Alexandria Real Estate Equities Inc ($ARE) Q3 2025 Earnings Call

Good day and welcome to the Alexandria Real Estate Equities third quarter 2025 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad and to withdraw your question, please press star then two. Please note today's event is being recorded. All right. Now I'd like to turn the conference over to Paula Schwarz from 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 I would like to turn the call over to Joel Marcus, executive chairman and founder. Please go ahead, Joel.

Thanks, Joel. This is Mark Binda, chief financial officer. Good afternoon. I plan to cover the performance for the third quarter as well as some key emerging trends expected to impact 2026. Our team continues to navigate a challenging environment given macro, industry, and policy factors beyond our control. Please refer to our earnings release for our EPS results. FFO per share diluted as adjusted was $2.22 for 3Q25 and included the following three key impacts compared with the prior quarter. First, occupancy was effectively down 1.1% for the quarter after considering the benefit from the exclusion of assets with vacancy which were sold or designated for sale during the quarter and was driven by a challenging life science supply and demand dynamic. Second, there was a 3-cent reduction in rental income associated with one tenant in our Seattle market to adjust rental income to cash basis. Importantly, that tenant remains in occupancy and is current on rent pending future critical milestones in the first half of 2026. And third, other income was down $8.7 million or about 5 cents compared to the prior quarter. Current quarter other income of $16 million remains consistent with the prior 8-quarter average. And as we discussed in our prior call, 2Q25 did have some lumpy fees in there. Leasing volume for the quarter remains solid at 1.2 million square feet in line with the five-quarter average. This includes the previously announced 467,000 square foot build-to-suit lease with a multinational pharma tenant that was executed in July. We continue to benefit from our scale, high-quality tenant roster, and brand loyalty with 82% of our leasing activity in the quarter coming from our existing deep well of approximately 700 tenant relationships. Rental rate growth for lease renewals and re-leasing of space for the quarter was solid at 15.2% and 6.1% on a cash basis, which is at the high end of our guidance range for the year. We reduced our guidance for 2025 rental rate increases on renewals and re-leasing of space by 2% primarily due to one short-term renewal in Canada that was executed in October as well as some higher free rent. Lease terms on leasing continue to be long at 14.6 years for the quarter, which is well above our historical average. And tenant improvement leasing costs on renewals and re-leasing of space for the quarter are relatively consistent with the prior year and down from the first half of the year. Occupancy at the end of the quarter was 90.6%, which was down 20 basis points from the prior quarter. As of September 30th, certain assets with vacancy were designated for sale and were removed from our operating occupancy metric, which benefited occupancy at September 30 by 90 basis points. As a result, the decline in occupancy for our operating properties on an apples-to-apples basis declined by 110 basis points during the quarter. While occupancy declined due to over-supply in certain of our submarkets, it's important to highlight that our mega campus platform, which represents 77% of our annual rental revenue as of 3Q25, outperformed overall market occupancy in our three largest markets by 18%. Our outlook for year-end occupancy was reduced by 90 basis points to a range of 90% to 91.6%. Our outlook assumes up to a 1% benefit from assets with vacancy, which could potentially be sold or designated as held for sale by December 31st, which implies an 80 basis point decline in occupancy by the end of 2025. Based upon the midpoint of our guidance, our team continues to execute with 617,458 square feet of leasing completed to date for spaces that are vacant today and expected to deliver upon the completion of construction in May of next year on average. Looking ahead to next year, we have 1.22 million square feet of lease expirations through the end of 2026 which are in great assets in AAA locations but are expected to go vacant and we expect downtime on those assets. Same property NOI was down 6% and 3.1% on a cash basis for the quarter. The decline in same property was primarily driven by lower occupancy. In addition, we provided an alternative same property presentation which recasts the first and second quarter results based upon the third quarter same property pool to provide a consistent quarterly trend view given several assets that were removed from the third quarter same property pool as they were either sold or designated as held for sale. It's important to note that this alternative presentation shows higher same property performance in the first half of 2025, which means there will be a tougher benchmark in the first half of 2026. We reduced our outlook for same property performance for 2025 by 1% primarily due to slower than anticipated leasing caused by a slower realization of demand. Despite this change, we continue to benefit from a very high-quality tenant base with 53% of our ARR coming from investment grade or publicly traded large cap tenants. Long remaining average lease terms of 7.5 years. Average rent steps approaching 3% on 97% of our leases. Solid rental rate increases on renewed and re-leasing space during the quarter. And our adjusted EBITDA margins remain strong at 71% for the most recent quarter, consistent with our 5-year average. On G&A, we continue to make great progress towards our goal of annual savings for 2025 of approximately $49 million compared to 2024 through a number of prudent and strategic cost savings initiatives. Our trailing 12 months G&A cost as a percentage of NOI was 5.7%, which represents approximately half the average of other S&P 500 REITs. We expect that around half of the 2025 savings will continue into 2026 given the temporary nature of some of the 2025 savings. With projects under construction and expected to generate significant NOI over the next few years and other earlier stage projects undergoing important entitlement, design, and site work necessary to be ready for future ground-up development, we are required to capitalize a portion of our gross interest cost. We have and will continue to curtail our large development pipeline coming off a decade bull run for the industry fueled by the rocket ship demand of COVID. Given the lack of clarity on near-term demand as well as significant availability in some of our submarkets, we're carefully evaluating on a project-by-project basis the $4.2 billion of land subject to capitalization during the first nine