Good afternoon and welcome to the Alexandria Real Estate Equities First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today's event is being recorded. At this time I'd like to turn the conference call 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 differentially 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 SEC. And now I would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead Joel.

Thank you, Paula and welcome everybody to the first quarter 2019 earnings call. With me today are Steve Richardson, Peter Moglia, and Dean Shigenaga. First quarter of 2019 was probably as close to a picture-perfect quarter as Alexandria has had in quite a long time, although we had many great quarters. But in addition to stellar earnings results, we had stellar leasing results which will be talked about in stellar's same-store results. And I want to thank the entire team and make sure we're focused on continuing our relentless passion to further our human health mission each and every day with operational excellence in an ego-less and high-integrity environment really important. At the grand opening of one of our latest developments the home -- West Coast home of research for Vertex Pharmaceuticals, Jennifer Ferguson the mother of two children with cystic fibrosis noted about Alexandria's unique world-class design of this building and said, this building is going to be more than steel and concrete. It is a life-saving cure for my kids. It is amazing to think about what is going on or what is going happen in this building. And that's how we feel about everything that we do day to day and how we take our charge and our mission very seriously. The first quarter was also the 25th anniversary since the start of the company when we did a Series A round closing I think on January 5th, 1994 of $19 million with family and friends. We have grown methodically and steadily and try to learn every day and every week and every month and every year along the way to become an investment grade S&P 500 company with a total market cap as of the end of the first quarter approaching $22 billion. We've got one…

Thank you, Joel. Good afternoon, everybody. I'd like to focus on Alexandria outperforming in all of its key clusters. The company is driven by its most important asset our best-in-class team used with our unique business model has and will continue to outperform in each of our key clusters. The life science industry we serve as Joel just highlighted and noted in our recently released annual report is undergoing a knowledge explosion. And Alexandria is pioneering and now dominant position creating highly desirable world-class campuses and ecosystems in urban settings adjacent to the countries most productive life science research universities and institutions is providing excellent financial results. I'll go ahead and run through the market and really highlight the outperformance with again significant contributions from each of the markets. In Cambridge, our franchise-leading campuses totaling 5 million square feet now are uniquely positioned to continue capturing growth in the immediate term. Rents have grown to the upper 80s, with one in fact eclipsing $90 triple net. And market's 0.2 vacancy rate and three-point million square feet of demand, an increase over the 2.8 million square feet of demand last quarter provides ample opportunity for Alexandria to continue its strong renewal and re-leasing rent growth over the next several quarters, without having to wait several years or more to capitalize on this strong market. The San Francisco region has an availability rate of 1.9%, down from 3% last quarter with demand up from 2.5 million square feet to 2.9 million square feet. The 480,000 square foot lease with Pinterest at 88 Bluxome highlights another superb example of the trusted partnerships we've created with our tenants, as we will embark together on the efforts to secure our Prop M allocation and create a world-class destination, a truly remarkable achievement and kudos to…

Thank you, Steve. I'm going to spend the next few minutes updating you on our near-term pipeline, recent lab office comps and provide an update on construction costs. As we noted on page two of the supplemental, we've delivered 1 million square feet over the past two quarters, including 481,000 square feet in the first quarter. After a delay noted on our last call due to work performed by the city of Cambridge that interfered with our glazing installation and delay caused by the power company who were months late in hooking up permanent power, we delivered 123,403 square feet at the 399 Binney Street building in January, only one month over our pro forma delivery date. More good news is that we've increased our stabilized cash yield to a 7.2% yield which is a solid increase of 50 basis points over our original pro forma of 6.7%. At today's cap rates for lab office in Cambridge, we believe we've developed to a value accretion margin in the range of 60% plus when comparing our current stabilized yield with current market cap rates. Anchored by Alphabet's Life Science subsidiary Verily, we delivered 139,810 square feet or 66% of the 279 East Grand building in South San Francisco in the first quarter at a very healthy 8.1% yield. Green Street's current NAV model applies a 5.3% nominal cap rate to South San Francisco assets. So the 280 basis point spread over that benchmark makes 279 a significant new contributor to NAV. 188 East Blaine, our new flagship building on Lake Union in Seattle, delivered 90,615 square feet or 46% of the building at a 6.7% initial stabilized cash yield. Steady leasing progress continued as we move from 49% leased at the end of 2018 to 67% leased at the end of…

