The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under "Item 15. Exhibits and financial statement schedules" in this annual report on Form 10-K. Forward -looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, those described within this "Item 7. Management's discussion and analysis of financial condition and results of operations" in this annual report on Form 10-K. We do not undertake any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events, or otherwise.
As used in this annual report on Form 10-K, references to the "Company,"
"Alexandria," "ARE," "we," "us," and "our" refer to
87 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g40.jpg]] 88 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g41.jpg]] Sources: Bloomberg andS&P Global Market Intelligence . Assumes reinvestment of dividends. (1)Alexandria's IPO priced at$20.00 per share onMay 27, 1997 . (2)Represents the FTSE Nareit Equity Office Index. 89 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g42.jpg]] As ofDecember 31, 2022 . (1)Quarter annualized. Refer to "Net debt and preferred stock to Adjusted EBITDA" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. 90 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g43.jpg]] As ofDecember 31, 2022 . (1)Represents the percentage of our annual rental revenue generated by our top 20 tenants that are also investment-grade or publicly traded large cap tenants. Refer to "Annual rental revenue" and "Investment-grade or publicly traded large cap tenants" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. (2)Represents annual rental revenue currently generated from space that is targeted for a future change in use, including 1.1% of total annual rental revenue that is generated from covered land play projects. The weighted-average remaining term of these leases is 5.2 years. (3)Our other tenants, which aggregate 2.0% of our annual rental revenue, comprise technology, professional services, finance, telecommunications, and construction/real estate companies and less than 1.0% of retail-related tenants by annual rental revenue. (4)Represents annual rental revenue in effect as ofDecember 31, 2022 . Refer to "Annual rental revenue" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. 91 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g44.jpg]] 92 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g45.jpg]] 93 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g46.jpg]] 94 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g47.jpg]] 95 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g48.jpg]] (1)Based on the closing price of common stock as ofDecember 31, 2022 of$145.67 and the common stock dividend declared for the three months endedDecember 31, 2022 of$1.21 annualized. 96 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g49.jpg]] (1)Includes initial proceeds from our joint venture partners' contribution toward construction projects. (2)Represents the aggregate gain and consideration in excess of book value recognized on dispositions and partial interest sales, respectively. (3)Represents the weighted-average capitalization rates for stabilized operating assets. 97 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g50.jpg]] Refer to "Net operating income" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details and its reconciliation from the most directly comparable financial measures presented in accordance with GAAP. (1)As ofDecember 31, 2022 . Represents projects under construction aggregating 5.6 million RSF and seven near-term projects aggregating 2.0 million RSF expected to commence construction during the next four quarters. 98 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g51.jpg]] (1)A credit rating is not a recommendation to buy, sell, or hold securities and may be subject to revision or withdrawal at any time. Top 10% ranking represents credit rating levels from Moody's Investors Service andS&P Global Ratings for publicly tradedU.S. REITs, from Bloomberg Professional Services as ofDecember 31, 2022 . 99 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g52.jpg]] As ofDecember 31, 2022 . (1)Quarter annualized. Refer to "Net debt and preferred stock to Adjusted EBITDA" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. 100 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g53.jpg]] 101 --------------------------------------------------------------------------------
Executive summary Operating results Year Ended December 31, 2022 2021 Net income attributable to Alexandria's common stockholders - diluted: In millions$ 513.3 $ 563.4 Per share$ 3.18 $ 3.82 Funds from operations attributable to Alexandria's common stockholders - diluted, as adjusted: In millions$ 1,361.7 $ 1,144.9 Per share$ 8.42 $ 7.76 The operating results shown above include certain items related to corporate-level investing and financing decisions. For additional information, refer to "Funds from operations and funds from operations, as adjusted, attributable toAlexandria Real Estate Equities, Inc.'s common stockholders" in the "Non-GAAP measures and definitions" section and to the tabular presentation of these items in the "Results of operations" section within this Item 7 in this annual report on Form 10-K.
An operationally excellent, industry-leading REIT with a high-quality client base of approximately 1,000 tenants supporting high-quality revenues, cash flows, and strong margins
Percentage of total annual rental revenue in effect from investment-grade or publicly traded large cap tenants
48 % Sustained strength in tenant collections: Tenant receivables as of December 31, 2022$ 7.6 million
99.4 % Occupancy of operating properties inNorth America 94.8 % Operating margin 70 % (1) Adjusted EBITDA margin 69 % (1) Weighted-average remaining lease term: All tenants 7.1 years Top 20 tenants 9.4 years
(1)For the three months ended
Second-highest annual leasing volume and rental rate increases (cash basis)
•Annual leasing volume of 8.4 million RSF in 2022 represents the second highest in Company history, with 74% generated from our client base of approximately 1,000 tenants. •Rental rate increase (cash basis) of 22.1% on lease renewals and re-leasing of space represents the second highest rental rate growth (cash basis) in Company history. 2022 Total leasing activity - RSF 8,405,587
Leasing of development and redevelopment space - RSF 2,828,539 Lease renewals and re-leasing of space: RSF (included in total leasing activity above)
4,540,325 Rental rate increases 31.0% Rental rate increases (cash basis) 22.1% 102 --------------------------------------------------------------------------------
Continued strong net operating income and internal growth, including highest annual same property growth in Company history
•Total revenues of$2.6 billion , up 22.5%, for the year endedDecember 31, 2022 , compared to$2.1 billion for the year endedDecember 31, 2021 . •Net operating income (cash basis) of$1.6 billion for the year endedDecember 31, 2022 , increased by$292.8 million , or 22.2%, compared to the year endedDecember 31, 2021 . •96% of our leases contain contractual annual rent escalations approximating 3%. •Same property net operating income growth of 6.6% and 9.6% (cash basis) for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , with both increases representing the highest growth in Company history. •Our 2022 same property growth outperformed our 10-year averages of 3.6% and 6.7% (cash basis) as a result of an increase in same property occupancy of 100 bps and early lease renewals that commenced in late 2021/early 2022.
Continued strong, consistent, and increasing dividends with a focus on retaining significant net cash flows from operating activities after dividends for reinvestment
•Common stock dividend declared for the three months endedDecember 31, 2022 was$1.21 per common share, aggregating$4.72 per common share for the year endedDecember 31, 2022 , up24 cents , or 5%, over the year endedDecember 31, 2021 . •Dividend yield of 3.3% as ofDecember 31, 2022 . •Dividend payout ratio of 58% for the three months endedDecember 31, 2022 . •Average annual dividend per-share growth of 6.5% over the last five years.
Alexandria's value-creation pipeline drives visibility for future growth
aggregating over
•Highly leased value-creation pipeline of current and seven near-term projects expected to generate greater than$655 million of incremental net operating income, primarily commencing from the first quarter of 2023 through the fourth quarter of 2025. •7.6 million RSF of value-creation projects, which are 72% leased. •77% of the leased RSF of our value-creation projects was generated from our client base of approximately 1,000 tenants.
External growth and investments in real estate
Delivery and commencement of value-creation projects
•During the three months endedDecember 31, 2022 , we placed into service development and redevelopment projects aggregating 497,755 RSF across multiple submarkets, resulting in$28 million of incremental annual net operating income. •Annual net operating income (cash basis) is expected to increase by$57 million upon the burn-off of initial free rent from recently delivered projects. •Commenced two development projects aggregating 467,567 RSF during the three months endedDecember 31, 2022 , including 212,796 RSF at1450 Owens Street in ourMission Bay submarket, which will be 100% funded by our joint venture partner, and 254,771 RSF at10075 Barnes Canyon Road in our Sorrento Mesa submarket, which will be 50% funded by our joint venture partner.
Value-creation pipeline of new Class A development and redevelopment projects as a percentage of gross assets
December 31, 2022 Under construction projects 68% leased/negotiating 10%
Near-term projects expected to commence construction in the next four
2% quarters 88% leased Income-producing/potential cash flows/covered land play(1) 7% Land 3% (1)Includes projects that have existing buildings that are generating or can generate operating cash flows. Also includes development rights associated with existing operating campuses. These projects aggregate 1.1% of total annual rental revenue as ofDecember 31, 2022 and are included in targeted for a future change in use in our industry mix chart. Refer to "High-quality and diverse client base inAAA locations" under Item 2 in this annual report on Form 10-K. •81% of construction costs related to active development and redevelopment projects aggregating 5.6 million RSF are under a guaranteed maximum price ("GMP") contract or other fixed contracts. Our budgets also include construction cost contingencies in GMP contracts plus additional landlord contingencies that generally range from 3% to 5%. Alexandria is at the vanguard of innovation for a high-quality client base of approximately 1,000 tenants, focused on accommodating their current needs and providing them with a path for future growth •During the year endedDecember 31, 2022 , we completed acquisitions in our key life science cluster submarkets aggregating 10.2 million SF, which comprise 9.5 million RSF of value-creation opportunities and 0.7 million RSF of operating space, for an aggregate purchase price of$2.8 billion . 103 --------------------------------------------------------------------------------
Execution of capital strategy
2022 capital strategy
During 2022, we continued to execute on many of the long-term components of our capital strategy, as described below.
Maintained access to diverse sources of capital strategically important to our long-term capital structure
•Generated significant net cash flows from operating activities
•In 2022, we funded approximately
•Continued strategic value harvesting through real estate dispositions and partial interest sales •In 2022, these sales generated$2.2 billion of capital for investment into our highly leased development and redevelopment projects and strategic acquisitions. In connection with these transactions, we recorded gains or consideration in excess of book value aggregating$1.2 billion . •Achieved significant growth in annualized Adjusted EBITDA of$215.7 million , or 13%, for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , which allowed us to: •Improve our net debt and preferred stock to Adjusted EBITDA ratio to 5.1x, representing the lowest ratio in Company history, for the three months endedDecember 31, 2022 annualized, and fund$1.2 billion of growth on a leverage-neutral basis; and •Take advantage of favorable capital market environment and opportunistically issue, on a leverage-neutral basis, unsecured senior notes payable aggregating$1.8 billion with a weighted-average interest rate of 3.28% and an initial weighted-average term of 22.0 years. •Continued disciplined management of common equity issuances to support growth in FFO per share, as adjusted, and NAV per share •In 2022, the aforementioned internally generated capital enabled us to meet our capital requirements while prudently limiting the amount of equity issuances to 12.9 million shares of common stock sold under our forward equity sales agreements and ATM common stock offering program for net proceeds of$2.5 billion .
Maintained a strong and flexible balance sheet with lowest leverage in Company
history as of
•Investment-grade credit ratings ranked in the top 10% among all publicly tradedU.S. REITs. •Net debt and preferred stock to Adjusted EBITDA of 5.1x, the lowest ratio in Company history, and fixed-charge coverage ratio of 5.0x for the three months endedDecember 31, 2022 annualized. •Total debt and preferred stock to gross assets of 25%. •99.4% of our debt has a fixed rate. •13.2 years weighted-average remaining term of debt. •No debt maturities prior to 2025. •No remaining LIBOR-based debt ahead ofJune 2023 phase-out. •$5.3 billion of liquidity. •$24.9 billion in total equity capitalization, which ranks in the top 10% among all publicly tradedU.S. REITs. •$1.4 billion of contractual construction funding commitments from existing real estate joint venture partners expected over the next four years.
Completion of unsecured senior line of credit amendment to upsize and extend term
•In 2022, we amended our unsecured senior line of credit with the following key changes:
New Agreement
Change
Commitments available for borrowing$4.0 billion Up$1.0 billion Maturity date January 2028 Extended by 2 years Interest rate SOFR+0.875% Converted to SOFR from LIBOR 104
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2023 capital strategy
During 2023, we intend to continue to execute our capital strategy to achieve further improvements to our credit profile, which will allow us to further improve our cost of capital and continue our disciplined approach to capital allocation. Consistent with 2022, our capital strategy for 2023 includes the following elements: •Allocate capital to Class A properties located in life science, agtech, and tech campuses inAAA urban innovation clusters. •Maintain prudent access to diverse sources of capital, which include net cash flows from operating activities after dividends, incremental leverage-neutral debt supported by growth in Adjusted EBITDA, strategic value harvesting and asset recycling through real estate disposition and partial interest sales, non-real estate investment sales, sales of equity, and other capital. •Continue to improve our credit profile. •Maintain commitment to long-term capital to fund growth. •Prudently ladder debt maturities and manage short-term variable-rate debt. •Prudently manage equity investments to support corporate-level investment strategies. •Maintain a stable and flexible balance sheet with significant liquidity. The anticipated delivery of significant incremental EBITDA from our development and redevelopment of new Class A properties is expected to enable us to continue to debt fund a significant portion of our development and redevelopment projects on a leverage-neutral basis. We expect to continue to maintain access to diverse sources of capital, including unsecured senior notes payable and secured construction loans for our development and redevelopment projects from time to time. We expect to continue to maintain a significant proportion of our net operating income on an unencumbered basis to allow for future flexibility for accessing both unsecured and secured debt markets, although we expect traditional secured mortgage notes payable will remain a small component of our capital structure. We intend to supplement our remaining capital needs with net cash flows from operating activities after dividends and proceeds from real estate asset sales, non-real estate investment sales, partial interest sales, and equity capital. For further information, refer to "Projected results, Sources of capital," and "Uses of capital" within this Item 7. Our ability to meet our 2023 capital strategy objectives and expectations will depend in part on capital market conditions, real estate market conditions, and other factors beyond our control. Accordingly, there can be no assurance that we will be able to achieve these objectives and expectations. Refer to our discussion of "Forward-looking statements" under Part I and "Item 1A. Risk factors" in this annual report on Form 10-K. 105 -------------------------------------------------------------------------------- Operating summary Historical Same Property Net Operating Income Growth(1) Favorable Lease Structure(3) Strategic Lease Structure by Owner and Operator of Collaborative Life Science, Agtech, and Technology Campuses Increasing cash flows Percentage of leases containing annual rent escalations 96% [[Image Removed: are-20221231_g54.jpg]] Stable cash flows [[Image Removed: are-20221231_g55.jpg]] Percentage of triple 93% net leases Lower capex burden Percentage of leases providing for the recapture of capital expenditures 93% Historical Rental Rate Growth: Renewed/Re-Leased Space Margins(4) Operating Adjusted EBITDA [[Image Removed: are-20221231_g56.jpg]] [[Image Removed: are-20221231_g57.jpg]] 70% 69% Net Debt and Preferred Stock to Adjusted EBITDA(5) Fixed-Charge Coverage Ratio(5) [[Image Removed: are-20221231_g58.jpg]] [[Image Removed: are-20221231_g59.jpg]] (1)Refer to "Same properties" and "Non-GAAP measures and definitions" within this Item 7 for additional details. "Non-GAAP measures and definitions" contains the definition of "Net operating income" and its reconciliation from the most directly comparable financial measures presented in accordance with GAAP. (2)Our 2022 same property growth outperformed our 10-year averages of 3.6% and 6.7% (cash basis) as a result of an increase in same property occupancy of 100 bps and early lease renewals that commenced in late 2021/early 2022. (3)Percentages calculated based on annual rental revenue in effect as ofDecember 31, 2022 . (4)Represents percentages for the three months endedDecember 31, 2022 . (5)Quarter annualized. Refer to the definitions of "Net debt and preferred stock to Adjusted EBITDA" and "Fixed-charge coverage ratio" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. 106 --------------------------------------------------------------------------------
Industry and ESG leadership: catalyzing and leading the way for positive change to benefit human health and society
•InJanuary 2022 , Alexandria Venture Investments, our strategic venture capital platform, was recognized bySilicon Valley Bank in its "Healthcare Investments and Exits: Annual Report 2021" as the #1 most active corporate investor in biopharma by new deal volume (2020-2021) for the fifth consecutive year. InMarch 2022 , Alexandria Venture Investments was also recognized by AgFunder in its "2022 AgriFoodTech Investment Report" as one of the five most active U.S. Investors in agrifoodtech by number of companies in which it invested (2021) for the second consecutive year. •Several of Alexandria's facilities and campuses across our regions received awards in honor of excellence in operations, development, and design: •200Technology Square on our Alexandria Technology Square® mega campus in ourCambridge /Inner Suburbs submarket earned a 2022 BOMA Mid-Atlantic TOBY (The Outstanding Building of the Year) award in the Corporate Category. The TOBY Awards honor and recognize quality in building operations and award excellence in building management. •Our Alexandria Center® for AgTech campus in our Research Triangle submarket was namedTop Flex/Warehouse Development in theTriangle Business Journal's 2022 SPACE Awards. The annual SPACE Awards recognize the Research Triangle's top real estate developments and transactions. •685Gateway Boulevard , an amenities building on our Alexandria Technology Center® -Gateway mega campus in ourSouth San Francisco submarket, which is on track to achieve Zero Energy Certification, was awarded one of 10 national awards issued by WoodWorks -Wood Products Council in the 2022 Wood Design Awards, an annual awards program that celebrates excellence in wood building design. •InFebruary 2022 , Alexandria earned the first-ever Fitwel Life Science certification for300 Technology Square , located on our Alexandria Technology Square® mega campus in ourCambridge /Inner Suburbs submarket. The new rigorous, evidence-based Fitwel Life Science Scorecard - developed in partnership with theCenter for Active Design exclusively for Alexandria - is the first healthy building framework dedicated to laboratory facilities, marking another pioneering effort by the Company to prioritize tenant health and wellness and further differentiate our world-class laboratory buildings. •InFebruary 2022 , Alexandria was ranked the #5 most sustainable REIT, as featured in the Barron's article, "10 Real Estate Companies That Are Both Greener and More Profitable." •InMarch 2022 , Alexandria's executive chairman and founder,Joel S. Marcus , was honored by theNational Medal of Honor Museum Foundation inArlington, Texas during a groundbreaking ceremony in celebration of the historic mission-critical milestone in the development of the national museum.Mr. Marcus , who serves on the foundation's board of directors, attended alongside fellow foundation board members, major museum donors, government officials, and 15 Medal of Honor recipients to commemorate the foundation's remarkable progress toward its goal to build a permanent home where the inspiring stories of our country's Medal of Honor recipients will be brought to life. •InApril 2022 ,9880 Campus Point Drive , a 98,000 RSF development on theCampus Point by Alexandria mega campus in ourUniversity Town Center submarket, earned LEED Platinum certification, the highest level of certification under theU.S. Green Building Council's Core & Shell rating system. Home to Alexandria GradLabs®, a dynamic proprietary platform purpose-built to accelerate the growth of promising post-seed-stage life science companies, the cutting-edge facility demonstrates high levels of sustainability, including decreased water consumption, significantly reduced energy use, and increased use of recycled resources and materials. •InJune 2022 , we released our 2021 ESG Report, which highlights our longstanding ESG leadership. The report details our efforts to advance our ESG impact, including by driving high-performance building design and operations to reduce carbon emissions, mitigating climate-related risk in our real estate portfolio, and investing in and providing essential infrastructure for sustainable agrifoodtech companies. It also showcases Alexandria's comprehensive efforts to catalyze the health, wellness, safety, and productivity of our employees, tenants, local communities, and the world through the built environment and beyond, including through our visionary social responsibility endeavors. Notable initiatives presented in the report that highlight our innovative approach include: •Furthering the development of our approach to physical and transitional climate-related risk by initiating a process to assess and understand potential physical risk and pathways to mitigate and adapt to climate change, as well as preparing for the transition to a low-carbon economy and continuing to develop science-based targets; •Implementing innovative solutions to minimize fossil fuel use in our state-of-the-art laboratory development projects, such as at325 Binney Street , which will harness geothermal energy to target a LEED Zero Energy certification and a 92% reduction in fossil fuel use as a key component of its design to be the most sustainable laboratory building inCambridge ; at751 Gateway Boulevard , which is pursuing electrification and is tracking to be the first all-electric laboratory building inSouth San Francisco ; and at our Alexandria Center® for Life Science -South Lake Union mega campus inSeattle , where the Company is incorporating an innovative wastewater heat recovery system; and •Increasing our investment in renewable electricity to mitigate carbon emissions in our existing asset base, including through a large-scale solar power purchase agreement that will significantly increase the supply of renewable electricity to ourGreater Boston market starting in 2024. •InJuly 2022 , Alexandria Venture Investments was recognized as the #1 most active corporate investor in biopharma by new deal volume (2021-1H22) for the fifth consecutive year bySilicon Valley Bank in its "Healthcare Investments and Exits: Mid-Year 2022 Report." Alexandria's venture activity provides us with, among other things, mission-critical data and insights into industry innovations and trends. 