Alexandria Real Estate Equities, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Alexandria is an urban office REIT focused on life science and technology campuses in major innovation markets.
Financial and operating performance
| Metric | Q1 2018 | Prior comparable period |
|---|---|---|
| Total revenue | $320.1 million | $270.9 million |
| Net income attributable to common stockholders | $132.4 million; diluted EPS $1.32 | $25.7 million; diluted EPS $0.29 |
| Adjusted FFO per diluted share | $1.62 | $1.48 |
| Net cash from operating activities | $128.9 million | $107.6 million |
| Operating margin / adjusted EBITDA margin | 71% / 69% | 72% / 67% |
| Common dividend declared per share | $0.90 | $0.83 |
- Revenue rose 18.2%, reflecting acquired properties and development and redevelopment projects placed into service. Same-property NOI increased 4.0%; cash-basis same-property NOI increased 14.6%.
- North American operating-property occupancy was 96.6%. Leasing activity totaled 1.48 million RSF, with 16.3% rental-rate increases on renewals and re-leasing, or 19.0% on a cash basis.
- Net income included $85.6 million of investment income, including $72.2 million of unrealized investment gains and $8.3 million of realized gains. The unrealized gains were largely noncash and followed a new accounting standard requiring certain investment valuation changes to run through earnings.
- Cash used in investing was $598.0 million, primarily for real estate purchases, construction, and joint-venture investments; cash provided by financing was $451.3 million. Cash, cash equivalents, and restricted cash ended at $259.0 million.
Balance sheet, debt, and liquidity
- Total assets were $12.82 billion. Consolidated debt was approximately $5.21 billion, up from $4.76 billion at December 31, 2017, primarily reflecting increased line-of-credit borrowings. Net debt was $4.98 billion.
- Debt was 85% fixed-rate or hedged and 15% unhedged variable-rate; weighted-average interest rate was 3.77%. Net debt to adjusted EBITDA was 5.4x on a quarterly annualized basis and 6.1x trailing 12 months.
- Reported liquidity was $2.315 billion, including $1.16 billion available under the $1.65 billion credit line, $713.7 million of unsettled forward equity sales, cash and restricted cash, publicly traded investments, and remaining construction-loan commitments.
- Management reported a positive S&P outlook revision to BBB/Positive from BBB/Stable. Credit covenants were met; the filing reports total debt to total assets of 36% and fixed-charge coverage of 4.07x under applicable loan covenants.
Material changes and business developments
- Q1 acquisitions included Alexandria PARC and Summers Ridge Science Park, plus interests in joint ventures at 704 Quince Orchard Road and 1655 and 1725 Third Street. Aggregate reported acquisition purchase price was $320.5 million.
- Development and redevelopment projects under construction totaled approximately 2.3 million RSF and were 81% leased, excluding space already in service. The company reported $76 million of expected contractual near-term annual cash-rent commencements, including $60 million through Q4 2018, as free-rent periods expire.
- In January, Alexandria entered forward equity sales for 6.9 million shares at a public offering price of $123.50 per share before discounts. It settled 843,600 shares in March and expected approximately $713.7 million from settlement of the remaining agreements. April subsequent events included an additional $94.2 million of net ATM proceeds and the $87.3 million acquisition of 100 Tech Drive.
- The common dividend increased approximately 8% year over year. The company declared $0.90 per common share for Q1.
Outlook, risks, and contingencies
- 2018 guidance: diluted EPS of $2.88–$2.98; diluted FFO per share of $7.28–$7.38; and adjusted diluted FFO per share of $6.52–$6.62. Guidance includes Q1 realized and unrealized investment gains; future fair-value changes in investments are excluded.
- Other 2018 targets include 96.9%–97.5% year-end North American operating occupancy, 2.5%–4.5% same-property NOI growth (9%–11% cash basis), and net debt to adjusted EBITDA below 5.5x at Q4 annualized.
- Management forecast construction spending of $1.05–$1.15 billion and acquisitions of $670–$770 million for 2018. The capital plan depends on operating performance, project delivery and leasing, capital-market conditions, debt issuance, and real estate dispositions, partial-interest sales, and equity issuance.
- Key exposures include interest-rate and equity-price volatility; tenant and life science/technology sector conditions; development costs, completion and lease-up; refinancing and access to capital; and uncertainty around tax-law implementation. A 1% interest-rate increase was estimated to reduce annualized earnings by $5.8 million; a 10% change in equity-investment values would affect earnings by approximately $72.4 million.
- Commitments included approximately $630.2 million of remaining construction costs under contract and $175.7 million of expected funding for non-real-estate investments over several years. Ground and office lease payments totaled approximately $590.7 million; the company estimated a $170–$230 million present value for those obligations under upcoming lease accounting rules.
Important facts for investors to verify
- How much of reported earnings and guidance depends on investment gains rather than recurring property operations, and how those gains affect comparable periods.
- Whether development schedules, leasing, and free-rent expirations convert into forecast occupancy, cash rents, and NOI.
- Whether planned asset sales, equity settlements, and debt financing occur on expected terms, and the resulting dilution and leverage.
- Near-term debt maturities, variable-rate exposure, covenant headroom, and the effects of interest-rate changes.
- Joint-venture funding commitments, project cost-to-complete, and the timing and value of the remaining China property sale.