Thanks, Peter. Dean Shigenaga here. Good afternoon, everyone. I'll briefly cover four key topics today, including our first quarter results and our strong start to 2019; second, lease accounting matters; third, our venture investment portfolio; and fourth, and last our updated guidance for 2019. Our financial and operating results across the board were truly outstanding for the first quarter and highlights that our team is off to a strong start for the year. The first quarter highlights included continued strong leasing velocity and rental rate growth. 680,000 rentable square feet of development and redevelopment leasing that was executed. Well, side almost 510,000 rentable square feet of lease renewals and releasing the space at significant rental rate increases of 32.9% and 24.3% on a cash basis and approximately 50% of this leasing volume related to contractual explorations beyond 2019. So rate of renewals continue to drive leasing velocity. Our unique and differentiated business strategy focuses on high-quality cash flows from our collaborative life sciences and technology campuses in key urban innovation clusters. Class A properties in AAA locations generated 77% of our annual rental revenue. Additionally we have an industry-leading high-quality tenant roster with 50% of our annual rental revenue from investment-grade rated or publicly traded large-cap entities. We reported solid growth and same property net of operating income of 2.3% and 10.2% on a cash basis for the first quarter. The strength and consistency of our same-property NOI growth was driven by among other items continued positive real estate in life science industry fundamentals, high velocity of leasing, and solid rental rate growth and our favorable lease structure. Our adjusted EBITDA margin was very strong at 70% and represented another top statistics within the REIT industry. As expected, we adopted new accounting rules for leases effective January 1 of 2019.…

Okay. Operator, if we could go to Q&A please.

[Operator Instructions] And our first question today comes from Manny Korchman from Citi. Please go ahead with your question.

Hey, good afternoon, everyone. Steve, the Pinterest lease that you guys signed at Bluxome what happens if you don't get the Prop M allocation or – I was making it more specific. What if you don't get that allocation this year or next year?

Yeah, Manny let me walk through the process again. The Central SoMa plan was approved by the Board of Supervisors in December of 2018. As we've talked about you had four challenges were filed at that time. Those parties continue to work with the city and work through a process and at the same time very consistent with what we've said all along. There are huge community benefits of value to all stakeholders here. So the city in fact has very affirmatively and proactively continued the approval process. We view this as another step in the process. We expect as we've said for a couple of quarters now to be in front of the Planning Commission in the late summer of this year. We expect to secure our approvals and then would expect that the lawsuits will be resolved at the end of the year. So of course, there's a hypothetical out there, but it could take longer could be another quarter or two. But everything has pointed and we've seen this time and time again things do get delayed, but ultimately they would get resolved here. So Pinterest is working with us arm in arm and we expect to have a very successful outcome here.

Thanks. And maybe switching close to Boston, at NECO on the Seaport it looks like you've got it under development delivery schedule as an after -2022 event. When would you start construction there? And then, does that end up being a cluster or one-off or trial? Or how do we think about your concentration in Boston Seaport?

Yes. So I think Manny at the moment, we'd prefer not to make any comment on that. There are a lot of moving parts and I think in the future quarter or so we could give better color on kind of our view of the world. But at the moment, I think we're going to not make any comment.

Okay Joel. Since I didn't get an answer on that one, can I ask another one?

Sure.

The tech IPO market right now is pretty hot. Any impact on your tenants or markets or marketable securities balances from new IPOs?