107 -------------------------------------------------------------------------------- •InSeptember 2022 , coinciding with National Suicide Prevention Month, we announced our deepened partnership with KITA, a non-profit providing tuition-free summer camp for children who have lost a loved one to suicide, and the advancement of our eighth social responsibility pillar addressing the mental health crisis. Through Alexandria's significant support, KITA will have free, long-term access to 28 acres inActon, Maine that will serve as the non-profit's new home and enable it to grow its program and increase the number of children it serves. •InOctober 2022 , Alexandria continued to enhance its first social responsibility pillar focused on advancing human health by empowering NEXT for AUTISM's development of important support services for autistic individuals and their families. Alexandria has been forging strategically supportive partnerships with highly impactful organizations that aim to accelerate groundbreaking medical innovation to advance vitally needed therapies for individuals with autism. •InOctober 2022 , Alexandria's position as a groundbreaking leader in ESG was reinforced in the 2022 GRESB Real Estate Assessment, with several achievements, including (i) Regional and Global Sector Leader for buildings in development in the Science & Technology sector, (ii) #2 ranking for buildings in operation in the Diversified Listed sector, and (iii) "A" disclosure score for the fifth consecutive year. Alexandria has earned "Green Star " recognitions in the operating asset benchmark for the sixth consecutive year and in the development benchmark for the third consecutive year since its 2020 launch. •InOctober 2022 , Alexandria was recognized as a Climate Leader by the Sponsors of Mass Save®, a collaborative of the energy utilities and energy efficiency service providers inMassachusetts . Utilizing these programs in ourGreater Boston market, we have implemented over 65 energy conservation projects across more than 40 buildings over the last 10 years, resulting in estimated recurring annual energy savings of over 5 million kWh. Alexandria was the only real estate company to be selected in the inaugural cohort of honorees. •InOctober 2022 ,Mr. Marcus , as a newly appointed member of thePrix Galien USA's esteemed Awards jury, honored groundbreaking medical innovations in life science. He served on the Prix Galien committee, alongside other influential science leaders, that recognized the Best Startup, Best Digital Health Solution and the inaugural Best Incubators, Accelerators and Equity. •InOctober 2022 ,9880 Campus Point Drive on theCampus Point by Alexandria mega campus in ourUniversity Town Center submarket received an Orchid award for Architecture from theSan Diego Architectural Foundation , and a People's Choice Orchid. The facility is home to Alexandria GradLabs®, a dynamic platform that is accelerating the growth of promising early-stage life science companies. •Alexandria is addressing some of today's most urgent societal challenges through our eight social responsibility pillars, including the mental health crisis and opioid addiction. InOctober 2022 : •Alexandria presented a timely conversation on the state of mental health in America with former congressmanPatrick J. Kennedy , one of the world's leading voices and policymakers on mental health, at theGalien Forum USA 2022, which was held at the Alexandria Center® for Life Science -New York City . •OneFifteen, a novel, data-driven comprehensive care model we developed in partnership with Verily, celebrated its third anniversary of the campus's opening inDayton, Ohio . OneFifteen has treated over 5,800 patients since opening its doors inOctober 2019 . •InNovember 2022 , our executive chairman and founder,Joel S. Marcus , presented at the much-anticipated AnnualBaron Investment Conference for a rare second time.Mr. Marcus opened the program with a presentation on what renowned author and business strategistJim Collins describes as our "Superior Results, Distinctive Impact, and Lasting Endurance." •InNovember 2022 , Alexandria earned several 2022 TOBY (The Outstanding Building of the Year) Awards from BOMA (Building Owners and Managers Association ) inBoston ,Seattle , and Raleigh-Durham. The TOBY Awards recognize quality in commercial buildings and reward excellence in building management. •In ourCambridge /Inner Suburbs submarket: Four recognitions across three of our premier mega campuses - Alexandria Center® atKendall Square , Alexandria Center® atOne Kendall Square , and Alexandria Technology Square® - for Corporate Facility,Laboratory Building ,Renovated Building , andBuilding Under 100,000 SF categories. •In ourLake Union submarket: A recognition for1165 Eastlake Avenue East on The Eastlake Life Science Campus by Alexandria mega campus in the Corporate Facility category. •In our Research Triangle submarket: A recognition for9 Laboratory Drive on our Alexandria Center® for AgTech campus in the Life Science category. •InJanuary 2023 , Alexandria Venture Investments was recognized bySilicon Valley Bank in its "Healthcare Investments and Exits: Annual Report 2022" as the #1 most active corporate investor in biopharma by new deal volume (2021-2022) for the sixth consecutive year. Alexandria's venture activity provides us with, among other things, mission-critical data on and insights into key macro life science industry and innovation trends. 108 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g60.jpg]] (1)Reflects current score for Alexandria and latest scores available for the FTSE Nareit All REITs Index companies from Bloomberg Professional Services as ofDecember 31, 2022 . (2)Top 10% ranking among companies included in the Sustainalytics Global Universe, based on information available from Bloomberg Professional Services as ofDecember 31, 2022 . (3)Reflects current scores for Alexandria and latest scores available for the FTSE Nareit All REITs Index companies on ISS's website as ofDecember 31, 2022 . (4)Top 10% ranking among FTSE Nareit All REITs Index companies, based on information available from Bloomberg Professional Services as ofDecember 31, 2022 . 109 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g61.jpg]]
Environmental progress data for 2021 reflected in the chart above received
independent limited assurance from
(1)2025 environmental goal for Alexandria's cumulative progress relative to a 2015 baseline on a like-for-like basis for buildings in operation that the Company directly manages. (2)2025 environmental goal for buildings in operation that Alexandria indirectly and directly manages. In alignment with industry best practice, the Company reports waste diversion annually; the 2025 goal is to achieve a waste diversion rate of at least 45% by 2025. (3)Progress toward 2025 goals. 110 -------------------------------------------------------------------------------- [[Image Removed: are-20221231_g62.jpg]] 111 --------------------------------------------------------------------------------
Climate change and sustainability
We cannot predict the rate at which climate change will progress. However, the physical effects of climate change could have a material adverse effect on our properties, operations, and business. For example, most of our properties are located along the east and west coasts of theU.S. and some of our properties are located in close proximity to shorelines. To the extent that climate change impacts weather patterns, our markets could experience severe weather, including hurricanes, severe winter storms, wild fires, droughts, and coastal flooding due to increases in storm intensity and rising sea levels. Over time, these conditions could result in declining demand for space at our properties, delays in construction and resulting increased construction costs, or in our inability to operate the buildings at all. Climate change and severe weather may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable, and by increasing the costs of energy, maintenance, repair of water and/or wind damage, and snow removal at our properties. We continue to evaluate our asset base for potential exposure to the following climate-related risks: sea level rise and increases in heavy rain, flood, drought, extreme heat, and wildfire. As a part of Alexandria's risk management program, we purchase property insurance to mitigate the risk of extreme weather events and natural disasters. However, our insurance may not adequately cover all of our potential losses. As a result, there can be no assurance that climate change and severe weather will not have a material adverse effect on our properties, operations, or business.
Board of directors and leadership oversight
The Audit Committee of Alexandria's Board of Directors oversees the management of the Company's financial and other systemic risks, including those related to climate. At a management level, Alexandria's Sustainability Committee, which comprises members of the executive management team and senior decision makers spanning the Company's Real Estate Development, Asset Management, Risk, and Sustainability teams, leads the development and execution of our approach to climate-related risk.
Proactively managing and mitigating climate risk
The resilience of our properties under a changing climate is paramount both for our business and our tenants' mission-critical research, development, manufacturing, and commercialization efforts. We consider the potential impacts associated with climate change and extreme weather conditions in the acquisition, design, development, and operation of our buildings and campuses. Our approach to climate readiness focuses on physical and transition risks and is aligned to guidelines issued by theTask Force on Climate-related Financial Disclosures ("TCFD"), which we endorsed in 2018. To this end, we have initiated a process to assess potential physical risks as well as the pathways to mitigate and adapt to climate change. We are also preparing for the transition to a low-carbon economy and continue to advance our approach to sustainable design and operations to align with our tenants' strategic sustainability goals and anticipate evolving regulations. As further detailed in the "Monitoring and preparing for transition" section below, over the past few years, regulatory bodies in most of our regions have either passed or proposed legislation to limit the carbon footprint of buildings, require procurement of clean power, or eliminate natural gas from new construction projects. Additionally, certainU.S. jurisdictions incorporated guidelines into their building codes to address the up-front impacts of building materials such as concrete. Moreover, our tenant preferences for green, efficient, and healthy buildings continue to rise. As ofDecember 31, 2022 , 90% of Alexandria's top 20 tenants (by annual rental revenue) have set net-zero carbon and/or carbon neutrality goals. As a result of our own sustainability mission compelling us to reduce carbon emissions and mitigate climate risk, as well as the changing regulatory environment and our tenants' expectations, we have implemented a comprehensive approach to assessing and mitigating physical risk to our properties as well as to preparing for the transition, as described below.
Assessing and mitigating physical risk to our properties
We consider two climate change scenarios for the years 2030 and 2050 when evaluating physical risk to our properties: (1) a business-as-usual scenario in which greenhouse gas ("GHG") emissions continue to increase with time (Representative Concentration Pathways ("RCP") 8.5); and (2) a mitigation scenario in which GHG emissions level off by the year 2050 and decline thereafter (RCP 4.5). To ensure a conservative evaluation of potential risk at the asset level, we use the RCP 8.5 scenario, which has greater climate hazard impacts than RCP 4.5. These climate change assessments covering both acute and chronic risks enable us to assess preparedness for climate-related risks across the real estate life cycle.
For our property acquisitions, our risk management and sustainability teams will conduct climate change evaluations and advise the transactions and asset management teams of any need for potential property upgrades, which are evaluated in our financial modeling and transactional decisions.
For our developments and redevelopments of new Class A properties, we will evaluate the potential impact of sea level rise, storm surges in coastal or tidal locations, and changing temperatures out to the year 2050. As feasible, we will consider designs that accommodate potential expansion of cooling infrastructure to meet future building needs while providing flexibility and optimization of infrastructure funds for more immediate needs. In water-scarce areas, we will consider planting drought-resistant vegetation and equipping buildings to connect to a municipal recycled-water infrastructure where available and feasible. In areas prone to wildfire, we will work toward incorporating brush management practices into landscape design and including enhanced air filtration systems to 112 -------------------------------------------------------------------------------- support safe and healthy indoor air. For example, we have designed our development project at 15 Necco street to account for a high-emissions climate scenario and incorporate a number of innovative measures, including the strategic placement of critical infrastructure and building systems to provide multiple layers of protection, elevate the first floor above predicted 2070 flood evaluation (as published by theCity of Boston ), and install landscape and hardscape features to decrease surface water runoff and serve as barriers to potential flooding.
For our properties located in the areas prone to wildfires or flooding, we are evaluating the extent to which we have mitigations in place and which operational and physical improvements may be made. For example, resilience measures that may be implemented at some of our properties will include the following:
•In areas prone to fire, we will work toward incorporating brush management practices into landscape design; we will select less flammable vegetation species and position them in a reasonable distance from a property; we will construct building envelopes with fire-resistant materials; and will install HVAC systems that are able to filter smoke particulates in the air in the event of fire. •In areas prone to flooding, critical building mechanical equipment will be positioned on the roofs or significantly above the projected potential flood elevations; temporary flood barriers will be stored on-site to be deployed at building entrances prior to a flood event; property entrances or the first floor will be elevated above projected present-day and future flood elevations; backflow preventors on storm/sewer utilities that discharge from the building will be installed; and the building envelope will be waterproofed up to the projected flood elevation. As a part of Alexandria's risk management program, we maintain all-risk property insurance at the portfolio level to mitigate the risk of extreme weather events and natural disasters (including floods, wildfires, earthquakes, and wind events). However, our insurance may not adequately cover all of our potential losses. As a result, there can be no assurance that climate change and severe weather will not have a material adverse effect on our properties, operations, or business.
We also maintain all-risk property insurance at the portfolio level to mitigate certain risks associated with natural catastrophes (floods, wildfires, earthquakes, and wind events); our insurance policies, however, may not completely cover all our potential losses.
Monitoring and preparing for transition
Globally, public concern regarding climate change has continued to escalate. OnNovember 20, 2022 , theUnited Nations ("UN") held its annual climate summit,COP27 , and as a result of the summit announced an agreement that reaffirmed the goal to limit the global temperature rise to the crucial temperature threshold of 1.5 degrees Celsius above pre-industrial levels. The agreement also provided a loss and damage fund for countries most vulnerable to climate disasters. As of the date of this report, no decisions have been made on who should pay into the fund, where the funds will come from, and which countries will benefit, and it is unknown how or if the terms of the agreement will be carried out effectively or whether these funds will be sufficient to mitigate the effects of damages related to climate change over time. InAugust 2021 , theUnited Nations' Intergovernmental Panel on Climate Change issued a detailed report titled "Climate Change 2021: The Physical Science Basis," which provides comprehensive evidence of the catastrophic impact of GHG emissions on climate change, including increases in severe and dangerous weather conditions. In theU.S. , inJune 2019 ,President Biden identified climate change as one of his administration's top priorities and pledged to seek measures that would pave the path for theU.S. to eliminate net GHG pollution by the year 2050. InApril 2021 ,President Biden announced his plan to reduce theU.S. GHG emissions by at least 50% by the year 2030. These environmental goals earned a prominent place inPresident Biden's $1.2 trillion infrastructure bill, which was signed into law onNovember 15, 2021 . Also, inAugust 2022 ,U.S. Congress signed into law the Inflation Reduction Act of 2022 ("IRA"), which directs nearly$400 billion for federal spending to be used toward reducing carbon emissions and funding clean energy over the next 10 years and is designed to encourage private investment in clean energy, transport, and manufacturing. It is yet unknown what impact, if any, the IRA may have on us.
Numerous states and municipalities have adopted state and local laws and policies on climate change and emission reduction targets, including, but not limited to, the following:
•InSeptember 2018 , Senate Bill 100 was signed into law inCalifornia , accelerating the state's renewable portfolio standard target dates and setting a policy of meeting 100% of retail electricity sales from eligible renewables and zero-carbon resources byDecember 31, 2045 .
•In
113 --------------------------------------------------------------------------------
•In
•In
•InSeptember 2022 , GovernorGavin Newsom enacted a package of legislation that, among other measures, will allow the state to achieve carbon neutrality no later than 2045; establish an 85% emissions reduction target by 2045; achieve 90% and 95% clean energy by 2035 and 2040, respectively; and establish a regulatory framework for removing carbon pollution.
•In
•InSeptember 2021 , theBoston City Council approved an amendment to theBuilding Emissions Reduction and Disclosure Ordinance ("BERDO 2.0"), which imposes enforceable emission limits on buildings over 20,000 square feet starting in 2025-2030, targeting zero emissions by 2050. Furthermore, BERDO 2.0 adds a requirement that water and energy use data reported to theCity of Boston be verified by a third-party. (An annual reporting requirement starting in 2022 for year 2021 was imposed by BERDO 1.0.) •InAugust 2022 , GovernorCharlie Baker enacted a bill to enable the state to meet its climate targets, with key provisions, including mandating all new vehicles sold to be emission free by 2035; providing certain municipalities the ability to ban fossil fuel hookups in new construction or major renovation projects; requiring theMassachusetts Bay Transportation Authority to electrify its entire fleet of public transportation vehicles by 2040 and purchase only zero-emission buses starting in 2030; and phasing out incentives for fossil fuel-powered heating and cooling systems.
•In
•InDecember 2022 ,New York approved the Scoping Plan, which details actions required to advance directives stated in the CLCPA and to enableNew York to achieve: •70% renewable energy by 2030; •Zero emissions electricity by 2040; •40% GHG emissions reduction below 1990 levels by 2030; •85% GHG emissions reduction below 1990 levels by 2050; and •Net-zero GHG emissions statewide by 2050.
