Alexandria Real Estate Equities, Inc. (ARE) Earnings Call Transcript & Summary

It's time to move on and get to our panel discussion through the COVID-19 economy and beyond, which is in some sense, a continuation of the conversation that began yesterday afternoon. And I'm pleased to introduce our panelists there: Tom Bartlett, President and CEO of American Tower Corporation, a multinational REIT, focused on cell towers and other wireless and broadcast infrastructure. We also have with us Tamara Fischer, President and CEO of National Storage Affiliates, a company focused on self-storage facilities in high-growth markets. Also with us today is Joel Marcus, the Executive Chairman and Founder of Alexandria Real Estate Equities, which owns office buildings and lab space designed for the life science and technology industries. And Charles Meyers, the President and CEO of Equinix, a multinational company that specializes in Internet connection and data centers. Welcome to all of you, and thank you all for being with us today. So we look forward to a wide-ranging conversation over the next hour. All of you represent different sectors of the REIT space. And one of the happy aspects of REIT and publicly traded real estate is the great breadth and depth of coverage in terms of the real estate landscape. And we have with us today CEOs of companies representing several of the sectors that operate that make use of the land and the improvements put on the land. And the real estate that everyone in our society and economy needs each and every day to work, to play, to live, to make their way in life. And so much of what all of you do through your companies are additive each and every day to our needs individually. And with that, I'd like to begin just with a few general questions about the economic situation we've been living through in recent months and now into the future and how that affects your outlook for the company and the economy more generally. We had strong GDP growth in the third quarter, obviously, since last March, when the COVID-19 crisis began, and we went through shutdowns and different parts of the economy were treated different ways between essential and nonessential. So everyone's had different experiences in that sense, but it's ultimately affected everybody's business in some sense.So I'd like to start, Joel, just with your sense of where we are from your vantage point in the economy coming out of third quarter -- strong third quarter, again in the fourth quarter, looking to next year, how you see it?

So thank you very much, Steve, and a pleasure to be here. Yes, we had a very strong third quarter after a pretty precipitous drop in the second quarter. We hope that January 5 will be an important, I think, date where the Senate will be determined. And if we're fortunate enough to get split government, we think that rational tax and economic policies will prevail, and that's going to be very important. Obviously, in our sector, you've seen a number of announcements, including this week by Pfizer and Moderna of historic development and manufacturing simultaneously and ultimately, the delivery of at least 2 initial vaccines, which will move along the, I think, the population here in the United States to really be able to protect itself against COVID-19. And we hope that by the third quarter or fourth quarter of 2021, we've really developed complete what they call herd immunity to this virus. So that's pretty critical. I think it's also fair to say that warp speed has really made a huge difference from January to now in bringing forward vaccines that would otherwise take several years. One, discovered to test and then the manufacturer. And we would hope that also that those in-charge of both local jurisdictions, states and even federal government won't resort to kind of the shutdown techniques that have hurt the economy and heard a lot of individuals broadly across the country.

So Joel, when you look out ahead with the recent news on the vaccines from 2 of the companies you mentioned in recent days, and you sort of look at the calendar into next year, do you expect things to normalize midyear next year or later? Or do you have a sense of it?

Well, if you look at just macro-wise, I think it will be well into the second to third quarter before enough people have access to all the vaccines. Most of the vaccines, there will be a host of them that have different performance capabilities, durabilities, efficacies and so forth. And it looks like there'll be 2 vaccines per person. We've got, what, 350 million people. So that's almost, what, 700 million doses and then not to include the rest of the world, assuming everybody were to take the 2 vaccines. So we've got a lot of work to do, but in record time. And we hope that, I would say, by the third -- second to third quarter, we should be approaching a much more, I think, realistic view of taking the economy forward. So it's going to take some time, but we've made huge progress, and the death rates have plunged considerably, which is despite the infection rate, the death rate has gone down remarkably by more than 85%.

And well, thank you...

And want to add to the steroids and the therapeutic antibodies, which are being used slowly but more widely.

