We can scale them. We have operational excellence, and I say this all the time, no one’s going to get fired, for picking an Alexandria building. You might get fired for picking a building from someone who has no idea what they’re doing.
Tom Catherwood: Actually that kind of feeds into the next question which is and this is probably another crystal ball question here, but if we take a step back and think more broadly on the unleased competitive supply and your comments on secondary markets and secondary operators. How do you think distress could play out in the life science real estate market, if at all and does that present a potential opportunity for Alexandria?
Peter Moglia : Yes, it’s a great question. We get asked, my first reaction is always well, gosh, if we weren’t there by now, it wasn’t a priority. I believe they’ll probably be some opportunities that we will look at in the future. If we put our brand on the building and people know we’re operating it even if it’s in a newer market, it can be successful. A great illustration of that is what we did in the Fenway. We came in there, it was an unproven market. The 201 Brookline asset that we bought was about 17% leased. We come in, put our brand on it, put our knowhow into it and within I think 3 quarters it was fully stabilized. That said that was a submarket that we knew was going to be had a lot of the fundamentals that make a good submarkets.
Some of these areas that the supply is in today, I don’t see the same profile. So probably a tougher decision down the road. But what happens to those buildings, I think a lot of them will become office buildings. Frankly, offices certainly not dead, probably office that was built in the ‘60s and ‘70s and even the ‘80s might have to go away because it’s functional obsolete. But if you built a new lab building and you couldn’t lease it as lab, it’s probably going to be a pretty good office building. But again crystal ball, that’s just my opinion.
Operator: The next question will come from Anthony Paolone with JPMorgan.
Anthony Paolone: I guess first question is your development yields seem to have been around 7% for a number of years at this point. And Joel, you mentioned interest rates being stubbornly high. But if this is the rate environment on a go forward basis. Is that 7% is that an appropriate level for you all to continue with the program or and maybe you’ve just been over earning on spread in prior years or does that number have to go up? Like how do you think about that?
Joel Marcus: Yes. So, Peter, thoughts?
Peter Moglia: Yes. Look, Tony, I think you really have to look Joel laid out what creates opportunities that we may capitalize on, but we are going to be looking obviously at cost of capital. We can’t make decisions though on what we think or what the cost of capital is today. We absolutely take a longer look. So as an analyst, you would look at the internal rate of return that you will get on a development because you know that if you believe that fundamentals are going to improve over time, you could do something with a 6 yield today, a 7 yield today. But as cap rates adjust, as rental growth adjust, you look out 10 years and you get an IRR that’s above your weighted average cost of capital today. And then you have confidence to go forward.
So I know it’s real easy to just look at initial yield and we publish that because it’s an interesting topic to everybody and rightly so. But in challenging times like this, you really have to take a longer view because you don’t want to miss on opportunity that would be very strategic and excellent for your shareholders over the long run. And that’s what we’re trying to do.
Anthony Paolone: Okay. And then just on the funding side of that then, you talked about just the preference for dispositions versus stake sales. But just what about your comment at this point? I mean is that completely off the table or similar type discussion where it could make sense depending on what’s teed up.
Joel Marcus: Yes. So Tony, as we’ve said, our guidance assumes no equity, same was true in 2023 to remind everybody. And our focus is on as sources of capital to fund our business on the noncore assets outside of the mega campus. But obviously you reevaluate that on an ongoing basis just like we have in past practice.
Anthony Paolone: And then if I could just sneak one more in for Peter since you got your crystal ball out. If you kind of look forward to, I guess, maybe next year when you’re past this whole wave of supply that you outlined. What do you think happens to market rents between now and then, and not just base, but just totality of lease economics?
Peter Moglia: Yes. Like we’re anticipating a very flat environment. Opportunities that Alexandria can provide in a mega campus are likely going to perform much better, materially better than some of the supply that’s going to be delivered. But certainly supply is going to weigh on rents and, but we don’t necessarily see a retrenchment outside of certainly levels that were hit in 2021 and 2022 are going to be back we’re going to back off from that. But the area the rental areas of ’17, ’18, ’19 that our submarkets were in, I’m certain will be the bottom and it’ll grow from there.
Operator: Your next question will come from Jim Kammert with Evercore.
Jim Kammert : Joel, certainly appreciate your comments that demand can be more event driven for the lab business, which is understandable. But is it possible for the team to provide just a little bit more context or quantification regarding your tenant interest in your development and redevelopment pipeline today, say, versus 90 to 180 days ago? And when I say context, I’m thinking the number of tenants you’re holding discussions with, the range of space requirements they might be seeking and maybe the timetables for making decisions, just trying to get some more comfort into the visibility of the lease up?
Joel Marcus: I don’t think we would want to be that transparent given the competitive nature of what we’re doing these days. I’m not sure that would serve our interest or even our tenants interest. In fact, they may not want us to be talking about something like that in advance. So I’d be pretty wary of that kind of thing. I think that what is happening is and Peter I think has talked about this, we kind of hit a low in ’23 certainly after the Silicon Valley Bank episode and some of the market shutters and so forth. But I think as Hallie has presented, the market since October is really solidified and more money was flowing or is flowing into the sector. And I think that’s really a better benchmark and certainly as companies hit milestones as Hallie mentioned intracellular hitting a critical, critical very high quality milestone and was able to do.
I think their last financing and then they turned profitable. So that’s kind of how we look at it. I think anything more of a NORAD early warning system probably wouldn’t be in our best interest. I apologize for that.