•In
•InDecember 2021 ,New York City passed Local Law 154, which will phase out fossil fuel usage in newly constructed residential and commercial buildings starting in 2024 for lower-rise buildings and in 2027 for taller buildings. With few exceptions, all buildings constructed inNew York City must be fully electric by 2027.
•InMay 2019 , the Clean Buildings Act was signed into law in the state ofWashington . The law imposed a cap on the energy used in commercial buildings larger than 50,000 square feet and established a phase-in compliance requirement starting in 2026. InMarch 2022 , the law was expanded to apply to commercial buildings exceeding 20,000 square feet. •In 2020, theState of Washington set GHG emission limits, which will require the state to reduce emissions levels by 45% below 1990 levels by 2030 and by 70% below 1990 levels by 2040, and to achieve net-zero emissions by 2050.
•In
114 --------------------------------------------------------------------------------
•To report energy use data annually beginning in 2025; •To reduce direct GHG emissions by 20% from 2025 levels by 2030; and •To have net-zero direct emissions by 2040.
The law also requires the state to reduce its GHG emissions by 60% below 2006 levels by 2031 and to achieve net-zero GHG emissions by 2045.
•InJanuary 2022 , GovernorRoy Cooper signed an executive order that updates the state's GHG emission goals to require a reduction of 50% below 2005 levels by 2030 and achievement of net-zero GHG emissions by 2050.
Alexandria has implemented a comprehensive approach to responding to transition risk through the following strategies:
Decarbonizing construction
Alexandria targets LEED Gold or Platinum certification for new ground-up developments. Through our sustainability goals for new developments, we deliver energy- and resource-efficient buildings that meet or exceed tenant, city, state, and federal requirements for energy and water efficiency, material sourcing, biodiversity, and alternative transportation.
We are also revolutionizing the design of our buildings through innovative
low-carbon solutions and are pursuing more advanced certifications in Zero
Energy from LEED and the
•At325 Binney Street , on our Alexandria Center atOne Kendall Square mega campus in ourCambridge submarket, the building design harnesses geothermal energy and is expected to yield a 92% reduction in fossil fuel consumption. The project is targeting LEED Platinum Core & Shell and LEED Zero Energy certifications. •At685 Gateway Boulevard , an amenities building on our Alexandria Technology Center® -Gateway mega campus in ourSouth San Francisco submarket, we are targeting Zero Energy Certification through ILFI by leveraging design strategies such as building envelope optimization, high-performance features, and on-site energy generation. With several jurisdictions shifting (or with plans to shift soon) from fossil fuels for heating and requiring all electric buildings as a strategy to reduce carbon emissions associated with building operations, we have proactively incorporated electrification into new building designs, with one project completed and three currently in progress. We also continue to explore further opportunities to heat and cool our buildings with alternative energy, such as geothermal and wastewater heat recovery. Embodied carbon from the building sector accounts for 11% of annual global GHG emissions, and Alexandria is playing a leadership role in the industry's effort to measure and ultimately reduce carbon associated with the construction process. In 2019, Alexandria became a sponsor and the first REIT to use theCarbon Leadership Forum's Embodied Carbon in Construction Calculator (EC3) tool. For new construction projects, we seek to procure products with Environmental Product Declarations ("EPDs"), which document and verify information on product composition and environmental impact. Using such EPDs, Alexandria targets a 10% reduction in embodied carbon for new ground-up development projects.
Investing in renewable energy
Alexandria anticipates a significant increase in the percentage of renewable electricity used by our properties beginning in 2024 as a result of a new large-scale solar power purchase agreement ("PPA") that we executed in ourGreater Boston market. Starting in 2024, the PPA is expected to supply theGreater Boston market with new renewable electricity with power produced by a solar farm that will be connected to theNew England grid. With this contract in place, 53% of Alexandria's total electricity consumption is expected to be renewable based on electric usage during 2021.
Reducing the environmental footprint of buildings in operation
Our sustainability mission compels us toward industry-leading sustainability practices and performance that can help reduce operating expenses and result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value, and thus enable us to capture climate-related opportunities. Our ongoing efforts to reduce consumption are driven by our commitment to operational excellence in sustainability, building efficiency, and service to our tenants. Alexandria's 2025 sustainability goals for buildings in operation and new ground-up construction projects provide the framework, metrics, and targets that guide the Company's focus on continuous, long-term improvement. For buildings in operation, we set goals to reduce carbon emissions, energy consumption, and potable water consumption and increase waste diversion by the year 2025. 115
-------------------------------------------------------------------------------- [[Image Removed: are-20221231_g63.jpg]] (1)2025 environmental goal for Alexandria's cumulative progress relative to a 2015 baseline on a like-for-like basis for buildings in operation that the Company directly manages. (2)2025 environmental goal for buildings in operation that Alexandria indirectly and directly manages. In alignment with industry best practice, the Company reports waste diversion annually; the 2025 goal is to achieve a waste diversion rate of at least 45% by 2025. (3)Progress toward 2025 goal. As we look to the future, we are creating our long-term strategy and plan for the net zero-carbon transition. We are developing an approach to set industry-leading science-based targets that will provide a pathway to reduce GHG emissions and continue our leadership in sustainability.
Refer to "Item 1A. Risk factors" in this annual report on Form 10-K for discussion of the risks we face from climate change.
116 --------------------------------------------------------------------------------
Results of operations
We present a tabular comparison of items, whether gain or loss, that may facilitate a high-level understanding of our results and provide context for the disclosures included in this annual report on Form 10-K. We believe that such tabular presentation promotes a better understanding for investors of the corporate-level decisions made and activities performed that significantly affect comparison of our operating results from period to period. We also believe that this tabular presentation will supplement for investors an understanding of our disclosures and real estate operating results. Gains or losses on sales of real estate and impairments of assets classified as held for sale are related to corporate-level decisions to dispose of real estate. Gains or losses on early extinguishment of debt are related to corporate-level financing decisions focused on our capital structure strategy. Significant realized and unrealized gains or losses on non-real estate investments, impairments of real estate and non-real estate investments, and acceleration of stock compensation expense due to the resignation of an executive officer are not related to the operating performance of our real estate assets as they result from strategic, corporate-level non-real estate investment decisions and external market conditions. Impairments of non-real estate investments are not related to the operating performance of our real estate as they represent the write-down of non-real estate investments when their fair values decrease below their respective carrying values due to changes in general market or other conditions outside of our control. Significant items included in the tabular disclosure for current periods are described in further detail under this Item 7 in this annual report on Form 10-K. Key items included in net income attributable to Alexandria's common stockholders for the years endedDecember 31, 2022 and 2021 and the related per share amounts were as follows: Year Ended December 31, 2022 2021 2022 2021 (In millions, except per share amounts) Amount Per Share - Diluted Impairment of real estate$ (65.0) $ (52.7) $ (0.40) $ (0.35) Loss on early extinguishment of debt (3.3) (67.3) (0.02) (0.46) Gain on sales of real estate(1) 537.9 126.6 3.33 0.86 Acceleration of stock compensation expense due to executive officer resignation (7.2) - (0.04) - Unrealized (losses) gains on non-real estate investments (412.2) 43.6 (2.55) 0.30 Impairment of non-real estate investments (20.5) - (0.13) - Significant realized gains on non-real estate investments - 110.1 - 0.75 Total$ 29.7 $ 160.3 $ 0.19 $ 1.10
(1)Refer to "Funds from operations and funds from operations, as adjusted,
attributable to
117 --------------------------------------------------------------------------------
Same properties
We supplement an evaluation of our results of operations with an evaluation of operating performance of certain of our properties, referred to as "Same Properties ." For additional information on the determination of ourSame Properties portfolio, refer to the definition of "Same property comparisons" in the "Non-GAAP measures and definitions" section within this Item 7 in this annual report on Form 10-K. The following table presents information regarding ourSame Properties as ofDecember 31, 2022 and 2021:December 31, 2022 2021
Percentage change in net operating income over comparable period from prior year
6.6% 4.2 %
Percentage change in net operating income (cash basis) over comparable period from prior year
9.6% 7.1 % Operating margin 70% 72% Number of Same Properties 253 247 RSF 26,121,796 23,490,412 Occupancy - current-period average 95.7% 96.6 % Occupancy - same-period prior-year average 94.7% 96.3 % 118
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The following table reconciles the number of
Development - under construction Properties4 Davis Drive 1201 Brookline Avenue 115 Necco Street 1751 Gateway Boulevard 1325 Binney Street 11150 Eastlake Avenue East 19810 Darnestown Road 199 Coolidge Avenue 1500 North Beacon Street and4 Kingsbury Avenue
2
9808 Medical Center Drive
1
6040 George Watts Hill Drive 11450 Owens Street 110075 Barnes Canyon Road 1 14 Development - placed into service afterJanuary 1, 2021 Properties1165 Eastlake Avenue East 1201 Haskins Way 1825 and 835 Industrial Road 29950 Medical Center Drive 13115 Merryfield Row 18 and 10 Davis Drive 25 and 9 Laboratory Drive 210055 Barnes Canyon Road 110102 Hoyt Park Drive 1 12 Redevelopment - under construction
Properties
4840 Winter Street 120400 Century Boulevard 19601 and 9603 Medical Center Drive 2One Rogers Street 1 40, 50, and60 Sylvan Road 3
Alexandria Center® for Advanced Technologies -
6651 Gateway Boulevard 18800 Technology Forest Place 1Canada 2 Other 2 24 Redevelopment - placed into service afterJanuary 1, 2021 Properties700 Quince Orchard Road 13160 Porter Drive 15505 Morehouse Drive 1 The Arsenal on the Charles 1130-02 48th Avenue 1 Other 1 16 Acquisitions afterJanuary 1, 2021
Properties
3301, 3303, 3305, 3307, 3420, and3440 Hillview Avenue 6Sequence District by Alexandria 5 Alexandria Center® for Life Science - Fenway 1550 Arsenal Street 11501-1599 Industrial Road 6One Investors Way 22475 Hanover Street 110975 and 10995 Torreyana Road 2Pacific Technology Park 5 1122 and 1150 El Camino Real 212 Davis Drive 18505 Costa Verde Boulevard and4260 Nobel Drive 2225 and 235 Presidential Way 2104 TW Alexander Drive 4One Hampshire Street 1 Intersection Campus 12100 Edwin H. Land Boulevard 110010 and 10140 Campus Point Drive and4275 Campus Point Court 3446 and 458 Arsenal Street 235 Gatehouse Drive 11001 Trinity Street and1020 Red River Street 2 Other 37 99 Unconsolidated real estate joint ventures 4 Properties held for sale
10
Total properties excluded fromSame Properties
179
Same Properties
253
Total properties inNorth America as ofDecember 31, 2022
432
119 --------------------------------------------------------------------------------
Comparison of results for the year ended
The following table presents a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . We provide a comparison of the results for the year endedDecember 31, 2021 to the year endedDecember 31, 2020 , including a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , in the "Results of operations" section within this Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2021 . Refer to the "Non-GAAP measures and definitions" section within this Item 7 in this annual report on Form 10-K for definitions of "Tenant recoveries" and "Net operating income" and their reconciliations from the most directly comparable financial measures presented in accordance with GAAP, income from rentals and net income, respectively. Year Ended December 31, (Dollars in thousands) 2022 2021 $ Change % Change Income from rentals: Same Properties$ 1,385,380 $ 1,289,246 $ 96,134 7.5 % Non-Same Properties 564,718 329,346 235,372 71.5 Rental revenues 1,950,098 1,618,592 331,506 20.5 Same Properties 478,333 407,450 70,883 17.4 Non-Same Properties 147,609 82,207 65,402 79.6 Tenant recoveries 625,942 489,657 136,285 27.8 Income from rentals 2,576,040 2,108,249 467,791 22.2 Same Properties 620 479 141 29.4 Non-Same Properties 12,302 5,422 6,880 126.9 Other income 12,922 5,901 7,021 119.0 Same Properties 1,864,333 1,697,175 167,158 9.8 Non-Same Properties 724,629 416,975 307,654 73.8 Total revenues 2,588,962 2,114,150 474,812 22.5 Same Properties 561,301 475,209 86,092 18.1 Non-Same Properties 221,852 148,346 73,506 49.6 Rental operations 783,153 623,555 159,598 25.6 Same Properties 1,303,032 1,221,966 81,066 6.6 Non-Same Properties 502,777 268,629 234,148 87.2 Net operating income$ 1,805,809 $ 1,490,595 $ 315,214 21.1 % Net operating income - Same Properties$ 1,303,032 $ 1,221,966 $ 81,066 6.6 % Straight-line rent revenue (54,991) (79,602) 24,611 (30.9) Amortization of acquired below-market leases (26,224) (27,252) 1,028 (3.8) Net operating income -Same Properties (cash basis)$ 1,221,817 $ 1,115,112 $ 106,705 9.6 % 120
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Income from rentals
Total income from rentals for the year endedDecember 31, 2022 increased by$467.8 million , or 22.2%, to$2.6 billion , compared to$2.1 billion for the year endedDecember 31, 2021 , as a result of increase in rental revenues and tenant recoveries, as discussed below.
Rental revenues
Total rental revenues for the year endedDecember 31, 2022 increased by$331.5 million , or 20.5%, to$2.0 billion , compared to$1.6 billion for the year endedDecember 31, 2021 . The increase was primarily due to an increase in rental revenues from ourNon-Same Properties related to 3.9 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2021 and 99 operating properties aggregating 9.6 million RSF acquired subsequent toJanuary 1, 2021 . Rental revenues from ourSame Properties for the year endedDecember 31, 2022 increased by$96.1 million , or 7.5%, to$1.4 billion , compared to$1.3 billion for the year endedDecember 31, 2021 . The increase was primarily due to rental rate increases on lease renewals and re-leasing of space sinceJanuary 1, 2021 and an increase in occupancy from ourSame Properties to 95.7% for the year endedDecember 31, 2022 from 94.7% for the year endedDecember 31, 2021 .
Tenant recoveries
Tenant recoveries for the year endedDecember 31, 2022 increased by$136.3 million , or 27.8%, to$625.9 million , compared to$489.7 million for the year endedDecember 31, 2021 . This increase was partially from ourNon-Same Properties related to our development and redevelopment projects placed into service and properties acquired subsequent toJanuary 1, 2021 , as discussed above under "Rental revenues."Same Properties tenant recoveries for the year endedDecember 31, 2022 increased by$70.9 million , or 17.4%, primarily due to higher operating expenses during the year endedDecember 31, 2022 , as discussed under "Rental operations" below. As ofDecember 31, 2022 , approximately 93% of our leases (on an annual rental revenue basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent.
Other income
Other income for the year endedDecember 31, 2022 increased by$7.0 million , or 119.0%, to$12.9 million , compared to$5.9 million for the year endedDecember 31, 2021 . The increase in other income was primarily due to an increase in fees for construction management services provided to tenants and an increase in interest income resulting from larger average deposits in, and higher interest rates earned by, our money market accounts during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 .
Rental operations
Total rental operating expenses for the year endedDecember 31, 2022 increased by$159.6 million , or 25.6%, to$783.2 million , compared to$623.6 million for the year endedDecember 31, 2021 . The increase was partially due to incremental expenses related to ourNon-Same Properties , which consist of development and redevelopment projects placed into service and acquired properties, as discussed above under "Rental revenues."Same Properties rental operating expenses increased by$86.1 million , or 18.1%, to$561.3 million during the year endedDecember 31, 2022 , compared to$475.2 million for the year endedDecember 31, 2021 . The increase was primarily the result of increases in (i) utilities expenses aggregating$21.4 million , primarily due to increased electricity usage and rates; (ii) property tax expenses aggregating$16.4 million , primarily related to changes in the ownership of four of our consolidated real estate joint ventures located in ourMission Bay submarket during the three months endedDecember 31, 2021 and resulting tax reassessment of values of the properties held by these joint ventures; and (iii) higher contract services costs aggregating$12.7 million , primarily due to increases in security services and trash and janitorial service consumption and rates.
General and administrative expenses
General and administrative expenses for the year endedDecember 31, 2022 increased by$25.8 million , or 17.0%, to$177.3 million , compared to$151.5 million for the year endedDecember 31, 2021 . For the year endedDecember 31, 2022 , approximately$7.2 million of the increase was the result of the acceleration of stock compensation expense recognized in connection with the resignation ofStephen A. Richardson , our former co-chief executive officer, which became effective onJuly 31, 2022 . The remaining increase was primarily due to the costs related to corporate related costs, additional headcount, and corporate responsibility efforts, as well as the continued growth in the depth and breadth of our operations in multiple markets, including development and redevelopment projects placed into service and properties acquired, as discussed above under "Rental revenues." As a percentage of net operating income, our general and administrative expenses for the years endedDecember 31, 2022 and 2021 were 9.8% and 10.2%, respectively. 121 --------------------------------------------------------------------------------
Interest expense
Interest expense for the years ended
Year Ended December 31, Component 2022 2021 Change Gross interest$ 372,848 $ 312,806 $ 60,042 Capitalized interest (278,645) (170,641) (108,004) Interest expense$ 94,203 $ 142,165 $ (47,962) Average debt balance outstanding(1)$ 10,374,497 $
9,071,513
Weighted-average annual interest rate(2) 3.6 % 3.4 % 0.2 %
(1)Represents the average debt balance outstanding during the respective periods. (2)Represents total interest incurred divided by the average debt balance outstanding during the respective periods.
The net change in interest expense during the year ended
Component Interest Rate(1) Effective Date Change Increases in interest incurred due to: Issuances of debt:$850 million unsecured senior notes payable 3.08 % February 2021$ 3,342 $900 million unsecured senior notes payable - 2.12 % February 2021 2,384 green bond$1.0 billion unsecured senior notes payable 3.63 % February 2022 31,138$800 million unsecured senior notes payable - 3.07 % February 2022 20,804 green bond Fluctuation in interest rate and average balance:$2.0 billion commercial paper program 7,167 Other increase in interest 3,032 Total increases 67,867 Decreases in interest incurred due to: Repayments of debt:$650 million unsecured senior notes payable - 4.03 % March 2021 (2,945) green bond Secured notes payable 3.40 % April 2022 (4,880) Total decreases (7,825) Change in gross interest 60,042 Increase in capitalized interest (108,004) Total change in interest expense$ (47,962)
(1)Represents the weighted-average interest rate as of the end of the applicable period, including amortization of loan fees, amortization of debt premiums (discounts), and other bank fees.
