Earnings Call Transcript - ARE Q2 2020

Operator, Operator

Good day, and welcome to the Alexandria Real Estate Equities Second Quarter 2020 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Paula Schwartz, Investor Relations. Please go ahead.

Paula Schwartz, Investor Relations

Thank you and good afternoon, everyone. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company's actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's periodic reports filed with the Securities and Exchange Commission. I now would like to turn the call over to Joel Marcus, Executive Chairman and Founder. Please go ahead, Joel.

Joel Marcus, Executive Chairman and Founder

Thank you very much, Paula, and welcome, everybody, to Alexandria's second quarter earnings call and our first full quarter conducted virtually. I want to thank the entire Alexandria family for an outstandingly executed second quarter, in all respects and by all metrics, especially given that it was our first full reporting quarter virtually. It was once said that everything changes but change. As I've quoted before, the visionary author Jim Collins noted, 'To be built to last must be built to change.' And Stephen Hawking said, 'Intelligence is the ability to adapt to change.' Alexandria has always been resilient and very responsive to a changing environment. We're blessed compared to many who are struggling during this pandemic, and I want my heartfelt wishes to go out to everyone for both safety and good health. We also want to give kudos to our entire accounting and finance team on our win of NAREIT's Best Communications Gold Award once again. In our first quarter call, we dialed back our growth in light of the uncertainties of the COVID pandemic. But now, having gotten through that quarter and the part of the second quarter, we have a clearer view of the landscape going forward. I want to speak briefly about corporate responsibility. This has been in the press, but our company is not new to this. We've worked hard on a variety of corporate responsibility initiatives over many years, including our pioneering zero carbon building in South San Francisco. More recently, in response to the COVID pandemic, we have been at the forefront of the life science industry advancing the search for solutions to COVID-19. In particular, I want to highlight our project, OneFifteen, in Dayton, Ohio, aimed at tackling the opioid crisis, which has become increasingly critical. The model we are developing there could serve as a template for other communities. This is the first complete care model from detox to job placement. I want to shift gears to the life science industry. We are living in unprecedented times due to the pandemic and resulting recession. However, we have seen a significant uptick in demand this quarter across all our markets from both new and existing tenants. This gives us a good deal of comfort. There is strong bipartisan support for life science R&D, which has included a commitment of $10 billion to Operation Warp Speed. Other funds have been allocated across various health agencies that will support COVID-19 efforts. This year, the FDA has approved 25 new drugs, and we are seeing a significant amount of venture capital backing life science projects, especially in Alexandria's region. Life likely won’t return to normal until we have a widely distributed COVID-19 vaccine, and good news is that this may happen sooner than expected thanks to private investment and cooperation between the U.S. government and drug companies. The potential return from resuming normal life far outweighs the transfer payments spent by Congress up to this point. I truly believe that the combination of private innovation and quicker regulatory actions will yield positive results.

Jenna Foger, Senior Vice President

Thank you so much, Joel, and good afternoon, everyone. Against the backdrop of this COVID-19 pandemic, the life science fundamentals remain strong. We are tracking over 80 tenants in our cluster markets working on solutions for COVID-19, and we owe them a tremendous debt of gratitude. The rollout of a vaccine is critical not only for public health but also for reopening the economy. Various companies are in various stages of human trials for vaccine candidates, with many more projects underway. I want to highlight the three most advanced vaccine developments: Moderna, Pfizer, and AstraZeneca, all key tenants of Alexandria. Each has reported positive early clinical data indicating safety and efficacy. Their programs have now officially enrolled tens of thousands of patients for late-stage pivotal studies worldwide. Moderna has received substantial funding from BARDA and has demonstrated promising initial data regarding neutralizing antibodies against the virus. Pfizer is expected to report efficacy data soon and has significant government support to deliver its vaccine. Likewise, AstraZeneca also shows a safe vaccine profile with promising results for immune responses. While it is challenging to predict widespread availability, we expect interim data releases from these pivotal studies in the coming months. If results are positive, Emergency Use Authorization by the FDA could happen as early as this year. However, the durability of immunity and the frequency of boosters remain open questions. Despite these uncertainties, new antibody therapies and a vast pipeline of COVID-19 treatments in development provide hope that we can manage the virus better over time. Our tenants are doing mission-critical work, and we look forward to supporting their efforts in the ongoing battle against this pandemic.

Stephen A. Richardson, Senior Vice President

Thank you, Jenna. Good afternoon, everyone. Alexandria's role as a leader in providing mission-critical health infrastructure is crucial as the pandemic progresses. Our operations team has been working diligently to provide exceptional service to our tenants. During the second quarter, we've collected 99.5% of accounts receivable, a testament to the quality of our tenants and our operations team's efforts. Our leasing activity outperformed previous quarters with a total of 1,077,000 square feet leased. We've maintained strong occupancy rates and rental rate increases, showcasing the resilience and demand within our portfolio. Our core clusters experienced no significant lab subleases coming to market during the pandemic, indicating ongoing interest in our offerings.