Well, I think Pinterest, we did have an equity investment there and that will get marked up to market when we report I guess next quarter. And I guess it was this quarter, we do have a stake in Uber, so when that goes public that will get mark-to-market. And we have still Google stock, we bought in 1998. Although Google was down -- Alphabet down 8% or something today, but -- so we've done some highly selected investing in certain technology companies and I would continue to imagine that most money managers view the tech sector as one of the most positive sectors these days in the general market. So I think its best we're viewing it things are pretty solid and we stuck to really high quality either big cap public companies or selected unicorns we feel have really legitimate business models and highly disruptive impact to the economy.

Thanks, Joel.

Yeah, thank you.

Our next question comes from Jamie Feldman from Bank of America Merrill Lynch. Please go ahead with your question.

Great, thank you. Joel thanks for color on Dayton venture with Verily. Can you talk about -- I mean is this something you could see doing multiple ventures like this and expanding to more markets? Or is this more of a one-off? And then how do we think about the economics?

Yeah our goal was not to get into the business of being a provider of real estate to the users here which are the dispensers of health care services. This is very unique. But what we did feel is we could make a difference and we spent a lot of time over a number of years trying to find the best place where we could make the best and biggest impact and that's Dayton for the reasons I enunciated. And we're trying to do a unique campus and a unique set of data-driven services that have never been done before from intake, literally from The Street to job placement. Not just you come in, you detox and you're out on the street in 28 days. I think the -- literally all those efforts fail wherever we've seen them. I don't think were going to be doing lots of sites or multiple sites because that's not our core business. But what we do feel is this is a model for every community in America which is hit hard and we'll make it -- we're going to make our secret sauce as available possible to the -- to other communities. Because we think this is something that private industry and the government should be partnering to really build throughout the country. So we're trying to be the tip of the spear, but not the spear.

Okay.

And our -- we own the real estate 50-50 with Verily. Our payback period's about a 25-year payback period. So it's not fast. Our returns aren't as great as Peter's enunciation of our other things. But I do believe, this was a critical call to action where we have unique skills and Verily has unique skills. And I -- we could not have done it with something we really compelled to do.

Okay that's helpful and I appreciate it. As we think about shifting gears, I guess to Dean on page 6. Your capital sources plan. So it looks like you've got the $438 million of sales done. But can you talk about some of these other buckets and the timing to get them done the debt the other and the common equity?

Sure Jamie. It's Dean here. That's basically done if you look at the bottom of the table on the right side on page 6. We did complete the issuance of our unsecured notes. In fact, upsized it opportunistically, which allowed us to retire some additional secured notes on our balance sheet. So that's been taken care of. What we are laser-focused on and that's pretty true every year. We've always had a component of dispositions going through. So on top of the 75/125 partial interest sale, we have another at the midpoint roughly $300 million of dispositions predominantly spread over two transactions that are in process, so stay tuned there. And then I assume you're also asking about common equity. We never really disclosed when that happens, but it's an open item for us to focus in on through the remainder of the year.

Okay. I mean, do you think asset sales could take the place of that or they have anything else in the pipeline?

No, I don't -- not necessarily. It's possible that a little of it, but Jamie we already have $750 million at the midpoint of our asset disposition program for 2019. So it's a pretty healthy volume. As we make our way through the two key transactions that are in process, we can give you more color once we get through those too.

Okay. And then just finally, I guess, back to Joel or anyone on the team. Appreciate your thoughts on Medicare for All, but any thoughts on just the drug pricing legislation particularly maybe the international comparison pricing? How that might impact the business and tenants, if you have any latest thoughts?

Yes. So that's actually a good question. I happen to see that in your note. We actually a group of us have actually been at Center for Medicare Services not just for pharma industry, but a wider group and we have been working pretty intensively with CMS on this issue. This issue would only cover the third of people covered by Medicare. The international pricing mechanism is probably not the best, because the U.S. is supporting pricing to some extent overseas, which is kind of unfair. So not only the drug -- or the biopharma industry, but I think payers providers and a group of people all feel like there are some alternatives that are better and those are under intense discussion with CMS as we speak.

Okay. Thank you.

Yes.

Our next question comes from Sheila McGrath from Evercore ISI. Please go ahead with your question.

