leased, including around 600,000, which is expected to stabilize in 2026, which is 93% leased. We also have 1.6 million square feet spread across 5 different projects for which we are evaluating the business and financial strategy. I'll walk through the 4 largest. First, 421 Park Drive is located in our Fenway mega campus. This is a ground-up development intended for laboratory use. We expect this project to be attractive to the many nearby institutions. And the outcome for this project will depend on tenant interest, and we expect to have critical construction milestones in early 2027, which we are evaluating. Second, 40 Sylvan Road is located in our Waltham mega campus. We believe this project could be attractive to advanced technology tenants that may find certain elements of the building attractive and may not require a full conversion to lab. This project has critical construction milestones in the second half of 2026, which we are also carefully evaluating. Third, 311 Arsenal Street is located on and is highly integrated into our Arsenal In the Charles mega campus located in Watertown in Greater Boston. We are seeing good activity for this project from advanced technology users, and we recently executed approximately 82,000 square feet of letters of intent with 4 tenants for this kind of use, which increased the lease negotiating percentage for this project up to 28%. And fourth, 3000 Minuteman Road is located in our mega campus along Route 495 north of Boston. We believe this site will be attractive to advanced technology tenants as evidenced by the 160,000 square foot letter of intent we recently signed for a portion of the project. For both 311 Arsenal Street and 3000 Minuteman Road, if we complete these advanced technology leases, we may place all or some portion of these spaces into the operating pool, which may reduce operating occupancy in the near term, but more importantly, will reduce our capital needs and generate near-term revenue upon delivery. 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 our large-scale noncore asset program in 2026. We expect land to comprise 10% to 25% of the $2.9 billion midpoint of our guidance for 2026 dispositions and sales of partial interest with core, noncore and sales of partial interest to comprise the balance of 75% to 90%. Our guidance assumes a weighted average completion date of August 2026, which is about a month later than our initial guidance provided at our Investor Day. We believe there is strong institutional interest for our core assets at a reasonable cost of capital. And accordingly, we believe that joint ventures for some of our core assets could be a significant component of our capital plan, and we expect to have more details over the next quarter on the mix of dispositions as well as the timing as this continues to evolve. Our team is making good progress with about 80% of the $2.9 billion midpoint for dispositions and sales of partial interest pending or identified and in process. We expect to make decisions on the remaining 20% over the next several months. In early December, our Board authorized a reload and extension of the common stock repurchase program of up to $500 million. Our guidance does not assume any common stock repurchases in 2026 based upon current market conditions, and we're currently prioritizing our fundraising efforts to go towards our existing capital needs before we consider future common stock repurchases. We continue to have a strong and flexible balance sheet. Our corporate credit ratings continue to rank in the top 15% of all publicly traded U.S. REITs. We have tremendous liquidity of $4.2 billion and the longest average remaining debt maturity among all S&P 500 REITs of 10 years. We have reiterated our guidance range for 4Q '26 net debt to annualized adjusted EBITDA of 5.6 to 6.2x. As expected, our first quarter 2026 leverage increased to 6.8x on a quarterly annualized basis, and we expect leverage to come down in the second half of 2026 as we make progress on our dispositions and sales of partial interest. We tightened the range of our guidance for 2026 FFO per share diluted as adjusted with no change to the midpoint of $6.40. We made a number of changes to the underlying assumptions for guidance, which were primarily driven by 2 items. First, we reduced rental rate changes and rental rate changes on a cash basis by 7% and 3%, respectively, primarily for 2 transactions, which include a 48,000 square foot long-term lease completed during 1Q '26 in Watertown to an entertainment studio user and an 81,000 square foot lease completed in April with an exciting growth stage life science company to backfill a struggling tenant located in Torrey Pines, and we continue to focus on capturing demand and meeting the market for the right tenants. Second, our initial guidance assumptions for occupancy and same-property performance included a 2% and a 3% benefit, respectively, for a range of assets that could be considered for sale during 2026. Due to changes in the mix of assets considered for sale this year since our initial guidance, we now have a smaller assumption for sales of assets with significant vacancy. Accordingly, we reduced our outlook for occupancy and same-property performance by 1.5% and 1%, respectively, to reflect an updated assumption that we hold on to more assets with vacancy in part due to good tenant interest on these types of assets. At our Investor Day in December, we provided a guidance range for 4Q '26 FFO per share diluted as adjusted of $1.40 to $1.60 with a midpoint of $1.50. We refined this range to $1.40 to $1.50, which implies a $0.05 decline at the midpoint of the range of $1.45 which is primarily related to a reduction in capitalized interest, as I discussed earlier. It's important to note that while our guidance for the fourth quarter of 2026 implies a $0.05 reduction in the midpoint to the $1.45, the midpoint for the full year 2026 FFO per share diluted as adjusted was unchanged at $6.40 and benefited from later timing on the projected timing of dispositions and sales of partial interest, which was moved back by about a month. In addition, we also provided several key current considerations on Page 6 of our supplemental package that highlight several factors that could have an impact on our results in and beyond 2026, including 1.5 million square feet of lease expirations for 2027 with approximately $97 million in annual rental revenue that are expected to have downtime and which we are closely monitoring. We remain keenly focused on executing the steps for our path forward that we established at our Investor Day, including maintaining a strong and flexible balance sheet, reducing funding needs, substantially completing our large-scale noncore disposition plan, focusing on improving occupancy and NOI and successfully managing G&A, among others. With 10,000 known diseases and limited cures and treatments, the industry has a lot to accomplish, and we continue to believe that life science companies will continue to recognize Alexandria as the market leader with the best assets in the best locations and the best on-the-ground teams to operate these mission-critical research facilities. Now I'll turn it back to Joel.

