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Alexandria (ARE) Recapitalizes San Diego Property at $981/RSF

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Alexandria Real Estate Equities, Inc. (ARE - Free Report) and its former real estate joint venture (JV) partner recently concluded the recapitalization of 9625 Towne Centre Drive and divested 70% of their interest in the property. The move aligns with the company’s value-harvesting and asset-recycling self-funding strategy.

The transaction was valued at $160.5 million or $981 per rentable square feet (RSF) with a strong capitalization rate of 4.5% based on ARE’s annualized cash net operating income (NOI) for the second quarter of 2023.

With this latest development, Alexandria now owns 30% interest in the Class A life science facility compared with 50.1% owned earlier. While the JV partner completely exited from the investment, ARE retained its operating control over the property.

Moreover, ARE gained $32.3 million as its share from the sales price and a value-creation margin of 88%, making the move a strategic fit. It intends to reinvest the proceeds from the disposition into its highly leased value-creation pipeline to capitalize on the secular trends of the life science industry.

The stand-alone operating property in San Diego's University Town Center was redeveloped in 2017 by Alexandria and delivered to Takeda (TAK - Free Report) , a multinational pharmaceutical company, in 2018. The LEED Gold and Fitwel certified facility, encompassing 163,648 RSF, is fully leased to Takeda and can be expanded by 100,000 square feet or more.

Focusing on its capital-recycling strategy, and dispositions and sales of partial interests target of $1.525 billion (at the midpoint of its guidance of $1.425–$1.625 billion) for 2023, this June, the company disposed of five non-core, non-mega campus properties in Greater Boston to affiliates of TPG Real Estate Partners.  

The sale of the portfolio, encompassing 428,663 RSF, was carried out for $365 million or an average sales price of $852 per RSF. Based on ARE’s NOI for second-quarter 2023, the weighted average capitalization rate was 5.2%, inclusive of vacancies available for redevelopment. The transaction yielded a gain on sale of $187.2 million and a value-creation margin of 80%.

Further, in May 2023, it sold 11119 North Torrey Pines Road, a fully leased 72,506 RSF single-tenant property, in its San Diego cluster to DivcoWest for $86 million. The capitalization rate was 4.6% based on ARE’s annualized NOI for first-quarter 2023, yielding significant realized value for the company.

Alexandria’s Class A properties are located in North America's AAA innovation cluster locations, with significant market presence in Greater Boston, San Francisco Bay Area, New York City, San Diego, Seattle, Maryland and Research Triangle. The advantageous locations of its properties have been driving demand, resulting in high occupancy levels.

Also, ARE’s focus on acquiring, developing and redeveloping new Class A properties in AAA locations bodes well for its external growth. As of Mar 31, 2023, its current and near-term value-creation projects totaled 6.7 million RSF and were 72% leased, which is encouraging.

The company expects to capture more than $610 million of annual incremental NOI from the second quarter of 2023 through the first quarter of 2026 with these projects.

With a solid balance-sheet position and ample financial flexibility, ARE is well-positioned to capitalize on long-term growth opportunities.

Shares of this Zacks Rank #3 (Hold) company have lost 12.3% in the quarter-to-date period compared with the industry’s decline of 5.4%.

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Some better-ranked stocks from the REIT sector are Ventas (VTR - Free Report) and Host Hotels & Resorts (HST - Free Report) . While Host Hotels sports a Zacks Rank #1 (Strong Buy), Ventas carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Ventas’ current-year funds from operations (FFO) per share has moved 1% northward over the past two months to $2.98.

The Zacks Consensus Estimate for Host Hotels’ ongoing year’s FFO per share has been raised 1.6% upward over the past month to $1.91.

Note: Anything related to earnings presented in this write-up represents FFO — a widely used metric to gauge the performance of REITs.

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