Peter M. Moglia, Chief Operating Officer

Thank you, Steve. I'm going to update you on our development pipeline and acquisitions during the quarter. We've added projects to our portfolio, including fully leased developments, reinforcing our commitment to meeting demand across our regions. While leasing percentages have remained stable, we are encouraged by interest from companies looking for space despite the overarching challenges posed by COVID-19.

Dean Shigenaga, Chief Financial Officer

Our platform has generated high-quality growth, with a significant portion of our rental revenue coming from investment-grade-rated companies. We recently published our annual corporate responsibility report reaffirming our ESG commitment. Our second quarter results align with expectations, demonstrating resilience with up to 99.5% rent collections and positive trends in occupancy and revenue growth.

Joel Marcus, Executive Chairman and Founder

We're now ready for questions from the group.

Emmanuel Korchman, Analyst

Dean, regarding the accelerated disposition program, could you elaborate on your rationale for pursuing dispositions in conjunction with equity offerings? What assets or markets are you considering for sale, and what is the expected timing?

Dean Shigenaga, Chief Financial Officer

Manny, we have consistently relied on a blended approach to our capital sources, balancing dispositions with equity issuance. We are evaluating opportunities to either sell partially or outright in high-valued core assets to generate equity capital for reinvestment.

Joel Marcus, Executive Chairman and Founder

Steve, do you want to elaborate on the demand for real estate needs from tenants focused on COVID-related initiatives?

Stephen A. Richardson, Senior Vice President

Manny, it’s a mix. Some existing platforms are utilizing their available capital for ongoing developments and initiatives related to COVID-19. We've also seen a rise in demand for lab spaces, as companies are seeking to scale manufacturing operations significantly.

Joel Marcus, Executive Chairman and Founder

We anticipate a robust strategy regarding acquisitions moving forward, with a careful approach based on market conditions and our historical performance.

Operator, Operator

And our next question will come from Sheila McGrath with Evercore.

Sheila McGrath, Analyst

Could you provide more details on the Sorrento Mesa leasing you mentioned? Did you have a tenant secured before purchasing the 9877 Waples property?

Joel Marcus, Executive Chairman and Founder

Yes, we did have a COVID-related requirement in place before the acquisition. We knew the demand existed. Regarding the one million square feet of leasing activity, we were not surprised. In fact, we expected even bigger figures, driven by our longstanding relationships with tenants. Many of these activities are still ongoing and indicative of the strong operational foundation we have in place.

Operator, Operator

And our next question will come from James Feldman with Bank of America Merrill Lynch.

James Feldman, Analyst

Can you provide your thoughts on potential risks if there is a Biden win in the upcoming election? And what are your thoughts on Proposition 13?

Joel Marcus, Executive Chairman and Founder

It’s challenging to predict the political landscape until we have more information post-election. However, there are concerns regarding the health of candidates, and we are continually monitoring developments around Proposition 13.

Peter M. Moglia, Chief Operating Officer

I believe there is potential for Proposition 13 to face significant opposition, and we are hopeful that it does not pass given the current economic conditions.

Joel Marcus, Executive Chairman and Founder

Regarding the future use of office space, I think there's recognition that companies will need to preserve their cultures and training processes, which require physical presence. While there are challenges, I believe a healthy office environment will endure.

Peter M. Moglia, Chief Operating Officer

While more flexibility and remote work are likely, the demand for office space will remain. The human element in operations is irreplaceable.

Stephen A. Richardson, Senior Vice President

Monitoring demand across our portfolio is crucial. We will continue to assess the evolution of work habits and the competitive landscape which influences our adjustment strategies going forward.

Joel Marcus, Executive Chairman and Founder

The market is significantly influenced by various sectors adapting to new operational realities, and we remain optimistic about future growth.

Operator, Operator

And our next question will come from Anthony Paolone with JPMorgan.

Anthony Paolone, Analyst

Can you discuss how the tech demand slowdown is affecting your pipeline for development? Are any adjustments being made in light of the current market?

Joel Marcus, Executive Chairman and Founder

In general, our strategy remains unaffected. We approach acquisitions carefully and are watching market conditions closely. We are very selective and want to ensure our risk is managed while we continue to grow our portfolio.

Operator, Operator

And our next question will come from Tom Catherwood with BTIG.

William Catherwood, Analyst

Following up on your potential for acquisitions, can you share your views on sourcing deals and the market dynamics you’ve witnessed recently?

Joel Marcus, Executive Chairman and Founder

After evaluating conditions, we are considering a range of acquisitions across various markets, remaining focused on delivering substantial value while being mindful of current economic uncertainties.

Operator, Operator

And our next question will come from Tayo Okusanya with Mizuho.

Omotayo Okusanya, Analyst

Congratulations on a great quarter! My question revolves around future acquisitions. Should we continue focusing on acquisition with high development potential, or are operating assets being considered?

Joel Marcus, Executive Chairman and Founder

Every acquisition opportunity varies. We remain agile and focused on opportunities that align best with our strategic goals and market needs.

Operator, Operator

This concludes our question-and-answer session. I'd like to turn the conference back over to Joel Marcus for any closing remarks.

Joel Marcus, Executive Chairman and Founder

Thank you, everyone. Please stay safe and be well. We look forward to connecting on the third-quarter call. Thank you again very much.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.