ARE: Brief Q2 2023 Update
Sometimes updates become full articles. This time it'll be quick.
Alexandria (ARE) reported Q2 2023 results. Nothing massive, but a few small positive developments and a few that are fairly neutral.
Core FFO guidance was tightened, midpoint remains at $8.96.
Note: ARE refers to this metric as "FFO, as adjusted". You'll hear us call it "Core FFO" or "Normalized FFO".
NAREIT FFO guidance was reduced. Doesn't concern me. The swing is mostly due to a revaluation of some non-real estate investments. Remember they own equity in some tenants. Not a bunch. This isn't Medical Properties Trust (MPW). Nothing like that. It's small positions in biotech.
We expect swings in unrealized losses and gains on those positions to make NAREIT FFO less useful.
Leasing spreads were down from Q1 2023. Not concerning. Guidance in Q1 2023 indicated leasing spreads would be much lower in the other quarters. Q1 2023 had the most favorable set of leases up for renewal / replacement.
Dispositions and Debt
Guidance for dispositions (selling real estate) and sales of partial interests was increased from $1.525 billion to $1.75 billion. That's good news. Previously I highlighted that ARE was accessing capital in the cheapest possible manner. They were selling properties at cap rates materially lower than their cost of capital. That's great.
They also reduced guidance for projected debt by $15 million. Given the high interest rates (even on Treasuries) and the difficult environment, that's good also.
It appears ARE increased guidance for construction by $210 million. That could be a bit misleading. They're doing the same amount of construction; instead of using a joint venture (another investor) for $210 million, they are using $210 million of the cash from additional sales.
Consequently, it's the same amount of construction. ARE simply has more cash from asset sales, so they fund it themselves. More profit for ARE. Works for me.
From the earnings call, management gave positive indications for 2025 supply levels:
We are tracking new supply to be delivered in 2025, and we'll update you on those statistics next quarter. For our current read is that volume will be below 2024 deliveries, likely due to high construction costs, higher cost of capital, a lack of available debt financing and adequate supply currently under construction.
Beyond guidance indicating higher-than-expected dispositions, management also suggested that they would have the possibility of selling even more assets:
At quarter end, we had closed $701 million of sales, including the 15 Necco sale announced last quarter and have another $175 million pending for a total of $876 million, which is a little over halfway to our midpoint guidance.
We have a number of other efforts in progress or soon to be launched that would exceed our guidance if we choose to execute on all of the opportunities. The vast majority of those identified assets are noncore non-campus assets we plan to fully dispose of and reinvest the proceeds into our value-add pipeline.
Remember that when an equity REIT trades below their net asset value, especially if it is significantly below, it can be a good idea to start selling off assets. As leverage falls, the market is stuck. Either the share price goes up, or the discount on gross assets becomes even larger. It puts the company in a strong position and anyone betting against them in a weak position.
Good quarter. Nothing wild. No big swing in guidance. Core FFO Leasing spreads are down, but in line with prior guidance. The slight increase in guidance for asset sales is positive as it provides further evidence supporting management's view of fair value and provides the company with cash at the lowest cost.