months of the year. With pre-construction milestones in April 2026 on average, we continue to evaluate whether to progress pre-construction or construction efforts beyond the current milestones and in various cases will likely pause or curtail activity. If we decide to pause on a project as it reaches the next milestone, capitalization of interest, payroll, and other required costs would cease on that project. While these ultimate decisions have not yet been made, we would like our funding program for next year to include a significant component of land dispositions which help us achieve one of our strategic objectives over the near to intermediate term to significantly reduce the size of our land bank. Sales of land could result in a significant reduction in capitalized interest and potential impairment charges. We expect steady to slightly lower capitalized interest in 4Q25 and lower capitalized interest beginning in the first quarter of 2026. Despite positive recent activity for the biotech XBI index, private and public biotech companies continue to remain challenged given the 5-year bear market for the sector. Given these and other factors unique to our venture investments, we did revise our guidance down to a range of $100 to $120 million. It's important to point out that for the first 9 months of 2025, we realized $95 million of gains from our venture investments which were included in FFO per share as adjusted or about $32 million per quarter. Based upon the midpoint of our revised guidance for realized investment gains of $110 million, this implies $15 million for the fourth quarter or a $17 million decline over the average quarterly run rate for the last three quarters. We continue to stand out as our corporate credit ratings rank in the top 15% of all publicly traded US REITs. We have the longest average remaining debt maturity among all S&P 500 REITs at 11.6 years and tremendous liquidity of $4.2 billion. We updated our guidance for year-end leverage to 5.5 to 6.0 times for 4Q25 net debt to annualized adjusted EBITDA. The increase from our prior target of 5.2 times was primarily due to two factors. First, a reduction in our disposition guidance to a midpoint of $1.5 billion related to $450 million of potential dispositions expected to be delayed into 2026. And second, a projected reduction in annualized EBITDA in the fourth quarter from lower same property net operating income and lower realized investment gains. We've completed $58 million of dispositions to date, which leaves $1 billion to complete in the fourth quarter, all of which are subject to non-refundable deposits, signed LOIs, or purchase and sale negotiations. In connection with our disposition program, we recognized impairments of real estate of $323.9 million during the quarter with approximately two-thirds of that coming from an investment in our Long Island City redevelopment property. Three items to highlight here. First, we acquired the site in 2018. That submarket suffered a substantial setback when Amazon abandoned its plan for a new HQ in that location in 2019, and it never recovered. Second, despite the lower rental rate price point and our dominance in that submarket, it has been challenging to get a critical mass of life science tenants to go to this location. And ultimately, we don't view it as a life science destination that can scale. And third, this location has become more of an industrial flex and cinema submarket rather than life science. Ultimately, at the end of September, we decided future capital needs and the sale proceeds related to this project would be better recycled into our mega campuses where we have greater conviction long term. Looking forward, we have a number of assets under consideration for sale either by the end of this year or sometime in 2026 that have estimated values below our carrying values ranging from $0 to $685 million. Although these potential impairments have not been triggered and final decisions to proceed have not been made, we updated our guidance range for 2025 to reflect these potential additional impairments in the fourth quarter. We anticipate an end to the large-scale non-core asset program by the end of 2026 or early 2027. We also expect dispositions to provide the vast majority of our capital needs for next year. Turning to capital allocation, two points here. First, we are continuing to evaluate some of our development and redevelopment projects expected to stabilize in 2027 and 2028 for opportunities to pivot. Second, we estimate our 2026 construction spending to be similar to slightly higher than the midpoint of construction spending for 2025 of $1.75 billion, which includes the recently announced build in San Diego and higher capex and repositioning costs necessary to lease vacant space related to our operating properties. But the goal is to continue to reduce non-income producing assets and other development pipeline and our development pipeline over time. Next on dividend policy, the board's approach has been to share cash flows from operating activities with investors as well as to retain a meaningful amount for reinvestment which has allowed us to retain $475 million at the midpoint of our guidance range for 2025. In addition, the cumulative growth in dividends and FFO has been highly correlated since 2013. Given the factors that we described in our press release that are expected to impact 2026 earnings and cash flows, we anticipate that our board of directors will carefully evaluate future dividend levels accordingly. We provided updated guidance for FFO per share diluted as adjusted for 2025 which was reduced by 25 cents or about 2.7% to a midpoint of $9.01 per share. This change was primarily due to lower investment gains and lower same property performance driven by lower occupancy. Looking ahead to 2026, as is our longstanding practice, we will provide detailed guidance at our investor day on December 3rd. In advance of that, we've shared five important trends that will impact earnings for 2026, including core operations and occupancy, capitalized interest, realized gains on non-real estate investments, G&A, and our disposition program. Please refer to page six of our supplemental package for more information. Given the various factors impacting 2026 earnings, it's important to recognize the tremendous intrinsic value of our highly differentiated mega campus assets included in consensus NAV, which is significantly above our current trading price today. With that consensus NAV coming in at around $117 per share. To be clear, we continue to be the dominant leader for life science real estate with the best assets in the best locations and the best tenants. Our focus on irreplaceable world-class mega campuses will continue to set us apart and give us an opportunity to capture premium economics for the long term as the demand and supply picture improves over time. Now, we'll turn it back to Joel.

