Alexandria Real Estate Equities, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The unaudited filing describes an S&P 500 REIT focused on life science, technology, and agtech properties in North American innovation clusters.
Business context and operating performance
At quarter-end, Alexandria reported 269 North American properties, 25.4 million rentable square feet of operating properties, and 96.6% occupancy, down from 97.4% at June 30, 2019. Management attributed the decline mainly to vacancy at recently acquired properties and planned renovation downtime. Investment-grade or publicly traded large-cap tenants generated 53% of annual rental revenue; the weighted-average remaining lease term was 8.3 years.
Management highlighted a substantial development and redevelopment pipeline, including 2.5 million rentable square feet of projects placed into service since Q4 2018 and 3.3 million square feet under construction or pre-construction. The 1.1-million-square-foot 88 Bluxome Street project was nearly 60% pre-leased, with construction expected to begin in 2020.
Financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $390.5 million | $341.8 million | $1,123.2 million | $987.0 million |
| Net income (loss) attributable to common stockholders | $(49.8) million | $208.9 million | $150.4 million | $394.1 million |
| Diluted EPS | $(0.44) | $1.99 | $1.35 | $3.85 |
| Adjusted FFO per diluted share | $1.75 | $1.66 | $5.19 | $4.92 |
| Same-property NOI growth | 2.5% (5.7% cash basis) | — | 3.3% (8.1% cash basis) | — |
Q3 rental income rose 14.6%; total revenue increased 14.2%. Growth reflected acquisitions, recently delivered projects, and higher rents. Q3 property-level NOI increased 13.2%, while the same-property operating margin was 71%. Company-wide operating margin was 70%, versus 71% a year earlier; adjusted EBITDA margin was 68%, versus 69%.
Q3 GAAP results included $70.0 million of unrealized investment losses and $40.2 million of early debt-extinguishment losses; the company also recognized a $7.1 million impairment on three private investments and a $1.7 million loss on terminating interest-rate hedges. These items contributed to the reported common-stockholder loss. By comparison, Q3 2018 included $117.2 million of unrealized investment gains and a $35.7 million gain from a joint-venture property sale. Adjusted FFO excludes specified investment and financing items and is a non-GAAP measure.
For the nine months, operating cash flow was $505.6 million, up from $414.1 million. Investing activities used $2.35 billion, primarily for property acquisitions and construction; financing activities provided $2.03 billion. Cash, cash equivalents, and restricted cash totaled $453.0 million at September 30.
Debt, liquidity, and capital allocation
Debt had a reported carrying amount of $6.74 billion, including $6.04 billion of unsecured senior notes, $351.9 million of secured notes, and $343.0 million drawn on the revolving credit facility. Net debt was $6.33 billion. Approximately 95% of debt was fixed-rate; the weighted-average interest rate was 3.93% and remaining term was 10.7 years. Management reported no debt maturities before 2023.
Reported liquidity was $3.50 billion, comprising $1.86 billion available on the $2.2 billion revolver, $453.0 million of cash and restricted cash, $213.0 million of publicly traded investments, and $979.2 million of expected proceeds from unsettled forward equity sales. The latter proceeds were not cash on hand. The company issued $2.72 billion of senior notes during the nine months, repaid $950 million of notes and its $350 million term loan, and incurred substantial refinancing charges. It also raised capital through property-interest sales and equity issuance.
After quarter-end, the company repaid the remaining $343.0 million revolver balance using commercial-paper borrowings and converted its remaining 2.3 million Series D preferred shares into approximately 578,000 common shares. It had established a commercial-paper program with capacity up to $750 million; there were no borrowings under it at September 30.
Outlook, risks, and other notable items
Updated 2019 guidance, issued October 28, reduced diluted EPS to $1.83–$1.85 from $2.39–$2.47, while adjusted FFO guidance was $6.95–$6.97 per share, with an unchanged midpoint. Management forecast same-property NOI growth of 1.5%–3.5% and cash-basis growth of 6%–8%, year-end North American occupancy of 96.7%–97.3%, and interest expense of $172–$182 million. The occupancy range was lowered, in part for lease-up at recently acquired and expected-to-close properties. Guidance depends on market conditions, leasing, project delivery, and capital-market access; actual results may differ materially.
Management expected 2019 construction spending of about $1.3 billion and acquisitions of $1.5–$1.6 billion. It reported approximately $1.1 billion of remaining construction costs under contract and $231.6 million of commitments for non-real-estate investments. Management cited approximately $70 million of anticipated annual cash-rent growth as free-rent periods expire on recently delivered projects.
Key risks include execution, cost, leasing, and timing risks across the development pipeline; tenant and life-science-sector credit or business weakness; access to debt and equity markets; interest-rate and commercial-paper costs; and market volatility affecting equity investments. The filing also discusses trade-policy and tariff risks, REIT qualification, and the LIBOR transition. The company had eliminated its LIBOR-based debt by the filing date, except for debt in unconsolidated joint ventures. It reported no material changes to previously disclosed risk factors other than the updates described in the filing. The company stated that disclosure controls were effective and that no material change in internal financial controls occurred during the quarter.
On January 1, 2019, the company adopted new lease-accounting guidance. It recorded a $3.5 million cumulative retained-earnings adjustment and recognized lease liabilities and right-of-use assets; comparative rental revenue presentation was reclassified. Partial sales of interests in properties were accounted for as equity transactions because the company retained control, so no gains were recognized in earnings.
Important facts for investors to verify
- Review the full reconciliation of GAAP earnings to adjusted FFO and assess how recurring the excluded investment and refinancing items may be.
- Track occupancy and lease-up at acquired properties, renovation-related vacancy, and whether the 2019 guidance assumptions are achieved.
- Verify project delivery schedules, pre-leasing, construction costs, and the expected timing of free-rent roll-off and cash-rent growth.
- Assess leverage and liquidity using cash actually available, distinguishing unsettled forward-equity proceeds and commercial-paper funding from cash on hand.
- Monitor tenant credit, investment valuation and impairment exposure, joint-venture debt, and the company’s remaining construction and investment commitments.