ARE: Q3 2023 Looks Pretty Good So Far

This is a quick reaction to Alexandria’s Q3 2023 earnings release.

Alexandria (ARE) had a pretty good quarter.

Good things:

• Guidance for FFO as Adjusted increased 2 cents at the midpoint.
• Weighted-average lease term on leases signed during the quarter was 13.0 years. That matches Q2 2023 and beats Q1 2023.
• Average GAAP rental rates increased 28.8% on renewals and re-leasing.
• Cash rental rates increased 19.7% on renewals and re-leasing.

Leasing spreads (the rental rates just referenced) are not as strong as Q1, but better than Q2.

Negative factors:

• Total 2023 value harvesting plan (projected asset sales) declined from $1.85 billion to $1.65 billion. The drop implies the market for asset sales may have weakened some.

Negative factor with a silver lining:

• ARE recognized an impairment on two non-lab properties they own in Boston.

They plan to sell the properties and needed to market the properties down to the expected net proceeds. The properties were industrial (unusual to see price dip there) and self-storage. They were acquired based on plans for future development. The original plan was to bulldoze them when existing leases expired and use the land for lab development.

However, since prices are down and interest rates are up (financing more expensive), ARE decided those development projects would not be their best use of capital. I concur with the decision and commend management for evaluating their cost of capital and cutting development projects that would no longer be adding value.

More developers should be ready to scrap plans in situations like this. By reducing the development pipeline, ARE is focusing on the best uses of capital. This is strong decision-making. Selling the assets for a loss is unfortunate, but I cannot fault any part of the process. When ARE acquired those assets, they may have had a reasonable belief that they would be able to develop them to meet returns well above the cost of capital.

Now that the market environment has changed, they are making decisions based on the new reality. It’s better than sticking to the original plan after the cost of capital increased dramatically.

I won’t put a grade on the quarter yet because we don’t have the earnings call.

Our thesis on ARE is still built around the balance sheet:

Upcoming

I’ve been working on the update for Rexford (REXR).

ARE jumped the queue by having a very simple update to write. Since this update is before the earnings call, we have less to cover. Ironically, ARE’s earnings call is tomorrow afternoon. It’s pretty rare to see a full day between the announcement and the earnings call.

Disclosure: Long ARE and all other shares in CWMF’s Portfolio.