Business context and reporting period
Alexandria Real Estate Equities, Inc. (NYSE: ARE) is a life science, agtech, and technology-focused REIT. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods. At quarter-end, the company reported 419 North American properties, 41.5 million operating rentable square feet (RSF), 93.7% occupancy of operating properties, and more than 800 tenants.
Financial and operating performance
- Revenue: Third-quarter revenue was $713.8 million, up 8.2% year over year; nine-month revenue was $2.13 billion, up 10.9%. Rental income rose 7.7% in the quarter and 9.9% year to date, reflecting acquisitions, delivered development projects, rent increases, and tenant recoveries.
- Profit and EPS: Net income attributable to common stockholders was $21.9 million, or $0.13 per diluted share, for the quarter, versus $341.4 million, or $2.11, in Q3 2022. For nine months, it was $184.4 million, or $1.08 per diluted share, versus $461.5 million, or $2.88. Comparisons were affected by lower real estate sale gains and investment losses, as well as real estate impairments.
- REIT operating measures: Adjusted FFO per diluted share was $2.26 for Q3, up from $2.13; nine-month adjusted FFO per share was $6.69, up from $6.28. Same-property NOI increased 3.1% for the quarter and 3.7% for nine months; cash-basis growth was 4.6% and 5.6%, respectively. Adjusted EBITDA margin was 69% for both the quarter and nine months.
- Cash flow and investment: Nine-month operating cash flow was $1.20 billion, compared with $893.2 million in 2022. Investing activities used $2.11 billion, principally for $2.60 billion of real estate additions; financing activities provided $619.0 million. Cash, cash equivalents, and restricted cash totaled $567.7 million at quarter-end, down from $858.0 million at year-end 2022.
- Debt and liquidity: Debt principal was approximately $11.20 billion, including $11.09 billion of unsecured notes; 99% was fixed-rate, with a 13.1-year weighted-average remaining term and no maturities before 2025. The $5.0 billion credit line and $2.5 billion commercial paper program had no balances outstanding at quarter-end. Reported liquidity was $5.9 billion. Net debt and preferred stock to adjusted EBITDA was 5.4x on a quarter-annualized basis and 5.5x on a trailing-12-month basis.
- Dividends: The company declared $1.24 per common share for Q3 and reported a 55% dividend payout ratio for the quarter.
Material changes versus prior comparable periods
- Q3 revenue grew, but GAAP common-stockholder earnings fell sharply from 2022, when the quarter included $323.7 million of real estate sale gains. Q3 2023 included no real estate sale gain and had an $80.7 million investment loss and $20.6 million real estate impairment charge.
- Nine-month net income included $214.8 million of real estate sale gains, down from $537.9 million in 2022. Real estate impairments increased to $189.2 million from $38.8 million, while investment losses narrowed to $204.1 million from $312.1 million.
- Nine-month operating cash flow increased by $308.8 million, while cash used in investing declined by $1.61 billion, largely because real estate purchases were substantially lower than in 2022. Construction additions remained high.
- Operating-property occupancy was 93.7%, down from 94.3% a year earlier. Q3 leasing totaled 867,582 RSF; renewals and re-leasing achieved 28.8% rental-rate growth, or 19.7% on a cash basis.
Outlook, management commentary, and risks
- Updated 2023 guidance: Diluted GAAP EPS of $1.36–$1.38; FFO per diluted share of $7.29–$7.31; and adjusted FFO per diluted share of $8.97–$8.99. The adjusted FFO midpoint increased two cents from prior guidance. Assumptions include year-end operating-property occupancy of 94.6%–95.6% and same-property NOI growth of 2%–4% (4%–6% cash basis).
- Capital plan: The company forecast $1.55–$1.75 billion in 2023 dispositions and partial-interest sales, and $2.785–$3.085 billion in construction spending. It expected approximately $1.2 billion of joint-venture partner contributions from October 2023 through 2026. Its development and redevelopment pipeline was expected to generate $580 million of annual incremental NOI as projects are delivered and stabilized through Q3 2026; timing and results depend on leasing, market conditions, and completion.
- Impairments and strategy: During the nine months, the company impaired and sold a non-core office campus and recorded other property impairments. After quarter-end, it recognized an approximately $90.8 million impairment on two Greater Boston non-laboratory properties after deciding not to proceed with the planned life science campus; it expected to sell them in Q4 2023.
- Management change: Dean A. Shigenaga resigned as President and CFO effective September 15, 2023; Marc E. Binda became CFO and Treasurer. The transition accelerated $15.6 million of share-based compensation expense through year-end, of which $1.9 million was recognized in Q3.
- Key risks: Results remain exposed to life science and technology tenant demand and credit, leasing and occupancy, development costs and execution, interest rates and capital-market access, investment valuation volatility, joint-venture partner funding, and potential banking disruptions affecting tenants or investments. Management disclosed no material changes to previously reported risk factors other than the updates described in the filing.
Important facts for investors to verify
- Whether the Q4 2023 disposition plan and expected joint-venture contributions close on the stated timing and terms.
- Whether occupancy, leasing spreads, tenant collections, and development-project pre-leasing support the company’s 2023 guidance and pipeline returns.
- The carrying values and sale outcomes for held-for-sale properties, including the post-quarter $90.8 million impairment.
- How investment losses, capitalized construction interest, and future impairments affect reported GAAP earnings versus adjusted FFO.
- Debt refinancing costs, leverage, liquidity, and the ability to fund construction and dividends while maintaining REIT qualification.