Absolutely, sir. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. Today's first question comes from Phil Grande with BFA. Please go ahead.

Hi, good afternoon. Thank you for taking my question. I first just want to touch on, I know last quarter you had some commentary about potential benefits to occupancy of about 600,000 or 1.7%. I was curious of the update in your expectations or line of sight that you're exceeding now.

Sure. Yeah, so we did provide an update. I think it's in page two of the press release. That number is about 617,000 square feet as of September 30th. It's primarily at properties located in greater Boston, San Francisco, San Diego, and Seattle. And it's about $46 million of potential annual rental revenue of $46 million. And we expect it to deliver on average, there's a lot of spaces in there as you can imagine, but on average around May 1st of next year.

And also I guess a broader question, in peers' calls we've heard that there was early positivity around leading indicators in the biotech market and you made a few comments around that but it generally still feels like you're very much seeing the impacts of supply and demand, but I'm curious what would turn your perspective or optimism a little bit higher either if that's greater IPOs or different capital market movements.

Thank you. And our next question today comes from Seth Bergie with Citi. Please go ahead.

Thanks. It's Nick Joseph here with Seth. Just as we think about the sources of capital, you mentioned equity-like capital. Could you elaborate on that and kind of the either the pricing or what exactly you mean by that?

Thanks. That's helpful. And then in your opening comments, you said the bear market is starting to turn the corner. Are you seeing that in the transaction market as well for on the stabilized asset side? Is there, you know, a change in buyer demand given the underlying fundamentals and what you're seeing?

Yeah, I would say that there is strong demand for our assets, especially ones that investors consider to be opportunistic. That's really the sweet spot right now. But yeah, we have no shortage of interest in everything that we're bringing to the table. That's life science and things that are alternative uses where we're finding a lot of interest from residential developers.

Thank you. And our next question today comes from Rich Anderson at Cantor Fitzgerald. Please go ahead.

Hi there. Good morning still. So can you talk a little bit more detail on the development process going forward? I think it's a matter of it maybe it comes down in order of magnitude over the coming years just in dollars in terms of development spend but also type of development. Joel, did I hear you right that the focus going forward will be more on build-to-suits than anything else. Not that you haven't been focused on that, but I wonder what the development picture is going to look like, you know, kind of post 2026 when you top off what's left and then you consider the $4.2 billion that's sort of still early stage in terms of the process. Just if you could sort of give us a line of sight into what this will all look like eventually.

