ALEXANDRIA REAL ESTATE EQUITIES, INC. (ARE) stock intrinsic value fair value estimate & owner earnings analysis

Alexandria Real Estate Equities owns and develops laboratory and office campuses leased to drug makers, biotech companies and research institutions in the main U.S. life-science clusters: Greater Boston and Cambridge, the San Francisco Bay Area, San Diego, Seattle, Maryland, Research Triangle and New York City. About 97% of its leases carry built-in rent increases of roughly 3% a year, and tenants pay most property operating costs. Its largest tenants include Eli Lilly (4.5% of rent), Moderna (3.8%) and Takeda (2.5%). The business is in the middle of a hard reset. Too much lab space was built across its markets after 2021 just as biotech funding tightened. Occupancy fell from 94.6% at the end of 2024 to 90.9% at the end of 2025 and to 86.9% at June 30, 2026. Rents on renewed and re-leased space went from 29% increases in 2023 to 7% in 2025, and the company's 2026 outlook calls for cash rents on renewals 4% to 12% below the expiring rents. Leasing concessions have doubled, with tenant improvements and commissions rising from about $26 to $55 per square foot between 2023 and 2025. The company wrote down $2.2 billion of properties and land in 2025 and another $228 million in the first half of 2026. It cut its dividend by 45% in December 2025. It sold $1.47 billion of buildings in late 2025 that produced $118 million a year of operating income, and it plans about $2.9 billion more in sales in 2026. In June 2026 Moody's lowered its rating one notch to Baa2, which is still investment grade. How we measure earnings. We start from operating cash flow and remove working-capital timing and stock compensation. We then charge a yearly amount for keeping the existing buildings leasable: 1.75% of the net book value of the real estate, about $500 million a year, which also covers leasing commissions. That charge is slightly above what the company actually reported spending on building capital projects plus leasing commissions in 2025 (about $450 million), so we think it is adequate. Construction of new buildings is treated as investment, not as a cost of today's earnings. On that basis, owner earnings after interest grew from $3.62 per share in 2016 to $6.51 in 2025, up 2.5% in the last year. For this valuation we add back cash interest to measure what the business earns before its lenders are paid. That figure was $7.71 per share in 2025, up 5.9% on 2024. We do not use the 2025 level as the starting point. The business owned today is smaller, after the late-2025 sales, and less occupied. First-half 2026 results, annualized, show about $900 million of pre-interest cash earnings, and about $960 million allowing for the usual stronger second half. We start the base case at $910 million, or about $5.33 per share, for the portfolio owned at June 30, 2026, the same date as the debt we subtract. What changed since our last estimate. Our previous estimate valued the after-interest cash flow as if today's debt would roll over forever on today's terms. It also left the $12.8 billion of borrowings out of the arithmetic, with debt mentioned only as a risk. We now value the business before interest and then subtract what it owes. We give credit for the company's low-cost debt: about $11.8 billion of fixed-rate notes at about 3.9%, with an average of 11.4 years left to maturity, is worth about $2.0 billion less to lenders than the same debt priced at 6%. We also now count assets the earlier estimate left out: the land bank, the venture investment portfolio and signed leases on space under construction. The occupancy decline through mid-2026 and the reset in renewal rents also lower the starting earnings level. Together these moves cut our estimate sharply, from $134 to about $41 per share in the base case. What it owes. Borrowings at June 30, 2026 were $12.81 billion, almost all unsecured notes plus commercial paper, with no preferred stock. Subtracting about $0.37 billion of cash beyond operating needs leaves $12.44 billion. After the $2.0 billion credit for below-market fixed rates, the net figure is $10.45 billion, about $61 per share. Only $1.8 billion matures before 2030 ($350 million each in 2026 and 2027, $425 million in 2028, $700 million in 2029). Partners in consolidated joint ventures are entitled to roughly 20% of the operating cash flow, judged from their share of income ($213 million in 2025) and the distributions paid to them. We deduct that share in every case. Base case (about $41 per share). Rent from 1.4 million square feet of space that is already leased but not yet occupied ($69 million a year, starting around November 2026) roughly offsets further move-outs and lower renewal rents, so year one grows about 1%. That is below the 5.9% of the last full year, because 2026 guidance shows same-property income falling 7.5% to 9.5%. After that, cash earnings grow 1.5% a year: the 3% built-in rent increases, less lower rents on the roughly one lease in ten that renews each year and higher leasing costs. Beyond year ten we hold earnings flat. The buildings sit in established research clusters, and our yearly upkeep charge keeps them leasable, but nothing we can point to supports growth beyond that. We credit only the leased portion of the construction pipeline: about $150 million a year of Alexandria's share of operating income by 2029, out of $220 million expected from projects delivering in 2026-2028 that were 64% leased or in negotiation. We subtract about $1.2 billion still to be spent on construction and tenant build-outs. Land and future development sites (about $3.7 billion of book cost) are valued at half of cost. That reflects the repeated write-downs, most of them on land, and a carrying cost of roughly 3% of cost a year. The roughly $1.5 billion venture investment portfolio is valued at 75% of book. Sales of buildings at 8.5%-9.5% yields cost owners about $150 million compared with keeping them. The business is worth about $17.5 billion ($102 per share). It owes $10.45 billion ($61), leaving about $41 per share. Bear case (about $5 per share). The oversupply Moody's cited, especially in Boston, lasts longer. Occupancy keeps sliding at about the recent pace for another year. Renewals reset at the bottom of the company's own range. Cash earnings fall 5%, 4% and 2% over the next three years to about $780 million, then stay flat for the rest of the decade. After that they decline 1% a year as older converted lab buildings lose tenants; most of the second-quarter 2026 write-downs were on land and lab conversions. Only projects due in 2026 get leased, adding $70 million a year, and the rest are paused. Land is worth 30% of cost, the venture portfolio 50% of book, and forced asset sales cost owners about $300 million. The business is worth about $11.2 billion ($66 per share). It owes $10.45 billion ($61), leaving under $5 per share. Operating cash still covers the roughly $510 million a year interest bill about 1.4 times after the joint-venture partners' share, so this is a case of thin equity rather than default. It shows how much the high borrowing magnifies any further weakness. Bull case (about $63 per share). The company's leasing push continues. Second-quarter 2026 leasing of 1.04 million square feet was up 60% from the prior quarter, and 82% of 2025 leasing came from existing tenants. Cash earnings start from the seasonally adjusted $950 million, grow 3% a year for five years as vacant space refills, then 2% a year, and stay flat after year ten. About $190 million of pipeline income is secured. Land fetches 70% of cost, the venture portfolio 95% of book, and asset sales are completed at fair prices. The business is worth about $21.1 billion ($124 per share). It owes $10.45 billion ($61), leaving about $63 per share. What would make this estimate wrong. The biggest risks are occupancy falling below the mid-80s percent range and staying there, more land write-downs, and asset sales that close well below the company's targets. Net debt was 7.0 times annualized operating earnings in the second quarter of 2026, against a year-end target of 5.6 to 6.2 times. Any of these would push value toward the bear case. On the upside, a faster refill of vacant space in the Cambridge, South San Francisco and Torrey Pines campuses would move value toward the bull case. We could not reconcile first-half 2026 working-capital movements in full because the quarterly detail was not available to us, so we used a five-year median for that item.