Alexandria Real Estate Equities, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing is unaudited. Alexandria is a REIT focused on life science, technology, and agtech real estate campuses in major U.S. innovation markets.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $373.9 million | $325.0 million | $732.7 million | $645.2 million |
| Net income | $87.2 million | $60.5 million | $224.0 million | $202.1 million |
| Net income attributable to common stockholders | $76.3 million; $0.68/share | $52.0 million; $0.51/share | $200.2 million; $1.80/share | $185.0 million; $1.83/share |
| Adjusted FFO attributable to common stockholders | $192.7 million; $1.73/share | $167.9 million; $1.64/share | $382.5 million; $3.44/share | $330.4 million; $3.27/share |
| Operating cash flow | Not separately stated for the quarter | $308.3 million | $258.2 million |
- Q2 revenue increased 15.0%; six-month revenue increased 13.6%. Management attributed growth to acquired properties, recently delivered development and redevelopment projects, and higher rents.
- Q2 same-property NOI rose 4.3% (9.5% cash basis); six-month same-property NOI rose 3.5% (9.7% cash basis). Q2 operating margin was 72% and adjusted EBITDA margin was 69%.
- Six-month investing cash outflow was $1.452 billion, primarily for real estate purchases, construction, joint ventures, and investments. Financing cash inflow was $1.109 billion. Cash, cash equivalents, and restricted cash totaled $238.2 million at June 30, down from $272.1 million at year-end.
- At June 30, total debt was $6.356 billion, up from approximately $5.478 billion at December 31, 2018. Weighted-average interest rate was 4.05%; 92% of debt was fixed-rate or hedged. Net debt was $6.155 billion; net debt/adjusted EBITDA was 5.8x on a quarter-annualized basis and 6.1x trailing 12 months.
- Reported liquidity was $3.35 billion, including $1.686 billion available on the $2.2 billion credit line, forward equity sales, cash and restricted cash, and publicly traded investments. Fixed-charge coverage was 4.2x.
Material changes and notable items
- Investment income was $21.5 million in Q2 and $105.1 million for the first half, largely reflecting realized and unrealized investment gains. The first-half amount included $83.3 million of unrealized gains, which are market-sensitive and not recurring property operating income.
- Six-month diluted EPS was lower than the prior year despite higher net income, reflecting, among other items, a $7.4 million early debt-extinguishment loss, a $2.6 million preferred-stock redemption charge, and a larger weighted-average share count.
- In February, Alexandria sold a 60% interest in 75/125 Binney Street for $438 million, retaining control; the transaction was recorded in equity with no gain recognized in earnings. It also issued $850 million of unsecured notes in March and repurchased 275,000 Series D preferred shares for $9.2 million.
- Common shares issued and forward equity sales agreements covered 8.7 million shares at a weighted-average $144.50 per share, for approximately $1.2 billion of aggregate expected net proceeds; most proceeds depended on future settlement of the forward agreements.
- Alexandria adopted new lease accounting on January 1, 2019. At June 30, it reported a $243.6 million operating lease liability and a $237.0 million right-of-use asset. The adoption included a $3.5 million retained-earnings adjustment.
Outlook, management commentary, and risks
- Updated 2019 guidance dated July 29 set diluted EPS at $2.39–$2.47, versus prior guidance of $2.65–$2.75, and adjusted FFO per share at $6.92–$7.00, versus $6.90–$7.00. Management cited a forecast $43 million, or $0.38 per share, debt-refinancing loss expected in Q3 as a key EPS adjustment.
- Guidance assumes year-end North American operating occupancy of 97.2%–97.8%, same-property NOI growth of 1%–3% (6%–8% cash basis), and rental-rate increases on renewals and re-leasing of 27%–30% (14%–17% cash basis). The company cautioned that actual results may differ materially.
- Management reported 97.4% North American operating occupancy, an 8.4-year weighted-average remaining lease term, and $58 million of anticipated annual cash-rent growth as initial free-rent periods expire. The development pipeline and acquisitions require substantial capital; 2019 construction-spending guidance midpoint was $1.3 billion.
- In July, the company issued $1.25 billion of long-term notes, primarily refinancing $950 million of notes due in 2020 and 2022, repaying $175 million of its term loan, and reducing credit-line borrowings. Management estimated pro forma weighted-average debt maturity of 10.1 years, with no maturities until 2023.
- Risks include development and leasing execution, tenant and life-sciences sector conditions, access to capital and refinancing, interest-rate and LIBOR transition exposure, trade-policy effects on tenants and construction costs, and equity-investment valuation volatility. The filing reported no material change to other previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the updated 2019 EPS and adjusted FFO guidance is achieved, including the timing and final cost of the debt refinancing.
- Actual settlement proceeds and dilution from the 8.1 million forward equity shares, and the company’s subsequent equity issuance plans.
- Occupancy, leasing, construction costs, delivery timing, and lease-up of the large development pipeline; these drive expected cash-flow growth.
- Whether operating cash generation and asset or joint-venture sales adequately fund development, acquisitions, and dividends while leverage remains elevated.
- How much reported earnings depend on volatile investment gains rather than recurring rental operations.