Jonathan Litt Shorts Alexandria Actual Property. Why It is A Poor Commerce. (NYSE:ARE)

If it seems like an workplace. If it is occupied like an workplace. Is it an workplace? Activist Investor and founding father of Land and Buildings, Jonathan Litt, apparently thinks so.

In a recent segment on CNBC’s Quick Cash, Litt elaborated on his quick place in Alexandria Actual Property (NYSE:ARE), which is a life-science-focused REIT that could be a trusted landlord to among the largest pharmaceutical corporations, together with Bristol-Myers Squibb Firm (BMY), Moderna (MRNA), and Eli Lilly (LLY).

The primary premise of his quick place is that ARE is not any completely different than some other workplace operator and needs to be valued as such. To help this, he pointed to in-house analysis that analyzed mobile phone information of these coming into and leaving ARE’s properties.

The dataset confirmed that bodily occupancy throughout the portfolio is down 50%. That is telling and notable as a result of it cuts towards one of many important promoting factors about ARE’s portfolio. Being that their house is primarily medical labs, one would moderately anticipate that the portfolio could be insulated from the secular dangers of distant/hybrid working preparations. Litt’s information appears to say in any other case.

Constructing on the information, Litt warned about their lease expiration schedule and the specter of new incoming provide. And given present buying and selling values, he views the inventory as at the very least 40% overvalued to their office-based friends. Whereas his argument has benefit, I do not view it as a worthwhile one.

Jonathan Litt’s Issues On ARE’s Bodily Occupancy Ranges

Bodily site visitors ranges apart, ARE’s present occupancy charges are working north of 90%. Others are struggling to even attain the 90% mark. Boston Properties (BXP), for instance, ended Q1 with complete in-service occupancy of 88.6%. SL Inexperienced’s (SLG) charges had been in the identical ballpark. ARE’s stronger portfolio already warrants a premium to friends.

The bodily cell information additionally requires additional consideration.

By nature, there’s extra motion in a lab than there may be in a typical workplace. For instance, in an accounting agency, somebody can sit on the similar desk all day lengthy. In a lab, however, scientists could shuttle from one location to a different. How does the cell information account for this motion?

One other level price consideration is the sensitivity round lab work. In analysis environments, cell telephones are sometimes prohibited from entry as a consequence of both the proprietary nature of the work or just due to the injury it might trigger to the underlying experiment. What if cell telephones aren’t available when the house is occupied?

Litt’s information is capturing the period of time being despatched within the labs. Extra particularly, these which can be spending at the very least an hour, which is necessary as a result of it filters out these which may be merely visiting or delivering items, a nuisance that’s usually improperly mirrored in different datasets. For my part, I sense that extra administrative capabilities are being carried out remotely, whereas the lab elements are being carried out on website. If that is the case, there’s nothing mistaken with that as a result of there stays an underlying demand for the lab itself.

Litt acknowledged that these which can be spending time within the buildings aren’t staying for a full workday. As an alternative, they’re current for a mean of just below six hours. I might say, “so what?” to that. It would not change the truth that lab experiments merely can’t be carried out at residence.

The lab facet and the character of the delicate work carried out in it’s a key consideration, which I consider is being neglected by Litt.

Jonathan Litt’s Issues On ARE’s Asking Rents

Litt constructed upon the decrease bodily attendance ranges by stating that ARE’s asking rents are about $50/psf, which is under the $100/psf {that a} lab ought to command. This additional bolstered his place that ARE’s portfolio is extra typical of an workplace than a lab. As well as, Litt talked about that ARE could be at heightened danger upon lease expiration. This is sensible upon first thought. In any case, why would an organization need to pay 100% asking value on house if it is solely being 50% utilized?

However what he did not point out was the rental spreads ARE is commanding upon renewals. In Q1, the corporate realized money spreads of 25%. A conventional workplace could be fortunate to command that degree of pricing energy in as we speak’s surroundings. ARE’s leasing efficiency additionally contradicted his concern relating to the leasing expirations. In Q1, the corporate leased 1.2 MSF of house. This was the twelfth consecutive quarter with leasing quantity above 1 MSF. It was additionally above their 5 yr pre-2021 common.

If their house was actually at secular danger, why would corporations be speeding in to signal house at rents 25% above present costs?

Jonathan Litt’s Issues On ARE’s Building Exercise

One other level made pertained to new development exercise. Given the event pipeline and the specter of new incoming provide, the present considering is that there might be extra house in relation to demand. This can take time to play out in actual time. However I do not see the doom coming to fruition. ARE diminished steerage for development spend in 2023 by +$250M in recognition of the unsure surroundings.

The discount was triggered by a pause in a few of their initiatives underneath development. And apart from their actions, administration additionally famous a common pullback within the total sector pipeline as a consequence of delays and value escalations. Incoming provide, due to this fact, is anticipated to be lower than what most anticipate.

The pipeline for brand new drug improvement, however, is anticipated to proceed rising within the years forward. By 2027, for instance, complete spending is expected to close 2.0T. To accommodate that degree of spending, there’ll have to be obtainable lab house. If development is unable to maintain up, the provision dynamics might turn out to be very favorable to ARE.

Is Shorting ARE Inventory A Good Concept?

When contemplating cell information, present rents, upcoming expirations, and the specter of new provide, Litt views ARE at the very least 40% overvalued in comparison with different workplace operators.

Supposing for a second this holds water, traders ought to contemplate the place ARE is at present buying and selling at. At a present value of about $115/share, ARE is buying and selling at a couple of 6.5% implied cap fee. Different workplace operators are buying and selling at 10%+.

So Litt does have some extent in saying that ARE trades at a 40% premium. However one must also contemplate that ARE is doing offers within the sub 5.5% vary. That is a testomony to the standard of their total portfolio. Is a ten% implied cap fee, then, lifelike for ARE? I might argue on the contrary.

Potential traders can debate all day whether or not ARE is an workplace or not an workplace. However ultimately, one ought to ask themselves this: What’s a extra at-risk property class? A conventional workplace tailor-made for extra administrative capabilities? Or a lab which homes innovative analysis gear used for the event of subsequent technology medicines? To lump ARE in with different pure-play workplace operators is equal to disregarding their major enterprise mannequin.

Jonathan Litt made a daring commerce on ARE. However he is unlikely to submit a market beating return on it.