Right. Charles, you oversee a truly multinational company, and you operate in many countries around the world. Maybe you can give your perspective on where you see the U.S. relative to what's happening in other places around the world in terms of the economic effect of this in recovery?

The -- we certainly are seeing the impacts of the virus and the pandemic globally across all the markets in which we operate, which is 65 broadly across the world. I think that we are seeing different paces of progression in terms of the pandemic. I think, right now, we're seeing very positive momentum [Technical Difficulty] .

The largest REIT in the world operating multinationally as well, maybe you want to pick up where Charles was seeing here relative to the rest of the world?

No, I'd be happy to, Steve. And again, thanks for having us and all the great work that you all do. I spend a lot of time with Charles as well and so we overlap in many different markets. And it really depends upon the region that you're in. We look at markets, interestingly enough, like markets like Africa, which have actually done quite well over the last several months. But you look at markets like Europe, and we've actually opened and closed offices a few different times. And right now, they're in the -- really struggling, candidly, at this point in time, just from an overall disease perspective and infection perspective. And Latin America, where Brazil was actually struggling early on, we've actually reopened offices in São Paulo and Rio. And so they seem to be doing much better. And Mexico continues to struggle as well as some of the markets that we're in, in Asia. So it really does vary by region. I think Joel is right. I mean, I kind of look at -- it's very difficult to predict where the economy is going to be going. It's a bit of a sign way that opens and it closes and it opens and it closes. We pray that the vaccines do contribute. It's going to take a while for them. I just saw yesterday, New York is predicting that their economy is not going to be back on a pre-COVID basis for a few years. And so I think it's really going to affect a number of different industries differently. I mean our particular industry in terms of what drives us is really not -- it's really kind of noncyclical drivers. I mean it's broadband demand, it's usage, it's carriers' interest in spending and participating and getting on to our specific towers. So it hasn't impacted us candidly from an industry perspective like it has impacted many others, clearly. But yet, we still see the impacts on our people and on our local communities and on our customers overall.

And as far as the -- as far as the United States...

Tom, thanks for stepping in there.

Charles, are you available to continue?

I am. Thanks, Tom, for picking up that for me. So Steve, I'm back available when you wish.

Well, why don't you pick up on what you were saying? I think everyone should have that chance to hear.

Yes. I was able to hear Tom for the whole time. And my -- I think our view would very much mirror is, which is we've seen, obviously, very different levels of impact across the globe. I think right now we're seeing positive progression, in particular, in Asia. We've seen sort of reversion in Europe and the U.S. But I agree with the earlier comment, the optimism around the potential impact of the vaccine. Even I think in advance of that, actually, vaccinations being executed upon, I think, to the extent that we are -- we see that light at the end of the tunnel, I think that will have some positive impacts. But again, I think this is going to be -- I don't think we've even seen the full impact of the already -- the protracted periods of shutdown on the economy. I do think there's more work to be done both from governments and private sector in terms of stimulating a recovery. But hopefully, we're pointed in the right direction and vaccines will have a positive impact.

I'd like to ask, Tom, if you see -- Joel mentioned the potential for divided government January 5. Before we get to January 5, there continues to be arguably a need for additional government assistance. And I just wonder if you're -- where your thinking is on the need for additional legislation to provide assistance out there?

Well, Steve, I think I would suspect that all of us who are on the panel are really focused right now on supporting all of our employees and our customers and the communities that we're living in. So clearly, given the health and safety needs being our top priority, I think it needs to be the top priority of the government as well. And it's somewhat incredible that it's taken so long for this to be resolved in this last go round. But there are just so many -- we see it every day. There are just so many millions of workers and families and businesses just suffering from the economic impacts. And candidly, where I am in the East Coast, it's getting worse. And so more and more businesses are being forced to close. And I think as more and more of us do get COVID, it's just going to accelerate until we have a distribution of a vaccine. So it has to be a top priority, I think, of the federal government, regardless of who's controlling the Senate, and it needs to be very coordinated from a funding perspective. So yes, I think it remains to be the single largest priority that we have.