Depreciation and amortization
Depreciation and amortization expense for the year endedDecember 31, 2022 increased by$181.1 million , or 22.1%, to$1.0 billion , compared to$821.1 million for the year endedDecember 31, 2021 . The increase was primarily due to additional depreciation from development and redevelopment projects placed into service and properties acquired, as discussed above under "Rental revenues." 122 --------------------------------------------------------------------------------
Impairment of real estate
During the year ended
•Impairment charges aggregating$44.1 million , which consisted of write-offs of pre-acquisition costs, including the$38.3 million write-off of our entire investment in a future development project aggregating over 600,000 RSF in one of our existing submarkets inCalifornia . This impairment was recognized upon our decision to no longer proceed with this project as a result of a deteriorated macroeconomic environment that negatively impacted the financial outlook for this project. •Impairment charges aggregating$20.9 million recognized during the three months endedDecember 31, 2022 to reduce the carrying amount of 10 properties and a land parcel located in multiple submarkets to their respective estimated fair value, less costs to sell, upon classification as held for sale. We expect to sell these real estate assets in 2023. During the year endedDecember 31, 2021 , we recognized impairment charges aggregating$52.7 million , primarily related to impairment charges for a land parcel in our SoMa submarket for the development of an office property and a property located in our non-core submarket, to its estimated fair value less costs to sell. For more information, refer to the "Sales of real estate assets and impairment charges" section in Note 3 - "Investments in real estate" to our consolidated financial statements under Item 15 in this annual report on Form 10-K.
Loss on early extinguishment of debt
During the year ended
During the year endedDecember 31, 2021 , we recognized a loss on early extinguishment of debt of$67.3 million , including the write-off of unamortized loan fees primarily related to the refinancing of our 4.00% unsecured senior notes payable aggregating$650.0 million due in 2024 pursuant to a partial cash tender offer.
Equity in earnings of unconsolidated real estate joint ventures
During the years ended
Refer to Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Investment income
During the year endedDecember 31, 2022 , we recognized investment losses aggregating$331.8 million , which consisted of$80.4 million of realized gains and$412.2 million of unrealized losses. Realized gains of$80.4 million primarily consisted of sales of investments and distributions received, partially offset by impairment charges of$20.5 million primarily related to investments in privately held entities that do not report NAV. Unrealized losses of$412.2 million during the year endedDecember 31, 2022 primarily consisted of decreases in fair values of our investments in publicly traded companies and investments in privately held entities that report NAV.
During the year ended
For more information about our investments, refer to Note 7 - "Investments" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. For our impairments accounting policy, refer to the "Investments" section in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. 123 --------------------------------------------------------------------------------
Gain on sales of real estate
During the year endedDecember 31, 2022 , we recognized$537.9 million of gains related to the completion of nine real estate dispositions across various markets. The gains were classified in gain on sales of real estate within our consolidated statements of operations for the year endedDecember 31, 2022 . During the year endedDecember 31, 2021 , we recognized$126.6 million of gains, which included a$101.1 million gain recognized in connection with the sale of our entire 49.0% interest in the unconsolidated real estate joint venture at Menlo Gateway and a$23.2 million gain related to the sale of a property located in ourSeattle market. The gains were classified in gain on sales of real estate within our consolidated statements of operations for the year endedDecember 31, 2021 . For more information about our sales of real estate, refer to the "Sales of real estate assets and impairment charges" section in Note 3 - "Investment in real estate" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. Other comprehensive income Total other comprehensive income for the year endedDecember 31, 2022 decreased by$12.8 million to aggregate net unrealized losses of$13.5 million , compared to net unrealized losses of$0.7 million for the year endedDecember 31, 2021 , primarily due to unrealized losses on foreign currency translation related to our operations inCanada andChina . 124 --------------------------------------------------------------------------------
Summary of capital expenditures
Our construction spending for the year ended
Year
Ended
Construction Spending December
31, 2022
Additions to real estate - consolidated projects $
3,307,313
Investments in unconsolidated real estate joint ventures
1,442
Contributions from noncontrolling interests
(320,057)
Construction spending (cash basis)
2,988,698
Change in accrued construction 102,801 Construction spending$ 3,091,499
The following table summarizes the total projected construction spending for the
year ending
Year Ending Projected Construction SpendingDecember 31, 2023 Development, redevelopment, and pre-construction projects
(794,000) (1) Revenue-enhancing and repositioning capital expenditures 160,000 Non-revenue-enhancing capital expenditures 60,000 Guidance midpoint$ 2,975,000 (1)Approximately 55% of this amount represents contractual funding commitments from our existing consolidated real estate joint ventures, and the remaining amount is from projected new real estate joint ventures. 125 --------------------------------------------------------------------------------
Projected results
Based on our current view of existing market conditions and certain current assumptions, we present guidance for EPS attributable to Alexandria's common stockholders - diluted and funds from operations per share attributable to Alexandria's common stockholders - diluted for the year endingDecember 31, 2023 , as set forth in the table below. The tables below also provide a reconciliation of EPS attributable to Alexandria's common stockholders - diluted, the most directly comparable financial measure presented in accordance with GAAP, to funds from operations per share, a non-GAAP measure, and other key assumptions included in our updated guidance for the year endingDecember 31, 2023 . There can be no assurance that actual amounts will not be materially higher or lower than these expectations. Refer to our discussion of "Forward-looking statements" included in the beginning of Part I in this annual report on Form 10-K. Projected 2023 Earnings per Share and Funds From Operations per Share Attributable to Alexandria's Common Stockholders - Diluted Earnings per share(1)$3.41 to$3.61 Depreciation and amortization of real estate assets 5.50 Allocation of unvested restricted stock awards (0.05) Funds from operations per share(2)$8.86 to$9.06 Midpoint$8.96 (1)Excludes unrealized gains or losses afterDecember 31, 2022 that are required to be recognized in earnings and are excluded from funds from operations per share, as adjusted. (2)Refer to the definition of "Funds from operations and funds from operations, as adjusted, attributable toAlexandria Real Estate Equities, Inc.'s common stockholders" in the "Non-GAAP measures and definitions" section within this Item 7 in this annual report on Form 10-K for additional information. Key Assumptions(1) 2023 Guidance (Dollars in millions) Low High
Occupancy percentage for operating properties in
94.8% 95.8% Lease renewals and re-leasing of space: Rental rate increases 27.0% 32.0% Rental rate increases (cash basis) 11.0% 16.0% Same property performance: Net operating income increase 2.0% 4.0% Net operating income increase (cash basis) 4.0% 6.0% Straight-line rent revenue$ 130 $ 145 General and administrative expenses$ 183 $ 193 Capitalization of interest$ 342 $ 362 Interest expense$ 74 $ 94 (1)Our assumptions presented in the table above are subject to a number of variables and uncertainties, including those discussed as "Forward-looking statements" under Part I; "Item 1A. Risk factors"; and Item 7. Management's discussion and analysis of financial condition and results of operations in this annual report on Form 10-K. To the extent our full-year earnings guidance is updated during the year, we will provide additional disclosure supporting reasons for any significant changes to such guidance. Key Credit Metrics 2023 Guidance Net debt and preferred stock to Adjusted EBITDA - fourth quarter Less than or equal to of 2023 annualized
5.1x
Fixed-charge coverage ratio - fourth quarter of 2023 annualized
4.5x to 5.0x
126 --------------------------------------------------------------------------------
Consolidated and unconsolidated real estate joint ventures
We present components of balance sheet and operating results information for the noncontrolling interest share of our consolidated real estate joint ventures and for our share of investments in unconsolidated real estate joint ventures to help investors estimate balance sheet and operating results information related to our partially owned entities. These amounts are estimated by computing, for each joint venture that we consolidate in our financial statements, the noncontrolling interest percentage of each financial item to arrive at the cumulative noncontrolling interest share of each component presented. In addition, for our real estate joint ventures that we do not control and do not consolidate, we apply our economic ownership percentage to the unconsolidated real estate joint ventures to arrive at our proportionate share of each component presented. Refer to Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for further discussion.
Noncontrolling(1) Operating RSF Property/Market/Submarket Interest Share at 100% 50 and 60 Binney Street/Greater Boston/Cambridge/Inner Suburbs 66.0 %
532,395
75/125 Binney Street /Greater Boston /Cambridge /Inner Suburbs 60.0 %
388,270
70.0 % (2)
870,106
99 Coolidge Avenue /Greater Boston /Cambridge /Inner Suburbs 25.0 %
- (3)
Alexandria Center® for Science and Technology -
75.0 %
1,005,989
Area/Mission Bay (4) 1450 Owens Street/San Francisco Bay Area/Mission Bay 40.3 % (2)(5) - (3) 601, 611, 651, 681, 685, and 701 Gateway Boulevard/San Francisco Bay 50.0 %
789,567
Area/South San Francisco 751 Gateway Boulevard/San Francisco Bay Area/South San Francisco 49.0 % - (3) 211 and 213 East Grand Avenue/San Francisco Bay Area/South San Francisco 70.0 %
300,930
500 Forbes Boulevard /San Francisco Bay Area /South San Francisco 90.0 %
155,685
Alexandria Center® for Life Science -
54.7 %
-
San Francisco 3215 Merryfield Row /San Diego /Torrey Pines 70.0 % (2)
170,523
Campus Point byAlexandria/San Diego/University Town Center (6) 45.0 %
1,337,916
5200 Illumina Way /San Diego/University Town Center 49.0 %
792,687
9625 Towne Centre Drive /San Diego/University Town Center 49.9 %
163,648
SD Tech by Alexandria/San Diego /Sorrento Mesa(7) 50.0 %
876,869
Pacific Technology Park /San Diego /Sorrento Mesa 50.0 %
544,352
Summers Ridge Science Park /San Diego /Sorrento Mesa(8) 70.0 % (2)
316,531
1201 and 1208 Eastlake Avenue East and
70.0 %
321,218
400 Dexter Avenue North /Seattle/Lake Union 70.0 %
290,754
800 Mercer Street/Seattle/Lake Union 40.0 % (2) -
Operating RSF Property/Market/Submarket Our Ownership Share(9) at 100% 1655 and 1725 Third Street/San Francisco Bay Area/Mission Bay 10.0 %
586,208
1401/1413 Research Boulevard /Maryland /Rockville 65.0 % (10)
(11)
1450 Research Boulevard /Maryland /Rockville 73.2 % (12)
42,679
101 West Dickman Street /Maryland/Beltsville 57.9 % (12)
135,423
(1)In addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in three other real estate joint ventures inNorth America . (2)Refer to the "Formation of consolidated real estate joint ventures and sales of partial interests" section in Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. (3)Represents a property currently under construction. Refer to "New Class A development and redevelopment properties: current projects" under Item 2 in this annual report on Form 10-K for additional details. (4)Includes 409 and 499 Illinois Street,1500 and 1700 Owens Street , and455 Mission Bay Boulevard South . (5)The noncontrolling interest share of our joint venture partner is anticipated to increase to 75% as our partner contributes 100% of the remaining cost to complete the project over time. (6)Includes 10210, 10260, 10290, and10300 Campus Point Drive and 4110, 4150, 4161, 4224, and4242 Campus Point Court . (7)Includes 9605, 9645, 9675, 9685, 9725, 9735, 9808, 9855, and9868 Scranton Road and 10055, 10065, and10075 Barnes Canyon Road . (8)Includes 9965, 9975, 9985, and9995 Summers Ridge Road . (9)In addition to the unconsolidated real estate joint ventures listed, we hold an interest in one other insignificant unconsolidated real estate joint venture inNorth America . (10)Represents our ownership interest; our voting interest is limited to 50%. (11)Represents a joint venture with a distinguished retail real estate developer for a retail shopping center aggregating 84,837 RSF. (12)Represents a joint venture with a local real estate operator in which our partner manages the day-to-day activities that significantly affect the economic performance of the joint venture. 127 -------------------------------------------------------------------------------- The following table presents key terms related to our unconsolidated real estate joint ventures' secured loans as ofDecember 31, 2022 (dollars in thousands): At 100% Interest Aggregate Debt
Unconsolidated Joint Venture Maturity Date
Stated Rate Rate(1) Commitment Balance(2) Our Share 1401/1413 Research Boulevard 12/23/24 2.70% 3.33 %$ 28,500 $ 28,146 65.0% 1655 and 1725 Third Street 3/10/25 4.50% 4.57 % 600,000 599,081 10.0% 101 West Dickman Street 11/10/26 SOFR+1.95% (3) 6.38 % 26,750 11,575 57.9% 1450 Research Boulevard 12/10/26 SOFR+1.95% (3) 6.44 % 13,000 3,802 73.2%$ 668,250 $ 642,604
(1)Includes interest expense and amortization of loan fees.
(2)Represents outstanding principal, net of unamortized deferred financing
costs, as of
The following tables present information related to the operating results and financial positions of our consolidated and unconsolidated real estate joint ventures (in thousands): Noncontrolling Interest Share of Our Share of Unconsolidated Consolidated Real Estate Joint Ventures Real Estate Joint Ventures December 31, 2022 December 31, 2022 Three Months Three Months Ended Year Ended Ended Year Ended Total revenues$ 102,013 $ 366,794 $ 2,689 $ 11,130 Rental operations (31,176) (109,358) (753) (3,197) 70,837 257,436 1,936 7,933 General and administrative (372) (1,594) (10) (106) Interest (15) (15) (772) (3,516) Depreciation and amortization of (29,702) (107,591) (982) (3,666) real estate assets Fixed returns allocated to redeemable noncontrolling interests(1) 201 805 - -$ 40,949 $ 149,041 $ 172 $ 645 Straight-line rent and below-market lease revenue $ 3,858$ 15,776 $ 274$ 1,136 Funds from operations(2)$ 70,651 $ 256,632 $ 1,154 $ 4,311 (1)Represents an allocation of joint venture earnings to redeemable noncontrolling interests primarily in one property in ourSouth San Francisco submarket. These redeemable noncontrolling interests earn a fixed return on their investment rather than participate in the operating results of the property. (2)Refer to the definition of "Funds from operations and funds from operations, as adjusted, attributable toAlexandria Real Estate Equities, Inc.'s common stockholders" in the "Non-GAAP measures and definitions" section within this Item 7 in this annual report on Form 10-K for the definition and its reconciliation from the most directly comparable financial measure presented in accordance with GAAP. As of December 31, 2022 Noncontrolling Interest Share of Our Share of Consolidated Real Unconsolidated Estate Joint Real Estate Joint Ventures Ventures Investments in real estate$ 3,392,839 $ 114,664 Cash, cash equivalents, and restricted cash 129,186 4,729 Other assets 386,667 11,346 Secured notes payable (14,599) (87,694) Other liabilities (183,233) (4,610) Redeemable noncontrolling interests (9,612) -$ 3,701,248 $ 38,435 During the years endedDecember 31, 2022 and 2021, our consolidated real estate joint ventures distributed an aggregate of$192.2 million and$112.4 million , respectively, to our joint venture partners. Refer to our consolidated statements of cash flows and Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. 128 --------------------------------------------------------------------------------
Investments
We hold strategic investments in publicly traded companies and privately held entities primarily involved in the life science, agtech, and technology industries. The tables below summarize components of our non-real estate investments and investment income. Refer to Note 7 - "Investments" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. December 31, 2022 Year Ended December 31, (In thousands) Three Months Ended Year Ended 2021 Realized gains$ 4,464 (1)$ 80,435 (1) $ 215,845 (2) Unrealized (losses) gains (24,117) (412,193) 43,632 Investment (loss) income$ (19,653) $ (331,758) $ 259,477 Investments Unrealized (In thousands) Cost Unrealized Gains Losses Carrying Amount Publicly traded companies$ 210,986 $ 96,271$ (100,118) $ 207,139 Entities that report NAV 452,391 315,071 (7,710) 759,752 Entities that do not report NAV: Entities with observable price changes 100,296 95,062 (1,574) 193,784 Entities without observable price changes 388,940 - - 388,940 Investments accounted for under the equity method of accounting N/A N/A N/A 65,459 December 31, 2022$ 1,152,613 (3) $ 506,404$ (109,402) $ 1,615,074 December 31, 2021$ 1,007,303 $ 830,863$ (33,190) $ 1,876,564 (1)For the three months and year endedDecember 31, 2022 , includes impairments aggregating$20.5 million primarily related to three non-real estate investments in privately held entities that do not report NAV. (2)Includes six separate significant realized gains aggregating$110.1 million related to the following transactions: (i) the sales of investments in three publicly traded biotechnology companies, (ii) a distribution received from a limited partnership investment, and (iii) the acquisition of two of our privately held non-real estate investments in a biopharmaceutical company and a biotechnology company. (3)Represents 2.9% of gross assets as ofDecember 31, 2022 . Public/Private Mix (Cost) [[Image Removed: are-20221231_g64.jpg]] Tenant/Non-Tenant Mix (Cost) [[Image Removed: are-20221231_g65.jpg]] 129
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Liquidity
Minimal Outstanding Borrowings and Significant Availability on Unsecured Senior Liquidity Line of Credit (in millions)$5.3B (In millions) Availability under our unsecured senior line of credit, net of amounts outstanding under [[Image Removed: are-20221231_g66.jpg]] our commercial paper program$ 4,000 Outstanding forward equity sales agreements(1) 102
Cash, cash equivalents, and restricted cash 858 Remaining construction loan commitments
136
Investments in publicly traded companies 207
Liquidity as of
$ 5,303
(1)Represents expected net proceeds from the future settlement of 0.7 million shares under forward equity sales agreements after underwriter discounts.
We expect to meet certain long-term liquidity requirements, such as requirements for development, redevelopment, other construction projects, capital improvements, tenant improvements, property acquisitions, leasing costs, non-revenue-enhancing capital expenditures, scheduled debt maturities, distributions to noncontrolling interests, and payment of dividends, through net cash provided by operating activities, periodic asset sales, strategic real estate joint ventures, long-term secured and unsecured indebtedness, borrowings under our unsecured senior line of credit, issuances under our commercial paper program, and issuances of additional debt and/or equity securities. We also expect to continue meeting our short-term liquidity and capital requirements, as further detailed in this section, generally through our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make the distributions necessary to continue qualifying as a REIT. For additional information on our liquidity requirements related to our contractual obligations and commitments, refer to Note 5 - "Leases" and Note 10 - "Secured and unsecured senior debt" to our consolidated financial statements under Item 15 in this annual report on Form 10-K.