Okay. And so, do you think that there will be like an investor day some sort of run rate development exposure that Alexandria will sort of commit to at the other side of all this? Is that sort of the messaging that you expect to provide if not right now?

As a, well as a percentage of assets or however you want to look at it.

Yep. Okay. You did say that. My apologies. And then lastly for me, on the dividend, you're running at a $5.28 annual dividend. And you know, talking about the board taking a look at it next year. What's your comfort level from a payout ratio sort of, you know, when you kind of think about resetting the dividend? I'm just curious, you know, where what the sort of the policy is the dividend.

Well I would, the only thing I would add to that is we do have room in our taxable income. So that, you know, the board will obviously make the final decision but you know, there's room potentially up to, you know, 30, 40%. But they'll be looking at a variety of factors including, you know, the amount of retained cash flows, our capital needs for next year, FFO coverage as well as a few other stats there.

Okay fair enough. Thanks very much.

Thank you. And our next question today comes from Anthony Palone with JP Morgan. Please go ahead.

Yeah, thanks. Just on that last point on the dividend, Mark, you know, do you all have taxable net? Like do you need to pay a dividend or do you have the ability to just keep the cash?

No, we do need to pay a dividend. That's right. I mean, yeah.

Okay. Just wondering because also it seems like even after a day like today with the stock down the way it is and you had brought up kind of where some of the street numbers are for NAV, like does this bring back the prospect of using capital just for your stock here or are the development needs just going to be great enough that you got to keep going down that path?

Okay. And then just other question, just in the, you called out the 1.22 million square feet that are sort of the key leases or move-outs we should be thinking about. But the remaining like 1.3 million square feet expiring next...

Are those likely to stay, and so you kind of have kept them in a separate bucket, or should we assume there's still some normal retention and move out in that grouping as well?

Um yeah, look, those what's left over is are things in the normal course of leasing. So what we've called out are items that we know are going to go vacant. The rest of it, you know, are things that are just too early to tell.

Okay. If I could just sneak one more in just March, you mentioned the 15 million in venture gains for the fourth quarter. I know you'll give details on other income in December, but you know, should we think of 15 as the new 32 or any guideposts there at this point?

Um look the 15 million as the number for the fourth quarter is really a reflection of where we think the market is and you know the unique factors specific to our portfolio of investments. Um we'll be able to give a clearer picture on what we think you know next year looks like at our investor day come you know come December.

Okay, thank you.

Yep. Thanks, Tony.

Thank you. And our next question comes from West Holiday Baird. Please go ahead.

Hey, everyone. Just looking at the future pipeline, you know, the 3 billion and the 1.2 billion. How much of the potential residential land plays will come out of that bucket? And then when you also look at the potential for 685 million of impairments, would that mostly fall in that bucket as well?

Uh yeah, hi it's Mark. I can definitely take the second question on the 685 million. Um just to be clear, the 685 million relates to a variety of assets that are under consideration. Um so there's a variety of ways that could go. Just depends on, you know, what happens with the buyer. If we can get a price that we like etc. you know some of these assets we could end up holding if we decide to pivot. Uh but the 685 million I would say the bigger chunk there has to do with land type assets.

Okay. And then for the leases that are going to commence in I guess the first half of next year, was there any it looks like there might have been a small delay on that. Was that anything like permitting wise or just the tenant looking to move in a little bit later?

Oh yeah. No, I don't know that there was necessarily a delay. It's just that bucket continues to evolve, right, as some of it gets delivered and then we're obviously adding new stuff there, right? We're leasing space that then extends that. So that'll be an evolution just because that bucket changes from quarter to quarter.

Okay. Thanks for the time.

Yep. Thank you.

Thank you. And our next question comes from Michael Carroll at RBC Capital Markets. Please go ahead.

Yep. Thanks. Um can you provide some color on the type of tenant activity that the company is tracking right now? I mean, it sounds like in the prepared remarks that you're seeing activity being kind of flat despite the XBI uptick. Um but are there certain tenants looking for different types of spaces? I mean, how many tenants are looking for like the class A space versus the class B space? I mean, is there different price points that tenants are looking at just given them trying to extend their cash burn rates given the current uncertainty?

All right, that's helpful. And then just following up on Anthony's question related to the 1.3 million square ft of 2026 lease expirations that are still outstanding that you guys need to address. Is that mostly lab tenants that are looking at that space or I guess what's the mix between lab tenants or maybe covered land plays that those assets were holding? I mean can you provide any details on what type of tenants are included in that bucket?

