Alexandria Real Estate Equities' CEO Discusses Q2 2012 Results - Earnings Call Transcript

Alexandria Real Estate Equities, Inc. (ARE)

Q2 2012 Earnings Call

July 31, 2012 3:00 PM ET


Rhonda Chiger – IR

Joel Marcus – Chairman, President and CEO

Steve Richardson – COO and Regional Market Director

Dean Shigenaga – CFO, SVP and Treasurer

Peter Moglia – Chief Investment Officer


Jamie Feldman – Bank of America

Steve Sakwa – ISI Group

John Stewart – Green Street Advisors

Michael Bilerman – Citi

Philip Martin – Morningstar

Michael Carroll – RBC Capital Markets



Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Alexandria Real Estate Equities, Inc. Earnings Conference Call. My name is Diana, and I will be the coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Rhonda Chiger. Please go ahead.

Rhonda Chiger

Thank you and good afternoon. This conference call contains forward-looking statements within the meaning of the federal securities laws. 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 Form 10-K, annual report, and other periodic reports filed with the Securities and Exchange Commission.

Now I would like to turn the call over to Mr. Joel Marcus. Please go ahead.

Joel Marcus

Thanks, Rhonda, and welcome, everybody, to the second quarter conference call. With me today are Dean Shigenaga, Steve Richardson, Peter Moglia, Krupal Raval. I guess I would like to start out with a bit of a macro view for I guess the second quarter which really epitomizes – I think where we see things today from a strategic advantage point. And that is scientific advancement as a team froth that can be best done in a bio-pharma hub with multiple players that’s what Boston is to us.

And this was a quote recently in a interview by Elias Zerhouni he was President of the Global Research at Sanofi and as many of you know he was former head of the NIH, who really pioneered translational research in areas best positioned to take maximum advantage of this. I’d kind of like to label the macro industry comments today, what I’d call the gathering pipeline momentum. We’re witnessing a perfect explosion of biotech products, earnings and expansion, really what I call the biotech business. And just to name a few companies that are participating, many of which are our clients, Amgen, Celgene, Biogen Idec, Gilead, Alexion, Vertex, and Onyx.

If you look at the markets, the Supreme Court’s confirmation that the constitutionality of essentially Obamacare will move U.S. to full coverage of over 300 million people, which means the market, will be increasing and clearly the increasing of the emerging markets is – where big pharma is heavily focused as well. Last year, the U.S. spent $320 billion on medicine, so there certainly is a robust business.

Today’s climate is actually a lot better than you might think the FDA’s been doing over the last year or two, a much better job, I think from the industry perspective, a job of – approval of new medicines. And if you look at through today 7/31/ 2012, 18 drugs have been approved and an amazing 50% of which were ARE client tenants. The PDUFA law that was just enacted, included some very important helpful attributes for the biotech and the pharma industry, including confirmation of 12-year data exclusivity, fast track approval for new noble drugs which we were involved with and I think it’s also fair to say that based on what we hear from Washington, it appear that the NIH will be spared cuts if we get an election that makes sense here. So, we’re hopeful about that.

From the technology standpoint, the lifeblood of biotech and pharma, we’re seeing really a variety of emerging new highly disruptive first-in-class drugs including things like small molecule inhibitors for cancer stem cell, which really potential have the ability to someday reduce or maybe even eliminate radiation in chemotherapy. So, the outlook, we’re really entering a second wave for biotech’s successes and we’re extremely well-positioned as the leader in each of our key adjacency submarkets to take maximum advantage of this second wave expansion.

Moving to the balance sheet and capital allocation. I think it’s clear and Dean will speak to this a bit. Our goal over time is as we’ve said is to operate in about the 6.5 times debt-to-EBITDA range, achieved through a variety of strategies including on boarding of additional NOI continued use of the ATM and pay down of debt, continued sales of selected non-income producing land parcels, you’ll see some coming up here in the third quarter, and we’ll likely see an equity partner for Asia operations to share CapEx for what we consider to be a big opportunity.

We see significant near-term opportunities to take advantage in – of two converging macro forces of pharma penetration of our adjacency clusters as we’ve referred to and now the emergence of this second wave of biotech expansion, primarily Greater Boston, San Francisco, and New York City. We’ll selectively continue to allocate capital including recycled from suburban asset sales including some even closed today to our core cluster development sites with quality tenants where yields are significantly better than prevailing cap rates on sales of stabilized assets in such submarkets. So, there is a real good business there.

And in the second quarter, we did acquire a modest redevelopment site in the AAA location in Torrey Pines for almost $14 million. When we look to the second quarter internal and external growth, I think one thing that is I think we’re very proud of and kind of an amazing statistic is an astounding 48% of our annual base rent from investment grate tenants.

Once again and Steve will speak to this, we had very strong leasing quarter, almost 960,000 square feet with pretty solid staff, Boston kind of won the price 29% of leasing, San Francisco about 22% and Maryland about 18% and this included landing the new NIH’s mission critical MCATs requirement, which we’re very proud of. Other than East Jamie and the Gates Seattle Headquarters conversion and gain Steve will talk a little bit about this. We had solid returns on development and redevelopment. We have pretty solid returns on our India projects and with pretty high level credit and we’re working on expansion there.

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