Operator, let's go to questions, please.

[Operator Instructions] Today's first question comes from Farrell Granath with BofA.

I first wanted to address the change in occupancy guidance that you made a commentary about the consideration of those assets no longer being considered for disposition, but the disposition guidance did maintain at the $2.9 billion. So I was just wondering if you could bridge that change what other assets were maybe being considered? Is it more assets that don't have as much vacancy? Or is it land? I'm just trying to understand that mix.

Yes, Marc?

Yes. So it was a change in the mix. As you said, the midpoint was unchanged. There were a handful of assets that we had been considering for sale that had vacancy that we've seen, in some cases, some good leasing interest from tenants. And so we ended up changing some of the assumptions to other assets that have more kind of stabilized occupancy. The ultimate mix, we gave a broader range this time around of 75% to 90% for both core, noncore as well as joint ventures. So that's really where the change in the mix will come in that component. And we should be able to have more color on what that looks like over the -- I would say, over -- hopefully, over the next quarter or 2.

And my second question is about the leasing into the entertainment studio for the arsenal lease. Just curious about that type of exit opportunity of reaching the demand that's in the market and maybe being an alternative use. How much of the near-term or line of sight leasing is potentially for this alternate use versus life science?

Well, yes, Farrell, this is Joel. The entertainment tenant was an existing tenant, and it was a renewal given the fact that rental rates for that type of space have come down in the area. So it seemed prudent to renew a tenant in hand rather than empty out the space and reposition it or whatever. So it wasn't a new use. It was already there. And that's an asset that we've owned for probably 20 years. But I think you see through a number, 311 Arsenal, we've had very good activity with a range of advanced technology companies where we can utilize the space at a less CapEx investment. Rental rates are not as buoyant as lab, but those represent good opportunities. So it really depends on the location, the type of space. It's hard to generalize.

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

It's Nick Joseph here with Seth. Just given the FDA leadership uncertainty and NIH budget pressures, have you seen any behavioral changes on the private biotech tenant side around expansion decisions or sublease activity or requests for lease modifications?

Well, on the private side, I think we've said that ventures continue to raise money and deploy that money. They've done it in a much more judicious fashion than during, obviously, the bull market run of the last decade and then kind of a rocket ship of COVID, just given market conditions and the fact that you can't -- some companies can execute an IPO, but it's pretty difficult. But overall, I think that the FDA impact to the private side is really more impactful on the public markets, but they do obviously impact the private markets in the sense of confidence in raising the money. But I don't know, Jenna, any comments you want to make?

I think that's right. I think overall, FDA uncertainty as far as policy is concerned, changes. I mean, obviously, there are some things that the FDA has tried to do and announce in trying to expedite regulatory review processes and the like, which is hopefully net positive for the industry, but that's not really playing out, as Joel mentioned on the private side just yet. Public are kind of contending with that a bit more.

That's helpful. And then just curious, any changes to the current tenant watch list relative to kind of the past few quarters?

Yes, Marc, you could comment on that.