Over the next several years, our balance sheet, capital structure, and liquidity objectives are as follows:
•Retain positive cash flows from operating activities after payment of dividends and distributions to noncontrolling interests for investment in development and redevelopment projects and/or acquisitions. •Improve credit profile and relative long-term cost of capital. •Maintain diverse sources of capital, including sources from net cash provided by operating activities, unsecured debt, secured debt, selective real estate asset sales, strategic real estate joint ventures, non-real estate investment sales, and common stock. •Maintain commitment to long-term capital to fund growth. •Maintain prudent laddering of debt maturities. •Maintain solid credit metrics. •Maintain significant balance sheet liquidity. •Prudently manage variable-rate debt exposure through the reduction of short-term and medium-term variable-rate debt. •Maintain a large unencumbered asset pool to provide financial flexibility. •Fund common stock dividends and distributions to noncontrolling interests from net cash provided by operating activities. •Manage a disciplined level of value-creation projects as a percentage of our gross real estate assets. •Maintain high levels of pre-leasing and percentage leased in value-creation projects. 130 -------------------------------------------------------------------------------- The following table presents the availability under our unsecured senior line of credit, net of amounts outstanding under our commercial paper program; outstanding forward equity sales agreements; cash, cash equivalents, and restricted cash; availability under our secured construction loan; and investments in publicly traded companies as ofDecember 31, 2022 (dollars in thousands): Stated Aggregate Outstanding Remaining Description Rate Commitments Balance(1) Commitments/Liquidity Availability under our unsecured senior line of credit, net of amounts outstanding under our commercial paper program SOFR+0.875%$ 4,000,000 $ - $ 4,000,000 Outstanding forward equity sales agreements(2) 102,427 Cash, cash equivalents, and restricted cash 857,975 Remaining construction loan commitments SOFR+2.70%$ 195,300 $ 58,396 135,583 Investments in publicly traded companies 207,139 Liquidity as of December 31, 2022 $ 5,303,124 (1)Represents outstanding principal, net of unamortized deferred financing costs, as ofDecember 31, 2022 . (2)Represents expected net proceeds from the future settlement of 0.7 million shares under forward equity sales agreements after underwriter discounts.
Cash, cash equivalents, and restricted cash
As ofDecember 31, 2022 and 2021, we had$858.0 million and$415.2 million , respectively, of cash, cash equivalents, and restricted cash. We expect existing cash, cash equivalents, and restricted cash, net cash provided by operating activities, proceeds from real estate asset sales, partial interest sales, strategic real estate joint ventures, non-real estate investment sales, borrowings under our unsecured senior line of credit, issuances under our commercial paper program, issuances of unsecured senior notes payable, borrowings under our secured construction loans, and issuances of common stock to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, distributions to noncontrolling interests, scheduled debt repayments, acquisitions, and certain capital expenditures, including expenditures related to construction activities. Cash flows We report and analyze our cash flows based on operating activities, investing activities, and financing activities. The following table summarizes changes in our cash flows for the years endedDecember 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 Change
Net cash provided by operating activities
$ 284,124 Net cash used in investing activities$ (5,080,458) $ (7,107,324) $ 2,026,866 Net cash provided by financing activities$ 4,229,772 $ 5,916,361 $ (1,686,589) Operating activities Cash flows provided by operating activities are primarily dependent upon the occupancy level of our asset base, the rental rates of our leases, the collectibility of rent and recovery of operating expenses from our tenants, the timing of completion of development and redevelopment projects, and the timing of acquisitions and dispositions of operating properties. Net cash provided by operating activities for the year endedDecember 31, 2022 increased by$284.1 million to$1.3 billion , compared to$1.0 billion for the year endedDecember 31, 2021 . The increase was primarily attributable to the following sinceJanuary 1, 2021 : (i) cash flows generated from our highly leased development and redevelopment projects recently placed into service, (ii) income-producing acquisitions, and (iii) increases in rental rates on lease renewals and re-leasing of space. 131 --------------------------------------------------------------------------------
Investing activities
Cash used in investing activities for the years ended
Year Ended December 31, Increase 2022 2021 (Decrease) Sources of cash from investing activities: Proceeds from sales of real estate$ 994,331 $ 190,576 $ 803,755 Change in escrow deposits 155,968 - 155,968
Return of capital from unconsolidated real estate joint ventures
471 - 471
Sale of interests in unconsolidated real estate joint ventures
- 394,952 (394,952) Sales of and distributions from non-real estate investments 198,320 424,623 (226,303) 1,349,090 1,010,151 338,939 Uses of cash for investing activities: Purchases of real estate 2,877,861 5,434,652 (2,556,791) Additions to real estate 3,307,313 2,089,849 1,217,464 Change in escrow deposits - 161,696 (161,696)
Acquisition of interest in unconsolidated real estate joint venture
- 9,048 (9,048) Investments in unconsolidated real estate joint ventures 1,442 13,666 (12,224) Additions to non-real estate investments 242,932 408,564 (165,632) 6,429,548 8,117,475 (1,687,927) Net cash used in investing activities$ 5,080,458
The decrease in net cash used in investing activities for the year endedDecember 31, 2022 when compared to the year endedDecember 31, 2021 was primarily due to a decreased use of cash for purchases of real estate and increase in proceeds from dispositions of real estate, partially offset by increased cash used for additions to real estate. Refer to Note 3 - "Investments in real estate" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for further information. 132 --------------------------------------------------------------------------------
Financing activities
Cash flows provided by financing activities for the years ended
Year Ended
2022 2021 Change Borrowings from secured notes payable$ 49,715 $ 10,005 $ 39,710 Repayments of borrowings from secured notes payable (934) (17,979) 17,045
Payment for the defeasance of secured notes payable (198,304)
- (198,304) Proceeds from issuance of unsecured senior notes payable 1,793,318 1,743,716 49,602 Repayments of unsecured senior notes payable - (650,000) 650,000 Premium paid for early extinguishment of debt - (66,829) 66,829
Borrowings from unsecured senior line of credit 1,181,000
3,521,000 (2,340,000)
Repayments of borrowings from unsecured senior line of credit
(1,181,000) (3,521,000) 2,340,000 Proceeds from issuances under commercial paper program 14,641,500 30,951,300 (16,309,800) Repayments of borrowings from commercial paper program (14,911,500) (30,781,300) 15,869,800 Payments of loan fees (35,612) (18,938) (16,674) Changes related to debt 1,338,183 1,169,975 168,208 Contributions from and sales of noncontrolling interests 1,542,347 2,026,486 (484,139) Distributions to and purchases of noncontrolling interests (192,171) (118,891) (73,280) Proceeds from the issuance of common stock 2,346,444 3,529,097 (1,182,653) Dividend payments (757,742) (655,968) (101,774)
Taxes paid related to net settlement of equity awards (47,289)
(34,338) (12,951) Net cash provided by financing activities$ 4,229,772 $ 5,916,361 $ (1,686,589) 133
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Capital resources
We expect that our principal liquidity needs for the year endingDecember 31, 2023 will be satisfied by the following multiple sources of capital, as shown in the table below. There can be no assurance that our sources and uses of capital will not be materially higher or lower than these expectations. Key Sources and Uses of Capital 2023 Guidance (In millions) Range Midpoint Sources of capital: Incremental debt$ 550
300 300 300 Net cash provided by operating activities after dividends 350 400 375
Real estate dispositions, sales of partial interests, and issuances of common equity
1,400 2,400 1,900 (1) Total sources of capital$ 2,600 $ 3,950 $ 3,275 Uses of capital: Construction$ 2,400 $ 3,550 $ 2,975 Acquisitions 200 400 300 Total uses of capital$ 2,600
Incremental debt (included above): Issuance of unsecured senior notes payable$ 500 $ 1,000 $ 750 Unsecured senior line of credit, commercial paper program, and other 50 (150) (50) Incremental debt$ 550 $ 850 $ 700 (1)Refer to Note 15 - "Stockholders' equity" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional details. During the three months endedDecember 31, 2022 , we entered into new forward equity sales agreements aggregating$104.7 million to sell 699,274 shares under our ATM program at an average price of$149.68 per share (before underwriter discounts). We expect to settle these forward equity sales agreements in 2023 and establish a new ATM program during the first quarter of 2023. The key assumptions behind the sources and uses of capital in the table above include a favorable capital market environment, performance of our core operating properties, lease-up and delivery of current and future development and redevelopment projects, and leasing activity. Our expected sources and uses of capital are subject to a number of variables and uncertainties, including those discussed as "Forward-looking statements" under Part I; "Item 1A. Risk factors"; and "Item 7. Management's discussion and analysis of financial condition and results of operations" in this annual report on Form 10-K. We expect to update our forecast of key sources and uses of capital on a quarterly basis. 134 --------------------------------------------------------------------------------
Sources of capital
Net cash provided by operating activities after dividends
We expect to retain$350.0 million to$400.0 million of net cash flows from operating activities after payment of common stock dividends and distributions to noncontrolling interests for the year endingDecember 31, 2023 . For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences. For the year endingDecember 31, 2023 , we expect our recently delivered projects, our highly pre-leased value-creation projects expected to be delivered, and contributions fromSame Properties and recently acquired properties to contribute significant increases in income from rentals, net operating income, and cash flows. We anticipate significant contractual near-term growth in annual cash rents of$57 million related to the commencement of contractual rents on the projects recently placed into service that are near the end of their initial free rent period. Refer to "Cash flows" within this Item 7 in this annual report on Form 10-K for a discussion of cash flows provided by operating activities for the year endedDecember 31, 2022 .
Debt
We expect to fund a portion of our capital needs in 2023 from real estate dispositions, sales of partial interests, strategic real estate joint ventures, settlement of our outstanding forward equity sales agreements, cash on hand, issuances under our commercial paper program, borrowings under our unsecured senior line of credit, and borrowings under our secured construction loans. InSeptember 2022 , we amended our unsecured senior line of credit to extend the maturity date toJanuary 22, 2028 fromJanuary 6, 2026 , increase the commitments to$4.0 billion from$3.0 billion , and convert the interest rate to SOFR plus 0.875% from LIBOR plus 0.815%. As ofDecember 31, 2022 , we had no outstanding balance on our unsecured senior line of credit. In addition to the cost of borrowing, the unsecured senior line of credit is subject to an annual facility fee of 0.15% based on the aggregate commitments outstanding. Based upon our ability to achieve certain annual sustainability targets, the interest rate and facility fee rate are also subject to upward or downward adjustments of up to four basis points with respect to the interest rate and up to one basis point with respect to the facility fee. InSeptember 2022 , we increased the aggregate amount we may issue from time to time under our commercial paper program to$2.0 billion from$1.5 billion . Commercial notes under our commercial paper program can have a maximum maturity of 397 days from the date of issuance and are generally issued with a maturity of 30 days or less. Our commercial paper program is backed by our unsecured senior line of credit, and at all times we expect to retain a minimum undrawn amount of borrowing capacity under our unsecured senior line of credit equal to any outstanding balance under our commercial paper program. We use borrowings under the program to fund short-term capital needs. The notes issued under our commercial paper program are sold under customary terms in the commercial paper market. They are typically issued at a discount to par, representing a yield to maturity dictated by market conditions at the time of issuance. In the event we are unable to issue commercial paper notes or refinance outstanding commercial paper notes under terms equal to or more favorable than those under the unsecured senior line of credit, we expect to borrow under the unsecured senior line of credit at SOFR plus 0.875%. The commercial paper notes sold during the year endedDecember 31, 2022 were issued at a weighted-average yield to maturity of 1.91%. As ofDecember 31, 2022 , we had no outstanding balance under our commercial paper program. InFebruary 2022 , we issued$1.8 billion of unsecured senior notes payable with a weighted-average interest rate of 3.28% and a weighted-average maturity of 22.0 years. The unsecured senior notes consisted of$800.0 million of 2.95% green unsecured senior notes due 2034 and$1.0 billion of 3.55% unsecured senior notes due 2052. InApril 2022 , we repaid two secured notes payable aggregating$195.0 million due in 2024 with an effective interest rate of 3.40% and recognized a loss on early extinguishment of debt of$3.3 million , including a prepayment penalty and the write-off of unamortized loan fees. 135 --------------------------------------------------------------------------------
The following table provides our average debt outstanding and weighted-average
interest rate during the year ended
Year Ended
Average
Debt
Outstanding Weighted-Average Interest Rate Long-term fixed-rate debt$ 9,999,145 3.50 %
Short-term variable-rate unsecured senior line of credit and commercial paper program debt
564,649 1.72 Blended average interest rate$ 10,563,794 3.40
Loan fee amortization and annual facility fee related to unsecured senior line of credit
N/A 0.11 Total/weighted average$ 10,563,794 3.51 %
Proactive management of transition from LIBOR
LIBOR has been used extensively in theU.S. and globally as a reference rate for various commercial and financial contracts, including variable-rate debt and interest rate swap contracts. However, based on an announcement made by theFinancial Conduct Authority onMarch 5, 2021 , one-week and two-month LIBOR rates ceased to be published afterDecember 31, 2021 ; all other LIBOR settings will effectively cease afterJune 30, 2023 , and it is expected that LIBOR will no longer be used after this date. In connection with this change, in theU.S. the Alternative Reference Rates Committee ("ARRC") was established to help ensure the successful transition from LIBOR. InJune 2017 , the ARRC selected SOFR, a new index calculated by reference to short-term repurchase agreements backed byU.S. Treasury securities, as its preferred replacement forU.S. dollar LIBOR. We have been closely monitoring developments related to the transition from LIBOR and have implemented numerous proactive measures to eliminate the potential transition-related impacts to the Company, specifically: •SinceJanuary 2017 , we have proactively eliminated outstanding LIBOR-based borrowings, and as ofDecember 31, 2022 , we had no LIBOR-based debt or financial contracts, including through our consolidated and unconsolidated real estate joint ventures. •From 2020 throughDecember 31, 2022 , we increased the aggregate amount available under our commercial paper program to$2.0 billion from$750.0 million . Our commercial paper program is not subject to LIBOR and is used for funding short-term working capital needs. This program provides us with the ability to issue commercial paper notes bearing interest at short-term fixed rates with a maturity of generally 30 days or less and a maximum maturity of 397 days from the date of issuance. As ofDecember 31, 2022 , we had no commercial paper notes outstanding. •InSeptember 2022 , we amended our unsecured senior line of credit to convert its interest rate to SOFR, among other changes. As ofDecember 31, 2022 , we had no borrowings outstanding under our unsecured senior line of credit. Refer to Note 10 - "Secured and unsecured senior debt" to our consolidated financial statements under Item 15 and "Item 1A. Risk factors" in this annual report on Form 10-K for additional information about our management of risks related to the transition from LIBOR.
Real estate dispositions, sales of partial interests, and issuances of common equity
We expect to continue the disciplined execution of select sales of operating assets. Future sales will provide an important source of capital to fund a portion of pending and recently completed opportunistic acquisitions and our highly leased value-creation development and redevelopment projects, and also provide significant capital for growth. We may also consider additional sales of partial interests in core Class A properties and/or development projects. For 2023, we expect real estate dispositions, sales of partial interests, and issuances of common equity ranging from$1.4 billion to$2.4 billion . The amount of asset sales necessary to meet our forecasted sources of capital will vary depending upon the amount of Adjusted EBITDA associated with the assets sold. Refer to Note 3 - "Investment in real estate", Note 4 - "Consolidated and unconsolidated real estate joint ventures", and Note 15 - "Stockholders' equity" to our consolidated financial statements under Item 15 and "Dispositions and sales of partial interests" under Item 2 in this annual report on Form 10-K for additional information on our dispositions, sales of partial interests, and issuances of common equity. As a REIT, we are generally subject to a 100% tax on the net income from real estate asset sales that theIRS characterizes as "prohibited transactions." We do not expect our sales will be categorized as prohibited transactions. However, unless we meet certain "safe harbor" requirements, whether a real estate asset sale is a prohibited transaction will be based on the facts and circumstances of the sale. Our real estate asset sales may not always meet such safe harbor requirements. Refer to "Item 1A. Risk factors" in this annual report on Form 10-K for additional information about the "prohibited transaction" tax. 136 --------------------------------------------------------------------------------
Common equity transactions
During the year ended
•InJanuary 2022 , we entered into new forward equity sales agreements aggregating$1.7 billion to sell 8.1 million shares of our common stock (including the exercise of an underwriters' option) at a public offering price of$210.00 per share, before underwriting discounts and commissions. •During the year endedDecember 31, 2022 , we settled all of our outstanding forward equity sales agreements by issuing 8.1 million shares and received net proceeds of$1.6 billion . •InDecember 2021 , we entered into a new ATM common stock offering program, which allows us to sell up to an aggregate of$1.0 billion of our common stock. •During the year endedDecember 31, 2022 , we entered into new forward equity sales agreements aggregating$858.1 million to sell 4.9 million shares under our ATM program at an average price of$175.12 per share (before underwriting discounts). •During the three months endedDecember 31, 2022 , we settled a portion of our outstanding forward equity agreements by issuing 4.2 million shares and received net proceeds of$737.4 million . •We expect to settle the remaining outstanding forward equity agreements by issuing 699,274 shares and receive net proceeds of approximately$102.4 million in 2023. •As ofDecember 31, 2022 , the remaining aggregate amount available under our ATM program for future sales of common stock was$141.9 million . We expect to establish a new ATM program during the first quarter of 2023.
