Life Science REIT has doubled down on its expanding labs and offices portfolio, despite falling values pushing it to a loss in its maiden results this week.
Simon Farnsworth, managing director of the firm’s investment adviser, Ironstone Asset Management, told EG that, even with hindsight, the company would buy its existing assets again at the same price given rapidly rising rents.
“Twice over,” Farnsworth added. “We love the buildings we bought. There is not a single acquisition that we look back on with any doubt. We are delighted with the portfolio, and we wouldn’t change a thing.
“We are still as bullish as we were, maybe even more bullish now than we were 15 months ago when we sat here launching the IPO.”
The company posted a £27.5m loss for 2022, driven by a £31.3m decline in the value of its properties, or 7.5% reduction on book value. Management said the “vast majority” of the fall was attributed to its 2022 transactions, “where acquisitions and purchasers’ costs were the main contributor”.
Finance director David Lewis said: “We are never, ever going to be able to completely cover all of our acquisition costs. We were lucky before when a valuation did increase by that and covered it.
“You are always going to get a slight decrease post-acquisition. But ultimately, with what we have and what we are going to do, we can more than offset that over time. I think this is just a blip and just a reaction on the market from post-Budget last year.”
Farnsworth added: “We can’t change interest rate policy; we can’t control what happens to the macro picture. All we can do is crack on with doing what we do best.
“I think we are really well positioned. We are a specialist REIT, we are not a generalist. We are very clear, very disciplined in what we do. There is no style drift here, we are not moving into other sectors. We are doing what we said we would do when we IPOed.”
Growth on pause
Farnsworth said the REIT is still looking at acquisitions but a recent drop in the share price is holding it from raising extra cash. Life Science REIT shares have fallen by 40% over the past year, reaching an all-time low on Monday (27 March) of 59.99p.
“The main challenge for us now is that our share price isn’t currently allowing us to grow the business as quickly as perhaps we thought we might. But at the end of the day, we can only do so much,” Farnsworth said.
As such, the company is in talks to extend its debt facility and said it would look at joint venture opportunities for the right transactions as a way of growing the business for its shareholders.
Life Science REIT points to its £1.9m retrofitting project at Rolling Stock Yard, King’s Cross, N7, as an exemplar of what it wants to achieve with offices-to-labs conversion. The 57,600 sq ft office building was turned into fully fitted labs on a speculative basis, adding about £8m to the value of the asset, resulting in a yield-on-cost of around 30%.
The REIT had spent £150 per sq ft on repurposing and achieved a price of £110 per sq ft after signing a leasing deal with Syncona. This is almost double the rent of £65 per sq ft quoted at the building prior to its conversion.
“We have proved the thesis,” said Farnsworth. “We have driven the rents up, and Cambourne near Cambridge is our next major announcement.”
Patience and perseverance
At Cambourne Business Park, the company plans to repurpose around 40,000 sq ft, with a deal with a potential occupier for about 35% of the space to be signed shortly.
Farnsworth said: “I am not saying that persists to that degree in every market, but it is indicative of the supply-demand imbalance that we have in all three of our core markets.
“We are still seeing a lot of investment into life science businesses. We are seeing government policy now pushing the economy towards a science and technology-based growth strategy. And from an occupational point of view, we are seeing really, really strong levels of demand across London, Cambridge and Oxford.”
Farnsworth says finding quality space is the main challenge for life sciences firms in “a growth mode”, underpinned by problems around the recruitment of staff. He said: “I think the main challenge for us is the pace at which we want to lease out the properties and just keeping our foot to the floor.
“Patience and perseverance, and making sure that we are disciplined in our capital allocation, that we don’t get distracted and that we can demonstrate the thesis across the portfolio.”
To send feedback, e-mail evelina.grecenko@eg.co.uk or tweet @Gre_Eve or @EGPropertyNews