Yes. Look, we continue to evaluate tenants really on a kind of one by one, tenant-by-tenant basis. I will say at the beginning of the year or really at our Investor Day, I think we had identified something around $23 million. That number has crept up in terms of a reserve for wind downs or tenant failure. That number today is somewhere in that $25 million to $30 million range. And it's through a variety of -- it's a variety of tenants, both private and public biotech as well as the kind of the ancillary type tenants, the revenue kind of producing tenants that also service those types of tenants as well.

Yes. I think, Seth (sic) [ Nick ], if you look at the -- just one comment on that. If you look at the current environment over the last, say, year or 2 as distinguished from historical biotech, this is the first time that companies have really more -- or owners have more aggressively, not at the public level, but at the private level, tried to combine companies or wind down companies that they feel that the opportunities for the marketplace just aren't there. And so that's just part of capital discipline and the judiciousness with which people are watching dollars, again, given tight public capital markets. So that's the big change, I think, that we've seen compared to historical.

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

I was looking through some of the disclosure on the 2027 expirations, which were really helpful in terms of -- I think there were some added expirations coming in 2027 versus prior. I guess my question is, as we're sort of putting it all in the blender and you're thinking on a same-store basis, it seems likely that 2027 could be down similar magnitudes as 2026, given it's a pretty similar setup with the expiration level. Is that a fair way to think about it? Or just what breadcrumbs would you provide for that?

Yes. So I'll ask Marc to comment, but maybe just from a topside view, I think we're not -- it's so early in the year and so much can change. Just look at what changed last year from inauguration through the year was kind I couldn't believe the impact to the industry. It's pretty clear that, number one, we can't give '27 guidance at the moment. And number two, I think we're hopeful, as you see from some of the -- if you call them breadcrumbs, but the movement in leasing, whether it be for life science or alternative advanced technology to be gaining some good foothold there. And I think that gives us hope that we can address some of these. As I said, one of our key elements to the path forward is increase occupancy and hence, NOI. So -- but Marc, any comments you want to make?

Yes. Just that, as Joel said, we're not ready to give guidance for '27. But certainly, you're right that there's some expirations that we expect to have downtime. But a lot of -- the ultimate answer to your question is how quickly can we lease up vacant space, lease up the developments, et cetera, to blend into an occupancy number that makes sense. And a lot will really just depend on where the industry goes and a lot of these kind of macro factors. But we'll continue to lease and I hope continue to outperform in terms of capturing the amount of demand.

Yes. And a couple of examples that Marc mentioned, 311 Arsenal and 3000 Minuteman are really good examples of that where we were having chronic vacancy and figuring out the strategy that we wanted to go forward, whether it is hold and lease, whether it's reposition, whether it's disposition, et cetera. And I think just those incremental achievements this quarter have been positive. So that just gives you a little bit of the change we're seeing.

Great. My second question was just on the dispositions. It sounds like there's a little bit of a pivot away from some of the more vacant assets. I think you said you're considering JVs now. I guess my question is, is there also a change in sort of pricing expectations? And is there any sort of market concentrations where you're seeing more or less traction?

Yes. So I'll ask Peter to comment, but let me say, in general, I think any mix, and Marc has kind of given you the mixing bowl and there's a slide in the pre-supp read. It's very dependent upon traction of leasing and where we see leasing progress, especially if we can lease for lower CapEx and get quicker NOI realization, we're going to pivot on that particular asset in a positive way. That doesn't mean that someday we would hold the asset indefinitely, we might choose to sell it. But I think that's been the key driver. But Peter, just a comment or 2 on the transaction market.

Yes. We have just found that there's a good amount of core type capital in the market that's looking for high-quality assets. So we wanted to leverage that. We have found a way to do it through JVs. But I wanted to say that it doesn't mean that our noncore asset sales would suffer through because of that. There's still a lot of people out there looking at those types of acquisitions as well. And everything that we have been marketing has been well received and does have multiple people looking at it. So we got a lot of confidence that we're going to hit our numbers despite the fact that we didn't do much this quarter, although we let people know that early. But anyway, yes, the amount of money from the core side that's coming into the market has really just allowed us to lower our cost of capital overall by doing some of these JVs.

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

Joel, you mentioned the FDA and judicious capital markets as being some factors out there in the environment. But just what do you -- are there any other items that you think right now are impacting the demand for space? Has there been any change in sort of like the type of space folks want? Or this is just going to take a while to play out?