Other sources
Under our current shelf registration statement filed with theSEC , we may issue common stock, preferred stock, debt, and other securities. These securities may be issued, from time to time, at our discretion based on our needs and market conditions, including, as necessary, to balance our use of incremental debt capital. Additionally, we, together with joint venture partners, hold interests in real estate joint ventures that we consolidate in our financial statements. These existing joint ventures provide significant equity capital to fund a portion of our future construction spend, and our joint venture partners may also contribute equity into these entities for financing-related activities. Over the next four years, we expect to receive$1.4 billion from our existing real estate joint venture partners to fund construction projects. For 2023, we expect contributions from noncontrolling interests to aggregate$794.0 million , approximately 55% of which represents funding commitments from our existing real estate joint ventures and the remaining amount of which represents funding expected from our future real estate joint ventures. During the year endedDecember 31, 2022 , we received$1.5 billion of contributions from and sales of noncontrolling interests. 137 --------------------------------------------------------------------------------
Uses of capital
Summary of capital expenditures
One of our primary uses of capital relates to the development, redevelopment, pre-construction, and construction of properties. We currently have projects in our value-creation pipeline aggregating 5.6 million RSF of Class A properties undergoing construction, 9.9 million RSF of near-term and intermediate-term development and redevelopment projects, and 17.3 million SF of future development projects inNorth America . We incur capitalized construction costs related to development, redevelopment, pre-construction, and other construction activities. We also incur additional capitalized project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, pre-construction, or construction of a project, during periods when activities necessary to prepare an asset for its intended use are in progress. Refer to "New Class A development and redevelopment properties: current projects" under Item 2 in this annual report on Form 10-K for more information on our capital expenditures. We capitalize interest cost as a cost of the project only during the period in which activities necessary to prepare an asset for its intended use are ongoing, provided that expenditures for the asset have been made and interest cost has been incurred. Capitalized interest for the years endedDecember 31, 2022 and 2021 of$278.6 million and$170.6 million , respectively, was classified in investments in real estate in our consolidated balance sheets. Property taxes, insurance on real estate, and indirect project costs, such as construction administration, legal fees, and office costs that clearly relate to projects under development or construction, are capitalized as incurred during the period an asset is undergoing activities to prepare it for its intended use. We capitalized payroll and other indirect costs related to development, redevelopment, pre-construction, and construction projects, aggregating$83.8 million and$69.8 million , and property taxes, insurance on real estate and indirect project costs aggregating$97.3 million and$73.8 million during the years endedDecember 31, 2022 and 2021, respectively. The increase in capitalized costs for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily due to an increase in our value-creation pipeline projects undergoing construction and pre-construction activities in 2022 over 2021. Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective tenants. These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings. Should we cease activities necessary to prepare an asset for its intended use, the interest, taxes, insurance, and certain other direct and indirect project costs related to the asset would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred. Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income. For example, had we experienced a 10% reduction in development, redevelopment, and construction activities without a corresponding decrease in indirect project costs, including interest and payroll, total expenses would have increased by approximately$36.2 million for the year endedDecember 31, 2022 . We use third-party brokers to assist in our leasing activity, who are paid on a contingent basis upon successful leasing. We are required to capitalize initial direct costs related to successful leasing transactions that result directly from and are essential to the lease transaction and would not have been incurred had that lease transaction not been successfully executed. During the year endedDecember 31, 2022 , we capitalized total initial direct leasing costs of$186.7 million . Costs that we incur to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax, or legal advice to negotiate lease terms, and other costs, are expensed as incurred.
Acquisitions
Refer to the "Acquisitions" section in Note 3 - "Investments in real estate" and to Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K, and the "Acquisitions" section in "Item 2. Properties" in this annual report on Form 10-K for information on our acquisitions.
Dividends
During the years endedDecember 31, 2022 and 2021, we paid common stock dividends of$757.7 million and$656.0 million , respectively. The increase of$101.8 million in dividends paid on our common stock during the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily due to an increase in the number of common shares outstanding subsequent toJanuary 1, 2021 as a result of issuances of common stock under our ATM program and settlement of forward equity sales agreements, and partially due to the increase in the related dividends to$4.66 per common share paid during the year endedDecember 31, 2022 from$4.42 per common share paid during the year endedDecember 31, 2021 . 138 --------------------------------------------------------------------------------
Secured notes payable
Secured notes payable as ofDecember 31, 2022 consisted of three notes secured by two properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 6.75%. As ofDecember 31, 2022 , the total book value of our investments in real estate securing debt was approximately$216.8 million . As ofDecember 31, 2022 , our secured notes payable, including unamortized discounts and deferred financing costs, comprised approximately$649 thousand and$58.4 million of fixed-rate debt and unhedged variable-rate debt, respectively. Unsecured senior notes payable and unsecured senior line of credit
The requirements of, and our actual performance with respect to, the key
financial covenants under our unsecured senior notes payable as of
Covenant Ratios(1) Requirement December 31, 2022 Total Debt to Total Assets Less than or equal to 60% 27% Secured Debt to Total Assets Less than or equal to 40% 0.2%
Consolidated EBITDA(2) to Interest Expense Greater than or equal to 1.5x
18.2x Unencumbered Total Asset Value to Unsecured Debt Greater than or equal to 150% 363% (1)All covenant ratio titles utilize terms as defined in the respective debt agreements. (2)The calculation of consolidated EBITDA is based on the definitions contained in our loan agreements and is not directly comparable to the computation of EBITDA as described in Exchange Act Release No. 47226. In addition, the terms of the indentures, among other things, limit the ability of the Company,Alexandria Real Estate Equities, L.P. , and the Company's subsidiaries to (i) consummate a merger, or consolidate or sell all or substantially all of the Company's assets, and (ii) incur certain secured or unsecured indebtedness.
The requirements of, and our actual performance with respect to, the key
financial covenants under our unsecured senior line of credit as of
Covenant Ratios (1) Requirement December 31, 2022 Leverage Ratio Less than or equal to 60.0% 26.6% Secured Debt Ratio Less than or equal to 45.0% 0.1% Greater than or equal to Fixed-Charge Coverage Ratio 1.50x 4.34x Greater than or equal to Unsecured Interest Coverage Ratio 1.75x 18.87x
(1)All covenant ratio titles utilize terms as defined in the credit agreement.
Estimated interest payments
Estimated interest payments on our fixed-rate debt are calculated based upon contractual interest rates, including interest payment dates and scheduled maturity dates. As ofDecember 31, 2022 , 99.4% of our debt was fixed-rate debt. For additional information regarding our debt, refer to Note 10 - "Secured and unsecured senior debt" to our consolidated financial statements under Item 15 in this annual report on Form 10-K.
Ground lease obligations
Operating lease agreements
Ground lease obligations as ofDecember 31, 2022 , included leases for 40 of our properties, which accounted for approximately 9% of our total number of properties. Excluding one ground lease that expires in 2036 related to one operating property with a net book value of$6.3 million as ofDecember 31, 2022 , our ground lease obligations have remaining lease terms ranging from approximately 31 to 99 years, including available extension options that we are reasonably certain to exercise. 139 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , the remaining contractual payments under ground and office lease agreements in which we are the lessee aggregated$870.1 million and$34.1 million , respectively. We are required to recognize a right-of-use asset and a related liability to account for our future obligations under operating lease arrangements in which we are the lessee. The operating lease liability is measured based on the present value of the remaining lease payments, including payments during the term under our extension options that we are reasonably certain to exercise. The right-of-use asset is equal to the corresponding operating lease liability, adjusted for the initial direct leasing cost and any other consideration exchanged with the landlord prior to the commencement of the lease, as well as adjustments to reflect favorable or unfavorable terms of an acquired lease when compared with market terms at the time of acquisition. As ofDecember 31, 2022 , the present value of the remaining contractual payments, aggregating$904.2 million , under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was$406.7 million , which was classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. As ofDecember 31, 2022 , the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 42 years, and the weighted-average discount rate was 4.6%. Our corresponding operating lease right-of-use assets, adjusted for initial direct leasing costs and other consideration exchanged with the landlord prior to the commencement of the lease, aggregated$558.3 million . We classify the right-of-use asset in other assets in our consolidated balance sheets. Refer to the "Lease accounting" section in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Commitments
As ofDecember 31, 2022 , remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated$3.5 billion . In addition, we may be required to incur construction costs associated with our future development projects aggregating 643,331 RSF in ourGreater Boston market pursuant to an agreement whereby our counterparty may elect to execute future lease agreements on mutually agreeable terms.
We expect payments for these obligations to occur over one to three years,
subject to capital planning adjustments from time to time. We may have the
ability to cease the construction of certain projects, which would result in the
reduction of our commitments. In addition, we have letters of credit and
performance obligations aggregating
We are committed to funding approximately$415.4 million related to our non-real estate investments. These funding commitments are primarily associated with our investments in privately held entities that report NAV and expire at various dates over the next 12 years, with a weighted-average expiration of 8.6 years as ofDecember 31, 2022 .
Exposure to environmental liabilities
In connection with the acquisition of all of our properties, we have obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues. The Phase I environmental assessments of our properties have not revealed any environmental liabilities that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any material environmental liabilities that have occurred since the Phase I environmental assessments were completed. In addition, we carry pollution legal liability insurance covering exposure to certain environmental losses at substantially all of our properties. 140 --------------------------------------------------------------------------------
Foreign currency translation gains and losses
The following table presents the change in accumulated other comprehensive loss attributable toAlexandria Real Estate Equities, Inc.'s stockholders during the year endedDecember 31, 2022 due to the changes in the foreign exchange rates for our real estate investments inCanada andAsia . We reclassify unrealized foreign currency translation gains and losses into net income as we dispose of these holdings. (In thousands) Total Balance as ofDecember 31, 2021 $ (7,294)
Other comprehensive loss before reclassifications (13,518) Net other comprehensive loss
(13,518) Balance as ofDecember 31, 2022 $ (20,812) Inflation As ofDecember 31, 2022 , approximately 93% of our leases (on an annual rental revenue basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Approximately 96% of our leases (on an annual rental revenue basis) contained effective annual rent escalations that were either fixed (generally ranging from 3.0% to 3.5%) or indexed based on a consumer price index or other indices. Accordingly, we do not believe that our cash flows or earnings from real estate operations are subject to significant risks from inflation. A period of inflation, however, could cause an increase in the cost of our variable-rate borrowings, including borrowings under our unsecured senior line of credit and commercial paper program, issuances of unsecured senior notes payable, and borrowings under our secured construction loans, and secured loans held by our unconsolidated real estate joint ventures. In addition, refer to "Item 1A. Risk factors" in this annual report on Form 10-K for a discussion about risks that inflation directly or indirectly may pose to our business. 141 --------------------------------------------------------------------------------
Issuer and guarantor subsidiary summarized financial information
Alexandria Real Estate Equities, Inc. (the "Issuer") has sold certain debt securities registered under the Securities Act of 1933, as amended, that are fully and unconditionally guaranteed byAlexandria Real Estate Equities, L.P. (the "LP" or the "Guarantor Subsidiary"), an indirectly 100% owned subsidiary of the Issuer. The Issuer's other subsidiaries, including, but not limited to, the subsidiaries that own substantially all of its real estate (collectively, the "Combined Non-Guarantor Subsidiaries"), will not provide a guarantee of such securities, including the subsidiaries that are partially or 100% owned by the LP. The following summarized financial information presents on a combined basis, balance sheet information as ofDecember 31, 2022 and 2021, and results of operations and comprehensive income for the years endedDecember 31, 2022 and 2021 for the Issuer and the Guarantor Subsidiary. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to (i) the Issuer's interests in the Guarantor Subsidiary, (ii) the Guarantor Subsidiary's interests in the Combined Non-Guarantor Subsidiaries, and (iii) the Combined Non-Guarantor Subsidiaries' interests in the Guarantor Subsidiary, where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All assets and liabilities have been allocated to the Issuer and the Guarantor Subsidiary generally based on legal entity ownership. The following tables present combined summarized financial information as ofDecember 31, 2022 and 2021, and for the years endedDecember 31, 2022 and 2021, for the Issuer and Guarantor Subsidiary. Amounts provided do not represent our total consolidated amounts: December 31, (in thousands) 2022 2021 Assets: Cash, cash equivalents, and restricted cash$ 465,707 $ 78,856 Other assets 107,287 101,956 Total assets$ 572,994 $ 180,812 Liabilities: Unsecured senior notes payable$ 10,100,717
Unsecured senior line of credit and commercial paper - 269,990 Other liabilities 466,369 401,721 Total liabilities$ 10,567,086 $ 8,988,389 Year Ended December 31, (in thousands) 2022 2021 Total revenues$ 33,052 $ 26,798 Total expenses (277,647) (363,525) Net loss (244,595) (336,727)
Net income attributable to unvested restricted stock awards
(8,392) (7,848)
Net loss attributable to
$
(252,987)
As ofDecember 31, 2022 , 420 of our 432 properties were held indirectly by the REIT's wholly owned consolidated subsidiary,Alexandria Real Estate Equities, L.P. 142 --------------------------------------------------------------------------------
Critical accounting estimates
Our consolidated financial statements have been prepared in accordance with GAAP. The preparation of these financial statements in conformity with GAAP requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. We base these estimates, judgments, and assumptions on historical experience, current trends, and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the estimates, judgments, and assumptions we use to prepare our consolidated financial statements. Changes in estimates, judgments, or assumptions could affect our financial position and our results of operations, which are used by our stockholders, potential investors, industry analysts, and lenders in their evaluation of our performance. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our significant accounting policies, which utilize these critical accounting estimates, are described in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. Our critical accounting estimates are described below.
Recognition of real estate acquired
Generally, our acquisitions of real estate or in-substance real estate are accounted for as asset acquisitions and not business combinations because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions requires that the acquisition consideration (including acquisition costs) be allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. Any excess (deficit) of the consideration transferred relative to the sum of the fair value of the assets acquired and liabilities assumed is allocated to the individual assets and liabilities based on their relative fair values.
We assess the relative fair values of tangible and intangible assets and liabilities based on:
(i)Available comparable market information; (ii)Estimated replacement costs; or (iii)Discounted cash flow analysis/estimated net operating income and capitalization rates. In certain instances, we may use multiple valuation techniques and estimate fair values based on an average of multiple valuation results. We exercise judgement to determine key assumptions used in each valuation technique. For example, to estimate future cash flows in the discounted cash flow analysis, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, and anticipated trends and market/economic conditions. The use of different assumptions in the discounted cash flow analysis can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations. We completed acquisitions of 42 properties for a total purchase price of$2.8 billion during the year endedDecember 31, 2022 . These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair values of the assets acquired and liabilities assumed. Refer to the "Investments in real estate" section in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Impairment of long-lived assets
Impairment of real estate assets classified as held for sale
A property is classified as held for sale when all of the accounting criteria for a plan of sale have been met. These criteria are described in the "Investments in real estate" section in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. Upon classification as held for sale, we recognize an impairment charge, if necessary, to lower the carrying amount of the real estate asset to its estimated fair value less cost to sell. The determination of fair value can involve significant judgments and assumptions. We develop key assumptions based on the following available factors: (i) contractual sales price, (ii) preliminary non-binding letters of intent, or (iii) other available comparable market information. If this information is not available, we use estimated replacement costs or estimated cash flow projections that utilize estimated discount and capitalization rates. These estimates are subject to uncertainty and therefore require significant judgment by us. We review all assets held for sale each reporting period to determine whether the existing carrying amounts are fully recoverable in comparison to their estimated fair values less costs to sell. Subsequently, as a result of our quarterly assessment, we may recognize an incremental impairment charge for any decrease in the asset's fair value less cost to sell. Conversely, we may recognize a gain for a subsequent increase in fair value less cost to sell, limited to the cumulative net loss previously recognized. 143 --------------------------------------------------------------------------------
Impairment of other long-lived assets
For each reporting period, we review current activities and changes in the business conditions of all of our long-lived assets, including our rental properties, CIP, land held for development, right-of-use assets related to operating leases in which we are the lessee, and intangibles, to determine the existence of any triggering events or impairment indicators requiring an impairment analysis. If triggering events or impairment indicators are identified, we review an estimate of the future undiscounted cash flows, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Long-lived assets to be held and used, are individually evaluated for impairment when conditions exist that may indicate that the carrying amount of a long-lived asset may not be recoverable. The carrying amount of a long-lived asset to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Triggering events or impairment indicators for long-lived assets to be held and used, including our rental properties, CIP, land held for development, and intangibles, are assessed by project and include significant fluctuations in estimated net operating income, occupancy changes, significant near-term lease expirations, current and historical operating and/or cash flow losses, construction costs, estimated completion dates, rental rates, and other market factors. We assess the expected undiscounted cash flows based upon numerous factors, including, but not limited to, construction costs, available market information, current and historical operating results, known trends, current market/economic conditions that may affect the property, and our assumptions about the use of the asset, including, if necessary, a probability-weighted approach if multiple outcomes are under consideration. Upon determination that an impairment has occurred, a write-down is recognized to reduce the carrying amount to its estimated fair value. If an impairment loss is not required to be recognized, the recognition of depreciation or amortization is adjusted prospectively, as necessary, to reduce the carrying amount of the real estate to its estimated disposition value over the remaining period that the asset is expected to be held and used. We may also adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
The evaluation for impairment and calculation of the carrying amount of a long-lived asset to be held and used involves consideration of factors and calculations that are different than the estimate of fair value of assets classified as held for sale. Because of these two different models, it is possible for a long-lived asset previously classified as held and used to require the recognition of an impairment charge upon classification as held for sale.
