Alexandria, BioMed/Blackstone and Healthpeak say they remain committed
By Murray W. Wolf
Alexandria has dropped plans convert this Newton, Mass., office park into a life sciences campus. (Photo courtesy of Alexandria)
The four largest owners of life sciences real estate (LSRE) are publicly traded companies, and three of those released their first quarter (Q1) earnings reports in recent days. So how are their executives feeling about the current state of the LSRE market during these uncertain times?
Those earnings reports acknowledged a number of sticky issues, including struggling tenants, discontinued projects and development challenges. Yet all three companies professed continued faith in the long-term prospects for the LSRE market.
So let’s take a closer look at the earnings reports from those three firms:
■ Alexandria Real Estate Equities Inc. (NYSE: ARE), the largest healthcare REIT, with about 47 million square feet as of the end of 2022, according to Statistica;
■ Blackstone Group Inc. (NYSE: BX), the owner of BioMed Realty, with 14.9 million square feet; and
■ Healthpeak Properties Inc. (NYSE: PEAK), with 12.2 million square feet.
(The fourth largest owner of LSRE, Ventas Inc., NYSE: VTR, with 10 million square feet, is scheduled to report its Q1 earnings May 8.)
■ Alexandria: ‘Weathering a tough macro environment’
“Weathering a tough macro environment, ARE posted a very solid first quarter,” Joel Marcus, Alexandria’s executive chairman and founder, said Tuesday (April 25) during the firm’s earnings conference call with securities analysts.
As by far the largest owner of LSRE, Alexandria is a bellwether for the LSRE space, so securities analysts, the news media, investors and others pay close attention to the firm’s activities and finances. Thus it was perhaps reassuring to many that the Pasadena, Calif.-based firm beat the consensus earnings expectations of securities analysts in Q1. The REIT reported quarterly funds from operations (FFO) of $2.19 per share, beating the consensus estimate of $2.15 per share. That also topped ARE’s FFO of $2.05 per share a year ago, and marked the fourth straight quarter in which the firm has surpassed consensus FFO estimates.
Alexandra also reported annualized net operating income (NOI) of $1.8 billion in Q1, up $245 million, or 16.2 percent, compared to the same time last year. Rental growth was also strong in terms of both square feet and rates. The firm leased 1.2 million square feet of space during Q1, exceeding its five-year quarterly average of 1.1 million square feet. And the REIT recorded a Q1 rental rate increase of 48.3 percent, which was the highest quarterly rental rate growth in its history.
But the LSRE market has not been without its challenges, even for Alexandria. In recent months, the firm dropped plans for a life sciences conversion in suburban Boston and decided to sell the property at a loss.
In January 2020, Alexandria paid $235 million to acquire the three-building, 509,702 square foot Riverside Center office park at 275 Grove St. in Newton, Mass., in Boston’s Route 128 submarket. The REIT planned to gradually convert the fully leased campus into office/laboratory space as existing leases expired.
However, in its Form 10-Q quarterly report, filed Monday (April 24) with the U.S. Securities and Exchange Commission (SEC), Alexandria stated, “Since our acquisition, the macroeconomic environment and demand for office space have deteriorated considerably. In April 2023, upon meeting the criteria for classification as ‘held for sale,’ we recognized a real estate impairment charge of approximately $139 million to reduce our investment in this campus to its current fair value, less costs to sell, from the book value of $259 million. These buildings represent our only pure operating office campus in the Greater Boston market, and we expect to complete the sale in mid-2023.”
Alexandria executives elaborated during Tuesday’s earnings call.
Mr. Marcus explained that Alexandria prefers to invest in high barrier-to-entry markets and, in light of “a tougher macro environment,” the firm is looking to selectively “prune and right-size” certain “good, high-quality, workhorse assets” in some of those markets.
Peter Moglia, CEO and co-chief investment officer, added that when Alexandria bought the Newton property, the executive team believed there was “an opportunity to expand our holdings in that neighborhood and, in fact, adjacent to it. So, in addition to high barriers to entry, we also really are focused on aggregating into mega campuses, and the opportunity to do that wasn’t attractive enough for us to move forward.
“And so we ended up with this kind of stand-alone asset, which is a really good office asset.” Mr. Moglia added. “But you have to start prioritizing, and that one just kind of lost some of its shine when the opportunity to expand kind of went away.”
Another fact revealed in Alexandria’s Q1 earnings report was the share of ownership recently Alexandria sold to a Japanese investor in another of its other Boston-area projects.
As BREI reported two weeks ago, Alexandria announced April 12 that it had sold a partial interest in its under-construction 15 Necco St. project in the Seaport Innovation District in Boston to a U.S. affiliate of Tokyo-based Mori Trust Co. Ltd. The value of the transaction was not disclosed.
However, Alexandria’s Q1 earnings report reveals that Mori America LLC acquired a 20 percent stake in the joint venture (JV). The REIT says it sold 18 percent for $66.1 million, while its existing JV partner, National Development, sold a 2 percent interest. That leaves Alexandria with 72 percent and National with 8 percent. The ownership had been a 90-10 split between Alexandria and National.
