This is an updated version of a report originally posted on May 14.
Acknowledging that the ongoing economic and financial upheaval has lowered occupancy rates for its space and has flattened rental rates since last year, top executives of Alexandria Real Estate Equities told analysts they still expect the numbers to bounce back in coming months as several large new properties complete their development phases and sign up new tenants nationwide.
The publicly treated real estate investment trust specializing in life-sciences space cited several leases either signed or well into talks in recent months. The largest of these was the 10-year, 58,632-square-foot lease signed by a research unit of Johnson & Johnson for a building identified only as being in "the suburban Washington, DC, market," where Alexandria maintains 31 properties totaling about 2.5 million square feet.
"The good news is, there is real demand for our buildings," Alexandria Chairman and CEO Joel Marcus told analysts on the REIT's May 7 conference call, held the day it announced its first-quarter financial results. Alexandria ended the first three months of this year with an 11-percent gain in net income, to $41.2 million from $37.2 million in the first quarter of 2008. Revenues rose 21 percent to almost $132.8 million in Q1 '09 from about $109.6 million in the year-ago quarter.
Alexandria's revenues included a 28-percent recorded gain in rental revenues, which swelled to $104.9 million in Q1 2009 compared to $81.8 million in Q1 2008. But nearly all that gain consisted of $18.5 million in rental income the REIT recorded following the end in January of a lease with cancer therapy developer Cell Genesys for 155,000 square feet at 500 Forbes Blvd. in South San Francisco.
"The additional rental income includes the fair value of building improvements and equipment which was received in the modification of the lease and recognized over the remaining term of the applicable lease," Alexandria stated in its 10-Q filing with the US Securities and Exchange Commission.
"This opportunity to exit the former tenant, to stabilize the property with a credit tenant, we felt, clearly was the appropriate business decision. It gave us the best economics for the property for the long term," Dean Shigenaga, Alexandria's chief financial officer, told analysts. "We feel pretty comfortable that that property is going to perform well in the long term. At the end of the day, we're ahead on total consideration under the new lease."
Shigenaga said Alexandria acted properly in counting the money as rent rather than a termination fee. Excluding that rental income, Alexandria still finished the first quarter with a 9-percent gain in total revenue and a 7-percent rise in property net operating income, he noted.
In a May 11 filing with the US Securities and Exchange Commission, Cell Genesys confirmed that it had terminated leases for all of its major facilities — including its Alexandria-owned office and research space at 500 Forbes. The retrenchment followed Cell Genesys' Oct. 16, 2008, announcement that it was restructuring its business operations following the failure of its GVAX immunotherapy for prostate cancer during two phase 3 clinical trials.
Alexandria has since leased the space to a new tenant, whose identity it did not disclose on the conference call.
"We would have been obligated to make rental payments of approximately $86 million through the lease expiration in 2018 for South San Francisco, and approximately $24 million through the lease expiration in 2017 for Hayward if we had not terminated these leases," Cell Genesys said in its filing.
Leasing, Occupancy Rates Dip
Alexandria reported that its leasing activity fell year over year, which it said reflects recent market conditions, and reported that it had executed 37 leases totaling 465,000 square feet compared with 48 leases for about 570,000 square feet at 31 different properties a year earlier. Both figures exclude month-to-month leases.
Likewise, Alexandria's occupancy rate dipped to 94.3 percent during the first quarter, from 95.3 percent in the first three months of 2008.
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Alexandria "luckily has in hand the ability to grow in future years — someday when it's possible to do so — and the credit markets have repaired themselves from the devastation that has been wreaked upon them," Marcus said.
J&J is among the multinational pharmaceutical giants that account for the largest share — 27 percent — in Alexandria's tenant portfolio, With the new lease, the drug maker's presence within Alexandria's portfolio has grown to a combined 170,451 square feet in two buildings.
Currently, Alexandria's portfolio comprises 156 properties totaling 11.7 million rentable square feet, including spaces now under active redevelopment; and another 1.1 million square feet of newly developed space.
After J&J, the next-largest share, with 20 percent, comprises public biopharmaceutical companies, followed by revenue-producing life-science product and service companies, with 17 percent, medical and research institutions, with 15 percent, privately held biopharmaceutical companies, with 14 percent, and traditional office tenants, with 7 percent.