Well, I think the pinch points are a couple of pinch points. One is the turmoil at NIH, which caused a lot of -- certainly impacted us directly in a number of markets. And now that's easing up with the limitation on the indirect cost reimbursement that the NIH was doing and then kind of the NIH going to the hill wanting a reduction in their budget, which I've never actually heard of anybody who would want to do that when the Senator or when Congress on both sides of the aisle are in favor of more or less fully funding the NIH. So that's early-stage stuff. And hopefully, that gets worked out over time. I think there's some good positives there, but leadership is a problem. I think the FDA is a huge problem. Almost every day -- there was just a release today that it looks like they may try to pull an approved drug off the market because the FDA claims that maybe there was some manipulation in data. So almost every day, you're getting a shock effect from the FDA, both at the leadership and at the core level. And I think that's very real because as people think about funding, whether it's preclinical or into the clinic, you've got to be mindful of time, cost and approvability. I think that another pinch point clearly is the capital markets. As I said, public biotech, whether they're preclinical or clinical, can't really finance unless they've got data or a milestone, and that's kind of a killer situation.

Okay. That's real helpful. And then just second one on 421 Park Drive. I just -- I didn't quite get what the considerations or what the options were as you evaluate that. So I think there's a little bit of leasing there, but I couldn't tell if there was a change of use or I just was hoping to understand that a bit better.

Yes. So 421 is a state-of-the-art lab. It is -- we've sold several floors of that on a condo basis to a major institution in Boston and the rest remains for lease or for sale in the sense of a condominium kind of situation. But the NIH 15% kind of brought a halt to almost all demand, certainly in the Boston area and to some extent across the country. Now that, that has been overturned in the circuit courts and the administration has not chosen to fight it. I think the path forward there likely will be institutional leasing or sale of condominium interest. So we're waiting for that to kind of evolve. I don't think we would pivot to another use there likely. I mean it could be office from Longwood Medical Center or the Fenway. There is a huge amount of medical-related office demand there. And so that's a possibility, but we feel pretty good about the future there now that the 15% issue has kind of gone by the wayside. It will just take a little bit of time.

And our next question today comes from Jim Kammert with Evercore.

Joel and team, pardon my ignorance, what do you define as advanced technology tenants? And I'm just trying to get a sense of maybe not your tenants, but what would those industries or tenants representatively be? And what would sort of be the tenants of that sort in the market across your 3 primary Boston, San Diego, San Francisco markets?

Well, a lot of that is secret sauce. So -- but let me say, I think an example, and you guys were just there at Campus Point when you did the tour with us, that campus holds -- primarily, we're delivering the Bristol-Myers West Coast Research headquarters hub. We're working -- we just broke ground on Novartis, and there's a lot of early-stage biotech there. But the campus in addition to being heavily big pharma is heavily advanced technology, 2 tenants really make up maybe 25% of the rent roll there. One is a Amazon. This is not a fulfillment or a distribution. This is part of -- I really can't say what part of Amazon, but it is a very sophisticated and research-oriented part of Amazon, and they've been there for quite a long time. And then we did a build-to-suit on that property. I think we showed you the buildings or the building, several stories of brand-new office for Leidos who does the -- they manufacture the advanced screening technology at airports, et cetera. And then we've built several floors of skiff space below that. So we consider both the Amazon use and the Leidos use as advanced technology uses. So advanced technology is pretty broad. We've been involved in it since -- I mean, we did Google, although Google is not necessarily an office -- or a lab-type tenant, although we've leased to some of their subsidiaries laboratory would be -- advanced technology is a pretty broad definition. But I don't necessarily on a public call, get into how we view this and how we're trying to position some of our spaces because obviously, it's a highly competitive marketplace. But the demand there is large and the funding there is large.

Very helpful. And then for second question. As regards to the 4Q $1.40 to $1.50 run rate, does that contemplate at the lower end even $3.7 billion potentially capital recycling or more closer to the midpoint of $2.9 billion? Just trying to square some of our modeling assumptions.

Yes, Marc?

Yes. Yes, sure. Yes. No, we did bring down that range, Jim, I think at Investor Day, we gave a range of $4 billion to $5.5 billion, so $4.75 billion as the average amount of basis being capitalized for 4Q '26. We brought that range down by about $200 million. So that's kind of where we expect things to fall out. Obviously, things can change, but that's our best guess for now.