Impairment of real estate joint ventures accounted for under the equity method of accounting
We generally account for our investments in real estate joint ventures that do not meet the consolidation criteria under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the investee's earnings or losses, distributions received, and other-than-temporary impairments. Our unconsolidated real estate joint ventures are individually evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for an unconsolidated joint venture include its recurring operating losses, and other events such as occupancy changes, significant near-term lease expirations, significant changes in construction costs, estimated completion dates, rental rates, and other factors related to the properties owned by the real estate joint venture, or a decision by investors to cease providing support or reduce their financial commitment to the joint venture. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of our investment to its estimated fair value. As ofDecember 31, 2022 , the carrying amounts of our investments in unconsolidated real estate joint ventures aggregated$38.4 million , or approximately 0.1% of our total assets. During the year endedDecember 31, 2022 , no other-than-temporary impairments related to our unconsolidated real estate joint ventures were identified. Refer to the "Unconsolidated real estate joint ventures" section in Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Impairment of non-real estate investments
We hold strategic investments in publicly traded companies and privately held entities primarily involved in the life science, agtech, and technology industries. As a REIT, we generally limit our ownership percentage in the voting stock of each individual entity to less than 10%. Our investments in privately held entities that do not report NAV per share require our evaluation for impairment when changes in these entities' conditions may indicate that an impairment exists. We closely monitor these investments throughout the year for new developments, including operating results, prospects and results of clinical trials, new product initiatives, new collaborative agreements, capital-raising events, and merger and acquisition activities. We evaluate these investees on the basis of a qualitative assessment for indicators of impairment by monitoring the presence of the following triggering events or impairment indicators: (i) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee; (ii) a significant adverse 144 -------------------------------------------------------------------------------- change in the regulatory, economic, or technological environment of the investee, (iii) a significant adverse change in the general market condition, including the research and development of technology and products that the investee is bringing or attempting to bring to the market, (iv) significant concerns about the investee's ability to continue as a going concern, or (v) a decision by investors to cease providing support to reduce their financial commitment to the investee. If such indicators are present, we are required to estimate the investment's fair value and immediately recognize an impairment loss in an amount equal to the investment's carrying value in excess of its estimated fair value. As of eachDecember 31, 2022 , 2021, and 2020, the carrying amounts of our investments in privately held entities that do not report NAV per share accounted for approximately 2% of our total assets and aggregated$582.7 million ,$491.3 million , and$389.2 million , respectively. During the years endedDecember 31, 2022 , 2021, and 2020, we recognized impairment charges aggregating 4%, 0%, and 6% of the carrying amounts of our investments in privately held entities that do not report NAV, respectively.
Monitoring of tenant credit quality
We monitor, on an ongoing basis, the credit quality and any related material changes of our tenants by (i) monitoring the credit rating of tenants that are rated by a nationally recognized credit rating agency, (ii) reviewing financial statements of the tenants that are publicly available or that are required to be delivered to us pursuant to the applicable lease, (iii) monitoring news reports regarding our tenants and their respective businesses and industries in which they conduct business, and (iv) monitoring the timeliness of lease payments. We have a team of employees who, among them, have an extensive educational background or experience in biology, chemistry, industrial biotechnology, agtech, and the life science industry, as well as knowledge in finance. This team is responsible for timely assessment, monitoring, and communication of our tenants' credit quality and any material changes therein. During the fiscal years ended 2022, 2021, and 2020, specific write-offs and a general allowance related to deferred rent balances of tenants recognized in our consolidated statements of operations have not exceeded 0.8% of our income from rentals for each respective year. For additional information, refer to the "Monitoring of tenant credit quality" section in Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Allowance for credit losses
For the financial assets in scope of the accounting standard on credit losses, we are required to estimate and recognize lifetime expected losses, rather than incurred losses, which results in the earlier recognition of credit losses even if the expected risk of credit loss is remote. As ofDecember 31, 2022 , all of our 432 properties were subject to the operating lease agreements, which are excluded from the scope of the standard on credit losses. As ofDecember 31, 2022 , we had one direct financing lease agreement for a parking structure with an aggregate net investment balance of$39.4 million , which represented approximately 0.1% of our total assets. At each reporting date, we estimate the current credit loss related to these assets by assessing the probability of default on these leases based on the lessees' financial condition, credit rating, business prospects, remaining lease term, and, in the case of the direct financing lease, the expected value of the underlying collateral upon its repossession, and, if necessary, we recognize a credit loss adjustment. Since our adoption of this standard onJanuary 1, 2020 , and as of eachDecember 31, 2022 and 2021, our allowance for credit losses has not exceeded$2.8 million , or 0.01% of our total assets. For further details, refer to the "Allowance for credit losses" section in Note 2 - "Summary of significant accounting policies" and to Note 5 - "Leases" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. 145 --------------------------------------------------------------------------------
Non-GAAP measures and definitions
This section contains additional information of certain non-GAAP financial measures and the reasons why we use these supplemental measures of performance and believe they provide useful information to investors, as well as the definitions of other terms used in this annual report on Form 10-K.
Funds from operations and funds from operations, as adjusted, attributable to
GAAP-basis accounting for real estate assets utilizes historical cost accounting and assumes that real estate values diminish over time. In an effort to overcome the difference between real estate values and historical cost accounting for real estate assets, the Nareit Board of Governors established funds from operations as an improved measurement tool. Since its introduction, funds from operations has become a widely used non-GAAP financial measure among equity REITs. We believe that funds from operations is helpful to investors as an additional measure of the performance of an equity REIT. Moreover, we believe that funds from operations, as adjusted, allows investors to compare our performance to the performance of other real estate companies on a consistent basis, without having to account for differences recognized because of real estate acquisition and disposition decisions, financing decisions, capital structure, capital market transactions, variances resulting from the volatility of market conditions outside of our control, or other corporate activities that may not be representative of the operating performance of our properties. The 2018 White Paper published by the Nareit Board of Governors (the "Nareit White Paper") defines funds from operations as net income (computed in accordance with GAAP), excluding gains or losses on sales of real estate, and impairments of real estate, plus depreciation and amortization of operating real estate assets, and after adjustments for our share of consolidated and unconsolidated partnerships and real estate joint ventures. Impairments represent the write-down of assets when fair value over the recoverability period is less than the carrying value due to changes in general market conditions and do not necessarily reflect the operating performance of the properties during the corresponding period. We compute funds from operations, as adjusted, as funds from operations calculated in accordance with the Nareit White Paper, excluding significant gains, losses, and impairments realized on non-real estate investments, unrealized gains or losses on non-real estate investments, gains or losses on early extinguishment of debt, significant termination fees, acceleration of stock compensation expense due to the resignation of an executive officer, deal costs, the income tax effect related to such items, and the amount of such items that is allocable to our unvested restricted stock awards. We compute the amount that is allocable to our unvested restricted stock awards using the two-class method. Under the two-class method, we allocate net income (after amounts attributable to noncontrolling interests) to common stockholders and to unvested restricted stock awards by applying the respective weighted-average shares outstanding during each quarter-to-date and year-to-date period. This may result in a difference of the summation of the quarter-to-date and year-to-date amounts. Neither funds from operations nor funds from operations, as adjusted, should be considered as alternatives to net income (determined in accordance with GAAP) as indications of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as measures of liquidity, nor are they indicative of the availability of funds for our cash needs, including our ability to make distributions. The following table reconciles net income to funds from operations for the share of consolidated real estate joint ventures attributable to noncontrolling interests and our share of unconsolidated real estate joint ventures for the three and twelve months endedDecember 31, 2022 (in thousands): Noncontrolling Interest Share of Our Share of Unconsolidated Consolidated Real Estate Joint Ventures Real Estate Joint Ventures December 31, 2022 December 31, 2022 Three Months Three Months Ended Year Ended Ended Year Ended Net income $ 40,949$ 149,041 $ 172 $ 645 Depreciation and 29,702 107,591 982 3,666 amortization of real estate assets Funds from operations $ 70,651$ 256,632 $ 1,154 $ 4,311 146
-------------------------------------------------------------------------------- The following tables present a reconciliation of net income (loss) attributable toAlexandria Real Estate Equities, Inc.'s common stockholders, the most directly comparable financial measure presented in accordance with GAAP, including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, and funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted, and the related per share amounts for the years endedDecember 31, 2022 , 2021, and 2020. Per share amounts may not add due to rounding. Year Ended December 31, (In thousands) 2022 2021 2020 Net income attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - basic and diluted$ 513,268 $ 563,399 $ 760,791 Depreciation and amortization of real estate assets 988,363 804,633 684,682
Noncontrolling share of depreciation and amortization from consolidated real estate JVs
(107,591) (70,880) (61,933) Our share of depreciation and amortization from unconsolidated real estate JVs 3,666 13,734 11,413 Gain on sales of real estate (537,918) (126,570) (154,089) Impairment of real estate - rental properties 20,899 (1) 25,485 40,501 Allocation to unvested restricted stock awards (1,118) (6,315) (7,018)
Funds from operations attributable to
879,569 1,203,486 1,274,347 Unrealized losses (gains) on non-real estate investments 412,193 (43,632) (374,033) Significant realized gains on non-real estate investments - (110,119) - Impairment of non-real estate investments 20,512 (3) - 24,482 Impairment of real estate 44,070 (4) 27,190 15,221 Loss on early extinguishment of debt 3,317 67,253 60,668 Termination fee - - (86,179) Acceleration of stock compensation expense due to executive officer resignation 7,185 (5) - 4,499 Allocation to unvested restricted stock awards (5,137) 710 4,790
Funds from operations attributable to
$ 1,361,709 $ 1,144,888 $ 923,795 (1)Primarily consists of an impairment of one real estate asset recognized to reduce the carrying amount of the asset to its estimated fair value, less cost to sell, upon its classification as held for sale inDecember 2022 . We expect to complete the sale of this asset during 2023. (2)Calculated in accordance with standards established by the Nareit Board of Governors. (3)Primarily relates to three investments in privately held entities that do not report NAV. (4)Includes (i) the write-off of pre-acquisition deposits primarily related to one previously pending acquisition, which was recognized upon our decision not to proceed with the acquisition, and (ii) a$38.3 million impairment charge related to one future development, which we recognized upon our decision not to proceed with the project. (5)Relates to the resignation ofStephen A. Richardson , our former co-chief executive officer, inJuly 2022 . 147 -------------------------------------------------------------------------------- Year Ended December 31, (Per share) 2022 2021 2020
Net income per share attributable to
$ 3.82 $ 6.01 Depreciation and amortization of real estate assets 5.47 5.07 5.01 Gain on sales of real estate (3.33) (0.86) (1.22) Impairment of real estate - rental properties 0.13 (1) 0.17 0.32 Allocation to unvested restricted stock awards (0.01) (0.04) (0.05) Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted 5.44 8.16 10.07 Unrealized losses (gains) on non-real estate investments 2.55 (0.30) (2.96) Significant realized gains on non-real estate investments - (0.75) - Impairment of non-real estate investments 0.13 (1) - 0.19 Impairment of real estate 0.27 (1) 0.18 0.12 Loss on early extinguishment of debt 0.02 0.46 0.48 Termination fee - - (0.68) Acceleration of stock compensation expense due to executive officer resignation 0.04 (1) - 0.04 Allocation to unvested restricted stock awards (0.03) 0.01 0.04 Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted$ 8.42
Weighted-average shares of common stock outstanding for calculations of: EPS - diluted
161,659 147,460 126,490 Funds from operations - diluted, per share 161,659 147,460 126,490
Funds from operations - diluted, as adjusted, per share 161,659
147,460 126,490 (1) Refer to footnotes on the previous page for additional details. 148
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Adjusted EBITDA and Adjusted EBITDA margin
We use Adjusted EBITDA as a supplemental performance measure of our operations, for financial and operational decision-making, and as a supplemental means of evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA is calculated as earnings before interest, taxes, depreciation, and amortization ("EBITDA"), excluding stock compensation expense, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, impairments of real estate, and significant termination fees. Adjusted EBITDA also excludes unrealized gains or losses and significant realized gains or losses and impairments that result from our non-real estate investments. These non-real estate investment amounts are classified in our consolidated statements of operations outside of total revenues. We believe Adjusted EBITDA provides investors with relevant and useful information as it allows investors to evaluate the operating performance of our business activities without having to account for differences recognized because of investing and financing decisions related to our real estate and non-real estate investments, our capital structure, capital market transactions, and variances resulting from the volatility of market conditions outside of our control. For example, we exclude gains or losses on the early extinguishment of debt to allow investors to measure our performance independent of our indebtedness and capital structure. We believe that adjusting for the effects of impairments and gains or losses on sales of real estate, significant impairments and realized gains or losses on non-real estate investments, and significant termination fees allows investors to evaluate performance from period to period on a consistent basis without having to account for differences recognized because of investing and financing decisions related to our real estate and non-real estate investments or other corporate activities that may not be representative of the operating performance of our properties. In addition, we believe that excluding charges related to stock compensation and unrealized gains or losses facilitates for investors a comparison of our business activities across periods without the volatility resulting from market forces outside of our control. Adjusted EBITDA has limitations as a measure of our performance. Adjusted EBITDA does not reflect our historical expenditures or future requirements for capital expenditures or contractual commitments. While Adjusted EBITDA is a relevant measure of performance, it does not represent net income (loss) or cash flows from operations calculated and presented in accordance with GAAP, and it should not be considered as an alternative to those indicators in evaluating performance or liquidity. In order to calculate the Adjusted EBITDA margin, we divide Adjusted EBITDA by total revenues as presented in our consolidated statements of operations. We believe that this supplemental performance measure provides investors with additional useful information regarding the profitability of our operating activities. 149 -------------------------------------------------------------------------------- The following table reconciles net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA and calculates the Adjusted EBITDA margin for the three months and years endedDecember 31, 2022 and 2021 (dollars in thousands): Three Months Ended December 31, Year Ended December 31, 2022 2021 2022 2021 Net income $ 95,268$ 99,796 $ 670,701 $ 654,282 Interest expense 17,522 34,862 94,203 142,165 Income taxes 2,063 4,156 9,673 12,054 Depreciation and amortization 264,480 239,254 1,002,146 821,061 Stock compensation expense 11,586 14,253 57,740 48,669 Loss on early extinguishment of debt - - 3,317 67,253 Gain on sales of real estate - (124,226) (537,918) (126,570) Significant realized gains on non-real estate investments - - - (110,119) Unrealized losses (gains) on non-real estate investments 24,117 139,716 412,193 (43,632) Impairment of real estate 26,186 - 64,969 52,675 Impairment of non-real estate investments 20,512 - 20,512 - Adjusted EBITDA$ 461,734 $ 407,811 $ 1,797,536 $ 1,517,838 Total revenues$ 670,281 $ 576,923 $ 2,588,962 $ 2,114,150 Adjusted EBITDA margin 69% 71% 69% 72% Annual rental revenue Annual rental revenue represents the annualized fixed base rental obligations, calculated in accordance with GAAP, for leases in effect as of the end of the period, related to our operating RSF. Annual rental revenue is presented using 100% of the annual rental revenue from our consolidated properties and our share of annual rental revenue for our unconsolidated real estate joint ventures. Annual rental revenue per RSF is computed by dividing annual rental revenue by the sum of 100% of the RSF of our consolidated properties and our share of the RSF of properties held in unconsolidated real estate joint ventures. As ofDecember 31, 2022 , approximately 93% of our leases (on an annual rental revenue basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Annual rental revenue excludes these operating expenses recovered from our tenants. Amounts recovered from our tenants related to these operating expenses, along with base rent, are classified in income from rentals in our consolidated statements of operations.
Capitalization rates
Capitalization rates are calculated based on net operating income and net operating income (cash basis) annualized for the quarter preceding the date on which the property is sold, or near-term prospective net operating income.
Cash interest
Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums (discounts). Refer to the definition of "Fixed-charge coverage ratio" in this section within this Item 7 in this annual report on 10-K for a reconciliation of interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest.
Class A properties and
Class A properties are properties clustered inAAA locations that provide innovative tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity, and success. Class A properties generally command higher annual rental rates than other classes of similar properties. 150 --------------------------------------------------------------------------------AAA locations are in close proximity to concentrations of specialized skills, knowledge, institutions, and related businesses. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space.
Construction costs related to active development and redevelopment projects under contract
Includes (i) costs incurred to date, (ii) remaining costs to complete under a general contractor's guaranteed maximum price ("GMP") construction contract or other fixed contracts, and (iii) our maximum committed tenant improvement allowances under our executed leases. The general contractor's GMP contract or other fixed contracts reduce our exposure to costs of construction materials, labor, and services from third-party contractors and suppliers, unless the overruns result from, among other things, a force majeure event or a change in the scope of work covered by the contract.
Development, redevelopment, and pre-construction
A key component of our business model is our disciplined allocation of capital to the development and redevelopment of new Class A properties, and property enhancements identified during the underwriting of certain acquired properties, located in collaborative life science, agtech, and technology campuses inAAA innovation clusters. These projects are generally focused on providing high-quality, generic, and reusable spaces that meet the real estate requirements of, and are reusable by, a wide range of tenants. Upon completion, each value-creation project is expected to generate a significant increase in rental income, net operating income, and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality entities, which we believe results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. Development projects generally consist of the ground-up development of generic and reusable facilities. Redevelopment projects consist of the permanent change in use of office, warehouse, and shell space into office/laboratory, agtech, or tech office space. We generally will not commence new development projects for aboveground construction of new Class A office/laboratory, agtech, and tech office space without first securing significant pre-leasing for such space, except when there is solid market demand for high-quality Class A properties. Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective tenants. These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings. Ultimately, these projects will provide high-quality facilities and are expected to generate significant revenue and cash flows. Development, redevelopment, and pre-construction spending also includes the following costs: (i) amounts to bring certain acquired properties up to market standard and/or other costs identified during the acquisition process (generally within two years of acquisition) and (ii) permanent conversion of space for highly flexible, move-in-ready office/laboratory space to foster the growth of promising early- and growth-stage life science companies.
Revenue-enhancing and repositioning capital expenditures represent spending to reposition or significantly change the use of a property, including through improvement in the asset quality from Class B to Class A.
Non-revenue-enhancing capital expenditures represent costs required to maintain the current revenues of a stabilized property, including the associated costs for renewed and re-leased space.
Dividend payout ratio (common stock)
Dividend payout ratio (common stock) is the ratio of the absolute dollar amount of dividends on our common stock (shares of common stock outstanding on the respective record dates multiplied by the related dividend per share) to funds from operations attributable to Alexandria's common stockholders - diluted, as adjusted. Dividend yield
Dividend yield for the quarter represents the annualized quarter dividend divided by the closing common stock price at the end of the quarter.