A J&J spokeswoman said Friday the company would not comment on the lease.
Further up the East Coast from Maryland, an even larger deal is in the works at Alexandria. Marcus said the REIT is in lease talks with a prospective anchor tenant for 90,000 square feet at the 310,000-square-foot East Tower of its East River Science Park now under construction in New York City.
Alexandria is also negotiating less formal letters of intent by five prospective tenants seeking a combined 92,500 square feet at the same East River Science Park building, Marcus added. The would-be tenants are seeking, in descending size order, spaces of 45,000 square feet, 27,000 square feet, 10,000 square feet, 7,500 square feet, and 3,000 square feet.
"In my view, although nothing is done till it is done, this is pretty amazing progress in the face of huge headwinds in New York, and virtually nothing else getting done in the office sector," Marcus said. "We feel comfortable that we’re making good and demonstrable progress."
Using the REIT's estimate of $500 invested in the project per square foot, the projected cost of the East tower is $155 million.
Alexandria has cited lease talks at ERSP in conference calls stretching back to the fourth-quarter 2007 session with analysts early last year [BRN, Feb. 19, 2008]. This week, Marcus did not say if any or all of the tenants with which the REIT were in negotiations were the same as the tenants discussed during last year's conference calls.
This time around, "all economic terms and conditions are agreed to" between Alexandria and the 90,000-square-foot prospective anchor tenant, Marcus said.
ERSP's lack of progress, he contended, should be seen in the context of a commercial real-estate market where tenant companies have given up more than 2 million square feet of office space over the past year, following the implosion of New York City's financial-services industry.
In response, Mayor Michael Bloomberg and other Big Apple officials have sought to broaden the city's economic base by nurturing industries beyond Wall Street, including the life sciences.
Last November, Bloomberg attended a reception marking the completion of a new $17 million AIDS Vaccine Design and Development Laboratory for the nonprofit research institute International AIDS Vaccine Initiative, or IAVI, at New York City’s Brooklyn Army Terminal [BRN, Dec. 1, 2008]. And last week the city Economic Development Corp. trumpeted a May 6 workshop on obtaining federal Small Business Innovative Research and Small Business Technology Transfer grants.
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But with fewer new projects being developed, Alexandria's construction management income has fallen, as has interest income as rents have remained level rather than rising, and investment income given the freezing of the financial markets.
Marcus said Alexandria is also busy developing its Alexandria Science & Technology Center at Mission Bay in San Francisco, where it broke ground last summer on a third building, the 210,000-square-foot 455 Mission Bay Blvd. South, after Pfizer signed a 15-year lease for about 100,000 square feet — with an option for another 50,000 square feet. Pfizer plans to shift there its Biotherapeutics and Bioinnovation Center, now located in South San Francisco [BRN, Aug. 11, 2008]. That building is slated for completion in late 2010 or early 2011, the REIT stated in its quarterly filing.
Also at Mission Bay, Alexandria plans next year to complete the 158,000-square-foot 1500 Owens St. Late last year, the REIT said it would hold off on earlier plans to break ground on two new buildings that would have been built to suit for tenants it had already lined up [BRN, Nov. 3, 2008]
According to the 10-Q, Alexandria will expand its Bay Area presence this year when it completes a pair of projects in South San Francisco, Calif.:
• 249 East Grand Ave. — The 130,000-square-foot building is 55-percent leased to Exelixis Pharmaceuticals, which has an option for the remaining space through 2009. 249 East Grand is the first of four buildings totaling 540,000 square feet to be developed at Alexandria’s East Grand Technology Campus
• Alexandria Technology Center – The two-building, 162,000-square-foot campus on East Jamie Court remains just 16 percent, or about 25,920 square feet, leased: "[It] has been very frustrating to us because it's an unbelievable view site and very, very attractive, highly flexible lab buildings," Marcus said.
The cost of reinvestment in both buildings is projected at $350 a square foot, making Alexandria's estimated redevelopment costs $56.7 million for the Alexandria Technology Center, and $45.5 million for 249 East Grand Ave., Alexandria said in its 1Q '09 filing.
