Alexandria Real Estate Equities, Inc. — Q3 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2013. Alexandria is an investment-grade REIT focused on owning, operating, developing, redeveloping, and acquiring life-science real estate. Its operating properties were 93.5% leased; investment-grade tenants represented 50% of annualized base rent.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $158.6 million | $142.9 million | $463.2 million | $424.2 million |
| Income from continuing operations | $32.5 million | $22.5 million | $94.3 million | $69.7 million |
| Net income attributable to common stockholders | $24.6 million | $10.6 million | $72.5 million | $46.6 million |
| Diluted EPS | $0.35 | $0.17 | $1.08 | $0.75 |
| Net operating income (NOI) | $110.9 million | $98.6 million | $324.0 million | $297.4 million |
| Adjusted EBITDA margin | 65% | 67% | 65% | 69% |
- Revenue and earnings: Q3 revenue rose 11.0% and common-stockholder net income more than doubled year over year. Revenue growth primarily reflected properties delivered from development/redevelopment and acquired properties; Q3 same-property NOI rose 1.9% on a GAAP basis and 4.7% on a cash basis.
- Cash flow: Nine-month operating cash flow was $236.4 million, versus $227.5 million. Investing used $391.1 million, including $450.1 million of property additions; financing provided $66.9 million. Cash and equivalents fell to $53.8 million from $141.0 million at year-end 2012.
- Debt and liquidity: Total consolidated debt was $2.87 billion, with a 3.91% weighted-average interest rate and 5.5-year weighted-average remaining term. Approximately 90% was fixed-rate or hedged; unhedged variable-rate debt was 10%. Reported liquidity was $1.54 billion, including $1.49 billion available on the $1.5 billion credit line and $53.8 million cash. Net debt to annualized adjusted EBITDA was 6.8x; fixed-charge coverage was 2.8x. The company reported compliance with debt covenants.
- Balance sheet and distributions: Total assets were $7.36 billion and total equity $3.97 billion. Common shares increased following a May offering that generated approximately $535.7 million net proceeds. Q3 common dividend declared was $0.68 per share.
Material changes versus prior periods
- Nine-month revenue increased 9.2%; continuing-operations income increased 35.2%. Same-property NOI grew 2.0% on a GAAP basis and 6.5% on a cash basis year to date.
- Debt balances shifted materially: unsecured senior notes rose to $1.05 billion from $549.8 million at year-end 2012, while the credit-line balance declined to $14 million from $566 million and bank term loans fell to $1.10 billion from $1.35 billion. The company issued $500 million of 3.90% senior notes due 2023 and amended credit facilities, reducing margins and extending certain maturities.
- Development and redevelopment deliveries supported operating growth. The company delivered 305,212 RSF at 225 Binney Street, fully leased to Biogen for 15 years, and 155,818 RSF across four redevelopment projects during Q3.
- Common dividends paid during the first nine months rose to $120.4 million from $92.7 million, reflecting higher per-share dividends and more shares outstanding.
Outlook, commentary, risks, and unusual items
- 2013 guidance, updated October 28: diluted EPS of $1.54–$1.58; adjusted diluted FFO per share of $4.38–$4.42. Assumptions include cash same-property NOI growth of 5%–7%, GAAP growth of 1%–3%, and year-end operating occupancy of 94.3%–94.8%. The filing does not provide AFFO-per-share guidance.
- Management targeted non-income-producing assets at 15%–17% of gross real estate by year-end, versus 19% at September 30. Planned Q4 construction spending was $137–$167 million. Management expected available cash, operating cash flow, asset-sale proceeds, and borrowing capacity to fund operations and commitments for at least 12 months.
- Capital plans depend on leasing, project delivery, asset sales, financing access, and favorable capital markets. The company cited risks including interest-rate increases, refinancing and covenant risks, tenant credit and lease-renewal risks, development execution, and concentration in the life-science industry.
- Tenant-specific exposure: ARIAD leased 99.4% of 75/125 Binney Street. Following safety concerns and FDA actions concerning ARIAD’s Iclusig drug, management said the impact on ARIAD’s business and financing plans was too early to predict and would be monitored closely.
- Other notable items: Q3 included a $1.4 million loss on early debt extinguishment; nine-month results included $2.0 million of such losses. The company sold seven properties for $128.6 million and three land parcels for $18.1 million in the first nine months. It had $258 million of contracted remaining construction costs and $48.8 million of investment funding commitments. A proposed $55.2 million sale of 1600 Owens Street was expected to close in December 2013, not yet completed at the filing date.
- Interest-rate swaps had a $9.3 million liability; approximately $8.5 million was expected to be reclassified to interest expense over the next 12 months. A 1% increase in rates was estimated to reduce annualized future earnings by $5.3 million, after hedges.
Most important facts for investors to verify
- Whether the 2013 EPS and adjusted FFO guidance was achieved, and how actual results compared with management’s occupancy and same-property NOI assumptions.
- Progress on leasing, delivery, completion costs, and yields for major developments, especially 75/125 Binney Street and 499 Illinois Street.
- ARIAD’s financial condition and lease performance following Iclusig-related regulatory developments.
- Execution and proceeds of the planned land sale, remaining asset sales, and the company’s ability to maintain liquidity while funding development and dividends.
- Debt maturities, exposure to variable rates, refinancing terms, covenant compliance, and the sustainability of cash distributions relative to operating cash flow.