As majority owner, Alexandria maintains control of the project. It said in its Q1 earnings report that proceeds from the transaction will be used to fund the construction of the 12-story, 345,995 square foot, “Class A” development on about 2.22 acres, which is scheduled to deliver in November 2023.
The laboratory/office component of 15 Necco St. will be fully occupied by the Lilly Institute for Genetic Medicine of Indianapolis-based Eli Lilly and Company (NYSE: LLY), one of the world’s largest pharmaceutical companies.
A team from Newmark Group Inc. (Nasdaq: NMRK) facilitated the recapitalization of the 15 Necco St. development, which it called “the largest single-building life science transaction in the U.S. year-to-date 2023.”
Alexandria executives said during Tuesday’s earnings call that they plan to make additional dispositions and sales of partial interests of certain assets this year.
Dean Shigenaga, president and CEO, said, “We’ve advanced transactions aggregating $865 million. They’re either completed or subject to executed LOIs (letters of intent) or purchase and sales agreements, including the new JV partner for our build-to-suit project for Eli Lilly. Many of the in-process transactions are targeted to close on or about June 30.
“Now we have also identified other dispositions and sales of partial interest to bring our total for the year to $1.5 billion. While the macro environment remains challenging, we are reasonably optimistic that we can execute on our disposition plan in 2023 at attractive values and cap rates.”
Construction costs remain a challenge, Mr. Moglia said during the earnings call.
“After commenting on construction costs for the past two years, I can still say they remain volatile but are on their way to stabilizing,” he said.
“The availability and price of commodities such as steel, copper, aluminum and concrete continue to fluctuate due to shortages of raw materials, low yields for mines, high demand from electrification, or low capability utilization rates in the mills and fabrication shops due to labor shortages.
“Cost of materials and supply chain volatility were the initial drivers of construction inflation, but now the primary driver is labor with a triple whammy of wage increases, shortage of workers and the inefficiency of the remaining labor force due to the retirement of older, more skilled labor. There are 330,000 open construction jobs today and the time it takes to train the new entrants to be highly skilled as measured in years. So these inefficiencies will be with us for a while.
He continued, “Specific to life science buildings, the availability of switchgear and equipment such as HVAC (heating, ventilating and air conditioning) units and generators … has slightly improved. But their lead times are still extraordinarily long with custom air-handlers taking 27 weeks longer to get than before COVID, and switch gear and generators an astounding 64 weeks longer. Even worse is the availability of large transformers provided by the utility companies, which can take as long as three years now to get.
“What’s driving these delays are chip shortages and demand from electrification projects happening all over the world as investors, governments and end-users demand improvement in carbon emissions.
“As you can imagine, the cost of this equipment is reflective of these shortages and, paired with high labor costs, is making new laboratory office projects more expensive to build than ever before.
“The upside for us is that 84 percent of our costs for our active development and redevelopment projects are under GMP (guaranteed maximum price) or other fixed contracts, with contingencies behind that. So, we are largely locked in.
“Anyone contemplating a speculative development these days will have to contend with these delays and associated high costs, which will put the feasibility of building and financing the project at considerable risk – one reason we will likely not see the supply many are expecting beyond what is under construction today,” Mr. Moglia concluded.
For more information, please click here.
■ BioMed Realty: LSRE is a ‘high-conviction sector’
Because BioMed Realty is a unit of Blackstone Group (Blackstone bought BioMed for its BREP VIII real estate fund for about $8 billion in 2016), detailed financial data is more difficult to come by than if the firm was still a stand-alone public company.
Blackstone, a New York-based alternative investment management company based, focuses on four areas: real estate, private equity, hedge fund solutions, and credit and insurance. It invests in a wide range of assets and owns more than 200 companies, including life sciences firms.
Blackstone is the world’s largest alternative asset manager, the world’s largest manager of commercial real estate funds and the world’s largest commercial landlord. It invests in industrial, single-family and multifamily residential, student housing, data centers, hospitality and more.
Commercial real estate represents $331.8 billion, or about one-third, of Blackstone’s total of $991.3 billion in assets under management (AUM), according to its Q1 earnings report, released last Thursday (April 20).
As just one company in an enormous investment portfolio, BioMed was not even mentioned by name in Blackstone’s earnings report. But BioMed is believed to be the second largest owner of LSRE. According to BioMed’s website, it owns and operates a portfolio of 16.4 million square feet in Boston/Cambridge, Mass.; San Francisco; San Diego; Seattle; Boulder, Colo.; and Cambridge, U.K.
Likewise, BioMed was not mentioned specifically during Blackstone’s earnings call last Thursday (April 20), but here’s what Blackstone officials had to say about the commercial real estate market and LSRE in general.
Steve Schwarzman, chairman and CEO, noted, “Today, investor sentiment toward real estate has been quite negative, again, largely due to the pressures … in the U.S. office market. Vacancies in offices have reached all-time high levels, and owners of many of these assets may be unable to extend financing in a more constrained capital environment.
