Business context and reporting period
Alexandria Real Estate Equities, Inc. is an investment-grade REIT focused on owning, operating, developing, redeveloping, and acquiring life-science real estate. This unaudited Form 10-Q covers the three months ended March 31, 2013; comparisons are with the three months ended March 31, 2012 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
At quarter-end, the company reported 173 properties with 16.7 million rentable square feet; operating properties were 93.0% leased. Investment-grade tenants represented 46% of annualized base rent, and no tenant accounted for more than 7.1%.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Total revenue | $150.4 | $135.7; up 11% |
| Income from continuing operations | $29.4 | $26.3; up 12% |
| Net income | $30.2 | $32.8 |
| Net income attributable to common stockholders | $22.4 | $18.4 |
| Diluted EPS | $0.36 | $0.30 |
| FFO per diluted share, as adjusted | $1.11 | $1.08; up 3% |
| AFFO per diluted share | $1.08 | $1.02; up 6% |
| Net operating income (NOI) | $105.2 | $95.3; up 10% |
| Same-property NOI growth | Cash 8.8%; GAAP 0.4% | Year-over-year comparison |
| Operating margin | 70% | 70% |
| Adjusted EBITDA margin | 66% | 70% |
| Cash from operating activities | $47.2 | $49.7 |
Revenue growth was driven primarily by properties delivered or acquired after January 1, 2012. Same-property revenue increased 2%; higher operating costs, including colder-weather costs and Massachusetts property taxes, limited same-property NOI growth on a GAAP basis. Net income declined year over year, while common-stockholder income and EPS increased; the 2012 period included a preferred-stock redemption charge and a land-sale gain.
Cash, cash equivalents, and restricted cash totaled $117.0 at March 31, 2013, including $87.0 of unrestricted cash. Total debt was $3.185 billion; weighted-average interest was 3.57%, and 68% of debt was fixed-rate or hedged. Net debt to annualized quarterly adjusted EBITDA was 7.8x. The company reported approximately $1.0 billion of liquidity from cash and available line capacity, including $0.9 billion available under its $1.5 billion revolver. Total assets were $7.091 billion and total liabilities $3.596 billion.
Investing cash outflow was $69.5, including $139.2 of property additions and $80.2 of property-sale proceeds. Financing cash outflow was $31.5; cash declined by $54.0 during the quarter. The common dividend declared for Q1 was $0.60 per share.
Material changes, outlook, and risks
- The company executed 44 leases covering approximately 703,000 square feet. Renewed or re-leased space achieved average rent increases of 5.9% cash and 12.7% GAAP; the weighted-average term for leases signed was 8.7 years.
- It sold six properties for approximately $124.3 million, with an aggregate net loss of approximately $0.3 million, and reported an 11% weighted-average unlevered IRR during ownership. There were no real estate acquisitions in the quarter.
- Development and redevelopment spending was substantial: the company reported $104.3 million of its share of construction spending in Q1 and forecast $570–$620 million for full-year 2013. Management cited project delivery and leasing as expected contributors to future rental income, NOI, and cash flow.
- 2013 diluted EPS guidance was $1.43–$1.59 and FFO per diluted share was $4.46–$4.62. Assumptions included cash same-property NOI growth of 4%–7%, year-end operating occupancy of 93.9%–94.3%, and net debt to adjusted EBITDA of 6.5x by year-end. These are forecasts, not results.
- Management targeted $209–$259 million of 2013 sales of non-income-producing assets and expected $60–$70 million of proceeds from a proposed partial sale of the 75/125 Binney Street development interest. The capital plan also projected $125–$175 million from at-the-market common-stock issuance, $350–$450 million of unsecured notes, and repayment of $125–$175 million of term loans. Execution and market conditions may differ from assumptions.
- Key exposures include refinancing and capital-market access, interest-rate changes, development cost/timing and lease-up, tenant concentration in life sciences, lease renewals and defaults, government and NIH funding, foreign currency, and changes in economic or real-estate conditions. Unhedged variable-rate debt was 32% of total debt; management targeted less than 18% by year-end. It expected approximately $14 million of accumulated swap losses to be reclassified to interest expense over the next 12 months.
- The company stated it was in compliance with debt covenants at March 31, 2013. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- Whether the company achieves its 2013 EPS/FFO guidance and 6.5x leverage target, particularly given planned development spending and asset-sale assumptions.
- Project leasing, completion timing, total costs, and funding terms for major developments, including 75/125 Binney Street and 360 Longwood Avenue.
- Debt maturities, revolver availability, covenant headroom, variable-rate exposure, and the cash-flow effect of expected swap-loss reclassifications.
- Occupancy, tenant credit and concentration, renewal outcomes, and whether rent growth and same-property NOI trends persist.
- Cash distributions and financing needs: FFO, AFFO, and NOI are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.