Tag Archive for: ARE

Catch-22

I don’t know if they hand out awards for the most optimistic investor relations team, but the gang at Alexandria Real Estate Equities just opened 2026 with a banger that will surely make them the top candidate. Yes, it’s been a rough three years for the nation’s largest owner of buildings dedicated to the pharmaceutical and biotechnology industries. The share price has fallen by 75% since the pandemic and they just slashed the dividend. But despair not ye of little faith. Just think about all of those diseases out there looking for a cure!

The Alexandria slide deck announces our glorious pharmaceutical future by declaring that only 10% of earthly diseases have been “solved”. That leaves 90% of the rest of the diseases left to cure. Talk about upside! The current market capitalization of the biotechnology industry is estimated by Alexandria to be $6 trillion. Extrapolating this figure for the next 80%, well, that’s another $14 trillion of potential market capitalization lying just beyond the rainbow. The god-like powers of capitalism will save humanity.

Alexandria’s team must have considered the irony of this future. After all, once 100% of the remaining diseases are “solved”, the market capitalization of the biotech industry should be closer to zero than $20 trillion. Realizing the potentially adverse effect of curing all diseases, they left open the possibility that 10% of the remaining diseases are beyond the grasp of even the most miraculous biotechnical engineering.  

Because, when you get right down to it, solving all diseases isn’t great for business. No, what we really need is a sort of Munchausen-by-proxy economy. By all means, come up with ways to treat the ills of mankind which improve comfort and extend lifetimes. But cure? Now, hold on there, that’s a lot of jobs we’re talking about. Healthcare is now more than 16% of our nation’s GDP.  You know what might work even better? What if we re-introduced diseases that were already “solved”? Take measles, for instance. Who knows? A resurgence of leprosy might be just what we need to avoid the next recession.

Ok, enough joking around. In fairness to Alexandria, much of the presentation describes the precarious state of the life sciences real estate market and the challenges facing the company. The real question before the house is whether shares in Alexandria Real Estate Equities (ARE) offer investors compelling value. The nation’s largest owner of real estate dedicated to scientific research claims that the net value of its assets is far higher than the current $54 share price. Alexandria’s investor presentation asserts that the true value is closer to $94. In my estimation, the shares are worth about $73. However, I won’t be buying stock any time soon. Much of this premium is based upon the book value of an uncertain development pipleine and the value of its speculative securities investment portfolio.

In this article, we’ll take a brief overview of the latest investor presentation, and I will guide you through some numbers that compose my valuation.

Alexandria has shaped its nationwide real estate portfolio into 26 dynamic innovation campuses. Primary markets include Boston, San Diego, San Francisco, Seattle, and DC. The company boasts a tenant roster of 700 companies in 27.1 million rentable square feet. Tenant retention has been over 80% over the past five years. Scientific innovation thrives when disparate groups of creative thinkers interact on a frequent basis. Despite the rise of remote work, it seems likely that medical technology will continue to emerge from the laboratories and offices of pharmaceutical companies, research universities, and medical device manufacturers.

Alexandria trades with a market capitalization of $9.3 billion and the current price allows for a 5.3% dividend yield on the reduced payout. The share price is roughly 8.6 times management’s guide for 2026 funds from operations (FFO). The undepreciated book value of real estate on its ledger amounts to $29.3 billion, with another $8.6 billion of construction in progress at the end of the 3rd quarter of 2025. The company has approximately $13.9 billion of debt and lease obligations. To improve the balance sheet, Alexandria intends to dispose $2.9 billion of “non-core” real estate assets and joint venture interests in 2026. ARE forecasts 2026 operating cash flow (after dividends) of $525 million. The resulting $3.4 billion cash pile will be split: $1.7 billion for debt reduction and $1.7 billion for the completion of construction projects.

Alexandria is rated BBB+ by Standard and Poor’s but has been placed on a negative credit watch. Still, the company does benefit from a low cost of financing and a long runway for debt maturities. The weighted average interest rate for ARE’s debt is 3.97% and the weighted average maturity is 11.7 years. Unfortunately, recently issued debt came with a 5.6% coupon.