Yeah. Yeah. I mean we tried to give some framework for kind of the key drivers there. I think it was on page 23 footnote 4. Um if you go kind of line by line through the call out of those properties, most of those are going to be lab related. Um with exception of the first one that we called out, which was about 137,000 in greater Stanford, that one is probably more likely to be targeted to an advanced technology use. But the other ones that we called out there in San Diego and then also in Cambridge are all lab.

Okay. Is this the 1.3 remaining square feet or is that footnote talking about the 1.1 million square ft that is expected to move out?

That's related to the sorry I was referring to the 1.2 million square ft of lease expirations that are known vacates.

And then the 13 that is remaining that is yet to be addressed. Is that mostly lab?

Um it's a mix. I would say mostly lab, but it's a mix.

Yeah, Mark, it's Peter. I can confirm it's mostly lab. There's also a little bit more tech space in there just like in the 1.2, but it's mostly lab.

Okay, great. Thank you.

Thank you. And our next question today comes from John Kim with Capital Markets. Please go ahead.

Thank you. Um, I was wondering if you could provide a little bit more color on the quantum of capitalized interest that may be lowered in 2026. I know you mentioned a lot of this will be driven by land sales, but I'm trying to match that with the 1.75 billion of expected construction spend you'll have next year, which would suggest that the majority of capital's interest will continue.

Yeah. Um, I can take that. So what two things driving next year in terms of construction numbers. One is the development costs and redevelopment costs to finish what's in the active pipeline, right? We still have a decent amount that's going to deliver next year that is, you know, 80% leased. And then we've also got higher, I would say capex or repositioning type costs next year than we had in 2025. And that has a lot to do with the fact that there are some known vacates and it's going to cost, you know, we're going to have higher maintenance costs just given how much vacancy we have to lease in this market. Um so those are really the two biggest drivers. Um I think in terms of your fundamental question of you know how much cap interest rolls off, I would just refer you to the commentary that Joel had earlier about really thinking through that pie chart on page 46 of the supplemental. The way we're thinking about the various buckets. Um, you know, the mega campuses obviously we'd love to do. They're very valuable, but we can't do them all. You've got the non-mega campus future land assets which would be ripe if there are opportunities to sell. Um, and then the 2027 and beyond projects which we may look at opportunities to pivot there in some fashion.

Okay. And then going back to the known moveouts for next year, the 1.2 million square feet, can you provide some commentary on why those tenants are not renewing, whether they're going through new product or they're shrinking footprint or there was some kind of event within the company.

Yeah, sure. Um I can rattle through those. Um, so maybe I'll just go through the four that we mentioned there. Um, the first basket was really a non-lab tenant. They were a software company that was in there when we acquired those assets in greater Stanford. That's 138,000 ft. Um, that was a known vacate. Um the original business plan there was to redevelop it when we bought that a number of years ago but things are obviously different and we may choose to do something different there in terms of targeting you know more advanced type technology users. So that would...

Yeah. And then in San Diego, you know, I would just point to the one asset in Torrey Pines, the 118,000 that was a project that had been occupied by a subsidiary of a big pharma. That big pharma ended up consolidating on our campus at Campus Point and they ended up coming out of that space but they did expand with us and I think that project delivers next year so that was kind of leave behind space. The 84,000 or 83,000 ft space in Sorrento Mesa similar story, that was a subsidiary of a big pharma that also expanded with us on our SD Tech campus and that was the leave behind space. Very good quality spaces in both of those instances but they're bigger spaces so it may take some time if we end up either targeting a larger user or smaller type users since they were big kind of single tenant spaces. And then the last bucket in Cambridge, you know, some of that was just a variety of different spaces. Those spaces as we mentioned there were older product that we really hadn't at least most of it hadn't really touched since we bought that campus in 2016. So it's a variety of factors.

Great caller. Thank you.

Thank you. And our next question today comes from Vik Malhotra with Mizuho. Please go ahead.

Uh good afternoon. Thanks for taking the questions. I guess Joel, you know, bigger picture. Uh you're now in a macro, you know, you'd sort of call the bottom, but things are uncertain. Obviously, you don't have control over that. Seems like the sales process is also it really depends on buyer timing, so perhaps less control and you're trying to solve for leverage and capital need. So I'm wondering like as you get through this in the next year or two, you know, to be in a better position to maybe take advantage of distress, you know, why not consider just outright equity to fix the balance sheet, fix your capital needs, rather than having to rely on the asset sale process, which I know is important, but I'm trying to...