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Fixed-charge coverage ratio
Fixed-charge coverage ratio is a non-GAAP financial measure representing the ratio of Adjusted EBITDA to fixed charges. We believe that this ratio is useful to investors as a supplemental measure of our ability to satisfy fixed financing obligations and preferred stock dividends. Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums (discounts). The following table reconciles interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest and fixed charges and computes the fixed-charge coverage ratio for the three months and years endedDecember 31, 2022 and 2021 (dollars in thousands): Three Months Ended December 31, Year Ended December 31, 2022 2021 2022 2021 Adjusted EBITDA$ 461,734 $ 407,811 $ 1,797,536 $ 1,517,838 Interest expense $ 17,522$ 34,862 $ 94,203 $ 142,165 Capitalized interest 79,491 44,078 278,645 170,641 Amortization of loan fees (3,975) (2,911) (13,549) (11,441) Amortization of debt (discounts) premiums (272) 502 (384) 2,041 Cash interest and fixed charges $ 92,766$ 76,531 $ 358,915 $ 303,406 Fixed-charge coverage ratio: - period annualized 5.0x 5.3x 5.0x 5.0x - trailing 12 months 5.0x 5.0x 5.0x 5.0x Gross assets
Gross assets are calculated as total assets plus accumulated depreciation as of
December 31, 2022 2021 Total assets$ 35,523,399 $ 30,219,373
Accumulated depreciation 4,354,063 3,771,241 Gross assets
$ 39,877,462 $ 33,990,614
Initial stabilized yield (unlevered)
Initial stabilized yield is calculated as the estimated amounts of net operating income at stabilization divided by our investment in the property. Our initial stabilized yield excludes the benefit of leverage. Our cash rents related to our value-creation projects are generally expected to increase over time due to contractual annual rent escalations. Our estimates for initial stabilized yields, initial stabilized yields (cash basis), and total costs at completion represent our initial estimates at the commencement of the project. We expect to update this information upon completion of the project, or sooner if there are significant changes to the expected project yields or costs. •Initial stabilized yield reflects rental income, including contractual rent escalations and any rent concessions over the term(s) of the lease(s), calculated on a straight-line basis. •Initial stabilized yield (cash basis) reflects cash rents at the stabilization date after initial rental concessions, if any, have elapsed and our total cash investment in the property.
Investment-grade or publicly traded large cap tenants
Investment-grade or publicly traded large cap tenants represent tenants that are investment-grade rated or publicly traded companies with an average daily market capitalization greater than$10 billion for the twelve months endedDecember 31, 2022 , as reported by Bloomberg Professional Services. Credit ratings from Moody's Investors Service andS&P Global Ratings reflect credit ratings of the tenant's parent entity, and there can be no assurance that a tenant's parent entity will satisfy the tenant's lease obligation upon such tenant's default. We monitor the credit quality and related material changes of our tenants. Material changes that cause a tenant's market capitalization to decrease below$10 billion , which are not immediately reflected in the twelve-month average, may result in their exclusion from this measure. 152 --------------------------------------------------------------------------------
Investments in real estate - value-creation square footage currently in rental properties
The square footage presented in the table below includes RSF of buildings in operation as ofDecember 31, 2022 , primarily representing lease expirations or vacant space at recently acquired properties that also have inherent future development or redevelopment opportunities and for which we have the intent to demolish or redevelop the existing property upon expiration of the existing in-place leases and commencement of future construction: RSF of Lease Expirations Targeted for Development and Redevelopment Property/Submarket Dev/Redev 2023 2024 Thereafter(1) Total Near-term projects: 100 Edwin H. Land Boulevard/Cambridge/Inner Suburbs Redev - 104,500 - 104,500 40 Sylvan Road/Route 128 Redev 312,845 - - 312,845 275 Grove Street/Route 128 Redev - - 160,251 160,251 840 Winter Street/Route 128 Redev 10,265 17,965 - 28,230 3301 Monte Villa Parkway/Bothell Redev - 50,552 - 50,552 323,110 173,017 160,251 656,378 Intermediate-term projects: 219 East 42nd Street/New York City Dev - 349,947 - 349,947 10975 and 10995 Torreyana Road/Torrey Pines Dev - 84,829 - 84,829 - 434,776 - 434,776 Future projects: 311 Arsenal Street/Cambridge/Inner Suburbs Redev - - 308,446 308,446 550 Arsenal Street/Cambridge/Inner Suburbs Dev - - 260,867 260,867 446 and 458 Arsenal Street/Cambridge/Inner Suburbs Dev - - 38,200 38,200 380 and 420 E Street/Seaport Innovation District Dev - - 195,506 195,506 Other/Greater Boston Redev - - 167,549 167,549 1122 and 1150 El Camino Real/South San Francisco Dev - - 655,172 655,172 3875 Fabian Way/Greater Stanford Dev - - 228,000 228,000 960 Industrial Road/Greater Stanford Dev - - 110,000 110,000 Campus Point by Alexandria/University Town Center Dev - 495,192 - 495,192 Sequence District by Alexandria/Sorrento Mesa Dev/Redev - - 688,034 688,034 4025 and 4045 Sorrento Valley Boulevard/Sorrento Valley Dev - - 22,886 22,886 601 Dexter Avenue North/Lake Union Dev 18,680 - - 18,680 830 4th Avenue South/SoDo Dev - - 42,380 42,380 Other/Seattle Dev - - 102,437 102,437 1020 Red River Street/Austin Redev - 126,034 - 126,034 18,680 621,226 2,819,477 3,459,383 341,790 1,229,019 2,979,728 4,550,537
(1)Includes vacant square footage as of
Joint venture financial information
We present components of balance sheet and operating results information related to our real estate joint ventures, which are not presented, or intended to be presented, in accordance with GAAP. We present the proportionate share of certain financial line items as follows: (i) for each real estate joint venture that we consolidate in our financial statements, which are controlled by us through contractual rights or majority voting rights, but of which we own less than 100%, we apply the noncontrolling interest economic ownership percentage to each financial item to arrive at the amount of such cumulative noncontrolling interest share of each component presented; and (ii) for each real estate joint venture that we do not control and do not consolidate, and are instead controlled jointly or by our joint venture partners through contractual rights or majority voting rights, we apply our economic ownership percentage to each financial item to arrive at our proportionate share of each component presented. The components of balance sheet and operating results information related to our real estate joint ventures do not represent our legal claim to those items. For each entity that we do not wholly own, the joint venture agreement generally determines what equity holders can receive upon capital events, such as sales or refinancing, or in the event of a liquidation. Equity holders are normally entitled to their respective legal ownership of any residual cash from a joint venture only after all liabilities, priority distributions, and claims have been repaid or satisfied. 153 -------------------------------------------------------------------------------- We believe that this information can help investors estimate the balance sheet and operating results information related to our partially owned entities. Presenting this information provides a perspective not immediately available from consolidated financial statements and one that can supplement an understanding of the joint venture assets, liabilities, revenues, and expenses included in our consolidated results. The components of balance sheet and operating results information related to our real estate joint ventures are limited as an analytical tool as the overall economic ownership interest does not represent our legal claim to each of our joint ventures' assets, liabilities, or results of operations. In addition, joint venture financial information may include financial information related to the unconsolidated real estate joint ventures that we do not control. We believe that in order to facilitate for investors a clear understanding of our operating results and our total assets and liabilities, joint venture financial information should be examined in conjunction with our consolidated statements of operations and balance sheets. Joint venture financial information should not be considered an alternative to our consolidated financial statements, which are presented and prepared in accordance with GAAP.
Mega campus
Mega campuses are cluster campuses that consist of approximately 1 million RSF or more, including operating, active development/redevelopment, and land RSF less operating RSF expected to be demolished. The following table reconciles our operating RSF as ofDecember 31, 2022 : Operating RSF Mega campus 28,554,356 Non-mega campus 13,219,366 Total 41,773,722 Mega campus RSF as a percentage of total operating property RSF
68 %
Net cash provided by operating activities after dividends
Net cash provided by operating activities after dividends includes the deduction for distributions to noncontrolling interests. For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences.
Net debt and preferred stock to Adjusted EBITDA
Net debt and preferred stock to Adjusted EBITDA is a non-GAAP financial measure that we believe is useful to investors as a supplemental measure of evaluating our balance sheet leverage. Net debt and preferred stock is equal to the sum of total consolidated debt less cash, cash equivalents, and restricted cash, plus preferred stock outstanding as of the end of the period. Refer to the definition of "Adjusted EBITDA and Adjusted EBITDA margin" within this Item 7 in this annual report on Form 10-K for further information on the calculation of Adjusted EBITDA. 154 -------------------------------------------------------------------------------- The following table reconciles debt to net debt and preferred stock and computes the ratio to Adjusted EBITDA as ofDecember 31, 2022 and 2021 (dollars in thousands): December 31, 2022 2021 Secured notes payable$ 59,045 $ 205,198 Unsecured senior notes payable 10,100,717
8,316,678
Unsecured senior line of credit and commercial paper -
269,990
Unamortized deferred financing costs 74,918 65,476 Cash and cash equivalents (825,193) (361,348) Restricted cash (32,782) (53,879) Preferred stock - - Net debt and preferred stock$ 9,376,705 $ 8,442,115 Adjusted EBITDA: - quarter annualized$ 1,846,936 $ 1,631,244 - trailing 12 months$ 1,797,536 $ 1,517,838 Net debt and preferred stock to Adjusted EBITDA: - quarter annualized 5.1 x 5.2 x - trailing 12 months 5.2 x 5.6 x
Net operating income, net operating income (cash basis), and operating margin
The following table reconciles net income (loss) to net operating income and net operating income (cash basis) and computes operating margin for the years endedDecember 31, 2022 , 2021, and 2020 (dollars in thousands): Year Ended December 31, 2022 2021 2020 Net income$ 670,701 $ 654,282 $ 827,171 Equity in earnings of unconsolidated real estate joint ventures (645) (12,255) (8,148) General and administrative expenses 177,278 151,461 133,341 Interest expense 94,203 142,165 171,609 Depreciation and amortization 1,002,146 821,061 698,104 Impairment of real estate 64,969 52,675 48,078 Loss on early extinguishment of debt 3,317 67,253 60,668 Gain on sales of real estate (537,918) (126,570) (154,089) Investment loss (income) 331,758 (259,477) (421,321) Net operating income 1,805,809 1,490,595 1,355,413 Straight-line rent revenue (118,003) (115,145) (96,676) Amortization of acquired below-market leases (74,346) (54,780) (57,244) Net operating income (cash basis)$ 1,613,460
Net operating income (from above)$ 1,805,809 $ 1,490,595 $ 1,355,413 Total revenues$ 2,588,962 $ 2,114,150 $ 1,885,637 Operating margin 70% 71% 72% 155
-------------------------------------------------------------------------------- Net operating income is a non-GAAP financial measure calculated as net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, excluding equity in the earnings of our unconsolidated real estate joint ventures, general and administrative expenses, interest expense, depreciation and amortization, impairments of real estate, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, and investment income or loss. We believe net operating income provides useful information to investors regarding our financial condition and results of operations because it primarily reflects those income and expense items that are incurred at the property level. Therefore, we believe net operating income is a useful measure for investors to evaluate the operating performance of our consolidated real estate assets. Net operating income on a cash basis is net operating income adjusted to exclude the effect of straight-line rent and amortization of acquired above- and below-market lease revenue adjustments required by GAAP. We believe that net operating income on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent revenue and the amortization of acquired above- and below-market leases. Furthermore, we believe net operating income is useful to investors as a performance measure of our consolidated properties because, when compared across periods, net operating income reflects trends in occupancy rates, rental rates, and operating costs, which provide a perspective not immediately apparent from net income or loss. Net operating income can be used to measure the initial stabilized yields of our properties by calculating net operating income generated by a property divided by our investment in the property. Net operating income excludes certain components from net income in order to provide results that are more closely related to the results of operations of our properties. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level rather than at the property level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort comparability of operating performance at the property level. Impairments of real estate have been excluded in deriving net operating income because we do not consider impairments of real estate to be property-level operating expenses. Impairments of real estate relate to changes in the values of our assets and do not reflect the current operating performance with respect to related revenues or expenses. Our impairments of real estate represent the write-down in the value of the assets to the estimated fair value less cost to sell. These impairments result from investing decisions or a deterioration in market conditions. We also exclude realized and unrealized investment gain or loss, which results from investment decisions that occur at the corporate level related to non-real estate investments in publicly traded companies and certain privately held entities. Therefore, we do not consider these activities to be an indication of operating performance of our real estate assets at the property level. Our calculation of net operating income also excludes charges incurred from changes in certain financing decisions, such as losses on early extinguishment of debt, as these charges often relate to corporate strategy. Property operating expenses included in determining net operating income primarily consist of costs that are related to our operating properties, such as utilities, repairs, and maintenance; rental expense related to ground leases; contracted services, such as janitorial, engineering, and landscaping; property taxes and insurance; and property-level salaries. General and administrative expenses consist primarily of accounting and corporate compensation, corporate insurance, professional fees, office rent, and office supplies that are incurred as part of corporate office management. We calculate operating margin as net operating income divided by total revenues. We believe that in order to facilitate for investors a clear understanding of our operating results, net operating income should be examined in conjunction with net income or loss as presented in our consolidated statements of operations. Net operating income should not be considered as an alternative to net income or loss as an indication of our performance, nor as an alternative to cash flows as a measure of our liquidity or our ability to make distributions.
Operating statistics
We present certain operating statistics related to our properties, including number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations as of the end of the period. We believe these measures are useful to investors because they facilitate an understanding of certain trends for our properties. We compute the number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations at 100% for all properties in which we have an investment, including properties owned by our consolidated and unconsolidated real estate joint ventures. For operating metrics based on annual rental revenue, refer to the definition of "Annual rental revenue" in this "Non-GAAP measures and definitions" section. 156 --------------------------------------------------------------------------------
Same property comparisons
As a result of changes within our total property portfolio during the comparative periods presented, including changes from assets acquired or sold, properties placed into development or redevelopment, and development or redevelopment properties recently placed into service, the consolidated total income from rentals, as well as rental operating expenses in our operating results, can show significant changes from period to period. In order to supplement an evaluation of our results of operations over a given quarterly or annual period, we analyze the operating performance for all consolidated properties that were fully operating for the entirety of the comparative periods presented, referred to as same properties. We separately present quarterly and year-to-date same property results to align with the interim financial information required by theSEC in our management's discussion and analysis of our financial condition and results of operations. These same properties are analyzed separately from properties acquired subsequent to the first day in the earliest comparable quarterly or year-to-date period presented, properties that underwent development or redevelopment at any time during the comparative periods, unconsolidated real estate joint ventures, properties classified as held for sale, and corporate entities (legal entities performing general and administrative functions), which are excluded from same property results. Additionally, termination fees, if any, are excluded from the results of same properties. Refer to "Same properties" section within this Item 7 in this annual report on Form 10-K for additional information.
Stabilized occupancy date
The stabilized occupancy date represents the estimated date on which the project is expected to reach occupancy of 95% or greater.
Tenant recoveries
Tenant recoveries represent revenues comprising reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses and earned in the period during which the applicable expenses are incurred and the tenant's obligation to reimburse us arises. We classify rental revenues and tenant recoveries generated through the leasing of real estate assets within revenues in income from rentals in our consolidated statements of operations. We provide investors with a separate presentation of rental revenues and tenant recoveries in "Comparison of results for the year endedDecember 31, 2022 to the year endedDecember 31, 2021 " in the "Results of operations" section within this Item 7 because we believe it promotes investors' understanding of our operating results. We believe that the presentation of tenant recoveries is useful to investors as a supplemental measure of our ability to recover operating expenses under our triple net leases, including recoveries of utilities, repairs and maintenance, insurance, property taxes, common area expenses, and other operating expenses, and of our ability to mitigate the effect to net income for any significant variability to components of our operating expenses.
The following table reconciles income from rentals to tenant recoveries for the
years ended
Year Ended December 31, 2022 2021 2020 Income from rentals$ 2,576,040 $ 2,108,249 $ 1,878,208 Rental revenues (1,950,098) (1,618,592)
(1,471,840)
Tenant recoveries$ 625,942 $ 489,657 $ 406,368 Total equity capitalization
Total equity capitalization is equal to the outstanding shares of common stock multiplied by the closing price on the last trading day at the end of each period presented.
Total market capitalization
Total market capitalization is equal to the sum of total equity capitalization and total debt.
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Unencumbered net operating income as a percentage of total net operating income
Unencumbered net operating income as a percentage of total net operating income is a non-GAAP financial measure that we believe is useful to investors as a performance measure of the results of operations of our unencumbered real estate assets as it reflects those income and expense items that are incurred at the unencumbered property level. Unencumbered net operating income is derived from assets classified in continuing operations, which are not subject to any mortgage, deed of trust, lien, or other security interest, as of the period for which income is presented. The following table summarizes unencumbered net operating income as a percentage of total net operating income for the years endedDecember 31, 2022 , 2021, and 2020 (dollars in thousands): Year Ended
2022 2021 2020 Unencumbered net operating income$ 1,790,033 $ 1,444,307 $ 1,295,520 Encumbered net operating income 15,776 46,288 59,893 Total net operating income$ 1,805,809 $ 1,490,595 $ 1,355,413 Unencumbered net operating income as a percentage of total net operating income 99% 97% 96%
Weighted-average shares of common stock outstanding - diluted
From time to time, we enter into capital market transactions, including forward equity sales agreements ("Forward Agreements"), to fund acquisitions, to fund construction of our highly leased development and redevelopment projects, and for general working capital purposes. We are required to consider the potential dilutive effect of our Forward Agreements under the treasury stock method while the Forward Agreements are outstanding. As ofDecember 31, 2022 , we had Forward Agreements outstanding to sell an aggregate of 0.7 million shares of common stock. Refer to Note 15 - "Stockholders' equity" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. The weighted-average shares of common stock outstanding used in calculating EPS - diluted, funds from operations per share - diluted, and funds from operations per share - diluted, as adjusted, for the years endedDecember 31, 2022 , 2021, and 2020 are calculated as follows. Also shown are the weighted-average unvested shares associated with restricted stock awards used in calculating the amounts allocable to unvested stock award holders for each of the respective periods presented below (in thousands):
Year Ended
2022 2021 2020 Basic shares for earnings per share 161,659 146,921 126,106 Forward Agreements - 539 384 Diluted shares for earnings per share 161,659 147,460 126,490 Basic shares for funds from operations per share and funds from operations per share, as adjusted 161,659 146,921 126,106 Forward Agreements - 539 384 Diluted shares for funds from operations per share and funds from operations per share, as adjusted 161,659 147,460 126,490 Unvested restricted shares used in the allocation of net income, funds from operations, and funds from operations, as adjusted 1,723 1,782 1,728 158
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