Alexandria Real Estate Equities, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Alexandria is a REIT focused on life science and technology properties in major U.S. innovation markets. Financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $325.0 million | $273.1 million | $645.2 million | $543.9 million |
| Net income | $60.5 million | $41.5 million | $202.1 million | $89.1 million |
| Net income attributable to common stockholders | $52.0 million; $0.51/share | $31.6 million; $0.35/share | $185.0 million; $1.83/share | $57.3 million; $0.64/share |
| Adjusted FFO per diluted share | $1.64 | $1.50 | $3.27 | $2.98 |
| Operating margin | 72% | 72% | 72% | 72% |
| Adjusted EBITDA margin | 69% | 68% | 69% | 67% |
Q2 revenue rose 19.0%; six-month revenue rose 18.6%. Growth reflected acquisitions, projects placed into service, higher occupancy and rent increases. Same-property NOI increased 4.1% in both the quarter and first half; on a cash basis, growth was 6.3% and 10.3%, respectively. North American operating-property occupancy was 97.1% at quarter-end.
Reported earnings included investment income of $12.5 million in Q2 and $98.1 million in the first half. First-half investment income included $77.3 million of unrealized gains and $20.8 million of realized gains. The new accounting standard adopted January 1, 2018 moved fair-value changes on certain equity investments into earnings; these gains are not a measure of property-level operating performance. Adjusted FFO excludes these investment gains.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $258.2 million, up from $223.7 million. Investing cash outflow was $1.269 billion, versus $981.7 million, largely reflecting acquisitions and construction. Financing provided $1.056 billion, versus $760.8 million.
- Cash, cash equivalents and restricted cash totaled $321.8 million at June 30, 2018. Total assets were $13.562 billion and total liabilities were $6.562 billion.
- Debt principal was approximately $5.635 billion; reported debt carrying value was $5.614 billion. Weighted-average debt interest rate was 4.01%, and 95% of debt was fixed-rate or hedged. Net debt was $5.326 billion.
- Quarter-annualized net debt/Adjusted EBITDA was 5.8x, up from 5.5x at year-end 2017; trailing-12-month leverage was 6.2x. Fixed-charge coverage was 4.3x. The $1.65 billion unsecured credit line had no balance drawn, and management reported total liquidity of approximately $2.9 billion.
- Q2 common dividend declared was $0.93 per share, up 8.1% year over year. First-half declared dividends were $1.83 per share.
- During the first half, the company issued $900 million of senior notes, receiving net proceeds of $891.4 million, and raised $300.8 million net from ATM common-stock sales. It also partially settled forward equity sales agreements. These equity and debt proceeds supported its growth funding needs.
Changes, outlook and notable items
- Acquisitions and recently delivered developments materially expanded the portfolio and contributed to revenue growth. First-half acquisitions included operating properties and development interests; additional acquisitions totaling $257 million were completed in July.
- Management’s July 30, 2018 full-year guidance was diluted EPS of $2.87–$2.93 and adjusted FFO of $6.57–$6.63 per share, midpoint $6.60. The adjusted FFO midpoint increased $0.03 from prior guidance. Guidance assumes year-end occupancy of 97.1%–97.7%, same-property NOI growth of 2.5%–4.5% (cash basis 9.0%–11.0%), and renewal/re-leasing rent increases of 17%–20% (cash basis 9.5%–12.5%).
- Management targeted fourth-quarter 2018 net debt/Adjusted EBITDA below 5.5x and fixed-charge coverage above 4.0x. It expected to repay the 2019 term loan during 2018 and anticipated extending its credit line and 2021 term loan maturities to 2024.
- The 2018 capital plan forecast construction spending of $1.05–$1.15 billion and acquisitions of $960 million–$1.06 billion. These plans depend on capital-market conditions, operating performance, project delivery and leasing.
- A $6.3 million impairment was recorded on a Northern Virginia land parcel classified as held for sale; it sold in July for $6.0 million with no additional gain or loss. No real estate asset sales were completed in the first half.
- Construction commitments under contract were approximately $696.1 million. The company also had commitments of about $190.6 million for non-real-estate investments and equity-funding commitments for joint ventures. Long-term ground and office lease payments were estimated at $610.8 million; their estimated present value was $200–$230 million. The company expected to adopt the new lease standard in 2019.
- Key risks include interest-rate and LIBOR transition uncertainty, equity-investment valuation volatility, execution and leasing of development projects, capital availability, tenant and life-science/technology industry conditions, and REIT qualification. Management stated disclosure controls were effective as of June 30, 2018.
Most important facts for investors to verify
- How much reported earnings growth reflects core property operations versus investment gains recognized under the new accounting standard.
- Whether the development pipeline meets delivery, leasing and yield expectations, and whether the projected $44 million of annual cash-rent growth from expiring free-rent periods materializes.
- Progress toward the leverage target, debt refinancing and repayment plans, and the actual availability and cost of capital and equity funding.
- Whether acquisition, construction and disposition plans remain achievable without materially increasing leverage or diluting shareholders.
- Exposure to investment-value declines, interest-rate changes and LIBOR replacement, alongside the company’s tenant and geographic concentration risks.