Okay. And then just on this investor day like there's a bit of a departure. You're giving a lot of teles on 26. So, I'm just wondering, you know, sort of why not so-called rip the band-aid, just give a high level number of where you think next year is going to shake out. Just it seems like a two-step process, which I don't know.

Great, we look forward to the update and definitely our area on the other side. Thanks.

Thank you and our next question today comes from Dylan Bzinski with Green Street. Please go ahead.

Good afternoon, guys. Thanks for taking the question. I guess just maybe going back to some of your comments, Joel. It seems like the only thing, you know, that's necessarily changed this quarter versus last quarter is really related to the government shutdown, right? Because you think about the supply pipeline that sort of continued to dwindle, albeit it is still at high levels. There's obviously been a huge challenging capital market environment for a lot of tenants. So I guess you mentioned that the government shutdown is having a huge impact in terms of tenant demand it seems like. So is it the idea that we should think that once the government comes back that demand should start to pick up off of this level?

I guess as a sort of followup to that, I mean, and maybe it was asked earlier, so sorry if I missed it. I joined late, but I mean I get the sense that just reading some or listening to the call today, reading some of the tea leaves and the 2026 considerations and supplemental that demand may have worsened, you know, since the second quarter, but it felt like looking back at my notes and stuff in your commentary during that, you know, things were set to improve and we're hearing out of peers of yours that the demand the overall touring pipeline is improving. So just trying to see if maybe I'm misreading into some of the comments made today as well as the 2026 considerations.

Maybe this is Hie here. Maybe just to add to Joel's comments, you know, when you think about tour activity where, you know, we're certainly seeing really great companies, you know, looking for new space, thinking about expansion, but as we mentioned before, decisions are taking longer. We're very conservative in how they think about, you know, when to pull the trigger. And given all of the factors Joel mentioned, there's still a lot of uncertainty. And so we do feel confident that there are some fantastic companies, really high quality in this market, that are going to need space. The question is, you know, when are they going to get comfort around making those decisions and to date there's just still a lot up in the air, especially on the regulatory front.

Yes, really appreciate that. And maybe just one more if I can. I know you guys kind of alluded to, you know, equity type capital and Joel you mentioned partial interest sales, dividend, stuff like that, but I know most of your guys's focus on the dispositions has sort of a non-core assets. I guess is there any desire to sell partial interest in any of the mega campuses given it still seems like there'd be a strong bid or depth of demand for that type of product today?

Really appreciate it, Joel. Thanks.

Thank you. And our next question today comes from Jim Cameron with Evercore. Please go ahead.

Good afternoon. Um, you've given a lot of great color regarding the 26 expirations and potential moveouts. Is it given the environment, is it like too early to even start thinking about 2027 type expirations and how those tenants are looking in terms of their burn rates and their intentions. I'm just curious, you know, as you go into the investor day, etc., you know, perhaps as much clarity on that would be helpful. Thank you.

Okay. Great. And quickly the second one, there was some press discussion that in Mission Bay you had been potentially looking to reallocate, I think is the term they use some of the lab space there at your four assets in Mission Bay to office use particularly targeting AI. I mean one is that a valid report and if there was validity to it how would that sort of work what would you do with your existing tenants?

Yeah. Um, so we already had a couple properties in Mission Bay. The Illinois properties already had 100% allocation for Prop M. When we developed the Owens properties, 1450, 1500, 1700 Owens and then 45 Mission Bay Boulevard, they only had a partial allocation for about a third of the building area. Um, that would be for pure office users only. Um office that houses the researchers is not included in that. We don't have to have Prop M for that. But, you know, as Joel alluded to, we're seeing more and more users from our tenant base both traditional tenant base and otherwise in that area that would like to have all office type of space. And it just makes a lot of sense to have that flexibility. You know, in addition to just the pure office users though, our lab users are more and more looking for additional office area for computational workflows as they integrate AI and other technologies into their research. So, all of the you know, we've been thinking about this for a while. We finally had an ability to act on it and so we did. Um, but I wouldn't read into anything as far as like are we not going to be doing lab there, of course that's the primary use. But you know, to the extent that our lab tenants need more office area or there's other alternative tech in the area that is complimentary to the innovation economy there, you know, we want to be able to serve it and the counselors agreed with us and allocated the Prop M.

