Alexandria Real Estate Equities, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Alexandria is an investment-grade REIT focused on life-science real estate. At quarter-end, it reported 173 properties totaling approximately 17.0 million rentable square feet; operating properties were 93.3% leased.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $154.2 million | $145.6 million | $304.6 million | $281.3 million |
| Income from continuing operations | $32.3 million | $20.9 million | $61.7 million | $47.2 million |
| Net income attributable to common stockholders | $25.5 million | $17.6 million | $47.9 million | $36.0 million |
| Diluted EPS | $0.38 | $0.29 | $0.74 | $0.58 |
| FFO per diluted share, as adjusted | $1.07 | $1.07 | $2.18 | $2.14 |
| AFFO per diluted share | $1.00 | $1.04 | $2.07 | $2.05 |
- Operating performance: NOI was $107.9 million in Q2, up 4.3%, and $213.1 million for the half, up 7.2%. Same-property NOI rose 7.2% on a cash basis and 3.2% on a GAAP basis in Q2; six-month increases were 8.3% and 2.0%, respectively.
- Cash flow: Six-month operating cash flow was $143.1 million, essentially flat year over year. Investing activities used $216.5 million; financing provided $236.6 million. Cash and cash equivalents ended at $302.2 million.
- Margins: Adjusted EBITDA margin was 65% for both Q2 and the first half, compared with 69% in the comparable 2012 periods. The filing reports these as non-GAAP measures.
- Debt and liquidity: Consolidated debt was $2.96 billion, with a 4.09% weighted-average interest rate and 5.3-year weighted-average remaining term. Net debt was $2.63 billion; net debt to adjusted EBITDA was 6.6x. The company reported $1.8 billion of liquidity, comprising $302.2 million cash and $1.5 billion available on its credit line. Eleven percent of debt was unhedged variable-rate debt.
- Balance sheet: Total assets were $7.38 billion and total liabilities $3.38 billion at June 30, 2013. The company had $3.98 billion of total equity. It declared a quarterly common dividend of $0.65 per share.
Changes from the prior comparable period
- Q2 revenue increased 5.9%; first-half revenue increased 8.3%. Rental revenue growth reflected properties delivered from development and redevelopment and an acquired property. First-half same-property cash NOI also benefited from operating growth.
- Q2 income from continuing operations rose 54.4%, while first-half income from continuing operations rose 30.8%. Lower interest expense and depreciation helped Q2 results; first-half other income was lower, largely because realized investment gains were lower than in 2012.
- Q2 adjusted FFO per share was unchanged at $1.07; first-half adjusted FFO per share increased to $2.18 from $2.14. AFFO per share declined in Q2 to $1.00 from $1.04 and increased for the half to $2.07 from $2.05.
- The company issued 7.6 million common shares in May for approximately $535.5 million net proceeds, increasing common shares outstanding. It also issued $500 million of 3.90% senior notes due 2023, repaid $150 million of a 2016 term loan, and paid off its credit-line borrowings.
- Cash and cash equivalents rose from $141.0 million at year-end 2012 to $302.2 million. Debt decreased from $3.18 billion at year-end to $2.96 billion, while equity increased, in part due to the share offering.
Outlook, commentary, and risks
- 2013 guidance, updated July 29: Diluted EPS of $1.53–$1.63; diluted FFO per share, as adjusted, of $4.35–$4.45. Assumptions include same-property cash NOI growth of 5%–7%, year-end operating occupancy of 94.3%–94.7%, and net debt to adjusted EBITDA of 6.5x. Guidance is management’s estimate, not a guarantee.
- Management projected $346–$376 million of development, redevelopment, and construction spending in the second half of 2013. It targeted non-income-producing assets at 15%–17% of gross real estate by year-end, versus 21% at quarter-end.
- Management expects existing cash, operating cash flow, asset-sale proceeds, construction financing, and access to debt and equity capital to cover commitments for at least the next 12 months. This outlook depends on capital-market conditions and execution of leasing, development, and asset-sale plans.
- After quarter-end, the company reported an LOI for an Ariad lease expansion at 75/125 Binney Street that could bring the project to 99% leased; a land-sale agreement for $55.2 million expected to close in December 2013; and a planned $13.1 million investment in San Diego office properties for future laboratory redevelopment. Amendments to reduce borrowing costs and extend certain debt maturities were completed or in progress.
- Key risks: Higher interest rates could raise borrowing and refinancing costs, reduce property values, and pressure the stock price or access to capital. Other disclosed risks include life-science tenant and funding conditions, lease renewals and defaults, development costs and delivery, market rents and occupancy, foreign currency exposure, and the company’s ability to maintain REIT status and comply with debt covenants. The company was in covenant compliance at June 30.
- Unusual items: A $0.6 million debt-extinguishment loss followed the term-loan prepayment. Foreign-currency translation losses were $20.7 million in Q2 and $23.1 million for the first half, recorded in other comprehensive income rather than net income. Seven properties were sold in the first half for $128.6 million with a net loss of $0.1 million; three land parcels sold for $18.1 million with a $0.8 million gain.
Important facts for investors to verify
- Whether development deliveries and leasing support the projected occupancy, NOI, and FFO growth, particularly given the company’s substantial construction spending.
- The status and terms of proposed credit-facility and term-loan amendments, including maturity extensions, pricing, and covenant changes.
- Whether planned land sales and acquisitions occur on expected terms and timing, and how proceeds are used.
- The effects of the May share issuance on per-share growth and the company’s future capital needs.
- Tenant concentration and credit exposure: investment-grade tenants represented 46% of annualized base rent; the largest tenant represented 7.3%.
- Interest-rate exposure, including 11% unhedged variable-rate debt and the expected $11.2 million increase to interest expense from swap losses to be reclassified over the next 12 months.