And Tammy, you operate -- oversee a company operate in probably 2/3 of the states of the country, so you're seeing the U.S. through much of it. What's your perspective of both on the economic recovery that how much time it will take to get deeper into it and equally important, the need for continued federal assistance to small business, small business tenants as well as individuals.

No, I'll start with the second piece of that question. And our tenants are about 80% residential, individuals and about 20% small businesses. And so from our perspective, I can't overemphasize the need for additional government support. I have no idea why they wasted as much time as they have, getting this thing done and taken care of -- oh, well, maybe I have an idea, but no point in going there. But in any case, I think it should be a top priority, and I think it's needed both for individuals and for small businesses. The impact on people in our communities has been devastating. So I also see that as a top priority. As it relates to -- sorry, what was your first -- what was the first part of that question? I latched onto the second part.

No worries. About the state of the economy in the areas of the country in which you operate and the ability to sort of bridge into next year and sort of get back to normal?

So I think there are 2 parts to that. One is that our exposure is predominantly to MSAs 20 and above. And so we are less impacted by the more densely populated MSAs around the country, coastal cities. However, we do have a huge presence and large exposure to Oregon and Portland specifically and the state of California. And in both cases, that -- it has been very challenging for our customers, for our employees and just to run business as usual. Self-storage is considered an essential business. So we were never really forced to close. Our employees have been protected along the way. But generally speaking, from an economic standpoint, we're seeing -- certainly seeing the effects in those markets. However, in the secondary and tertiary markets, we are less impacted, but the shutdowns were slower to happen. And I think they are more inclined to try to run life as usual, although with this most recent surge that is becoming more and more challenging. So that's probably the one in the shorter end.

Right. One interesting aspect of this group is you're all representing sectors that have fared fairly well through this crisis. And very much in terms of the real estate economy, it's been a tale of 2 cities, where some sectors have been affected far more harshly than others. And there is the expectation going forward that even when we return to normal, there will be some changes that will come through this process. And I'd be curious, Joel, in terms of your world in terms of lab space and some of the innovative things you've done over the years in your conversations with the tenant base and the science-driven industries, how you see this longer-term affecting the use of the type of space you provide or that it's more generally provided in the economy for office-related type work?

Well, focusing on our sector, which is the lab space, the real estate sector that we created back in 1984. I think it's fair to say that COVID-19 has revealed 2 fundamental macro factors that weren't as apparent before. And the industry has become kind of the savior of the world, if you will, which is actually a wonderful thing for a knowledge-based industry. The first factor that really was revealed by COVID is and you've heard a lot about this, is the repatriation of supply chains in the medical and health care arena. So many companies have started to work. And certainly, this administration, and I suspect the Biden administration will be focused on this of repatriating kind of what we call the RDC&M, the research, development, commercialization and manufacture of both commodity products and then specialty products, high-value, noncommodity products, many of which are pharmaceutical products back to the United States. The risk though is, I think, a real one, and we've seen demand kind of surge because of that in a variety of regions across the United States. The risk is the January 5, Georgia Senate runoff. If the Democrats actually were to win and win the Senate, they've actually stated one of the core principles is and Biden has been on the trail, consistently saying, we're going to raise taxes of corporations in the United States. So the practical result of that, which is kind of foolish for policymakers, you raise corporate tax, corporation [Audio Gap] is parking large amounts of cash overseas, keeping operations overseas, not repatriating and those that have actually come back, thinking of where they'll go in the world with much lower tax rates. So it sounds good to raise corporate taxes because it satisfies parts of their constituency, but it actually [Technical Difficulty].

I think we've lost Joel's audio here. Joel, can you hear us? Well, maybe we'll -- Joel, we're having difficulty with your audio. So maybe, Tom, if you could -- you and Charles both sort of are overseeing companies and undertakings that basically provide the means at which it's possible for us to work from home, so to speak, much more easily than in the past. And I just -- your comment on sort of what demands you faced as a result of this moment in time? And how you see it affecting your business going forward, Tom?