“At Blackstone, we have minimal exposure to traditional U.S. office, having reduced our holdings from over 60 percent of the real estate equity portfolio at the time of our IPO (initial public offering) in 2007 (to) less than 2 percent today. We instead emphasize sectors that are doing very well…”
One of those sectors is life sciences, according to Jon Gray, president and chief operating officer.
“Our strong returns are the direct result of the way we’ve deployed capital and where we are very well positioned for the current environment. As we’ve said before, where you invest matters,” Mr. Gray said.
“Nowhere is that more apparent than in real estate, where 83 percent of the portfolio is in our high-conviction sectors, including logistics, rental housing, hotels, data centers and life science/office. We’re seeing a massive divergence in performance in these areas compared to more challenged parts of the real estate market.”
For more information, please click here.
https://s23.q4cdn.com/714267708/files/doc_financials/2023/q1/Blackstone1Q23EarningsPressRelease.pdf
■ Healthpeak: ‘Life science … is going to continue to produce strong growth.’
Alexandria is primarily a pure-play LSRE firm, although also invests directly in some life sciences companies. Conversely, Blackstone invests in LSRE as only one component of a highly diversified portfolio of alternative assets. Healthpeak Properties is in between.
Although the Denver-based firm is a REIT, investing only in real estate, it is diversified in terms of product types. The firm invests in medical office buildings (MOBs) and continuing care retirement communities (CCRCs) as well as LSRE.
Healthpeak reported Q1 FFO of 42 cents per share, which matched the consensus expectations, although that was down from the 43 cents per share reported one year ago. The firm’s Q1 revenues of $525.7 million also exceeded expectations.
LSRE led the way for Healthpeak during Q1. Same-store portfolio cash (adjusted) NOI growth was the highest of the three product types at 6.3 percent, and Q1 life science new and renewal lease executions totaled 311,000 square feet. The firm also placed in service the remaining 19,000 square feet at its 101 CambridgePark Drive development in Cambridge, Mass.
Like Alexandria, despite strong overall results, Healthpeak has also faced some challenges. Perhaps the biggest of those involves the firm’s planned $120 million, five-story, 163,000 square foot Sorrento Gateway life science development in the Sorrento Mesa submarket of San Diego.
During Q2 2021, Healthpeak signed a plum tenant for the proposed building when Sorrento Therapeutics Inc. (OTC: SRNEQ) agreed to lease 100 percent of the space. Construction began in June 2021 and the Sorrento Gateway project was scheduled to be completed early this year.
However, that lease was thrown into question in February, when Sorrento Therapeutics Inc. (OTC: SRNEQ). The firm filed for Chapter 11 bankruptcy in February.
When asked about the situation yesterday during an earnings call with securities analysts (April 28), Scott Brinker, president and CEO of Healthpeak, replied, “I mean, the company is in bankruptcy. So, it’s not like you just pick up the phone and call their CEO and ask what our outlook is. There’s quite a few people involved in that process. So, we’re not going to speculate on what they’re saying behind those doors.
“But we’re also on the creditors committee and in some cases preview to certain information that’s just not public we say we’re not going to share that. We don’t have clarity yet on whether they’re going to accept or reject, but you would expect us to be doing some contingency planning either way. So, we’ll see what they end up doing. But yes, we’re obviously thinking about alternatives.”
Despite the uncertainty regarding the tenancy of the Sorrento Gateway project. Mr. Brinker said Healthpeak remains upbeat about the prospects for the LSRE sector as a whole.
“For the past 20 years, I’ve invested in an asset managed nearly every variation of healthcare real estate,” he said. “I’ve seen firsthand the pluses and minuses of each and believe life science falls on the favorable end of the continuum. I say that based on secular demand, the impact of innovation, barriers to entry and core submarkets, competitive advantage of incumbents, high operating margins and net cash flow growth over time. It’s a business driven by the aging population and the desire for improved health to things that aren’t going away.
Mr. Brinker continued, “At the same time, we fully acknowledge that any business runs in cycles. In fact, despite the market exuberance in the past few years, we correctly underwrote the growth would slow, and we position ourselves accordingly. No new development starts in the past 18 months, no material operating acquisitions in more than 24 months.
“Very few lease maturities this year are next due to proactive early renewals, and we didn’t compromise on asset quality during the boom. The reality is that not every drug candidate will succeed and biotechs don’t raise 10 years of cash up front. It’s a given that some companies won’t make it and none of this is a surprise to us. We built our portfolio around these realities.”
Mr. Brinker later added, “Life science, I think, is going to continue to produce strong growth. And you think about the supply, maybe it doesn’t go to zero in terms of new starts over the next year, but pretty close. So the supply/demand outlook over the next three to five years should actually be quite favorable from what we would have said two years ago.”
For more information, please click here.
The full content of this article is only available to paid subscribers. If you are an active subscriber, please log in. To subscribe, please click here: SUBSCRIBE