Okay, appreciate that.

And our next question -- sorry.

Yes, let me just say one other thing. So Jim, one thing that we've mentioned over and over is for a variety of technologies, we call them advanced, but it's a broad range of technologies. There are needs for highly secure spaces, heavy floor loading capacity, very enhanced HVAC systems, et cetera. There's a bunch of -- I think, even Hallie at quarter or 2 kind of highlighted some of that. So we're particularly interested in that kind of an advanced technology tenant, not just a, say, an office AI kind of tenant, we wouldn't really consider that in the same category. So if that's helpful, sorry.

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

I guess just I wanted to go back to that $1.40 to $1.50 run rate. I know you said that was sort of our best guess. But you revised the guide now a couple of times. And I guess I'm trying to figure out like at this point, is that truly the $1.40 bottom? What's maybe the biggest variable in your mind that could push that $1.40 lower? And just to clarify, is that $1.40 sort of the initial run rate going into '27?

Yes. So I'll let Marc answer that, but I think you have to remember, we give you our best judgment based on facts and circumstances as we know it at the quarter end point in time. And obviously, things change a lot. I mean, imagine what happened first quarter of '26 when the leadership and nature of health and human services changed dramatically with the appointment there last year. So -- and then tariffs came shortly thereafter. So you can only make a best judgment based on this time and space. So we'll update quarterly. But Marc, you can answer the question.

Yes, Vikram, so yes, cap interest is one of those drivers. That's the one that drove the number down by around $0.05 from kind of the last time we updated that number at Investor Day. I mean in terms of areas that we're focused on or risk factors, I mean, the couple that come to mind is we've got to execute on the disposition plan. As Peter said, we're very focused on that and I think are feeling incrementally more confident on our ability to execute there. And then tenant wind downs can sometimes be unpredictable. That number, as I think I mentioned earlier on the call, had grown from kind of a reserve number of $23 million to something closer to $25 million to $30 million, but we've continued to work through that. So those are a couple of things that we're watching closely, but the $1.45 midpoint is our best estimate at this point from what we know.

Okay. Great. And I just want to touch on 2 -- get your thoughts on 2 topics. One more specific, the G&A, sort of given the dispositions that you've embarked on for a while and now perhaps next 2 years, is there simultaneously maybe a relook at G&A to cut that further over the next 2 years, both sort of core G&A, but also performance-based? And then second, do you mind just touching on the topic of AI and square footage needs? There's a lot of debate on is the lab-to-office ratio changing? Is the total square footage potentially changing? But any anecdotes from your tenant base on their use of AI and what that means for future space would be helpful.

So maybe, Marc, do you want to take number one and then maybe Jenna and I will address two.

Sure. Yes. We've been -- in terms of G&A, we've obviously been focused on really managing G&A very carefully for many years. We had a big reduction last year that had $50-plus million of savings. And we've been highlighting for a while that some of that wouldn't necessarily continue into '26, but still a meaningful improvement. Part of that has been some restructure of the comp plans. There was certainly some forfeited comp for some of the executives last year. And so we -- look, we continue to do what's right for the organization and put people in the right positions to succeed. And so we continue to make sure we got the right people on the bus, and I think we have an outstanding team. I don't know if you want to add anything else there, Joel.

No, I think it was good. So on AI and square footage, I think it's fair to say that I made remarks in my commentary, and I would add to that. We haven't seen any tenant, not to my knowledge, and I've got pretty good insight into tenants across the portfolio who've come to us and said, gee, we want to reduce because of AI. We just haven't seen that, and we don't have back office space that would be highly susceptible to that. On the other hand, we haven't seen people come to us and say, gee, we're expanding because of AI, and we're ready to do that, generally. I mean those -- it's just too early, and I kind of laid out the experts view of this area, not Joel or Alexandria, but I think what I said in my earlier commentary rings true. But Jenna, from the ground -- on the ground thoughts, comments of what you're seeing there?

