Alexandria Reports Higher Revenues But Pauses Some Projects

“Demand has normalized from the record year of 2021,” Peter Moglia, CEO and co-CIO, said during ARE’s earnings call Tuesday. “There are less tenants actively seeking space in the market today, which we believe is being significantly driven by uncertainty in the economy.”

ARE’s executives illustrated confidence in the REIT’s portfolio by highlighting the growth of its tenants and their subsequent need for more space, along with the strength of the industry overall. Looking at the top life sciences markets in the nation, the company estimates direct vacancy to be 2.8 percent in Greater Boston, 3.5 percent in San Francisco, and 4.1 percent in San Diego.

“We have 10,000 known diseases wreaking havoc on human beings each and every day and the personal and economic cost of sickness, illness and today, the mental health crisis is continuing to skyrocket,” said Joel Marcus, ARE’s founder and executive chairman. “Continued innovation in medicine is an absolute national priority and the transformative work of our tenants in the industry is critical to addressing the massive unmet medical need.”

Further, Hallie Kuhn, senior vice president of science and technology and capital markets, detailed growth projections for ARE’s tenant base. For example, academic and institutional tenants, which constitute 12 percent of the company’s annual recurring revenue (ARR), are backed with $47.5 billion in National Institutes of Health funding this year, or 21 percent more than in 2019.

“The segment continues to be sheltered from larger macroeconomic conditions,” Kuhn said. 

Tenants with marketed products make up 14 percent of Alexandria’s ARR — including Amgen, Gilead, Vertex and Moderna — and those firms generated $150 billion in revenue in 2022. Private, venture-backed biotech companies make up 8 percent of the company’s ARR. Kuhn said venture capitalists have become more discriminating, disciplined and demanding of current and future investments.

“We continue to see a reset of venture deployment to pre-2020 and 2021, which, while down from the peak, remains strong by historic standards,” Kuhn said. “We are acutely aware of the years of abundance and easy capital that have passed, and that the separation of haves and have-nots will continue to widen. … While this market is and will continue to warrant extreme prudence, it is an opportunity for the best companies to home in on their long-term fundamentals and thrive.”

But ARE is not impervious to the market reset, and the firm is cutting back on a portion of its construction pipeline.

“In response to the uncertainty and volatility in the markets, we have made a strategic decision to reduce 2023 construction spend by $250 million by pausing or delaying projects that had been classified as under construction, so we can focus our capital on the most strategic projects that have the most attractive terms, enabling our highly vetted and fast tenant base,” CEO Moglia said. 

ARE delivered 453,511 square feet in five projects in the first quarter, and the projects’ combined annual net operating income (NOI) totals $23 million. The company’s pipeline, including projects under construction and projects expected to start construction over the next four quarters, totals 7.6 million square feet, which is already 74 percent leased or under negotiation.

“Construction costs remain volatile, but are on their way to stabilizing,” Moglia said. “Cost of materials and supply chain volatility were the initial drivers of construction inflation, but now the primary driver is labor.”

ARE also addressed the industry’s exposure — or lack thereof — to the recently collapsed Silicon Valley Bank, which was known to cater to California’s tech companies. On March 10, ARE’s tenants held $108.3 million in letters of credit issued by SVB. But, as of April 24, tenants moved $26 million to new banks or new forms of lease securities; $64.7 million is in the process of moving; while $17.6 million “remain to be transitioned.”

“Within approximately 72 hours from the start of the bank run, companies had access to all deposits, and the near-term risks such as making payroll were mitigated,” Kuhn said. “As for long-term risks driven by instability of regional banks, unlike some tech companies that maintain significant cash and deposit accounts, our tenants largely rely on safer third-party custodial and sweep accounts to minimize cash deposits.”

She added that the biotech industry is not as reliant on venture debt as the tech industry.

“We expect that the life science sector will be minimally affected going forward, as evidenced by venture financing rounds that closed in March as expected, and continue to do so in April,” Kuhn said. 

Alexandria also emphasized the difference between traditional office real estate and the product in its portfolio, declaring ARE is neither a health care service facilities company nor a “generic office company.”

“The office component cannot be broken out or compared to traditional office,” Kuhn explained. “It is an adjacent, highly integrated and critical component of lab design and workflows. Of course, this is also work that cannot be done from home.”

Moglia said the “increasing desperation” of office building owners trying to raise cash to stay afloat is adding to the overall level of difficulty in executing deals.

During the first quarter, ARE also sold an 18 percent interest in 15 Necco Street, a development project with 346,000 square feet in the Seaport District submarket of Boston, for $66.1 million. The asset is under construction and will be delivered by the end of this year, with cash flow commencing in mid-2024. The buyer will fund the remaining construction costs.

“The parties agreed to an evaluation at closing to be $576 million, or $1,665 per square foot, which is an initial yield of 5.25 percent on their investment based on in-place NOI at closing,” Moglia said.

Alexandria said it serves more than 850 tenants. The company also reported $5.3 billion of liquidity, no debt maturities prior to 2025, a 13.4 years weighted-average remaining term of debt, and that 96 percent of the company’s debt has a fixed rate. 

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.