Yes. On the other investment bucket, I'm just wondering if we should expect this year to be a little bit more elevated because so many of the companies that you mentioned are coming public and you would look to possibly sell just to get rid of some volatility in that line item.

Yes. So I'll let Dean answer that. But I think as you probably know Sheila, on the IPO, there is a standard six months lockup for all IPOs so that despite whether we wanted to or not selling after the IPO was limited to all participants. But Dean, can give you his view on.

Yes. Yes Sheila, so let me comment in two areas. First, as I mentioned in my prepared commentary, our run rate for last three quarters has been actually interestingly consistent averaging $8.9 million per quarter over the last three quarters. That might give you some sense of recent activity. To the extent that this type of environment with the types of investments we do hold, it's not unusual as to see something with a really great multiple come out. And to the extent there is one individual transaction like that, we'll exclude it from our run rate as we have historically. But hopefully, the commentary and you just look back over the last few quarters though as far as what they expect may be a better barometer, since we actually haven't provided specific guidance on that line item in our results for 2019.

Okay. And then on the Verily announcement in Dayton. I'm sorry, if I missed this, but how much capital do you estimate that project will require? And do you envision hiring an outside operator? And then just when you say tech enabled, just curious a little more detail what that means?

Yeah. Sheila, so the total investment is $20 million, split 50-50 between Verily and Alexandria. The operator is actually a consortium. We have put together a non-profit consortium. I don't want to get to details, because there is a kind of a big grand opening in public announcement kind of mid-June where the Governor of Ohio and the Mayor of Dayton will participate with us and the Verily folks. But it is a -- when you think about tech or information driven, think about if you were able to understand the all of the data, human data from or as much as you can from everyone you intake, who has been impacted by opioid addiction or overdosing, and you build a database, the treatment mechanisms can be much more individually tailored if you have a set of data that is valuable versus just giving everybody the same detox schedule. It's like cancer. And everybody knows, everybody has a cancer patient in their family, and literally virtually there are no two cancers that are identical. It's one of the most heterogeneous sets of diseases that you can possibly imagine. And so treatment has to be really tailored for each patient, and that's what we're trying to get to. So people are treated almost like cattle. They're just brought in detoxed and thrown back on the street. That's just a recipe for disaster, and that's why we have 115 people every day dying.

Okay. And one last quick question. Just on Launch Labs, you press released activity in Cambridge, and then another AgTech kind of Launch Labs in RTP. I was just wondering if you could update us on that product for Alexandria.

Yeah. We think -- I mean think about what we have said on the call, half of our revenue is generated by investment-grade tenants, and/or big cap companies. And so we also believe in the Life Science industry that you have to really be a part of the entire ecosystem, which means from seed stage to grown-up stage. A good company example that I always like to use, we were involved in the Series A start-up of Alnylam up in Cambridge with our Science Hotel product. I think they took 4,000 or 7,000 feet. Today, they occupy hundreds of thousands of feet, and are multiple billions of dollars in market cap. So it's good to be there at the beginning, so we can pick the winners of the future, especially given the amazing progress and disruptive technologies today. So that's our goal in dealing with that product.

Great. Thank you.

Yes.

Our next question comes from Tom Catherwood from BTIG. Please go ahead with your question.

Thanks. Good afternoon, everybody. Sticking with the question on RTP, and the AgTech Center down there, how does -- how do the companies and the lease structures in the AgTech world differ from what you would be doing in Cambridge or San Francisco? Is there any material difference?

No, they don't. Tom, this is Joel. There are three products. One is lab -- lab office, and then the other is greenhouse, and they're all triple net leases and the lease structure is exactly the same. We just felt that -- and I think I may have mentioned. If I didn't, venture capital certainly is one indicator went from something like $8 billion over $16 billion over the last two years in the AgTech, and it didn't fall on deaf ears when we tracked those statistics to understand that more and more this world is about not only fighting disease, but it's about gaining good nutrition. And this is an industry – especially, given the huge consolidation among the big guys. Now there's only three, and the Chinese own one of them. That's really important for what we think is a huge launch of innovation in this area. So that's why we've kind of gone after that particular niche.