Great answer. Thank you.

Thank you. And our final question today comes from Jamie Feldman at Wells Fargo. Please go ahead.

Great. Thank you for taking the question. Um Joel, I was hoping you can just look into your crystal ball a little bit. Um you know, you guys are clearly thinking about the balance sheet, making some changes to get capital in line, shrinking construction pipeline. You're probably, you know, the league leader in this space. you know, how should we think about what's to come from the competitive set or just the industry overall in terms of finding a bottom and working through other pain in this industry? And I'm thinking specifically about your comment about meeting the market. I assume you meant on rents. Like, do you think there's a lot more downside on rents?

Yeah. Look economics are very important. Um, you know, especially in an uncertain time when you don't know when the next dollar is coming from, but you need space, you need to renew, what have you. There's other choices out there as Joel alluded to, some dumb space, decisions made by others. And what that has caused is a deterioration in fundamentals. Um, we've talked a lot about the TI allowances that are in the market, the free rent that's in the market. Um, by and large, the market has held the rents fairly high. I mean, I think we're still above pre-COVID rents in the big markets and especially in the tertiary markets where there's been less competition. But even our tenants who are used to our great service, they know what's out there. They want to stay with us and they increasingly come to us and say, 'Guys, we want to renew. We want to stay with you. We want to make a long-term commitment, but the realities of the market are this.' And we just want to assure people that we understand that and we're going to meet the market. Now, are we going to have to go to the bottom in order to make the play? No. Like what Joel said as far as why people come to us, our platform, our service, our mega campuses, they still value that, but at the same time, they need a deal. And we're out there understanding where we need to be and we are going to get a premium but it's not going to be where it was in the previous cycle. So we just want to assure everybody that the tenants that are the best tenants in the market that we want to retain we're going to retain. And if that means more TIs than traditionally we had to get or a roll down in rent, then we'll do it. We're going to get through this time. It's going to take a while, but a lot of this zombie buildings will go and become different uses. The market will get tight and we'll be in a better position the next time around, but we're going to continue to prioritize occupancy and that's why Joel mentioned meeting the market.

Thank you for that. Super helpful. So, as you think about I mean you're on slide 19, you still have a positive mark to market. I mean is it can do you sense when markets are bottoming or leases are bottoming or it's just too early to tell? Can you maintain...

Yeah. Um I you know it's a guess right but as I see that the majority of supply left to be delivered which I think right now that we consider competitive is somewhere in the neighborhood of 3.3 million in our three big submarkets. Out of that 3.3 million, the majority of it is already pre-leased. So, I'd say roughly about maybe 30% of that 3.3 million is going to be delivered vacant and increase availability. But then after that, you know, we don't see anything in 27 and that's inclusive of things delivering in 26 by the way. We don't see anything coming in 27. Um so the availability numbers are going to peak and maybe it's a little bit into 26 when they peak and so you're only going to go up from there. So I don't see fundamentals deteriorating further given that there's just we're going to start recovering soon but you never know.

Okay, just to add here and to summarize that given all the work myself and the team on the ground are seeing as we continue to out lease competitors which we are doing across all of our markets, we do see the early stages and acceleration of conversion of what we're targeted as life science spaces going to other uses. And so back to your original question on competition, the more that we continue to out lease and dominate, the more we'll see that balance of supply coming into picture.

Yeah, that makes sense. And if I could just throw in one more, um, I mean, it seems like a big strategic moment for the company. Um, I mean, we've seen some of your office peers talk about asset light models. Is that something I think your answer to one of the prior questions is no, you just want to continue to own your best mega campuses, but have you thought about that at all? I mean, you have such a good operating platform. Is there a way to monetize the platform without tying up so much capital?

Yeah, I mean it's an interesting concept, Jamie, that we actually have discussed a number of times. Um, at this point in time, though, it really doesn't make sense to have so many different players. It's going to consolidate down to where it was before. Um meaning experienced developers that have their own platforms and a lot of these projects that have deteriorated the fundamentals are just going to be something else and those operators are going to go away. So I don't know if it's really an opportunity to where you're managing other people's projects because those projects aren't going to be lab. That would be my take.

Okay. I appreciate your thoughts and good luck out there.

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Joel Marcus for closing remarks.

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