Alexandria Real Estate Equities, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Alexandria is a life-science-focused REIT operating in North American innovation clusters, with approximately 825 tenants and 74.9 million square feet of assets.
Financial performance and position
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Total revenue | $713.9 million | $643.8 million in Q2 2022, up 10.9% |
| Net income | $133.7 million | $309.4 million in Q2 2022 |
| Net income attributable to common stockholders; diluted EPS | $87.3 million; $0.51 | $269.3 million; $1.67 in Q2 2022 |
| Adjusted FFO attributable to common stockholders; diluted per share | $382.4 million; $2.24 | $338.8 million; $2.10 in Q2 2022 |
| Adjusted EBITDA margin | 70% | 70% in Q2 2022 |
- For the first six months, revenue was $1.415 billion, up 12.4%; net income was $255.4 million versus $192.0 million; diluted EPS was $0.95 versus $0.74; and adjusted FFO per share was $4.43 versus $4.15.
- Q2 same-property NOI grew 3.0% (4.9% cash basis); six-month growth was 3.4% (6.5% cash basis). North American operating-property occupancy was 93.6%, compared with 94.6% a year earlier.
- Six-month operating cash flow was $784.0 million, versus $530.1 million. Investing activities used $1.434 billion; financing activities provided $752.6 million.
- At June 30, cash, cash equivalents, and restricted cash totaled $960.3 million. Debt was $11.183 billion, including $11.091 billion of unsecured senior notes; there were no borrowings under the $5.0 billion credit line and no commercial paper outstanding. About 99.2% of debt was fixed-rate, with a 3.69% weighted-average interest rate and 13.4-year weighted-average remaining term.
- Management reported $6.3 billion of liquidity, net debt and preferred stock to Adjusted EBITDA of 5.2x, and a 4.7x quarterly annualized fixed-charge coverage ratio. The declared Q2 dividend was $1.24 per share.
Material changes and unusual items
- GAAP Q2 net income fell substantially year over year despite revenue growth. Results included $168.6 million of real estate impairment charges and $78.3 million of investment losses, partly offset by $214.8 million of real estate sale gains. The real estate impairment included $145.4 million related to the 275 Grove Street campus, sold in June, and a $17.1 million write-down of the remaining Asia property.
- Higher rents, development deliveries, and acquisitions supported revenue and NOI growth. Same-property rental revenue also rose, while higher repairs, contracted services, and insurance costs increased operating expenses.
- For the first half, depreciation and amortization increased to $538.9 million from $482.7 million. GAAP interest expense declined to $30.8 million from $53.7 million, primarily because more interest was capitalized to development projects, despite higher gross interest incurred.
- Alexandria issued $1.0 billion of long-term notes in February and increased its unsecured credit-line commitments from $4.0 billion to $5.0 billion in June. In July, it increased the commercial-paper program limit from $2.0 billion to $2.5 billion.
Outlook, commentary, and risks
- Updated 2023 guidance: diluted EPS of $2.72–$2.78; diluted FFO per share of $7.95–$8.01; and adjusted FFO per share of $8.93–$8.99. Adjusted FFO guidance midpoint remained $8.96. EPS guidance reflects, among other items, real estate sale gains and impairment charges.
- Management’s 2023 assumptions include year-end operating occupancy of 94.6%–95.6%, same-property NOI growth of 2%–4% (4%–6% cash basis), and lease renewal/re-leasing rate increases of 28%–33% (12%–17% cash basis).
- 2023 guidance includes a $1.65–$1.85 billion range for dispositions and partial-interest sales, with a $1.75 billion midpoint, and construction spending of $2.785–$3.085 billion, with a $2.935 billion midpoint. Management expects $350–$400 million of operating cash flow after dividends and distributions and approximately $1.3 billion of partner contributions for construction through 2026.
- The development pipeline is material: 5.3 million RSF under construction and 9.4 million RSF of near- and intermediate-term projects. Management expects the value-creation pipeline to generate $605 million in incremental annual NOI as projects are placed in service and stabilized; delivery, leasing, cost, and market assumptions could affect that outcome.
- Key risks include changes in life-science, agtech, and technology tenant demand and financing; tenant credit and rent collection; interest rates and capital-market access; construction costs and project execution; and joint-venture partner funding or disputes. The filing also discusses a June short-seller report that the company characterized as containing false allegations, and potential costs or distraction from related inquiries or legal actions.
Important facts for investors to verify
- How much of the decline in GAAP earnings reflects nonrecurring impairments and investment marks, and how adjusted FFO reconciles to reported results.
- Whether occupancy, leasing, tenant collections, and tenant credit quality support management’s 2023 assumptions, particularly amid sector financing pressures.
- Progress on the $1.75 billion disposition midpoint, construction spending, partner contributions, and planned project deliveries and stabilization.
- Debt and liquidity capacity under changing interest rates, including the refinancing calendar and exposure to variable-rate borrowing.
- Whether redevelopment and impairment assumptions, including the sale of 275 Grove Street and remaining held-for-sale assets, are consistent with reported carrying values and outlook.