Top U.S. Lab REIT Unloaded $1.3B in 2023 While Portfolio Lost $460M in Value

The Pasadena, Calif.-based REIT also completed $259 million in acquisitions in 2023 with more than $103 million already closed in 2024, and another $358.7 million under contract.

However, ARE also reported $271.9 million in lost value, or real estate “impairment charges,” in the fourth quarter, with more than $461 million in total charges over 2023. Losses consisted primarily of non-laboratory assets.

“We initially acquired these real estate assets with the intention to entitle or reposition each site as part of a life science campus,” the firm said. “Since acquiring these assets, the macroeconomic environment has changed and we decided not to proceed with them.”

Chairman and founder Joel Marcus said one of the impairment charges includes the planned sale of a property on 42nd Street in New York City leased to Pfizer, which previously vacated and moved its headquarters. Marcus said ARE decided not to move forward with a redevelopment of the site in part because of challenging state and local government policies. Chief Financial Officer Marc Binda said more impairment costs could be expected for 2024, but said it’s difficult to predict the total amount.

ARE’s portfolio occupancy was at 94.6 percent at the end of the year, up 90 basis points from the prior quarter, and the firm anticipates occupancy to exceed 95 percent this year. The landlord also reported 889,737 square feet in leasing for the fourth quarter, and more than 4.3 million in total for 2023.

CEO Peter Moglia said the beginning of 2023 was the low point for demand in life sciences space, but he said it’s now rebounding. However, ARE expects 2024 to be the peak year for new lab deliveries.

This comes as the Jon Litt-run investment management firm Land & Buildings (L&B) raises concerns about usage and demand for life sciences real estate, particularly with ARE. In November, Litt accused ARE of presenting misleading information during its third-quarter earnings call regarding leasing activity, and, last summer, his firm raised the alarm about sharply declining attendance at ARE’s properties compared to before the pandemic.

“Yikes, cracks in the armor are getting wider,” Litt posted Tuesday on X (formerly Twitter), pointing to rising vacancies and spikes in construction deliveries set for this year in the top three U.S. life sciences markets. “Pfizer building on 42nd St NYC being sold for about half recent purchase price, continuing trend of impairments. … begs the question with $15 billion acquisition spree since 2017 what is the magnitude of future impairments?”

ARE said Tuesday, and during the third-quarter earnings call, that leasing — while about half as strong as in 2021 and 2022 — was in line with averages from 2013 to 2020 before the pandemic. L&B contends that the portfolio today is more than 50 percent larger than it was before the COVID-19 pandemic. Thus, the leasing volume may be similar to pre-pandemic averages, but the pace of leasing in relation to the size of the portfolio is well below the pace of leasing before 2020.

Furthermore, L&B argues that nearly 20 percent of Alexandria’s office and lab space is available for lease sublease, citing CoStar data.

In response to general questions about the overall rise in hybrid work strategies and concerns about tenants’ declining office and lab utilization, Hallie Kuhn, ARE’s senior vice president of science and technology and capital markets, said, “Cancer can’t be cured from the couch.”

“While the reset of the life science industry from euphoric 2021 highs has been rocky, healthy pessimism is seeding renewed momentum, underscored by rational valuations and capital flowing to the strongest technologies and experienced management teams,” Kuhn said.

ARE announced $91.9 million in net losses in the fourth quarter, bringing revenue down to $92.4 million on the year, which is far below the $513.3 million in net income from 2022. However, officials emphasized the development pipeline delivered the highest incremental annual net operating income in company history — with $145 million in net operating income commencing during the fourth quarter, and $265 million for all of 2023.

“We witnessed the unprecedented eight-year bull run of the life science capital markets 2014 through 2021, the longest on record, coupled with the rocket ship funding during COVID,” Marcus said. “And the market in 2023 has clearly reflected the rationalization of the past decade. … We expect to make significant progress on our lease expirations and filling vacant space, while achieving positive rent growth.” He added the company was making a strong leasing effort this year and expects “a handful of significant leases to mature soon.”

ARE reported $757.2 million in revenue in the fourth quarter, which is 13 percent higher than the same period last year. Its $2.89 billion in revenue on the year was 11.5 percent higher than in 2022. However, ARE reported $871 million in expenses in the fourth quarter, about 54 percent higher than the previous quarter, and $2.69 billion in expenses on the year, which is 26 percent more than in 2022. The REIT announced it earned $389.8 million in funds from operations attributable to stockholders.

The firm has $5.8 billion in liquidity and no debt maturities prior to 2025.

The 30-year-old company said it has $33.1 billion in total market capitalization, and $21.8 billion in total equity capitalization, which ranks in the top 10 percent among all publicly traded U.S. REITs.

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