Happy to. Hello, everyone. So as Joel mentioned, we are really not seeing material changes from AI on the ground in terms of tenant demand and the specificity of which they need in terms of lab office ratios shifting at this point, we're just not seeing it. And part of the reason why is because as Joel mentioned, we are still in superbly early innings of AI's impact on drug discovery and development. And Joel mentioned 37 trillion cells in the human body. Biology is so massively complex. And certainly, disease pathophysiology, we just don't understand it enough to apply an AI layer to make it completely autonomous. We're very far from that. So AI certainly cannot replace physical experimentation or validation in a lab. But what we are seeing, and we hope because the opportunity set is so large with 10,000 diseases and only 10% addressed, many of them with not even adequate treatment is that we hope that AI will have value in compressing time lines, increasing efficiencies and reducing costs and really recovering lost institutional knowledge. So that is kind of where we're starting to see AI take place and some of our companies are fully starting to incorporate AI into lab workflows in this lab in a loop type fashion, where they'll generate in silico knowledge and then they will test it in biological systems within the lab. So again, as far as AI's impact -- and we cannot reiterate this enough, in terms of AI's impact on real estate demand and also kind of in the types of states right now, it really remains neutral. Certainly, if AI really does bear the promise of allowing one company to increase the number of targeted experiments that can run at one time, lab requirements may increase. You may have some issues where you have more distributed AI going on. We just don't know yet. But certainly, we're really not seeing a shift. So we really want to get that message across today.

It looks like our next question today comes from Rich Anderson at Cantor Fitzgerald.

I'll keep it to one question as we're getting long here. A while back, someone asked -- I think it was Ronald who asked about lease expiration activity in 2027. You rightfully said you do not given guidance at this point, but there is, call it, $0.55 of annual revenue related to that 1.5 million square feet. Is it prudent in your mind to -- for us to be assuming the entirety of that $97 million gets put into a delay bucket of some sort as you look to re-lease that space? Or is there progress going to be made now in front of next year such that it may not be that draconian of an event?

Yes, Marc, I'll ask you to respond.

Yes. Rich, so yes, if you're just talking about those expirations in a vacuum, Rich, we do expect there to be downtime on those particular spaces. Look, we're making good progress. And I think we identified something like 35% or 36% of that, that we've got kind of early negotiations on. So obviously, we're going to try our best to beat the amount of downtime that we guided to there and to try to get revenue as soon as possible. But also, as I said, that also doesn't consider all the other things that we're focused on. Obviously, we're focused on filling vacant space today, in particular, kind of some of these developments with the alternative use as Joel mentioned, and trying to convert things to revenue as soon as possible elsewhere in the portfolio to make up for that, but TBD.

Okay. Yes. And just real quick for you, Marc. The assets that you are no longer selling that are -- that have some vacancy to them, you're holding on them because you're seeing some leasing success. Is that a result of just the market coming towards you? Or is that a change of strategy for these assets, maybe bringing in tech type tenants? What has changed the narrative on those assets, whereby you're thinking about holding on to them now whereas before you were considering selling them?

Yes. Look, I can give you one example of a property that we had considered as a potential to be sold in San Diego. And Joel kind of alluded to this earlier, if there was ability to get near-term revenue and put in a reasonable amount of capital, we would certainly consider that. And the asset I'm thinking about was a big asset. It was 160,000 feet, and we've got somebody looking at that very closely right now. And it's a nice asset. So I mean, it's really a consideration on an asset-by-asset basis. We didn't -- it wasn't like we just kind of said, okay, well, let's just sell less noncore assets. That wasn't the case. It was really asset by asset, those assets that needed a lot of capital or were, in our minds, noncore kind of not really associated with the mega campuses were definitely assets we're continuing to look to sell if it makes sense. And in some cases, when we saw good activity, we decided to pivot on those.

Okay. Fair enough.

Yes, Rich, another good example would be -- and it's in the list or has been in the list over time of under business and financial review, the Minuteman assets north of Boston, we signed a pretty big LOI there. And so that inherently changes less CapEx and quicker time to delivery. That then changes your calculus on what you want to do with such an asset. So it's very driven by -- and in one case, there's life science use. In another case, it's advanced technology use. So it's not one use per se, it's -- really depends on the market.

And our next question today comes from Wes Golladay of Baird.

We're now about 5 years past the COVID boom where tenants were funded on weaker science, and you did call out aggressive wind down. So just curious where are we at as far as winding down these COVID era tenants, are we in the late innings?

