REIT sells more than $700 million in assets and plans to sell another $1 billion
By Murray W. Wolf
Alexandria recently agreed to sell 268,000 s.f. of the 421 Park Drive development in Boston for $155 million. (Rendering courtesy of Alexandria Real Estate Equities)
PASADENA, Calf. – When it comes to life sciences real estate (LSRE) business, few firms get more attention than Alexandria Real Estate Equities Inc. (NYSE: ARE), the LSRE market’s largest U.S. property owner and its only pure-play REIT. So when Alexandria reports its quarterly earnings, there is always a flurry of reaction from numerous securities analysts and news media outlets, who consider the Pasadena-based REIT to be a barometer for the LSRE business as a whole.
If that’s the case, Alexandria’s most recent quarterly earnings report, released Monday (July 24), suggests that the LSRE market is in pretty good shape.
Alexandria reported second quarter (Q2) revenues that beat the consensus estimate of securities analysts by 12.1 percent and its funds from operations (FFO) topped expectations by 1.82 percent. For the quarter ended June 30, the REIT’s revenues were $713.9 million, compared with $643.8 million for the same quarter last year, and its FFO was $2.24 per share, compared to $2.10 per share a year ago. (These figures are adjusted for non-recurring items.)
Alexandria has surpassed consensus FFO estimates during each of the past four quarters.
During the REIT’s Q2 earnings conference call with securities analysts, which was held Tuesday (July 25), Executive Chairman and Founder Joel Marcus said, “Our one-of-a-kind company, which pioneered the lab space niche, continues to perform well in both good times and tough times, demonstrating the resiliency of our unique business model in our now post-pandemic world.”
These results are encouraging, especially in light of Alexandria’s falling stock price most of this year and a negative analyst report last month. The REIT’s stock price has declined 25.9 percent since Feb. 2, from a high of $170.82 to $126.51, as of yesterday (July 28), dragged down, at least in part, by concerns about the health of the commercial real estate (CRE) industry in general.
And for those who argue that Alexandria is insulated from the vagaries of the mainstream CRE market because it focuses on office and lab space rather than only traditional office space, a white paper released last month by activist investor Jonathan Litt’s Stamford, Conn.-based Land & Buildings, raised questions about that hypothesis.
The white paper, titled “The Work-from-Home Hurricane Has Hit Life Sciences,” said that, based on cell phone data, “attendance in Alexandria’s office/lab buildings is down 50 percent as compared to pre-pandemic attendance,” which is “on par with traditional office buildings,” which have suffered from high vacancy rates as the work-from-home movement has taken hold.
The report also stated, “Land & Buildings’ study concludes that if the path for life science follows traditional office, as it appears to be doing, Land & Buildings estimates ARE could trade at valuations similar to traditional coastal office REITs – which suggests an approximate 30-40 percent downside from current levels.”
“Alexandria’s got a real problem,” Mr. Litt said during a subsequent interview on CNBC.
Not surprisingly, the REIT’s executive team strongly questioned Land and Buildings’ methodology and conclusions during Tuesday’s earnings call.
“Much like a data center that is constantly and consistently capturing and storing data throughput, the volume, velocity and value of the scientific throughput occurring in our spaces at any point in time is not correlated with the volume of people flowing in and out of our buildings and campuses,” Jenna Foger – Senior VP and Co-Lead, Science and Technology, told analysts.
“As such, a more relevant metric for measuring the utilization of Alexandria’s lab space assets by our tenants is energy consumption. And we have seen consistent same-store electricity energy consumption — same-store electricity consumption across Alexandria’s lab space asset base today as we did in pre-pandemic years.”
Ms. Foger continued, “Equally as important to note, within Alexandria’s lab space assets, the laboratories and adjacent non-technical space cannot be decoupled. Each tenant base floor and building plan is fully integrated and intentionally designed to enable seamless workflows between laboratory and non-technical spaces within the leased premises.
“Remember, the majority of tenant employees in our lab space assets interact with the science in the lab in some ways, including to conduct experiments, analyze and interpret data, plan new experiments, make business decisions about the data, or engage in other related activities. This is the nature of life science companies’ research workflows – critical aspects of which clearly cannot be performed from home.”
She concluded, “And, lastly, collaboration – collaboration is also fundamental to innovation and overall life science industry productivity and really critical for translating discoveries from academia into treatments, diagnostics and cures by biotech and pharma companies.”
Was Ms. Foger’s argument convincing? Perhaps. Alexandria’s stock price rose 2.5 percent this week.
But there is still plenty of uncertainty about Alexandria and the LSRE market in general. Interestingly, even two funds from the same funds family recently demonstrated sharply different expectations.
In its June 30 letter to shareholders, Baron Asset Fund, sponsored by New York-based Baron Capital Inc., reported, “We exited our position in Alexandria Real Estate Equities Inc., a REIT focused on developing office and laboratory space for the life sciences industry, given concerns about slowing real estate demand among its primary tenant base.”
Conversely, in its own June 30 shareholder letter, a sister fund, Baron Real Estate Income Fund, shared the opposite opinion.
“Following a sharp decline in its shares in the first six months of 2023,” the letter stated, “we reacquired shares in Alexandria Real Estate Equities Inc., the life science industry leader and sole publicly traded life science pure-play REIT.
“At its current discounted valuation, we believe Baron Real Estate Income Fund concerns about competitive supply and distress for some of the company’s biotechnology and healthcare tenants are overblown and sufficiently discounted in the company’s valuation.
“We believe the management team has assembled a desirable real estate portfolio, enjoys a leading market share position in its geographic markets, and has solid prospects for long-term growth as demand for life science real estate is expected to remain strong.”
Others have questioned Alexandria’s prospects in light of canceled projects and asset sales.
In January 2020, the REIT 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, with plans to gradually convert the fully leased campus into office/laboratory space as existing leases expired.
However, in its Form 10-Q quarterly report, filed 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.”
That sale closed recently, as a MassMutual subsidiary and Boston-based developer Greatland Realty Partners paid $117.5 million – exactly half of what the REIT paid to acquire the complex in January 2020.
In all, Alexandria had $701 million in completed and pending dispositions during Q2, according to its earnings report. That included $603 million of sales of 100 percent interests and $98 million of partial interests. The REIT says it plans to sell another $1.149 billion of assets during the second half of this year, for a total 2023 capital plan of $1.85 billion.
Again, although some analysts see those asset sales as a troubling sign, Alexandria executives assure that the recent dispositions and partial asset sales are all part of the firm’s “strong and timely execution of our strategic value harvesting and asset recycling program to raise accretive capital…” Noting that the bulk of the sales were made at capitalization rates ranging from 4.5 percent to 5.4 percent, the firm’s Q2 supplement report says that the transactions demonstrate “continued, solid demand for our scarce, high-quality life science assets.”
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