Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Alexandria Real Estate Equities Inc (ARE, Financial) reported a solid FFO per share growth of 5.3% for the second quarter and 6.3% for the first half of 2024.
- The company achieved 100% renewable energy for its electricity needs in the Greater Boston cluster market.
- 74% of Alexandria Real Estate Equities Inc (ARE)'s annual rental revenue (ARR) comes from mega campuses, with plans to increase this to over 90% in the coming years.
- The company has a strong balance sheet with significant liquidity and almost one-third of its debt expiring after 2049.
- Alexandria Real Estate Equities Inc (ARE) has maintained stable occupancy with a very solid leasing quarter and strong cash same-store NOI growth.
Negative Points
- The life science industry is currently in a bear market, which has impacted demand and leasing activities.
- There is a significant amount of new supply expected to be delivered in 2024, which could impact leasing and occupancy rates.
- The company has a substantial amount of lease expirations in 2024 and 2025, which may require significant downtime and repositioning efforts.
- Capitalized interest has declined for three consecutive quarters, indicating a slowdown in development activities.
- The company is heavily reliant on asset sales and dispositions to fund its development pipeline, which could expose it to market risks and impairments.
Q & A Highlights
Q: Can you discuss the driver of the change at Alexandria Technology Square from single tenancy to multi-tenancy?
A: Joel Marcus, Founder and Executive Chairman, explained that the change was driven by McDermott moving out of the space to their new R&D and HQ headquarters. The plan is to re-lease the vacated laboratory assets as multi-tenant spaces. This is a strategic move and not indicative of a fundamental market shift.
Q: Can you comment on the slight drop in letters of intent and pending acquisitions between 1Q and 2Q?
A: Peter Moglia, Co-President and Regional Market Director, clarified that the decrease was due to an increase in square footage at one of the assets, which affected the lease percentage. The focus remains on conserving capital and prioritizing dispositions.
Q: What are the cap rates on the pending $806 million of sales or stake sales?
A: Peter Moglia noted that cap rates are varied and depend on the quality of the assets and the cost of capital. He mentioned that good quality assets are still in demand and hinted at positive updates in the next quarter.
Q: Is there a percentage of the portfolio that doesn't fit the long-term mega campus strategy?
A: Joel Marcus stated that the goal is to move annual rental revenue from mega campuses into the high 80s or low 90s over the next few years. The company has been shedding non-core assets and focusing on high-quality mega campuses.
Q: Can you explain the decline in the weighted average lease term for renewals this quarter?
A: Joel Marcus and Peter Moglia attributed the decline to a higher proportion of early-stage companies signing shorter-term leases. These companies expect to grow and prefer shorter leases to maintain flexibility.
Q: Why was the 651 Gateway project in South San Francisco pushed to 2026?
A: Joel Marcus explained that South San Francisco has an outsized supply issue. The project is an old building being redeveloped, and the timeline was adjusted accordingly. However, there are ongoing transactions that could positively impact the project.
Q: What is the outlook for market rents in Boston relative to in-place rents?
A: Marc Binda and Peter Moglia noted that while rents have come off their peaks, they are still above pre-pandemic levels. The mark-to-market for the entire portfolio remains solid at around 12%.
Q: What would it take for larger tenants to become more active in leasing?
A: Joel Marcus and Hallie Kuhn highlighted that the opening of the IPO market would be a significant factor. Additionally, companies hitting clinical milestones and demonstrating pipeline value would drive demand.
Q: Can you explain the lower retention rates over the last six quarters?
A: Marc Binda clarified that the retention rates might appear lower due to large tenants like Moderna moving to new developments. When normalized for such factors, the retention rates have not significantly dropped.
Q: How does new supply impact tenant retention in the life science sector?
A: Joel Marcus emphasized that tenants in the life science sector do not move for minor rent differences. The quality of the landlord and the ability to provide growth options within mega campuses are critical factors in retaining tenants.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