The reasons for worrying about Alexandria’s future are easy to find. Winter has arrived for the medical technology industry. Demand for life science space has fallen 60% since the pandemic. To make matters worse, the most recent Senate budget presents a 40% decline in spending for the National Institutes of Health (NIH) to $48.7 billion. It is estimated that 1,500 jobs will be eliminated. Meanwhile, only about $9 billion of venture capital funding is anticipated for the medical technology industry in 2026. This represents a substantial reduction from 2021 when $41 billion was raised. Pharmaceutical company spending on research and development peaked in 2023 at $317 billion and has fallen the past two years.

Market occupancy levels have dropped precipitously. Over 30% of space is available in the company’s top three markets of Greater Boston, the San Francisco Bay Area, and San Diego. Occupancy levels at Alexandria’s buildings reflect the industry decline. They fell dramatically from 94.6% at the end of 2024 to 90.6% at the end of the 3rd quarter of 2025. Any time real estate owners see an occupancy level with an 8 in front of it, beads of sweat start to appear. Occupancy at Alexandria is forecast to drop to as low as 87.7% by the end of 2026.

More problems could lie ahead. Alexandria has a plan for 2026, but what about the completion of projects in 2027 and 2028? Future capital raises to finish buildings in progress may be needed, and they will certainly dilute current shareholders. At the end of the 3rd quarter of 2025, Alexandria projected that 4.2 million rentable square feet will be placed into service between the end of 2025 and 2028. 43% of the new space is under lease or in negotiation. This new space is expected to generate more than $390 million of NOI. But that assumes another 2 million square feet has yet to be absorbed in what promises to be a soft market. It could take many years to backfill the overall 30% market availability in Cambridge, Massachusetts.

Finally, the entire cost structure of newer assets may face a pricing reset. Capital improvements amounted to $260 million in 2023, but they were expected to rise to $415 million by the end of last year. On a per square foot basis, TI’s and commissions rose from $26 to $66 over three years. Free rent to secure new leases has doubled during the timeframe. Even the strongest pharmaceutical companies will balk at the rental rates on offer and demand substantial concessions.

Alexandria forecasts that 2026 FFO will fall from approximately $9 per share in 2025 to $6.40 per share in 2026. While dispositions account for a large portion of the reduction, rents on lease renewals are forecast to fall by as much as 12%. Same-store net operating income will drop by as much as 9% in 2026.

Valuation

My valuation method is very simple. I took $1.1 billion of projected funds from operations for 2026, added back the forecast interest expense of $260 million, subtracted $175 million for maintenance capital expenditures, and subtracted cash lease adjustments. The cash lease adjustments are identical to the numbers for 2025, but they have been reduced by 27% to estimate the portion attributable to joint ventures. The resulting free cash flow from operations for 2026 is estimated to be approximately $1 billion. This sum was divided by a capitalization rate of 6.38% to arrive at $15.9 billion of value.

Next, I added $552 million of cash on hand, the securities investment portfolio of $1.5 billion and the book value of construction in progress of $6.9 billion. Construction in progress was calculated by subtracting $1.75 billion from the September 2025 balance of $8.6 billion. Finally, after accounting for management’s guidance of $1.75 billion of debt reduction, the 2026 debt level of $12.2 billion was subtracted. The net value is $12.6 billion, or approximately $73 per share.

The table shows the change in computed net asset value over the past three years. In 2023 through 2025, I “grossed up” funds from operations to include joint venture partnerships before capitalizing the cash flow. An adjustment was made at the bottom using a percentage of book value attributable to noncontrolling interests. My calculation for 2025 indicates a net asset value of $88 per share, showing that a substantial decline in the stock was justified.

My capitalization rate is based on a weighted cost of capital where the market value of net debt accounts for 56% of the measure. At a BBB+ rating, the cost of debt was attributed as 5.1%. This is a forgiving number considering the recent placements at higher rates. Equity, the remaining 44% of the weight, was awarded a simple 8% rate. I don’t have a sophisticated explanation for the use of 8%, but it generally “feels right”.