Well, yes, Steve, I think just to add on, I think where Joel was talking about and some of the things that have become obvious, I think, from the world that we're living in right now is the significance of this digital divide. It's incredible to just understand and appreciate how many people don't have a connection and/or have a connection that's very poor. And so one of the clear things that we've seen, it's the have and have-nots. And so just kind of going to the follow-on on the stimulus package. I think not only do we need support for individuals and businesses, but we do need to really advance the ball on a significant infrastructure initiative within the United States. And by the way, it's not just within the United States that we see this significant need. I mean we need to figure out ways of connecting the unconnected. Now the carriers, our customers, the wireless carriers are doing their very best to be able to meet that need. And as a matter of fact, in many markets, they're extending credit to consumers who aren't able to pay bills, just so that, in fact, they can continue and be connected and not be in such isolation. But it's become obvious to, I think, many that the opportunity to really accelerate the connection for those that don't have one and for even in America, into rural America, getting speeds and connectivity is incredibly important. And so that's one of the most obvious things, I think, that we've seen. The carriers continue to spend money on their networks. And so as I said before, the demands in our business are much different than most other asset classes in real estate. And so the carriers continue to heavily invest into their networks because there is such increased demand on their networks as a result of the need for remote just broadband connectivity. So it's actually been strong from that standpoint, and we're somewhat insulated from really the true impacts of what's going on. But there's just a much more significant need to connect the unconnected.

Charles, you have a perspective on sort of what you've seen in your business through this crisis in terms of the use of technology and the demands of it? And where it's likely to take us in the next few years, given what consumers and businesses have learned about the cloud and interconnectivity?

Sure. Sure, Steve. I think there's a few different lenses we can put on it. One is that our -- just how we operate our own business. We talked a little bit about that. And we, of course, like everybody else, saw this movement in terms of work from home for a significant portion of our workforce. Obviously, our frontline employees in the data centers had to be on the ground and working through that. But I think we've been able to respond to that effectively. I think like many companies, we found that we can -- our business effectively progress on many dimensions with really a lot of remote work. We will, I think, move towards some middle ground, which sort of combines traditional physical presence with a greater work-from-home dynamic over time. But that was -- that's kind of how our business specifically responded. In terms of the broader demand, we did see a period of time in the spring where some of the dynamics that Tom discussed there in terms of the carriers reacting to the work-from-home dynamic and enterprises rearchitecting their VPNs to adapt to that as well as sort of demand from digital service providers across a range of companies like Zoom and Webex and others that are responding to the services that are needed to support the work-from-home setting. That created some surge of demand in the earlier part of the year. But I think the more durable phenomenon is really in how companies, broadly speaking, are thinking about digital transformation. And the priority that, that has in their boardrooms and in their executive teams around the world. And I think that, that really is something we're going to see. There's a very durable phenomenon going forward is, is people seeing that those that were better prepared for a more virtualized and digital world are outperforming those that were less prepared. And therefore, we're seeing really an investment in digital infrastructure and a movement towards really hybrid and multi-cloud as the long-term architecture of choice. People are absolutely embracing the cloud. And -- but I also think there they realize that they have a private infrastructure requirement over time. And I think that will continue to be fuel for at least our sector. And I think, broadly speaking, will be a stimulus for the broader economy.

Well, thank you, Charles. Tammy, in your business, we're dealing -- you're dealing with the consumer, you say 80% residential. And there's been a lot of talk about individuals, not only increasingly working from home, but perhaps into the longer-term at the margin some shift to working from home. There's been -- in some of the big cities like New York and San Francisco, news about some out migration from the cities, at least temporarily. And I wonder if you see this effect at all in your business in terms of the demand for storage space as people's lives are changing through this process.

