Business context and reporting period
Alexandria Real Estate Equities, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The REIT focuses on Class A life-science and technology properties in urban innovation clusters. Its portfolio totaled 31.6 million square feet, including 18.5 million square feet of operating and current value-creation projects; approximately 53% of annualized base rent came from investment-grade tenants.
Financial and operating performance
Amounts below are in millions of dollars except per-share data and where noted.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $185.6 | $158.3 | $538.2 | $462.3 |
| Income from continuing operations | $36.1 | $32.5 | $112.5 | $94.2 |
| Net income attributable to common stockholders | $27.6 | $24.6 | $88.3 | $72.5 |
| Diluted EPS | $0.39 | $0.35 | $1.24 | $1.08 |
| NOI | $128.2 | $110.6 | $375.9 | $323.2 |
| FFO per share, diluted, as adjusted | $1.21 | $1.06 | $3.57 | $3.23 |
| AFFO per share, diluted | $1.08 | $0.99 | $3.10 | $3.06 |
For the nine months, operating cash flow was $255.1 million, versus $236.4 million a year earlier; investing cash outflow was $474.3 million, versus $391.1 million; and financing cash inflow was $230.0 million, versus $66.9 million. Cash and equivalents were $67.0 million at September 30. The company declared common dividends of $0.72 per share for Q3; dividends declared were $2.14 per share for the first nine months.
Total debt was $3.50 billion, with a 3.39% weighted-average interest rate and 5.9-year weighted-average remaining term. Net debt was $3.41 billion; net debt to adjusted EBITDA was 7.2x on a quarterly annualized basis and 7.5x trailing 12 months. Fixed-charge coverage was 3.3x. Available liquidity, including cash and undrawn credit and construction facilities, was reported at $1.61 billion. About 89% of debt was fixed-rate or hedged; 11% was unhedged variable-rate debt.
North American operating-property occupancy was 97.3%, up 230 basis points year over year; occupancy including redevelopment properties was 96.3%. Same-property NOI increased 5.0% in Q3 and 4.5% for the nine months; cash-basis growth was 5.9% and 5.2%, respectively. The company reported a 70% operating margin for the nine-month period and a 64% adjusted EBITDA margin.
Material changes versus prior comparable periods
- Nine-month revenue grew 16.4% and common-stockholder net income grew 21.7%; diluted EPS rose to $1.24 from $1.08. Adjusted FFO per share increased 10.5%.
- Revenue growth reflected recently delivered development and redevelopment projects, acquisitions, and stronger same-property occupancy. Same-property occupancy was 96.6% for the nine-month period versus 93.3% a year earlier.
- Nine-month NOI increased 16.3%, including 4.5% same-property growth. Operating expenses also rose: rental operations increased 16.6%, partly due to new properties, higher occupancy, utilities, maintenance, and severe winter weather on the East Coast.
- Reported interest expense rose 13.8% for the nine months, primarily because less interest was capitalized as projects were delivered. Gross interest incurred declined, while debt increased and the company shifted toward longer-term fixed-rate financing.
- Assets grew to $8.02 billion from $7.53 billion at year-end 2013. Real estate investments increased to $7.20 billion from $6.78 billion.
Outlook, management commentary, and risks
- Updated 2014 guidance: diluted EPS of $1.65–$1.67 and adjusted diluted FFO per share of $4.79–$4.81. Assumptions include year-end North American operating occupancy of 96.9%–97.3% and same-property NOI growth of 3.5%–5.0% (cash basis 4.0%–6.0%).
- Management expects significant 2015 EBITDA growth as pre-leased development projects are completed. It expects to allocate $500 million–$600 million to value-creation development in 2015, funded on a leverage-neutral basis, and targets reducing non-income-producing assets over time.
- 2014 construction-spending guidance was $530 million–$580 million. The company reported $382.1 million spent in the first nine months and projected total liquidity sources and uses for 2014 of $694 million–$844 million each.
- In July, the company issued $700 million of unsecured notes at a weighted-average rate of 3.50% and average maturity of 9.6 years. Net proceeds were used mainly to reduce its line of credit and repay $125 million of its 2016 term loan. A $0.5 million debt-extinguishment loss was recorded.
- Alexandria and Uber formed an unconsolidated 51%/49% JV to acquire Mission Bay land for $125 million and develop 422,980 square feet. The project is fully pre-leased to Uber for 15 years; cost to completion was still being finalized. Management estimated revenue recognition could begin from Q3 2016 to Q1 2017, subject to design and construction timing.
- Development execution and leasing remain important: projects were reported 85% leased or under negotiation. One project at 75/125 Binney Street is leased to ARIAD, which was reassessing its plans to occupy all or part of the facility; design approvals were delayed, and expected rent commencement was late March 2015.
- Commitments included approximately $342.8 million of construction costs under contract, $65.6 million of investment funding commitments, and $13.7 million of letters of credit and performance obligations. Certain government development agreements require about 300,000 square feet of construction by 2016; failure to meet, extend, or amend these requirements could result in default under the agreements.
- Risks identified include tenant and life-science industry conditions, access to capital and debt refinancing, interest-rate and equity-price exposure, foreign currency movements, development costs and timing, and maintaining REIT status. The filing reported effective disclosure controls and no material change in internal control during the quarter.
Management’s FFO, AFFO, NOI, and adjusted EBITDA measures are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Important facts for investors to verify
- Confirm 2014 guidance assumptions against year-end occupancy, same-property NOI, leasing spreads, and project delivery results.
- Track completion costs, leasing, and rent-start timing for major developments, particularly Binney Street, 360 Longwood Avenue, and the Uber JV; review the ARIAD occupancy uncertainty.
- Monitor leverage, near-term maturities, unhedged variable-rate debt, credit-covenant headroom, and planned 2015 borrowing and development funding.
- Assess the realization and timing of forecast asset sales and whether they fund planned investment without weakening liquidity.
- Review the stated construction, investment, and government-agreement commitments, along with the company’s non-GAAP reconciliations and dividend coverage.