Alexandria Real Estate Equities, Inc. — Q3 2022 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and nine months ended September 30, 2022. Alexandria is a life-sciences-focused REIT with 74.5 million square feet of North American assets, including 41.1 million operating square feet. It reported 94.3% occupancy in North American operating properties and serves more than 1,000 tenants.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $659.9 million | $547.8 million | $1,918.7 million | $1,537.2 million |
| Net income attributable to common stockholders | $341.4 million | $101.3 million | $461.5 million | $490.6 million |
| Diluted EPS | $2.11 | $0.67 | $2.88 | $3.38 |
| Adjusted FFO per diluted share | $2.13 | $1.95 | $6.28 | $5.80 |
| Net cash provided by operating activities | — | $893.2 million | $760.6 million |
Q3 revenue rose 20.5%; nine-month revenue rose 24.8%. Growth reflected acquisitions, development and redevelopment projects entering service, higher rents and improved same-property occupancy. Same-property NOI increased 5.1% in Q3 and 7.0% year to date; cash-basis growth was 10.6% and 8.9%, respectively. Q3 operating margin was 70% and adjusted EBITDA margin was 69%, versus 70% and 71% a year earlier. Nine-month adjusted EBITDA margin was 70%, versus 72%.
Reported earnings included significant nonrecurring and market-sensitive items. Q3 included $323.7 million of real estate sale gains and $32.3 million of investment losses. For the first nine months, $537.9 million of real estate sale gains and $312.1 million of investment losses affected results. Adjusted FFO excludes specified items and is a non-GAAP measure; it should not be treated as a substitute for GAAP income or operating cash flow.
Balance sheet, debt and liquidity
- At September 30, total assets were $34.4 billion, total liabilities $13.1 billion, and total equity $21.2 billion. Cash and cash equivalents were $533.8 million; restricted cash was $332.3 million.
- Total debt, including commercial paper and net of unamortized financing costs, was approximately $10.5 billion. Debt was 95.9% fixed-rate, with a 13.2-year weighted-average remaining term; management reported no debt maturities before 2025.
- Net debt and preferred stock to adjusted EBITDA was 5.4x on a quarter-annualized basis; fixed-charge coverage was 4.9x. The company reported $6.35 billion of liquidity, including availability on its credit facility, cash, publicly traded investments, construction-loan commitments and expected forward-equity proceeds.
- In September, Alexandria expanded its unsecured credit facility to $4.0 billion, extended maturity to January 2028 and converted its benchmark to SOFR. Its commercial-paper program was increased to $2.0 billion; $386.7 million was outstanding at quarter-end. Alexandria issued $1.8 billion of long-term notes in February at a weighted-average rate of 3.28%.
- Operating cash flow increased by $132.5 million year over year for the first nine months. Investing cash outflow was $3.72 billion, primarily reflecting real estate purchases and construction; financing cash inflow was $3.28 billion.
Material changes and operating developments
- Real estate investments increased to $28.8 billion from $25.0 billion at year-end 2021. Alexandria acquired 39 properties for an aggregate contractual purchase price of $2.44 billion in the first nine months.
- Dispositions and partial-interest sales totaled $2.22 billion in contractual sales price. Some partial-interest transactions remained consolidated and were recorded as equity transactions, not earnings gains.
- Q3 leasing activity was 1.66 million square feet. Renewal and re-leasing rental rates increased 27.1% on a straight-line basis and 22.6% on a cash basis. Management reported 78% leasing across 7.6 million square feet of under-construction and near-term projects.
- Quarterly common dividend declared was $1.18 per share. The company issued shares through forward equity agreements and expected to settle remaining agreements for about $1.5 billion in net proceeds during Q4 2022.
Outlook, risks and unusual items
Updated 2022 guidance, issued October 24, set diluted EPS at $3.56–$3.58, FFO per share at $5.70–$5.72 and adjusted FFO per share at $8.40–$8.42. Adjusted FFO midpoint was unchanged from prior guidance; FFO guidance declined, primarily reflecting higher anticipated real estate sale gains in the EPS-to-FFO reconciliation. Guidance assumes year-end operating occupancy of 95.0%–95.6%, same-property NOI growth of 6%–8% (6.8%–8.8% cash basis), and construction spending of approximately $3.0 billion. Management forecast more than $645 million of incremental NOI from highly leased value-creation projects, primarily from Q4 2022 through Q3 2025.
Alexandria recorded a $38.8 million real estate impairment, including a $38.3 million write-off after abandoning a future California development project because of a deteriorated macroeconomic outlook. Q3 G&A included $7.2 million of accelerated stock compensation related to the former co-CEO’s resignation. Management cited inflation, rising interest rates, construction-cost and supply-chain pressures, tenant financial health, geopolitical disruption, cyber risk and joint-venture exposure as risks. It noted most operating costs are recoverable under leases, but recovery and project budgets are not assured. No material risk-factor changes were reported other than the updates described in the filing. Management stated disclosure controls were effective.
Important facts for investors to verify
- How much reported net income and EPS depended on real estate sale gains, and how recurring property operations compare using NOI and adjusted FFO.
- Whether project deliveries, leasing, occupancy and the forecast $645 million of incremental NOI meet timing, cost and stabilization assumptions.
- Whether forward-equity settlements, planned asset sales and other financing sources occur as expected, and the resulting dilution and leverage effects.
- How higher interest rates, inflation and construction costs affect debt costs, development yields and tenant demand; review the $3.5 billion of construction costs under contract and other commitments.
- Whether investment valuations recover or incur further losses; non-real-estate investment losses were $312.1 million for the first nine months.