ALEXANDRIA REAL ESTATE EQUITIES, INC. quarterly report, Q3 FY2016

Alexandria Real Estate Equities, Inc. — Q3 2016 Form 10-Q

Reporting period: Three and nine months ended September 30, 2016. The company is a REIT focused on life-science and technology real estate in major North American innovation markets. At quarter-end, its North American asset base was 24.5 million square feet, including 16.4 million square feet of operating properties; operating-property occupancy was 97.1%. Financial statements are unaudited.

Financial results and position

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Total revenue	$230.4 million	$218.6 million	$672.5 million	$619.5 million
Net income (loss) attributable to common stockholders	$5.5 million	$32.7 million	$(126.0) million	$81.7 million
Diluted GAAP EPS	$0.07	$0.46	$(1.69)	$1.14
Adjusted diluted FFO per share	$1.39	$1.33	$4.09	$3.92
Cash provided by operating activities	Not separately presented	Not separately presented	$291.9 million	$246.4 million

Q3 revenue rose 5.4%; nine-month revenue rose 8.6%. Rental revenue increased 7.3% in Q3 and 7.9% year to date, supported by rent increases, improved same-property occupancy, and recently delivered projects.
Same-property NOI increased 5.3% in Q3 and 5.0% year to date; cash-basis same-property NOI grew 6.1% in both periods. Management reported a 69% Q3 operating margin and a 67% adjusted EBITDA margin.
Adjusted FFO per share increased 4.5% in Q3 and 4.3% year to date. These are non-GAAP measures; adjusted FFO excludes specified items and is not a substitute for GAAP earnings or operating cash flow.
Nine-month investing cash outflow was $715.3 million, chiefly reflecting $638.6 million of additions to real estate. Financing provided $457.7 million. Cash and cash equivalents ended at $157.9 million.
Total assets were $9.294 billion and total liabilities $5.001 billion. Debt carrying value was $4.329 billion; net debt was $4.186 billion. Net debt to adjusted EBITDA was 6.8x on a quarter-annualized basis and 7.1x for the trailing 12 months.
Reported liquidity was approximately $1.877 billion, including available credit and construction-loan commitments, available-for-sale securities, and cash. 86% of debt was fixed-rate or hedged and 14% was unhedged variable-rate debt. The reported weighted-average debt rate was 3.49%.

Material changes versus comparable periods

GAAP results were significantly affected by $193.2 million of real-estate impairments in the first nine months, versus $14.5 million a year earlier. These included major write-downs on Asian assets being sold. Q3 included $8.1 million of real-estate impairment.
Nine-month depreciation and amortization rose 15.4% to $218.2 million, reflecting properties placed into service. Revenue growth also included contributions from development and redevelopment deliveries.
Despite higher gross interest incurred, reported interest expense fell to $75.7 million from $77.6 million for the first nine months, partly because more interest was capitalized during construction. Interest incurred and the weighted-average annual rate increased.
The company issued $350 million of 3.95% senior notes, amended and expanded its credit line to $1.65 billion and extended its stated maturity to 2021, and repaid $200 million of its 2019 term loan. It also issued common shares through an at-the-market program and entered forward equity sales agreements for 7.5 million shares.
Common dividends declared were $0.80 per share in Q3, up from $0.77 a year earlier. The company repurchased $98.6 million of Series D preferred stock during the first nine months and recognized a $25.6 million redemption charge.

Outlook, management commentary, and risks

Updated 2016 guidance: diluted GAAP net loss per share of $1.54–$1.52; diluted FFO per share of $3.67–$3.69; and adjusted diluted FFO per share of $5.50–$5.52. Management raised its ranges for rental-rate increases, same-property NOI growth, and cash-basis NOI growth. The adjusted FFO measure includes adjustments for items such as impairments and preferred-stock redemption charges.
Management projected 2016 year-end operating occupancy of 96.5%–97.1%, same-property NOI growth of 3%–5% (4.5%–6.5% cash basis), and construction spending of $785–$835 million. It targeted fourth-quarter annualized net-debt-to-adjusted-EBITDA of 5.9x–6.3x and fixed-charge coverage of 3.5x–4.0x.
The development pipeline was highly leased. Management estimated that deliveries from 2016 through 2018 would generate $195–$210 million of incremental annual NOI, subject to completion, lease-up, costs, and stabilization assumptions. Completing projects will also shift previously capitalized costs, including interest, into expenses.
The proposed $725 million One Kendall Square acquisition was expected to close in Q4, subject to lender approval to assume a $203 million secured loan and customary conditions. Forward equity proceeds were intended to fund the acquisition and other uses; settlement and share issuance remained subject to the transaction and contract terms. The October acquisition of Torrey Ridge for $182.5 million is a subsequent event. The 88 Bluxome Street acquisition could be deferred to Q1 2017.
The company was exiting its Asian real-estate investments. It recorded substantial impairments and expected to complete remaining dispositions over several quarters; sale proceeds and recoverable values are estimates and subject to market and transaction outcomes.
Principal risks identified include LIBOR volatility or replacement and resulting borrowing-cost changes, counterparty performance under hedges, adverse developments in science and technology industries or tenant credit, capital-market access and refinancing, development and leasing execution, asset-sale valuations, and broader economic and regulatory conditions. Construction commitments were approximately $636.5 million; contractual ground-lease payments totaled $607.3 million. Management said disclosure controls were effective at September 30, 2016.

Most important facts for investors to verify

Progress and final terms of One Kendall Square, including lender approval, loan assumption, and settlement of the forward equity sales agreements.
Realized proceeds and any further impairment or disposition costs from the remaining Asian assets.
Development-project delivery dates, lease-up, total costs, and whether projected NOI and yield estimates are achieved.
Actual leverage and liquidity versus management’s targets, including the impact of acquisitions, construction spending, asset sales, and equity issuance.
Reconciliation of GAAP losses to FFO and adjusted FFO, especially the substantial impairment and preferred-stock redemption adjustments.
LIBOR exposure, hedge effectiveness, and the company’s response to benchmark-rate changes.