Alexandria Real Estate Equities, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Alexandria is an urban office REIT focused on life science and technology campuses in major U.S. innovation markets. Financial statements are unaudited; results for the quarter are not necessarily indicative of full-year results.
Key financial results
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $358.8 | $320.1 | +12.1% |
| Net income | $136.8 | $141.5 | -3.3% |
| Net income attributable to common stockholders | $123.6 | $132.4 | -6.6% |
| Diluted GAAP EPS | $1.11 | $1.32 | -15.9% |
| Adjusted diluted FFO per share | $1.71 | $1.62 | +5.6% |
| Cash provided by operating activities | $136.7 | $128.9 | +$7.8 |
- Income from rentals was $354.7 million, up 11.7%; rental revenue increased 12.3% and tenant recoveries rose 9.6%.
- Net operating income (NOI) was $257.3 million, up 12.7%. Same-property NOI grew 2.3% on a reported basis and 10.2% on a cash basis. Annualized portfolio cash-basis NOI was $892.9 million, up 17.8%.
- Operating margin was 72%; adjusted EBITDA margin was 70%, compared with 71% and 69%, respectively, in Q1 2018.
- Cash used in investing was $734.3 million, primarily for property purchases, construction and joint-venture funding; financing provided $640.8 million. Cash, cash equivalents and restricted cash totaled $315.8 million at quarter-end.
Balance sheet, debt and liquidity
- Total assets were $15.48 billion and total equity was $8.34 billion at March 31, 2019.
- Debt was $5.84 billion, versus $5.48 billion at December 31, 2018. Net debt was $5.57 billion; net debt to adjusted EBITDA was 5.4x on a quarter-annualized basis and 5.8x on a trailing-12-month basis.
- All debt was fixed-rate or hedged; the company reported no unhedged variable-rate debt. Weighted-average debt interest rate was 4.09%, with a 7.2-year weighted-average remaining term.
- Reported liquidity was $2.74 billion, including an undrawn $2.2 billion revolving credit facility, $315.8 million of cash and restricted cash, and $225.0 million of publicly traded investments. The company reported $2.7 billion of liquidity and 95% of NOI unencumbered.
- Fixed-charge coverage was 4.5x quarter-annualized and 4.2x trailing 12 months. Debt covenants were reported as satisfied.
Material changes and notable transactions
- Revenue growth reflected recently delivered development and redevelopment properties, acquisitions made since the comparable 2018 period, and higher rents on renewals and re-leasing. North American operating-property occupancy was 97.2% at quarter-end.
- Leasing activity totaled 1.25 million RSF. Renewals and re-leasing produced rental-rate increases of 32.9% including straight-line rent and 24.3% on a cash basis. A 488,899-RSF Pinterest lease brought pre-leasing at 88 Bluxome Street to 58%.
- Investment income was $83.6 million, including $72.2 million of unrealized gains and $11.4 million of realized gains. This volatile, non-property income helped support reported earnings; it is excluded from adjusted FFO.
- Alexandria sold a 60% interest in 75/125 Binney Street for $438 million, retaining control and continuing to consolidate the venture. The $202.2 million difference between proceeds and the book value of the interest sold was recorded in equity, not as a gain in earnings.
- The company issued $850 million of unsecured senior notes in March and repaid $301.3 million of secured debt early. It recorded a $7.4 million debt-extinguishment loss. It also repurchased 275,000 Series D preferred shares for $9.2 million and recorded a $2.6 million redemption charge.
- Adoption of the new lease accounting standard on January 1, 2019 resulted in recognition of a $244.6 million operating lease liability and a $238.4 million right-of-use asset at quarter-end, and a $3.5 million cumulative reduction to retained earnings.
Outlook, management commentary and risks
- Updated 2019 guidance, issued April 29, 2019, is diluted GAAP EPS of $2.65–$2.75 and adjusted diluted FFO per share of $6.90–$7.00. Adjusted FFO midpoint remained $6.95. EPS guidance increased from $1.95–$2.15, in part reflecting $0.65 per share of unrealized investment gains recognized through March 31; future investment gains or losses are excluded from the guidance calculation.
- Guidance assumptions include year-end North American operating occupancy of 97.7%–98.3%, same-property NOI growth of 1%–3% (6%–8% cash basis), and renewal/re-leasing rent increases of 26%–29% (13%–16% cash basis). These are estimates, not assurances.
- Management targeted year-end 2019 quarter-annualized net debt/adjusted EBITDA of no more than 5.3x and fixed-charge coverage above 4.0x. It forecast $1.3 billion of 2019 construction spending and $630 million of acquisitions at the midpoint.
- Management cited approximately $65 million of expected annual cash-rent growth as initial free-rent periods burn off on recently delivered projects. It also reported about $1.1 billion of contracted construction costs remaining, generally payable over one to three years, and approximately $233.8 million of non-real-estate investment funding commitments.
- Principal disclosed risks include economic and credit-market conditions; the health of life science and technology tenants and industries; the ability to access capital or refinance debt; development, leasing and occupancy execution; investment valuation volatility; interest-rate and hedge-counterparty exposure; regulatory and REIT qualification matters; and environmental, climate and cybersecurity risks. A proposed term-loan maturity extension to January 2025 was agreed in April and remained subject to conditions; expected effectiveness was June 2019.
Investor verification priorities
- Verify the composition and sustainability of earnings: investment gains materially affected GAAP results, while adjusted FFO excludes those gains and specified financing charges.
- Track delivery, lease-up, free-rent burn-off and construction costs across the large development pipeline, including the 88 Bluxome Street project and the 2019–2020 delivery schedule.
- Reconcile liquidity and leverage measures, including the treatment of restricted cash, publicly traded investments, joint ventures and preferred stock; monitor progress against year-end leverage targets.
- Review the assumptions underlying guidance, particularly rent growth, occupancy, same-property cash NOI, construction spending, acquisitions and capital issuance.
- Monitor near-term lease expirations, tenant credit quality, the term-loan extension’s completion, and the company’s significant construction and investment commitments.