At East Jamie Court, Marcus said, "we are negotiating the remaining space" with an undisclosed "credit" tenant. Over the next quarter or so, he continued, "we hope to have good news there. But in this market, you can never be certain until the ink is on the paper."
That uncertainty extends beyond this year, since Alexandria expects to all but exhaust its pipeline of new projects as the ones now under construction come on line in 2009.
"We expect our construction spending to tail off significantly beyond 2009, as significant new development or redevelopment projects are not strategic priorities at the moment," Shigenaga told analysts on the conference call.
Also over the next three years, a total 201 leases for a combined 3.5 million square feet, or about one-third of Alexandria's total space, will expire.
In sites that have not yet broken ground, Marcus said, Alexandria has held off completing deals with prospective tenants for new projects in the Bay Area and elsewhere. As a result, he added, Alexandria has allowed many of its development sites to remain unoccupied "somewhat longer than we would have liked, but that is a function of, we'd rather be safe than sorry."
Projects like those in the Bay Area and elsewhere, according to Marcus, will leave Alexandria in a strong enough position to compete with rivals — as will the prospect of new tenants expected to receive federal cash through the $787 billion economic stimulus measure signed into law by President Obama, officially known as the American Recovery and Reinvestment Act.
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"We think that will help drive some future occupancy increases. We've seen that in Maryland, and I think we'll see additional increases in Maryland, almost directly tied to government spending," Marcus said.
Another cause for optimism, Shigenaga said, was Alexandria's continuation of several favorable streaks in the face of the wobbly economy: The just-completed quarter marked the 43rd consecutive quarter of positive results for properties operated more than a year, with a 3.6 percent gain, and 10 years of year-to-year gains in leasing activity, despite the first quarter dip.
Other markets Marcus discussed during the analyst call this week:
• Seattle — The 115,000-square-foot 199 E. Blaine St., in Seattle's South Lake Union neighborhood, is under construction and set to be completed next year. Almost all of the building, 106,000 square feet, has been leased by Gilead Sciences, which has an option for another 3 percent of the space or 3,450 square feet [BRN, Oct. 27, 2008]. At a projected $390 per square foot to build, the project is expected to cost $44.85 million. Alexandria already operates in the city 13 properties totaling 1 million square feet, including the Accelerator Corp.
• San Diego — Alexandria sold three properties totaling 64,218 square feet during the first quarter, for a combined total of nearly $14.5 million — a gain to the REIT of about $2.2 million. But the company also continued redevelopment of an 84,504-square-foot building and portions totaling 64,153 on three other properties with a total 227,393 square feet in San Diego's Torrey Pines area. The REIT operates a total roughly 1.7 million square feet in 32 properties in the California city.
• China — Alexandria said in its filing that it "is nearing shell completion" on the two-building, 280,000-square-foot campus it is building near Macau, in South China, with an undisclosed joint venture partner; and continuing construction on a two-building campus with about 300,000 rentable square feet in an unspecified North China location. As of March 31, the REIT estimated, it will need "less than $5 million" to complete the Macau-area shell construction project, and another $15 million to finish the shell of the North China campus.
"Our final costs for these projects will ultimately depend on many factors, including construction requirements for each tenant, final lease negotiations and the amount of costs funded by each tenant," Alexandria added in its filing.
In China and elsewhere, Alexandria stated, "we do not expect to make any new commitments for significant ground-up development projects in the near term."
In addition to China, Alexandria has rights with joint venture partner MaRS Discovery District to develop a $300 million 770,000-square-foot second phase of MaRS' research-office incubator campus in Toronto, Canada [BRN, May 19, 2008; https://www.genomeweb.com/bioregionnews/seven-years-after-mars-lands-incubator-toronto-nonprofit-plans-second ]; as well as rights to build up to 924,000 square feet in Edinburgh, Scotland, and to purchase the site of that project over the next 13 years. Back in 2007, Scottish Development International/Enterprise Scotland chose Alexandria to co-develop the $1.2 billion BioQuarter in Edinburgh, a 100-acre life sciences campus to consist of some 1.4 million square feet of new life science space [BRN, May 14, 2007]. Both projects have been delayed, as Alexandria has cited the economy in cutting back on development of new sites.