Alexandria Real Estate Equities, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Alexandria is a REIT focused on office, laboratory, and technology campuses serving science and technology tenants. Its North American portfolio included 18.9 million RSF of operating and development/redevelopment properties, plus 5.6 million RSF of future development opportunities. North American operating-property occupancy was 97.3%; investment-grade tenants generated approximately 52% of ABR.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $216.1 million | $196.8 million |
| Net income | $10.0 million | $25.0 million |
| Net income (loss) attributable to common stockholders | $(3.8) million; $(0.05) per share | $17.8 million; $0.25 per share |
| FFO per diluted share, as adjusted (non-GAAP) | $1.34 | $1.28 |
| AFFO per diluted share (non-GAAP) | $1.21 | $1.10 |
| Operating cash flow | $101.8 million | $106.8 million |
- Revenue rose 9.8%. Pro rata NOI, including the company’s share of joint ventures, increased 6.5% to $145.3 million; same-property NOI grew 5.3% (6.2% on a cash basis). Reported operating margin was 70%; adjusted EBITDA margin was 65%.
- Common-stockholder GAAP results declined substantially, chiefly reflecting a $29.0 million impairment charge on India land parcels, higher depreciation, and a $3.0 million preferred-stock redemption charge. The 2015 comparison included a $14.5 million real-estate impairment.
- Operating cash flow declined year over year due to timing of operating asset and liability payments; before those changes, it increased 12.1% to $101.2 million. Investing cash outflow was $171.1 million, including $159.5 million of additions to real estate. Financing cash inflow was $90.8 million. Cash and cash equivalents ended at $146.2 million.
- At March 31, total debt was approximately $4.09 billion and net debt was $4.01 billion. Approximately 85% of debt was fixed-rate or hedged; 15% was unhedged variable-rate debt. Net debt/adjusted EBITDA was 7.4x on an annualized Q1 basis and 7.2x trailing 12 months; management’s stated goal was below 6.0x. Fixed-charge coverage was 3.3x annualized.
- Reported liquidity was approximately $1.70 billion at quarter-end; including the April 100 Binney Street construction loan and related subsequent adjustments, management cited approximately $2.0 billion. The $1.5 billion credit line had $1.201 billion available at March 31.
Material changes and operating developments
- North American operating occupancy increased to 97.3% from 96.8% a year earlier. The company executed leases for 388,872 RSF; renewals and re-leasing on 218,342 RSF achieved reported rent increases of 33.6%, or 16.9% on a cash basis. Management noted that four leases drove much of the increase.
- Development and redevelopment projects totaling 3.5 million RSF were 81% leased overall. Projects scheduled for delivery in 2016 totaled approximately 1.5 million RSF and were 90% leased, with estimated incremental annual NOI of $75–$80 million upon stabilization. Projects scheduled for 2017–2018 were 72% leased, with estimated incremental annual NOI of $120–$130 million.
- Q1 common dividends declared were $0.80 per share, up from $0.74 in Q1 2015. The company issued 293,235 common shares through its ATM program for $25.3 million net and repurchased 931,934 Series D preferred shares for $25.6 million.
Outlook, risks, and unusual items
- Updated 2016 diluted EPS guidance was $(1.04) to $(0.94); FFO per diluted share was $4.15–$4.25 and adjusted FFO per share was $5.46–$5.56. Adjusted FFO excludes the preferred-stock redemption charge and specified land-impairment items; these are non-GAAP measures.
- Key 2016 assumptions included North American operating occupancy of 96.5%–97.1% at year-end, same-property NOI growth of 2%–4% (3.5%–5.5% cash basis), and construction spending of $800–$900 million. Management expected $300–$400 million of real-estate sales and $115–$135 million of operating cash flow after dividends.
- In March, the company recorded a $29.0 million impairment on two India land parcels classified as held for sale. After quarter-end, it decided to sell its remaining Asia real estate and recorded an additional $153.0 million impairment in April; estimated proceeds after disposition costs were approximately $104.4 million, with sales expected over the following 12 months. The Asia assets were not classified as discontinued operations.
- Other subsequent events included closing a $304.3 million construction loan for 100 Binney Street, repaying secured notes of $47.8 million in April and $126.0 million in May, and completing the purchase of the remaining Alexandria Technology Square noncontrolling interest for $54.0 million.
- Risks include execution, leasing, construction cost and delivery timing, capital-market access and refinancing, tenant and life-science-sector conditions, interest-rate and derivative-counterparty exposure, foreign currency, and asset-sale valuation and timing. Contracted construction and improvement commitments were approximately $890 million; the company also had $92.7 million of commitments for non-real-estate investments. Ground-lease contractual payments totaled $611.4 million.
Most important facts for investors to verify
- Progress and realized net proceeds from the Asia dispositions versus the approximately $104.4 million estimate, and whether further valuation changes arise.
- Delivery, lease-up, costs, and stabilization of the 2016–2018 development pipeline against management’s NOI estimates.
- Debt reduction and leverage trajectory relative to the below-6.0x net-debt/adjusted-EBITDA goal, including reliance on asset sales and new financing.
- Whether reported rent-growth and same-property NOI trends persist beyond the quarter and the unusually strong lease-level increases.
- Coverage of dividends and planned construction spending by recurring operating cash flow; non-GAAP FFO/AFFO are not substitutes for GAAP earnings or cash flow.