Earnings calls for life sciences juggernaut Alexandria Real Estate Equities traditionally hinge on how various metrics confirm if the life sciences REIT performed great or simply good.
Tuesday's second-quarter call included that aspect: ARE signed 1.3M SF of leases, above its historical average, grew total revenues to $713.9M — a 10.9% year-over-year jump — and saw net operating income grow nearly $200M. Occupancy stayed steady at 93.6%.
This time, however, the company's executives also made a point to argue about electricity bills.
ARE's decision to directly address a report released last month by activist investor Jonathan Litt, who utilized cellphone data to argue that life sciences spaces are as overvalued as office space, underscores that the sector is in a much different market landscape.
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As supply has increased across the board due to weaker demand — what Chairman Joel Marcus called a “moderately elevated supply dynamic environment” — questions are being raised about the performance of life sciences real estate.
During the Q2 earning’s call, Alexandria addressed Litt’s report directly, arguing that electricity usage is a better proxy for demand and has held steady from pre-pandemic usage to today.
"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," Senior Vice President Jenna Foger said.
Alexandria executives also laid out a picture of continued strong performance, noting strategic steps being taken to deal with a new market reality.
ARE saw a 16.6% increase in rental rates in Q2, a solid result yet a big drop from the record-breaking 48.3% increase in Q1. Alexandria CEO Peter Moglia said this was due to the types of lease being signed: Q1 was mostly big markets such as San Francisco, Boston and San Diego, whereas Q2 focused on secondary markets such as Seattle, the Research Triangle and Maryland.
The company's strategic plans include shedding more noncore properties and moderating supply growth. During discussions of ARE’s performance, executives noted that concessions for new leases are higher, and effective rents with those concessions are impacting development yields.
The firm’s pipeline is 70% leased as of the end of the quarter, a slight drop from last quarter’s 72%. Moglia said ARE would announce expected completions for 2025 next quarter, but he expects it to be below 2024, due in part to “adequate supply under construction.”
During the REIT's Q1 earnings call in April, executives announced the firm would cut construction funding by $250M by pausing or delaying projects, which Moglia attributed to labor shortages, rising wages and material costs.
ARE has also been engaged in a series of asset sales in recent months, offloading five Boston-area properties in late June and then two more in Newton, including one that included a $139M impairment charge. More such sales can be expected; Moglia said the firm may be selling noncore, noncampus assets to apply proceeds to next year’s program.
Alexandria executives also predicted growth potential in the second half of the year, expecting rental rate increases of between 28% and 30%, with total leasing volume to hit 95% by year’s end.
Marcus highlighted larger trends supporting biotech growth and demand, including growing biopharma M&A spending — multinational pharma firms represent 17% of Alexandria’s tenant base, new drug approvals and record-high fundraising amounts for early stage life sciences firms, with an average of $60M for Series A rounds this year.
“I think that uncertainty has held back the entire economy, and held back the life science economy,” Marcus said. “The uncertainty is starting to go away, and people are realizing there’s a lot of dry powder out there that needs to go to work. That is what is giving us the positive outlook.”
Alexandria operates nearly 42M SF in core cluster markets in North America, with tenants including pharmaceutical giants like Eli Lilly, Moderna and AstraZeneca.
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