Alexandria Real Estate Equities Inc. Upgraded To 'BBB+' On Strong Operating Performance And Deleveraging, Outlook Stable

  • The upgrade reflects Alexandria Real Estate Equities Inc.'s (ARE) track record of consistently strong operating performance and the successful execution of its development-focused growth strategy while strengthening its credit protection metrics.
  • We are raising our issuer credit rating on ARE to 'BBB+' from 'BBB'.
  • At the same time, we are raising our issue-level rating on the company's senior unsecured notes to 'BBB+' from 'BBB' and our issue-level rating on its preferred shares to 'BBB-' from 'BB+'.
  • The stable outlook reflects our view that ARE will continue to show above-average net operating income (NOI) growth relative that of its rated office REIT peers over the next 12-24 months while strengthening its leverage metrics as it stabilizes its projects under development. The outlook also incorporates our expectation that the company will improve its S&P Global Ratings adjusted debt to EBITDA to the mid-6x area and sustain it at that level over the next two years.
NEW YORK (S&P Global Ratings) Feb. 11, 2019—S&P Global Ratings today took the 
rating actions listed above.  The upgrade reflects ARE's consistently strong 
operating performance, as exhibited by its above-average operating metrics 
relative to those of its key rated peers, and the successful execution of its 
growth strategy while strengthening its credit protection metrics. Moreover, 
we believe that the company is competitively positioned to benefit from the 
favorable long-term fundamentals in the life science and tech industries, 
where the demand for office space is robust (driven by increased funding for 
research and development, an improved regulatory environment, and growing 
venture capital inflows) and new supply is limited. We believe this will allow 
ARE to continue to outperform its peers over the next few years. These factors 
led us to revise our assessment of the company's business risk profile to 
strong from satisfactory. 

The stable outlook on ARE reflects our view that the company will continue to 
report above-average NOI growth over the next 12-24 months while strengthening 
its leverage metrics as it stabilizes its projects under development. The 
outlook also incorporates our expectation that the company will improve its 
S&P Global Ratings adjusted debt to EBITDA to the mid-6x area by 2019 and 
sustain it at that level.

Although unlikely over the next two years, we could lower our ratings on ARE 
if its operating performance deteriorates meaningfully, possibly due to a 
deterioration in the quality of its tenant base because of distress  or merger 
and acquisition (M&A) activity among its tenants. This could reduce the amount 
of space that the tenants lease from ARE such that the company's occupancy 
rate declines or its pricing power weakens materially. We could also lower the 
ratings if ARE faces any significant development stumbles or if less favorable 
capital market conditions constrain its willingness to raise equity. 
Specifically, we would likely downgrade the company if its S&P Global Ratings 
adjusted debt to EBITDA rises above 7.5x for a sustained period.

Although unlikely in the next two years, we could raise our ratings on ARE if 
the company significantly increases its scale while maintaining an 
above-average operating performance on sustained favorable tailwinds in the 
life science and biotech industries. To merit strong consideration for an 
upgrade, ARE would need to adopt a more conservative financial policy, 
including sustaining S&P Global Ratings adjusted debt to EBITDA in the mid-5x 
area and debt to undepreciated equity in the low-to-mid 30% area.