Got you. And then when we think about the -- Steve I think you mentioned the 392,000 square feet of demand in RTP. Is that primarily private industry backed by those venture funds that you were talking about Joel? Or is this university-related tech transfer? Kind of how does that ecosystem round out?

Hi. It's Steve. That's a wide breadth of companies there. So as you annunciated it, it's all of the above.

Okay. And then...

In fact -- I mean, it's much like New York. We've got I don't know 50-plus tenants in our campus in New York. Not a single one of them other than one that I can remember did research in New York before we had the campus. So the -- some of the AgTech stuff in north -- in the Research Triangle region as we call it -- really these are new companies being seeded by venture people, sometimes institutional investors and sometimes the big majors to do things outside of the big corporations. And so a lot of these are very new companies. Some are big, big existing companies, but there's a broad range of demand that gives us comfort down there.

Got you. Got you. Then one last one Steve. Demand in San Francisco, you mentioned that picking up at 2.9 million square feet. Is that demand concentrated in any specific submarkets? And how is it trending in your Greater Stanford cluster?

I think we're seeing it very well distributed. You have continued demand in Mission Bay. The challenge of course is the supply constraint there. Equally strong in South San Francisco and we are seeing very positive demand down in the Greater Stanford cluster just as we anticipated. So it is broad-based in each of these core clusters, Tom.

Excellent. Thanks everyone.

Thank you.

Thank you.

Our next question comes from Rich Anderson from SMBC Nikko. Please go ahead with your question.

Thanks. Good afternoon everyone. So Joel, you mentioned the 50% number that is rental revenue from IG or large cap. What makes that the right number? I'm curious, if you see that going up, because 77% of your portfolio is defined as Class A. I don't know why, but I would think that the 15 to 77 should perhaps be closer together. Is that the wrong way to think about it?

Yes, because I mean if you look at Cambridge as an example and we are working day and night with tenants to try to direct them sometimes out of Cambridge most people want to be in Cambridge and our product is new Class A campus-like or rehab -- Class A rehab and that's where they want to be. They want to be in the best locations. And you have to remember that rental expenses aren't generally the biggest part of their budget. So I think that's why you see that that split. They're a lot of NewCos, same thing in San Francisco where they want to be in the best locations for interaction with UCSF et cetera. Going out to the burbs or to concrete tilt up buildings in lesser locations just aren't of great interest. So I think that's why you see -- I don't know that there's any right answer for what our credit amount should be, but I think 50%-plus is where we've been for a long time and fairly comfortable given lease durations of what we have.

But in the extreme -- and it may be for anyone in the room, the extreme case of Cambridge where you have five million square feet or more of demand and basically no availability. I mean at what point do people just acquiesce and say, okay, I got to be in Boston or some place somewhat close. And if that were to happen to increasing degree would you be willing to follow that demand?

Well I think that relates to the question that was asked earlier about Seaport and some of the other locations. I think naturally you have to look at other locations, because doesn't matter how much capital you have there's a limited amount of land and limited amount of buildings in Cambridge. And so clearly people have to look at other locations in some fashion.

Yes. Okay. And last for me. You're putting off these huge mark-to-markets whether you look at cash or GAAP. I'm not asking for 2020 guidance or 2021 guidance, but when you think about the sort of the geographically where assets are going to be having lease expirations. To what degree can we maintain levels in these huge ranges? Considering the fact that where leases expire is perhaps an important component to why you're getting the type of growth that you're getting?

Well, I think if you just -- I'll ask Steve and Peter to comment as well because they're very granular with this. But if you look at the 2020 expirations, I think 24 we've got what 1.7 million square feet of -- which is about what 5.9% of the annual rental revenue. But if you look at the rental rates on the right-hand side in the markets, many of these are well below market.

Yeah.