Self-storage has again shown its resilience in the face of unprecedented challenges presented by the pandemic and the ensuing economic recession and really untold numbers of people who have been unemployed, but self-storage is a needs-based business. And it's a very small ticket item. So one of the last things you're going to let go things that drive demand for self-storage, include death, divorce, dislocation, downsizing. And these drivers actually tend to increase demand in difficult times for different reasons, and you just named off a couple of them. Some of the things that we've seen drive demand and unseasonal demand have been the move toward remote working, remote learning where families need to create a space for children to work and learn. And certainly, this out migration where folks are moving out of the more intensely populated MSAs and moving back with family or combining households. All of that tends to create demand, and we've seen that in the past 3, 4, 5, 6 months. At the height of the pandemic, we saw lower move-in volumes. Our walk-in traffic is still about 56% of our business. And obviously, we weren't seeing much in the way of walk-in traffic. But we did move to contactless rental environment across our portfolio. And of course, as move-ins reduce so did move out. And so I think in part that has added to our ability to continue to deliver strong results. So I think, in general, what we are seeing is unseasonal increased demand in the third quarter and in the beginning of the fourth quarter. As the surge in cases continues here in the short term, it's quite possible that we'll level out on occupancy, which is at historic highs for us. And the move-out volumes will continue to decline through the fourth quarter.

Joel, I understand you're with us, at least by audio right now. Is that right?

Can you hear me?

We can hear you, absolutely. So one of the questions I'd like to ask you in the lab and life science spaces, you've got a mix of large and small tenants. And I just didn't know if the current -- the COVID-19 economy has affected the smaller tenant base differently, or if it's the same as the larger tenant base in terms of what you're seeing?

Yes. So I can speak about that. I'm not sure where I got cut off before, but I just wanted to go back and make sure because it's important...

Yes, go ahead, go ahead.

Macro trends where repatriation of supply chains, if Congress doesn't screw up the tax rules. And the second was new medicines are way more complex to produce -- to discover and produce. So we need to have those here in the United States. Moving to the tenant base, we collected 99.7% of our rents in last quarter and in the month of October. The only tenants that aren't paying rent are retail tenants and we've worked with them. So both the small venture-backed companies, the medium-sized private and public companies and then the big cap public companies are all doing very well in this environment. As you could well imagine, this is one of the most -- probably soul searching times for this country and the world, and this industry really is at the forefront of solving the problem.

One of the things that I think is happening more generally in the office space is my impression is owners are looking to learn from your area in terms of the indoor environment. And curious, if you're seeing that phenomenon, if people are sort of reaching out to you or looking at ventures along those lines?

Well, fundamentally, our laboratories have been our essential places since the shutdowns kind of initiated mid-March, we've been operating 24/7 since then. And oftentimes, tenants have shifts of people coming in during the day and through the evening, et cetera. Those who can work remotely, the white-collar workers certainly are doing that. I think when you go to the office area, it's pretty clear that depending on where you are in the country, that has been disrupted pretty substantially, as everybody knows, and we've learned to work from home. I think when it comes to our area, yes, offices are constructed just fundamentally differently than labs. Labs have natural spacing. Those of you who have either done chemistry or biology know that labs are inherently safe. They have lots of spacing now with masks and even more social distancing. You have many, many changes of fresh air each hour where in office buildings, you get recirculated air not many times during an hour. So they're fundamentally different environments, and we've been benefited greatly by those physical factors. And it's not easy to convert office buildings into laboratories. It takes -- you've got to have floor to ceiling height -- floor loading capacity, a whole lot of different things. And so most office buildings would never be able to provide the safety that we provide in the laboratory environment.

And as far as looking out, the demand for additional lab space in our economy, as we sort of look ahead, we see strength and resiliency there?

Well, I think the answer is, yes, the fundamental 5 -- we track 5 fundamental drivers of lab space, and they are very strong at the moment, and you overlay the 2 macro factors that have been revealed by COVID, I mentioned. One, being repatriation of supply chain; and two, increased sophistication of medicines, I think, bode very, very well for this industry. The only thing that can screw it up is mismanagement by the government or government interference or poor tax policy. So we'll hope that doesn't happen and split government should, I think, obviate that. So we're hoping for that.

Tom, when you mentioned the importance of infrastructure investment for the United States, and I completely agree. It's something that's we've been looking for now for, I think, decades, and maybe its time will come with the next Congress, let's hope. But the whole 5G rollout in a sense is infrastructure-related investment going forward in our economy. And you all are in the middle of it with your tenants. And I'd like to get a sense from you on where that's headed and adoption? And what it means for growth in your sector?