Alexandria Real Estate Equities, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated financial statements. Alexandria is a REIT focused on life-science and technology properties in major U.S. innovation markets. At quarter-end, it reported 185 properties and 17.7 million rentable square feet; its broader asset base, including future development capacity, was 31.2 million square feet.
Financial performance and condition
| Metric | Q1 2014 | Q1 2013 / prior period |
|---|---|---|
| Total revenue | $176.2 million | $150.1 million; up 17.4% |
| Income from continuing operations | $40.9 million | $29.4 million; up 39.2% |
| Net income attributable to common stockholders | $32.7 million; $0.46 per diluted share | $22.4 million; $0.36 per diluted share |
| FFO attributable to common stockholders, diluted | $83.1 million; $1.17 per share | $70.0 million; $1.11 per share |
| Net operating income (NOI) | $123.7 million | $104.9 million; up 17.9% |
| Cash flow from operating activities | $73.3 million | $47.2 million |
| Cash flow from investing activities | $(162.7) million | $(69.5) million |
| Cash flow from financing activities | $106.5 million | $(31.5) million |
| Cash and cash equivalents, March 31 | $75.0 million | $57.7 million at December 31, 2013 |
- Same-property NOI rose 3.8% (4.3% cash basis); same-property occupancy was 96.5%, versus 92.7% a year earlier. Reported North American operating-property occupancy was 96.6%.
- Management reported an approximately 70% operating margin. Adjusted EBITDA margin was 65%; these and NOI/FFO are non-GAAP measures and may not be comparable across REITs.
- At March 31, consolidated debt was $3.252 billion, with a 3.09% weighted-average interest rate and 5.4-year weighted-average remaining term. Approximately 74% was fixed-rate or hedged; 26% was unhedged variable-rate debt. Net debt to adjusted EBITDA was 6.9x on an annualized-quarter basis and 7.3x on a trailing-12-month basis.
- Reported liquidity was $1.313 billion, comprising $994.0 million available on the unsecured revolver, $244.4 million of available construction-loan commitments, and $75.0 million of cash. Debt covenants were reported as met, with actual leverage and coverage ratios within stated limits.
- Common dividends declared were $0.70 per share for the quarter. Dividends paid on common and preferred stock totaled $55.2 million.
Changes versus the comparable period
- Revenue growth reflected recently completed developments, acquired properties, and higher same-property rents and occupancy. Same-property revenue increased 4.5%; total NOI growth also benefited substantially from properties outside the same-property pool.
- Renewals and re-leasing achieved rental-rate increases of 18.2%, or 10.4% on a cash basis. The company executed 49 leases covering 563,394 square feet.
- Rental operating expenses rose 16.2%, partly reflecting portfolio growth and unusually severe winter weather in the East. General and administrative expense increased 13.5% to $13.2 million.
- GAAP interest expense rose 6.1% to $19.1 million, largely because less interest was capitalized as projects were completed, despite lower gross interest incurred. Depreciation and amortization rose 10.0% to $50.4 million.
- Cash from operations increased, while investing outflows increased because the quarter had property acquisitions and no property-sale proceeds, unlike Q1 2013. Financing cash flow reflected revolver borrowing, secured-debt repayments, and higher common dividends.
- Debt increased from approximately $3.061 billion at year-end to $3.252 billion, principally as revolver borrowings increased; the company also repaid a $208.7 million secured note in January. It reported $748.0 million of principal payments remaining in 2016.
Outlook, management commentary, and risks
- 2014 guidance: Diluted EPS of $1.75–$1.85 and diluted FFO per share of $4.70–$4.80. Assumptions include year-end North American operating occupancy of 96.5%–97.0%, same-property NOI growth of 2%–4% (4%–6% cash basis), and renewal/re-leasing rate increases of 10%–13% (3%–5% cash basis).
- Management forecast 2014 construction spending of $585–$645 million and acquisitions of $100–$200 million; it expected $145–$245 million of proceeds from land sales or strategic joint-venture capital. The company said it expected to opportunistically issue unsecured bonds in 2014 and believed available resources and expected cash flows would fund commitments for at least 12 months.
- Five North American ground-up development projects, including one unconsolidated joint venture, totaled about 1.4 million square feet; three redevelopment projects totaled 221,225 square feet. Management expects completed projects to add rental income and cash flow, but projects require execution, leasing, and capital spending. 79% of North American development and redevelopment space was leased or under negotiation.
- Key exposures include life-science tenant and industry conditions, development costs and lease-up, the ability to obtain or refinance capital, REIT qualification, economic and credit-market conditions, and interest rates. A 1 percentage-point rate increase was estimated to reduce annualized future earnings by $5.4 million after swaps; unhedged variable-rate debt was 26% of total debt.
- Other disclosed risks and obligations include $348.3 million of contracted construction costs, approximately $43.4 million of future investment funding, and government-related development commitments covering about 300,000 square feet that must be fulfilled, amended, or otherwise addressed by 2016. Environmental assessments had not identified liabilities management believed would be materially adverse.
- Unusual items included $18.8 million of unrealized gains on marketable securities recorded in other comprehensive income, not earnings; investment income of $2.3 million included in other income; and a $0.2 million loss from discontinued operations. The company noted an April 2014 accounting standard expected to cause fewer property disposals to qualify as discontinued operations.
- Subsequent events: Alexandria acquired the 500 Townsend Street land parcel in San Francisco for $50 million in April, targeting construction in 2015. The board also amended and extended CEO Joel Marcus’s employment agreement through 2016, with an option to extend to 2018.
Important facts for investors to verify
- Reconcile reported GAAP earnings with FFO and AFFO, and assess the effects of straight-line rent, capitalized costs, and investment gains.
- Track occupancy, renewal spreads on a cash basis, tenant credit quality, lease expirations, and the progress of projects that are leased or under negotiation.
- Validate development and redevelopment budgets, delivery dates, projected yields, and the company’s ability to meet its 2014 construction and acquisition plans.
- Review debt maturities—especially the 2016 concentration—variable-rate exposure, covenant headroom, and the assumptions supporting forecast bond issuance and liquidity.
- Assess whether expected land-sale and joint-venture proceeds, development commitments, and dividend distributions align with operating cash flow and capital needs.
- Review the full 2013 Form 10-K risk factors and subsequent SEC disclosures; this summary does not reproduce all contingencies or risk-factor detail.