That's a hard question to answer the way you framed it. I wouldn't call it COVID era tenants per se. I mean, I think -- and maybe you're just referring to companies that got formed on the prospects of a really super buoyant market or something. But so many of these are really probably too much money flowed to too many deals and -- both on the public and private side so some of those naturally get wound down along the lines that you talked about. But in today's market, the wind downs come from other things too, the recognition that, okay, we're going after a particular disease and it turns out somebody just hit a huge milestone. We feel we can't be first-in-class. We're going to be a follower and do we really want to put -- if I'm a venture person, put our money into that, that's not a frontline therapy. So that's a calculus that comes into a lot of this as well or particular issues with you're seeing side effects or you're seeing this or that. So it's complicated. There are a lot of different reasons, not just, gee, we went after a -- or we just took advantage of kind of silly money during COVID times, and now we're just unwinding it. So it's more complicated than that.

So I would add I would just add one thing to that. I think Joel's exactly right, it's not that there's a flushing out of COVID companies per se. It's in a capital constrained -- a continuous capital constrained environment where the cost of capital is high, Boards and investors on both the public and private side are being that much more judicious about where they're spending their capital. And if companies don't have a strong line of sight on milestones or certainly they miss those milestones, investors have to make decisions about where to allocate their capital. And so in this environment, that is really what is creating the decision-making of we may wind down a company or we may contract in terms of capital allocation. It's not necessarily all these companies are built over COVID, and now they're being flushed out.

Okay, I appreciate that.

That's a great point.

And then you did make the comment about no leases with public biotechs, but maybe you can talk about the pipeline? Are people touring that are public biotechs and are they just a little hesitant due to the macro environment?

Yes. I think that's probably a 1 quarter blip because I suspect we'll be back there during the second quarter with positive leasing, but it just goes to show that we've never seen that before. And as I say, that's a combination of a lot of factors that I've mentioned. But I think it's a 1 quarter blip. But still, the -- if you look at overall ARR from public biotech compared to the demand, that sector -- and we've said this continually over the last couple of year -- quarters and years, that's the one sector that's most obviously lacking in demand. And the primary reason is they can't -- unless you have good data or a critical milestone, you can't just go to the market and do a secondary offering just to extend your cash runway, really hard to do, both private and public.

And our next question comes from John Kim of BMO Capital Markets.

On your second quarter leasing guidance of 900,000 to 950,000 square feet, I was wondering how much visibility you have on that? And if you could provide some commentary on how much of that is new versus renewal versus new development? And lastly, how big your leasing pipeline is overall beyond the second quarter?

Yes. Number one, it's not guidance. It's just an indication based on activity and transaction work, and I don't think we will give any other comments on that at the moment.

Okay.

We wouldn't give an indication of general direction unless we felt pretty comfortable, I'll say that.

Sounds good. On capitalized...

But until things are done, they're never done, as you know.

Right. Capitalized interest, your guidance implies $58 million run rate going forward. It looks like you are going to be capitalizing about 1/3 less assets by the fourth quarter. So simple math kind of suggests it would be about $46 million by the fourth quarter. Is that math right? Is that how we should be looking at cap interest as we head into 2027?

Yes. John, our...

Yes, we're not giving guidance for '27, but Marc will give you some framework.

Yes. Yes, that's right. I mean if you look at the basis today, it's north of $6 billion of basis that we're capping today. And we've said, okay, we think the second half comes down because we've got some big deliveries. There's the one big delivery in San Diego, and then we've got some assets that have got some milestones that are probably going to either be put on pause or in some cases, sold. Some of that's land. And so we gave -- in our supplemental, we gave what we think that basis under capitalization is going to be in the fourth quarter, which was that kind of $4.5 billion or $4.6 billion of basis at the midpoint of that revised range for the fourth quarter. And then we tried to give folks a sense of what -- how much basis is out there that has milestones in 2027. Some of that is land, and we broke that out very carefully in our supplemental. Some of it's land and then some of it is these -- are these kind of 5 assets that we've been highlighting that we characterized it as evaluating business and financial strategy. There are some milestones related with those assets that's in the early part of 2027 that -- those are being capitalized today. The big one is 421 Park. So -- and that will -- we don't know what's going to happen there. It will -- a lot of it will just depend on the demand and how quickly we can lease up that project. But -- so that's about as best as I can frame it for you at this point.

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

Marc, I wanted to circle back on those 5 projects that ARE is evaluating for a potential change in the business strategy. Like what are the exact options here? Is it you're going to build it for a different use like advanced technologies? And then if that doesn't work, then you're going to like keep it kind of as is waiting for a better market to pursue those projects. So it's lease it as a different use or hold off until a better market. Are those the 2 options that you're analyzing?