You may think my cap rate is too high considering the gold-plated roster of tenants like Lilly and Merck and the proximity to the best universities in the world. Alexandria touts its asset values utilizing capitalization around 6% and below. Yet, the company has sold assets at cap rates above 8.5%. The building sales may may not represent “core assets,” but such a wide discrepancy can’t persist as long as interest rates remain elevated.

Although the calculation offers the appearance of upside, far too much weight is placed on the book value of construction in progress and the value of the company’s securities. Alexandria often took equity stakes in their tenants in lieu of rent. Given the uncertainty around new drug approvals, much of the securities portfolio could become impaired. Meanwhile the full lease absorption of $6.8 billion of construction in progress is far from certain. In the early years following completion, hefty concessions will be required to attract tenants. One can easily see that a 30% impairment of the development pipeline would eliminate the premium calculated in my valuation. The market may well be ascribing such a discount already.

Alexandria Real Estate Equities offers an intriguing way to invest in the future of the pharmaceutical industry. Medical innovations will continue to emerge, of course, and they may occur more frequently than not at one of Alexandria’s campuses. The company has a best-in-class real estate portfolio and has proven to be a skilled operator and attractor of premier tenants. But nobody is immune to the laws of supply and demand. There is simply too much laboratory space on the market, and the engines of demand are looking fairly dormant. When the government is no longer a key partner in the development of new drugs, your runway looks a lot cloudier. Is there upside? Probably so. But, I think there are better places to put your money in the meantime.

If you are attracted to Alexandria’s robust dividend yield, I would look elsewhere. Some of the pipeline master limited partnerships (MLPs) are more appealing. Western Midstream (WES) and Hess Midstream (HESM) yield about 9%, and the demand for natural gas seems much more reliable as power generation capacity continues to grow. Along those same lines, some of the big miners stand to benefit from the copper and minerals boom. BHP yields 3.5%, Rio Tinto is on 4.6%, and the much riskier Vale yields more than 8%. I would add that the large mining companies provide the added benefit of diversifying away from a deflating dollar.

We’ll leave it there for now. Until next time.

DISCLAIMER

The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.

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Don’t know much biology

Alexandria Real Estate Equities is the leading landlord for the pharmaceutical and biotechnology industries. The Pasadena-based firm boasts 41.8 million square feet of office and laboratory space, with a further 5.3 million square feet under construction. Shares of the real estate investment trust with the ticker ARE closed at $102.66 on Friday. Total market capitalization of $18 billion represents a slight discount to the book value of equity on the balance sheet.

Alexandria focuses on campus “clusters” where it has been proven that the proximity of multiple science innovators stimulates creativity. These clusters have been developed in locations with robust university ecosystems such as Boston, the Bay Area, San Diego, New York, the DC metro, Seattle, and the “Research Triangle” of North Carolina. Most recently, the company announced a 260,000 square foot lease with the bacterial disease biotech firm Vaxcyte at the San Carlos, CA campus.

Occupancy is a healthy 94.7% across the portfolio. Alexandria’s balance sheet shows $33 billion of real estate assets (undepreciated) and $12 billion of debt. Standard & Poor’s regards the debt as investment grade with a BBB+ rating.

Despite the good metrics, Alexandria stock has been pummeled over the past three years, falling by more than half from the $223 peak at the end of 2021. The biotech industry boomed during the early stages of the pandemic, but the subsequent collapse has been brutal. Deals in the pharmaceutical industry have fallen to their lowest level in a decade. This is a far cry from the halcyon days of 2020 and 2021, when over 183 firms raised more than $30 billion from initial public offerings. Today, most trade below their IPO price, and many are cash-burning zombies.

Over the years, Alexandria has invested in many of its tenants with it’s own venture capital arm. Between 2018 and 2021, Alexandria booked over $1 billion in investment gains on its portfolio.

Unfortunately, as the market turned hostile, investment losses in 2022 and 2023 exceeded $527 million. At the end of September. Alexandria carried $1.5 billion of investments among its assets. Some are publicly-traded and marked-to-market on a consistent basis, but most are illiquid and the value is highly subjective.

Trouble in the biotech industry also led to losses of rental income. Between 2020 and 2023, ARE faced lease impairments in excess of $750 million.

