ALEXANDRIA REAL ESTATE EQUITIES, INC. quarterly report, Q3 FY2017

Alexandria Real Estate Equities, Inc. — Q3 2017 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results. Alexandria is a REIT focused on life science and technology campuses in major North American innovation markets.

Financial results and operating metrics

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Total revenue	$285.4 million	$230.4 million	$829.3 million	$672.5 million
Net income (loss)	$59.5 million	$28.6 million	$148.6 million	$(69.6) million
Net income (loss) attributable to common stockholders	$51.3 million; $0.55/share	$5.5 million; $0.07/share	$108.6 million; $1.20/share	$(126.0) million; $(1.69)/share
FFO, as adjusted, per diluted share	$1.51	$1.39	$4.49	$4.09
Net cash provided by operating activities	Not separately stated for the quarter	Not separately stated for the quarter	$356.3 million	$291.9 million

Q3 revenue increased 23.9%; nine-month revenue rose 23.3%. Growth mainly reflected properties acquired and development/redevelopment projects placed into service, with same-property rental growth also contributing.
Q3 adjusted FFO per share increased 8.6%; nine-month adjusted FFO per share increased 9.8%. Nine-month GAAP earnings improved substantially from 2016, when real estate impairment charges were $193.2 million and preferred-stock redemption charges were $25.6 million.
Property-level NOI was $201.9 million in Q3 and $591.8 million year to date. Same-property NOI growth was 2.2% and 2.3%, respectively; on a cash basis, growth was 7.8% and 6.2%. Reported operating margin was 71% in Q3, versus 69% a year earlier; adjusted EBITDA margin was 68%, versus 67%.
North American operating-property occupancy was 96.1% at September 30, compared with 97.1% a year earlier. Occupancy including redevelopment properties was 93.9%. Q3 renewal/re-leasing rents increased 24.2% including straight-line rent and 10.0% on a cash basis.
Cash and cash equivalents were $118.6 million; restricted cash was $27.7 million. Total assets were $11.55 billion and total equity was $5.89 billion.
Total debt was $4.82 billion; net debt was $4.70 billion. Weighted-average debt interest rate was 3.76%, and 12% of debt was unhedged variable-rate debt. Net debt to adjusted EBITDA was 6.1x on a quarter-annualized basis and 6.4x trailing 12 months. Fixed-charge coverage was 4.1x annualized and 4.0x trailing 12 months.
Reported liquidity was approximately $1.74 billion, including $1.34 billion available under the credit line, $156.5 million of remaining construction-loan commitments, $100.6 million of available-for-sale securities, and cash and restricted cash.
Investing activities used $1.31 billion in the first nine months, primarily for $660.9 million of real estate additions, $590.9 million of acquisitions, and $128.2 million of investment additions. Financing activities provided $949.4 million. Cash declined $6.5 million from year-end 2016.

Material changes and capital actions

Real estate investments rose to $10.05 billion from $9.08 billion at December 31, 2016. Acquisitions during the nine months totaled $573.2 million; construction spending was $622.4 million.
Development and redevelopment projects underway totaled about 1.5 million RSF and were 81% leased. Management reported 663,672 RSF delivered year to date, 100% leased, with approximately $51 million of incremental annual NOI; further 2017 deliveries were projected at 95% leased.
Common equity issuance generated $705.4 million of net proceeds year to date. A new $750 million ATM program had $500.1 million of capacity remaining at quarter-end; 4.8 million shares under forward-sale agreements were expected to settle by December 31, 2017, for anticipated net proceeds of $495.5 million, subject to contractual adjustments.
Alexandria issued $425 million of 3.95% notes due 2028 and used net proceeds to repay credit-line borrowings. It repaid $200 million of its 2019 term loan. All $130 million of Series E preferred stock was redeemed in April; $17.9 million of Series D preferred stock was repurchased during the nine months.
The common dividend declared for Q3 was $0.86 per share, up 8% from Q3 2016. Nine-month declared common dividends were $2.55 per share.

Outlook, commentary, and risks

Updated 2017 guidance, issued October 30, 2017: diluted EPS of $1.57–$1.59; diluted FFO per share of $5.83–$5.85; and adjusted FFO per share of $6.01–$6.03. The company raised its expected rental-rate increases on renewals/re-leasing to 20.5%–23.5% including straight-line rent and 10.5%–13.5% cash basis. Expected year-end North American occupancy was 96.6%–97.2%.
2017 construction-spending guidance was $815–$915 million; acquisition guidance was $620–$720 million. Management’s capital plan anticipated $1.1–$1.4 billion from real estate dispositions and common equity, alongside operating cash flow and debt financing. Guidance depends on market conditions, leasing, project delivery, acquisitions, and access to capital.
Management cited approximately $70 million of contractual cash-rent growth from recently delivered projects, about $60 million expected to commence through Q3 2018. It also expects development completions to increase expenses as project costs cease to qualify for capitalization.
At September 30, two China operating properties totaling 634,328 RSF, with $38.1 million of net assets, remained classified as held for sale. Sale timing and proceeds were not specified clearly in the provided filing text.
Contracted construction and improvement costs remaining were approximately $571.6 million, generally payable over one to three years; additional commitments for certain non-real-estate investments were approximately $173.6 million. Ground-lease contractual payments totaled $584.0 million.
Key risks include changes or discontinuation of LIBOR (the filing noted the planned phaseout by the end of 2021), interest-rate and derivative-counterparty exposure, refinancing and capital-market access, development costs and delivery, tenant credit and life-science/technology sector conditions, cybersecurity, foreign-currency exposure, and maintaining REIT qualification. The company reported compliance with debt covenants and effective disclosure controls at quarter-end.

Most important facts for investors to verify

Whether reported leasing, occupancy, and rental-rate growth translate into sustained cash NOI and operating cash flow.
Whether development projects meet delivery, lease-up, cost, yield, and projected rent-growth assumptions.
Execution and dilution effects of the remaining ATM capacity and settlement of the 4.8 million forward-sale shares.
Debt maturity and interest-rate exposure, including the transition away from LIBOR, and the sustainability of leverage and coverage ratios.
Timing and realized proceeds from the China property sales, and funding needs for construction and investment commitments.
Reconcile GAAP earnings with FFO and adjusted FFO; the latter are non-GAAP measures and do not substitute for cash flow or distributions capacity.