Alexandria Real Estate Equities, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless otherwise noted. Alexandria is an urban office REIT focused on life science and technology properties in major U.S. innovation markets.
Financial results and operating metrics
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $270.9 million | $216.1 million | Up 25.4% |
| Net income | $47.6 million | $10.0 million | Common-stockholder earnings were $25.7 million, or $0.29 per diluted share, versus a $3.8 million loss, or $(0.05) per share |
| FFO, diluted, as adjusted | $130.6 million; $1.48 per share | $97.1 million; $1.34 per share | Up 34.5% in total and 10.4% per share; non-GAAP |
| Net operating income (NOI) | $193.8 million | $150.3 million | Up 29.0%; same-property NOI grew 2.6%, or 5.5% on a cash basis |
| Net cash from operating activities | $107.5 million | $101.8 million | Up $5.7 million |
| Net cash used in investing activities | $468.4 million | $171.1 million | Higher property acquisitions and construction spending |
| Net cash from financing activities | $386.9 million | $90.8 million | Included note issuance and common-stock proceeds |
| Common dividend declared | $0.83 per share | $0.80 per share | Up 3 cents year over year |
Rental revenue rose 30.9%, primarily from developments delivered and properties acquired after the comparable prior-year period. Same-property rental revenue increased 3.2%. Company-reported operating margin was 72%, and adjusted EBITDA margin was 67% (versus 65% in Q1 2016). North American operating-property occupancy was 95.5% at quarter-end, down from 96.6% at December 31, 2016, primarily reflecting space vacated by Eli Lilly in San Diego and vacancy in Maryland.
Balance sheet, debt and liquidity
- Total assets were $10.87 billion at March 31, 2017, including $9.47 billion of real estate investments. Cash and cash equivalents were $151.2 million; restricted cash was $18.3 million.
- Total debt was approximately $4.43 billion, compared with $4.16 billion at December 31, 2016. The weighted-average debt interest rate was 3.84%, and 95% of debt was fixed-rate or hedged; 5% was unhedged variable-rate debt.
- Net debt to adjusted EBITDA was 5.9x on a quarter-annualized basis and 6.6x on a trailing-12-month basis. Fixed-charge coverage was 4.1x annualized for Q1 and 3.8x for the trailing 12 months.
- Reported liquidity was approximately $2.16 billion, including $1.65 billion available on the unsecured credit line, $266.5 million of remaining construction-loan commitments, $74.2 million of available-for-sale securities and $169.5 million of cash, cash equivalents and restricted cash.
- The company reported compliance with its debt covenants. It also reported an S&P credit-rating upgrade to BBB/Stable from BBB-/Positive.
Material changes and capital allocation
- Real estate investments increased from $9.08 billion at year-end 2016 to $9.47 billion. Q1 acquisitions included the 88 Bluxome Street site in San Francisco for $130.0 million, 303 Binney Street land in Cambridge for $80.3 million, and San Diego land parcels for $8.3 million.
- In March, Alexandria issued $425 million of 3.95% senior notes due 2028, with $420.5 million net proceeds used to repay credit-line borrowings. It also repaid $200 million of its 2019 term loan, recording a $0.7 million extinguishment loss.
- The company issued 2.1 million common shares for $217.8 million net proceeds and entered forward sale agreements for another 4.8 million shares, expected to provide $495.5 million net proceeds upon settlement, subject to contractual adjustments.
- Alexandria repurchased 501,115 Series D preferred shares for $17.9 million and recorded a $5.8 million redemption charge. It announced redemption of all Series E preferred shares for $130 million plus accrued dividends; redemption was completed April 14, 2017.
- Q1 net income benefited from the absence of the $29.0 million real estate impairment recorded in Q1 2016. The 2017 common-stockholder result included $11.3 million of preferred-stock redemption charges and the $0.7 million debt-extinguishment loss.
Outlook, management commentary and risks
- Updated 2017 guidance: diluted EPS of $1.43–$1.53; FFO per share of $5.84–$5.94; and adjusted FFO per share of $5.97–$6.07. Guidance assumes year-end North American operating occupancy of 96.6%–97.2%, same-property NOI growth of 2.0%–4.0%, and renewal/re-leasing rent increases of 19.5%–22.5% (7.5%–10.5% cash basis).
- Management expects $815–$915 million of 2017 construction spending and $380–$480 million of acquisitions. Projected 2017 capital sources and uses are each $1.385–$1.655 billion; these estimates depend on operating performance, leasing, dispositions, financing and completion of projects and acquisitions.
- Management cited a highly leased development pipeline and expects 1.13 million RSF of 2017 deliveries to contribute $79–$89 million of incremental annual NOI upon stabilization for projects delivered in Q2–Q4. Such projections are estimates, not guaranteed results; completion and lease-up timing may vary.
- Key risks include refinancing and access to capital, interest-rate and derivative-counterparty exposure, weaker life-science or technology tenant conditions, tenant credit and leasing risk, development costs and delays, and broader economic, regulatory and market conditions. A 1% rate increase was estimated to reduce annualized earnings by about $1.9 million after hedging.
- Other items to monitor: $614 million of construction and improvement costs under contract; approximately $127 million of commitments for non-real-estate investments; and a joint-venture construction loan at 360 Longwood Avenue maturing July 5, 2017, with refinancing expected alongside a planned condominium sale. The filing reports no clear quantified outcome for these contingencies beyond the stated estimates and plans.
Investor verification priorities
- Verify delivery, lease-up and stabilization assumptions behind the development pipeline and projected incremental NOI.
- Track occupancy and tenanting of the space vacated in San Diego and Maryland, and compare actual same-property cash NOI with guidance.
- Confirm settlement proceeds and share dilution from the 4.8 million-share forward equity agreements, and the use of equity and disposition proceeds.
- Review debt maturities, variable-rate exposure, refinancing plans for the 360 Longwood Avenue joint venture, and progress toward leverage targets.
- Assess the assumptions underlying 2017 EPS/FFO guidance, construction spending, acquisition plans and expected asset sales; these are forward-looking and subject to change.