Is Alexandria’s stock now a bargain? Not quite. I consider a stock trading 25% or more below its intrinsic value to signal an investment green light. Based on my calculations, the stock trades at a 7% discount to the value of its underlying assets.

Intrinsic value calculation:

By my estimates, 2025 free cash flow will be approximately $1.7 billion. Capitalizing this amount at 6.59% leads to a value of $25.7 billion for the operating real estate. Adding development in progress and the company’s investment portfolio, both at book value, leads to a total asset value of $34.9 billion. Subtracting the market value of debt results in a net value of $24.5 billion. Many of the company’s assets are held in joint ventures with developers, so about 18% of the value is attributable to these partners, leaving a net asset value of $20 billion.

There are some important caveats to consider:

  1. I’ve mentioned the risky nature of the venture-backed tenants. They sow the seeds of major upside for Alexandria, but they could also prove to be a source of future impairments.
  2. Interest expense is mostly capitalized. The company reported about $162 million of interest over the trailing twelve months. In reality, this figure is much higher. In 2023, about $364 million of interest was capitalized because it was related to debt on new developments. This is entirely appropriate, but the failure to lease pending space could lead to a drag on results if this interest must be deducted from operating profits
  3. New developments are significantly more costly. Although ARE is only expanding its portfolio by 13% with its current development pipeline, the cost of new projects equate to more than 28% of undepreciated book real estate assets. Construction costs suffered massive inflation since 2020, and it will be difficult to obtain future rents that need to be 30-40% higher than current market levels to drive adequate returns.
  4. Returns on capital have never been much better than 6%. Taking a look at cash operating income as a percentage of undepreciated operating assets shows a company that has earned returns that aren’t exactly eye-popping. This is institutional-quality real estate with very low debt costs, so the 6% neighborhood may be respectable, but its not the kind of number that will drive exceptional growth.

Which brings me to my final issue with all REITs in an environment of sustained higher interest rates: the prospect of equity dilution.

REITs, by virtue of their tax-exempt status, must distribute most of their profits. Retained earnings are a limited source of growth capital. External capital and the reinvestment of gains from property sales provide the funding for growth. In the low-rate era between 2009 and 2021, earning a 6.5% return on capital drove returns on equity to the low double digits when borrowing costs were in the 3-4% range. Indeed, as share count rose by 65% over the past six years, assets on the balance sheet increased by 170%. This positive leverage is the key to building real estate wealth.

In the current rate environment, the math isn’t so hot. If Alexandria finds itself unable to grow with low-cost debt, incremental shares must be offered to the public in ever-increasing quantities. When capital is expensive, REIT shareholders face dilution.

So where does this leave us?

Alexandria has a solid business renting space to big pharma companies. Most of its debt is financed at 3.8% for another 13 years. The stock trades at a slight discount and offers a nice dividend in excess of 5%. However, ARE also relies on the ability of many cash-burning high-risk ventures to continue paying rent.

Many firms will fail. Some may become blockbusters. Alexandria doesn’t have to bet on one horse, it owns the thoroughbred farm. They know which smaller tenants are growing and making progress on their drug pipelines. In fact, their venture business gives the firm upside when a tenant wins the derby.

If you have a favorable outlook on the biotechnology industry, Alexandria shares seem like a decent way to receive a nice dividend while a recovery forms. Indeed, there are signs of a thaw. Several new funds have found traction. Venture money may be flowing to the industry once again.

As for me, I would prefer to wait for a further decline in the share price to make an acquisition. The company has $9.3 billion of development in progress that may struggle to find tenants willing to pay top dollar for lab space. The new paradigm for inflation-adjusted rents has not been “battle-tested” in a market where firms are looking to preserve cash. Splashing out big dollars on fancy office space probably won’t sit well with venture capital investors who have seen much of their pandemic era gains evaporate. Corporate austerity may be the new watchword for the biotech industry.

Until next time.

DISCLAIMER

The information provided in this article is based on the opinions of the author after reviewing publicly available press reports and SEC filings. The author makes no representations or warranties as to accuracy of the content provided. This is not investment advice. You should perform your own due diligence before making any investments.

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