Yes, Michael. So I mean, I think for most of these assets, it is considering whether we pivot away from a traditional lab use to some type of advanced technology use or other interested parties that would find the kind of the nature of those buildings very interesting for other uses other than laboratory. So that's most of the assets. 311 Arsenal Street, we mentioned we've seen some activity there from those types of uses. I think we signed 80-plus thousand of LOIs for that. 40 Sylvan, similar bucket, 3000 Minuteman, we actually did sign a big LOI for a non-laboratory use there. So the pivot -- the potential pivot there is -- on most of those assets is for other types of uses. But as Joel mentioned, we could also consider these as potential sale candidates down the road. 421 was the one that was a little uniquely different than the others, where we could consider condo interest or that asset could go office, I suppose, but it is intended to be a lab building. But all these assets are -- have -- or we've got a little bit of time here, but we're running up on milestones where we would need to make decisions or capitalized interest would turn off. And those milestones are coming up on average kind of early part of next year.

Great. And then if you do change the scope of those specific development projects, I mean, could that impact your construction budget in 2026? Or is that really the $500 million, I think, that it was highlighted in the supplemental, is that more of a '27 beyond impact just because the investments for these other types of uses would be smaller investments versus life science?

Yes. I think we have a good handle on this year's capital plan, Michael. It would really be more of an item that could impact spending for next year.

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

I appreciate the commentary so far on sort of the $97 million of vacates in 2027. I guess what we're trying to figure out is it looks like excluding that amount, there's, call it, another 1.536 million square feet of lease expirations. Do you guys sort of have a good handle on that? Is that -- are those likely to renew? I guess what we're trying to figure out is like the likelihood or probability of that $97.5 million moving higher as we get closer to '27.

Yes. Dylan, yes, it's just a little bit too early to tell on what happens with the rest of the expirations for 2027. What we do know now is that, that 1.5 million or the $97 million of rent you referenced that those may have -- or are likely to have some downtime. So it's really hard to predict at this point what the retention rate looks on the balance. I can tell you, at least for this year, we're -- I think at the beginning of the year, at least for 2026 expirations when we carved out the kind of the key lease expirations for '26, we thought we would be somewhere in the 60-plus percent retention rate. But I really don't think we're prepared to kind of comment on where '27 is.

That's fair. And maybe just -- and I appreciate the color on sort of the potential amount of leasing activity that you guys think you'll get done in Q2. I guess as we sort of think about beyond that, is that sort of a good, call it, 3.5 million to 4 million square feet of annualized leasing volume a good amount to sort of use as a run rate? Or -- and obviously, leasing is going to ebb and flow, but just sort of curious how we should sort of think about the pipeline beyond the next quarter.

I don't think you should assume that, that is a run rate. I think we're in a different time now. So I think the run rate will evolve over time, especially given a more life science/advanced technology mix given the assets. So I don't think you could use that immediately. But I mean, historically, give or take, some amount on either side, $1 million has been a common run rate over time. Whether we get back to that as a run rate, I think time will tell.

And our final question today comes from Jamie Feldman with Wells Fargo.

Congrats on getting to the end of the call. I just wanted to take your -- the latest temperature on opportunistic capital looking at the space from the real estate perspective. I think you had mentioned JV is looking a little more interesting. Has anything changed? Or can you give us the update on whether it's global capital, whether it's domestic capital, there's a lot shifting around there in terms of the capital needs across the globe. What's the latest state of affairs in terms of opportunistic buyers into life science?

Yes, I don't think we want to comment really too much on that. But Peter, you can.

Yes. I would say that it's a combination of both domestic and international capital that is looking at these assets.

So would you say the appetite has changed? Or it's pretty much the same?

What has changed is over the last 2 years up until this year, there was really no money looking at core. It was all opportunistic. And for the right reasons, right? I mean we were coming -- we were hopefully bottoming out in the real estate industry and everybody was raising money based on double-digit IRRs. And that's what those funds' targets were, and that's what they had to invest in. Now we have money, how it came about, I don't know, but we have folks that are saying, "Hey, I want good quality, safer assets." And I know I can get a real estate deal that will provide a spread over bonds that I like for the risk that I'm going to take. And so now that, that money is there, and as I said, it comes both domestically and internationally, we're leveraging that to get a better cost of capital overall for our program.

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

Yes. Thank you, operator, and thank you, everybody. We appreciate it.