Yeah. Rich this is Steve. I mean when you start looking at the mark-to-market in Cambridge right about 21%, San Francisco you got Mission Bay at 18%, South San Francisco as much as 27%, San Diego and UTC 11%, Seattle about 10%. So, in each of those markets, the mark-to-market opportunity is pretty significant. When you get into the individual sweeps that might be rolling, there may be a mix there. So that's not necessarily guidance for how it's all going to shakeout, when you roll it up. But I think across the board in those markets in particular, you can see it's pretty healthy.

Yeah.

Yeah. This is Peter. I just want to add, that we're roughly a third Greater Boston, a third Bay area, and a third everywhere else. Of course there's been a great run in Greater Boston and San Francisco everybody knows about. But I think what is going to help power -- it's an extended run like we're having is that these other regions like Maryland, Research Triangle region, New York City, San Diego are also doing very well, just given what Joel, set the stage for early on with the indicators of the industry. There are positive. They've been positive. And as we roll or re-lease in all the regions, they're just all contributing which we can't say has happened throughout our history but we're just happened in a great time where everything is clicking on truly also owners.

Okay great. Thanks and kudos on the Dayton project.

Thank you very much Rich.

Our next question comes from Dave Rodgers from Baird. Please go ahead with your question.

Yeah, maybe for Steve or Joel just on the 88 Bluxome and the Pinterest lease. Do you anticipate or is there any discussion about the recapturing the existing Pinterest space? Or would this be purely expansion?

Dave, hi it's Steve. No, it is purely expansion. That was the clear intent. And that's the way this is a new expansions stand-alone lease. So they're very excited about that. And they are thoroughly enjoying their existing billing at 505 Brannan which has actually won a number of design awards. So that's an important facility for them.

Great and then on the 2020 delivery, I guess you haven't laid out in the supplement. You've got about $1.9 million square feet plus or minus, may be planned for delivery as you've got about 350,000 started under construction. Do you anticipate delivering a larger number of maybe shells to tenants next year? Do you have the ability to kind of deliver some of these bigger buildings of 530,000 or 208,000 square foot buildings, in that kind of year to 15 or 16 month time frame? Any color on that?

Yeah. So I said in the beginning we would give over the next couple of quarters more granular visibility into 2020, but maybe just keep it high level. I think it's pretty clear we'll be able to deliver way more than shells in 2020. I think we've got a very robust pipeline. I think we have a lot of great activity. And will save it for another quarter but we have a lot of confidence in the 2020 pipeline. I think if you look at this year's pipeline, just think about that as continuing on into 2020.

And this is Peter I'll just comment a bit about, how we're able to deliver in a timely fashion. We're pretty proactive when we put these assets into our land bank. And start entitlement work almost right away if not right away. So we'll be able to come out of the ground if we're not already out of ground pretty much at any time we need to this year.

That's helpful. Thank you. And then maybe last one just for Dean. Given the equity forward that you've done, I think last year maybe how do you view your experience of that? And whether that's on the table again this year as well?

Dave, its Dean here. Every year we look at our capital line carefully. Each year is slightly different and the needs. And it's interesting it's only April. Well, it's almost May. It's a day from May and we've knocked down a good chunk of our capital needs which we're very pleased with. The bond deal is very successful the JV sale 75/125 Binney Street was an outstanding transaction. And so over -- as we go through and look forward Dave we'll provide more color. We never really get into the weeds on timing and structure. I think it's safe to say that we'll remain disciplined in our approach and we want to be prudent and disciplined in how we go about raising capital. Eventually we'll be able to lock-in great returns on the cost to capital here whenever we get to the race. And then it will allow us to move on to whatever else remains open on sources and uses of that point probably. We talked about our dispositions but we're working on that as well. So, surely in the year but we're firing up on all cylinders right now.

Yes. The big focus at the moment is on the two additional dispositions that Dean spoke about so that's kind of where our focus is.

All right. Great. Thank you all.

Thank you.

And ladies and gentlemen at this time we'll conclude today's question-and-answer session. I would like to turn the conference call back over to Mr. Marcus for any closing remarks.

Okay. Thank you very much. I appreciated and look forward to talking to on the second quarter.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.