Alexandria Real Estate Equities, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. Alexandria is a life science, agtech, and technology-focused REIT with 75.6 million square feet of North American assets and more than 850 tenants.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $700.8 million | $615.1 million |
| Net income (loss) attributable to common stockholders | $75.3 million; $0.44 per diluted share | $(151.7) million; $(0.96) per diluted share |
| Adjusted FFO attributable to common stockholders | $373.7 million; $2.19 per diluted share | $324.6 million; $2.05 per diluted share |
| Net cash provided by operating activities | $305.6 million | $191.1 million |
| Net cash used in investing activities | $(1.04) billion | $(2.49) billion |
| Operating margin / Adjusted EBITDA margin | 70% / 69% | 71% / 71% |
- Revenue increased 13.9% year over year. Rental income rose 12.3%, reflecting acquisitions, projects placed into service, and rent increases; higher tenant recoveries also contributed.
- GAAP earnings improved substantially from the prior-year loss, when investment losses were $240.3 million. Q1 2023 investment loss was $45.1 million, including $65.9 million of unrealized losses and $20.7 million of realized gains. Adjusted FFO excludes unrealized investment losses and is a non-GAAP measure.
- Same-property NOI increased 3.7% year over year, or 9.0% on a cash basis. Same-property average occupancy was 94.3%, versus 94.9% in the prior-year period. North American operating-property occupancy was 93.6% at quarter-end.
- Leasing totaled 1.22 million RSF. Renewals and re-leasing achieved a 48.3% rental-rate increase including straight-line rent, or 24.2% on a cash basis.
- Cash, cash equivalents, and restricted cash totaled $1.30 billion at quarter-end, up from $858.0 million at year-end 2022. Net operating cash flow increased year over year. Investing outflows included $873.4 million of real estate additions; financing provided $1.17 billion.
Balance sheet, debt, and liquidity
- Total assets were $36.9 billion. Debt totaled approximately $11.54 billion, including $11.09 billion of unsecured notes and $374.5 million of commercial paper. Debt increased from year-end, including the February issuance of $1.0 billion of long-term notes.
- Weighted-average debt interest rate was 3.73%, 96.1% of debt was fixed-rate, and weighted-average remaining debt term was 13.4 years. The filing reports no debt maturities before 2025.
- Net debt and preferred stock to Adjusted EBITDA was 5.3x on a quarter-annualized basis and 5.6x on a trailing-12-month basis. Fixed-charge coverage was 5.0x.
- Reported liquidity was $5.3 billion, including $3.63 billion of credit-line availability net of commercial paper, cash and restricted cash, expected forward-equity proceeds, remaining construction-loan commitments, and publicly traded investments. The $4.0 billion credit line had no direct balance outstanding; commercial paper was backed by the facility.
- Common dividends declared were $1.21 per share for the quarter. Operating cash flow after dividends and distributions to noncontrolling interests is expected to be a source of reinvestment capital.
Changes, outlook, and material events
- Compared with Q1 2022, revenue, operating cash flow, same-property NOI, and adjusted FFO increased. The prior-year GAAP loss was driven in large part by much higher unrealized investment losses; Q1 2023 also included unrealized investment losses, but at a lower level.
- Management’s updated 2023 guidance, as of April 24, 2023, was diluted EPS of $2.21–$2.31, FFO per share of $8.53–$8.63, and adjusted FFO per share of $8.91–$9.01. The adjusted FFO midpoint was unchanged from prior guidance, with the range narrowed. EPS guidance includes a subsequent real estate impairment item.
- Other 2023 assumptions include North American operating occupancy of 94.6%–95.6% at year-end; renewal and re-leasing rent increases of 28%–33% (12%–17% cash basis); same-property NOI growth of 2%–4% (4%–6% cash basis); and capital uses and sources of approximately $2.95 billion. Guidance assumes favorable capital markets, operating performance, leasing, and project delivery; actual results may differ.
- Management reduced planned 2023 construction spending and acquisitions, and expects $1.5–$1.7 billion from dispositions, partial-interest sales, and forward equity settlements. Approximately $965 million of these sources was completed or subject to executed agreements or letters of intent as of the filing date. Management also expects about $1.4 billion of existing JV partner contributions through 2026 to fund construction.
- In April 2023, Alexandria sold an 18% interest in the 15 Necco Street joint venture for $66.1 million and retained control. Also in April, it classified a Greater Boston office campus as held for sale, recorded an approximately $139 million impairment against a $259 million book value, and expected a mid-2023 sale. These are subsequent events, not Q1 results.
Risks, contingencies, and notable exposures
- Tenant and investment exposure is concentrated in life science, agtech, and technology. Industry funding, banking disruptions, tenant consolidations, or weaker demand could affect rent collection, leasing, and investment values.
- Following Silicon Valley Bank’s failure, the company reported $108.3 million of tenant letters of credit originally issued by SVB. As of April 24, $26.0 million had been replaced, $64.7 million was in transition, and $17.6 million remained to be transitioned. Management reported no direct exposure to SVB, Signature Bank, or other recently failed institutions, but noted tenant and deposit-access risks.
- Variable-rate borrowing and commercial paper expose the company to interest-rate and refinancing conditions. The filing also identifies risks from joint-venture partners’ ability to fund commitments, construction costs and timing, real estate sales, foreign currency, and valuation changes in non-real-estate investments.
- Remaining contracted construction costs were approximately $2.9 billion. The company also disclosed approximately $419.2 million of commitments to non-real-estate investments and a potential obligation to fund certain future development if a counterparty elects to proceed.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously reported risk factors were identified other than the updates described in the filing.
Investor verification points
- Track occupancy, tenant collections, leasing spreads, and the pace of lease-up and delivery for development projects.
- Verify execution of planned asset dispositions and partial-interest sales, expected JV contributions, and the updated construction and acquisition spending plans.
- Monitor commercial paper refinancing, borrowing costs, leverage, liquidity, and compliance with debt covenants.
- Confirm replacement of the remaining former-SVB tenant letters of credit and assess tenant liquidity in the company’s concentrated industries.
- Review the April office-campus sale process and impairment, and distinguish these subsequent events from reported Q1 results and guidance assumptions.