Operator: The next question will come from Dylan Burzinski with Green Street.
Dylan Burzinski: Hi, guys. Just going back to sort of the development yields coming down versus historical levels, I guess just given as you guys think about things from a holistic capital allocation approach, how do you weigh sort of starting in development at a low 6% cap rate versus sort of going out and buying in the open market or buying assets, I guess, I should say. Is it simply maybe you guys are willing to sort of accept that lower yield today because a lot of these developments are sort of an extension of the Mega Canvas strategy or is there something else?
Joel Marcus: Yes. No, I think that’s a really I’ll ask Peter to comment, but I think that the last point you raised is really the point. The mega campuses provide, I mean we were first mover, we have by and large in almost every market, I can’t think of any market where we don’t have really best locations. And if somebody wants to grow and grow on your campus that’s going to be a lot better for the long-term growth and health of the campus and the company as opposed to somebody who wants to go into a one off building somewhere. That’s just even if the yield is potentially higher, I don’t think so. And remember too with 3% plus bumps each year, the ending rental value on certainly development 10, 15, 20 year leases is pretty substantial. But Peter?
Peter Moglia: Yes. Hey, John. I just I’m not just me, but the team is not necessarily seeing anything we’d want to buy. Again, as I make the commentary about supply, most of what probably will be available to buy is not in the areas that we’re interested in today. I’m not saying we’re not never say never that an area might not become interesting in the future. And as I said, we could put our brand on it and make it work. But the opportunities that we will be talking about in the future and I’d say the near future are going to be on our mega campuses because of all the things that we talk about with the scale and the vibrancy our tenants and tenants that are not ours but want to be ours notice and understand the value. And so it’s going to make the, it’s just going to make more sense long-term for us to put them on these campuses rather than buy a one off building and put someone in there and end up wondering in the future why we did that because it doesn’t really match our model.
Operator: The next question will come from Michael Carroll with RBC Capital Markets.
Michael Carroll: I wanted to circle back on overall leasing activity. It sounds like trends are improving over the past few quarters. But does the recent push out in interest rate cuts, does that impact, I guess, tenants’ ability to raise capital at all or does that delay their decisions or ability to make these types of decisions?
Joel Marcus: No. And you can just look at what’s happened as Hallie outlined in the first quarter, Michael, again event driven, it’s not a direct correlation to economic environment or interest rates that just how this sector in industry kind of walks the walk. And it’s not totally shielded by that, because if there was to be some, I mean imagine if China decided to invade Taiwan, the market seized and rates spiked in some crazy fashion or something obviously that would have an immediate impact on everybody. But I think no not the deferral isn’t going to change if somebody hits a great milestone they’re going to be able to finance. Now maybe there might be a higher concession on the underwriting or the overnight or whatever method they choose. But that’s a rather infinitesimal cost to capital issue for companies.
Michael Carroll: Okay. I mean do tenants make decisions on expanding into 2 new areas of research based off of their ability to raise capital so like they’re and I think correct me if I am wrong…
Joel Marcus: Of course. And most of that is done at the venture level. And so when somebody is pioneering a new area venture and not so much the publicly traded markets. But once you get into the clinic then if you are fortunate enough to get public then the public markets kind of take hold of that.
Hallie Kuhn: Yes. And just to this is Hallie, just one addition. Recall that with venture firms, they’re sitting on a lot of dry powder, that is already committed capital that they can call on and there’s a number of larger funds that we’re talking to that are raising, closing multibillion dollar funds. So they are sitting on capital that’s ready to deploy. They are not dependent in the same way that a public company is on the interest rate.
Michael Carroll: And then just last one for me. I know there has been discussions where, the Board as some of these tenants have been making like veto decisions if companies can lease space or not. I mean is that are the boards loosening up? Are they willing to make these decisions now?
Joel Marcus: Well, I think historically, boards have had very careful oversight. I think unfortunately, when the markets become very frothy, boards get a little bit lazy and not as astute or disciplined in what they do. But I think you can be certain today, boards are very disciplined and it’s been that way now for a handful of years. So I don’t think anything’s changing in that regard. I mean the answer is, if somebody needs space to scale and grow because they hit a key milestone or they’ve turned profitable or whatever it happens to be, those are high quality decisions, because the cost of space for most of these companies is a fairly nominal amount of their overall cost of doing business.
Operator: Next question will come from Omotayo Okusanya with Deutsche Bank.
Omotayo Okusanya: I appreciate all the comments around supply and also development. If you could go back to this crystal ball type scenario, curious if you’d be willing to offer up when you think you might be able to start a new development? And then what potential market could that be given the demand supply dynamics you see in each of your key major markets and on your mega campuses?
Joel Marcus: Yes. I don’t think we would announce such a thing on an earnings call willy-nilly. It’s based on tenant demand, of course.
Omotayo Okusanya: But are markets getting better? Are you seeing like more demand suggests that could happen sooner rather than later?
Joel Marcus: Well, I think based on the questions that have been raised on the call right now and Hallie’s commentary, I think we’ve said since October, the market certainly have gotten better, yes.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Joel Marcus for any closing remarks. Please go ahead.
Joel Marcus: Yes. Thank you, everybody. Just remember May is Mental Health Month and we’ll be very focused on that with our efforts on a number of corporate social fronts. So be safe. Take care. God bless. Thank you.
Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
