ALEXANDRIA REAL ESTATE EQUITIES, INC. quarterly report, Q1 FY2015

Business context and reporting period

Alexandria Real Estate Equities, Inc. is a REIT focused on life-science and technology properties in coastal innovation markets. This unaudited Form 10-Q covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted. At quarter-end, the company reported 30.7 million square feet of assets, including operating, development, redevelopment, and future projects. Approximately 52% of annualized base rent came from investment-grade tenants.

Financial and operating performance

Revenue growth reflected acquired and newly delivered properties as well as higher tenant recoveries. Same-property average occupancy rose to 96.0% from 95.4% year over year; North American operating-property occupancy was 96.8% at quarter-end. Renewals and re-leasing produced rental rate increases of 30.8% on a straight-line basis and 18.5% on a cash basis. Management reported a 69% operating margin and a 64% adjusted EBITDA margin.

Common-stock dividends declared were $0.74 per share, versus $0.70 in Q1 2014. Operating cash flow before changes in operating assets and liabilities was $90.3 million, up 9.9%; reported cash flow also reflected working-capital movements.

Balance sheet, debt, and liquidity

At March 31, 2015, total assets were $8.41 billion and consolidated debt was approximately $3.90 billion. Debt carried a 3.17% weighted-average interest rate and a 5.3-year weighted-average remaining term; 81% was fixed-rate or hedged and 19% was unhedged variable-rate. Cash and cash equivalents were $90.6 million, with $56.7 million of restricted cash. Management reported $1.31 billion of total available liquidity, including cash and remaining credit and construction-loan commitments.

Net debt to adjusted EBITDA was 7.5x on a Q1 annualized basis and 7.9x on a trailing-12-month basis. The company reported a 3.3x fixed-charge coverage ratio. A $375 million term loan matures in 2016; management expected to partially repay it and extend the maturity to 2021. A $46.98 million secured loan was scheduled to mature in July 2015, with extension options the company expected to exercise.

Material changes and unusual items

• GAAP income declined despite higher revenue and FFO. Q1 2015 included a $14.5 million impairment charge on a vacant 175,000-square-foot building in Hyderabad, India, which was sold for $12.4 million in March. The impairment included estimated foreign-exchange losses; the disposition also released $9.2 million of accumulated foreign-currency translation losses from equity.
• Interest expense rose 21.5% to $23.2 million, reflecting higher debt and less interest capitalized as projects entered service. Depreciation and amortization increased 16.9% to $58.9 million.
• Cash used in investing activities was $170.1 million, including $93.9 million of real-estate purchases and $104.6 million of additions to real estate; sale proceeds were $67.6 million. Cash from financing activities was $67.7 million.
• The company agreed to acquire the remaining 10% interest in Alexandria Technology Square for $108.3 million. The first $54.3 million installment was paid April 1, 2015; the remaining $54.0 million is due in April 2016.
• Development pipeline execution remains significant: projects were on average 90% leased or under negotiation. The company began a 530,477-square-foot Cambridge project that was 98% leased or under negotiation. Q1 construction spending was $111.3 million.

Guidance, outlook, and risks

Management raised and narrowed 2015 diluted FFO guidance to $5.17–$5.27 per share, midpoint $5.22, and gave diluted EPS guidance of $1.42–$1.52. Guidance assumptions included year-end North American operating occupancy of 96.9%–97.4%, same-property NOI growth of 0.5%–2.5% (5%–7% cash basis), and 2015 construction spending of $645–$745 million. Management targeted net debt to adjusted EBITDA below 7.0x by Q4 2015 and a Q4 annualized fixed-charge coverage ratio of 3.0x–3.5x. These projections depend on leasing, project delivery, asset sales, financing markets, and other assumptions and are not guarantees.

Management cited risks including adverse conditions in science and technology industries or among tenants, access to capital and refinancing, interest-rate and foreign-exchange movements, government policy, and broader economic or credit-market disruption. The company had $559.9 million of remaining construction and improvement costs under contract and approximately $83.2 million of investment funding commitments. Certain government development agreements require delivery of specified space; failure to satisfy, extend, or amend those requirements could result in default. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether leasing, occupancy, and scheduled project deliveries support management’s FFO and NOI assumptions.
• Whether planned asset sales, acquisitions, and the 2016 term-loan refinancing occur on expected terms and timing.
• How the substantial development pipeline, construction commitments, and project costs affect cash flow, leverage, and returns.
• Whether interest-rate, tenant-credit, and foreign-exchange risks—including the Hyderabad impairment—create further earnings or valuation effects.
• How the non-GAAP measures FFO, AFFO, NOI, and adjusted EBITDA are defined and reconciled; they are not substitutes for GAAP earnings or operating cash flow.