Business context and reporting period
Alexandria Real Estate Equities, Inc. is a REIT focused on life science and technology campuses in major U.S. innovation markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. At quarter-end, North American operating-property occupancy was 95.7%, and the company reported a 28.4 million-square-foot North American asset base, including development and future-development projects.
Financial performance and position
- Revenue: Second-quarter revenue was $273.1 million, up 20.8% year over year; six-month revenue was $543.9 million, up 23.0%. Rental revenue rose 31.1% for the quarter and 31.0% for the half year, principally reflecting properties acquired or placed into service since the comparable periods. Other income declined, including because of lower investment income.
- Profit: Second-quarter GAAP net income attributable to common stockholders was $31.6 million, or $0.35 per diluted share, versus a loss of $127.6 million, or $1.72 per share, in Q2 2016. Six-month common-stockholder income was $57.3 million, or $0.64 per share, versus a loss of $131.5 million. The prior-year comparison was significantly affected by real-estate impairment charges; 2017 included a $4.5 million impairment of non-real-estate investments.
- FFO and property performance: Adjusted diluted FFO per share was $1.50 for Q2, up 10.3%, and $2.98 for the half year, up 10.4%. Same-property NOI increased 1.8% for the quarter and 2.2% for the half year; on a cash basis, growth was 7.0% and 6.2%, respectively. Q2 operating margin was 72% and adjusted EBITDA margin 68%.
- Cash flow: Six-month operating cash flow was $221.6 million, compared with $172.1 million a year earlier. Investing activities used $981.7 million, largely for property acquisitions and construction; financing activities provided $759.2 million. Cash and cash equivalents were $124.9 million at June 30; restricted cash was $20.0 million.
- Debt and liquidity: Debt carrying value was $4.775 billion (principal obligations were $4.788 billion), versus $4.164 billion of carrying-value debt at year-end 2016. Weighted-average debt interest rate was 3.75%; 11% of debt was unhedged variable-rate debt. Reported liquidity was approximately $1.758 billion, including $1.350 billion of undrawn credit capacity, $184 million of construction-loan commitments, available-for-sale securities, and cash and restricted cash. Net debt/adjusted EBITDA was 6.2x on a quarter-annualized basis and 6.8x trailing 12 months.
- Dividends: The declared common dividend was $0.86 per share for Q2, versus $0.80 in Q2 2016; the company reported a 4% increase from Q1 2017.
Material changes versus the prior comparable period
- Revenue and NOI expanded, primarily due to acquisitions and development/redevelopment deliveries, while same-property occupancy remained below the prior-year level: 95.6% average occupancy for Q2 versus 97.3% in Q2 2016.
- GAAP earnings turned positive, chiefly because the $156.1 million Q2 2016 real-estate impairment did not recur. Depreciation and amortization rose to $104.1 million from $70.2 million, and interest expense increased to $31.7 million from $25.0 million, reflecting a larger average debt balance and higher interest rates.
- Operating cash generation improved, while property investment spending increased substantially. Common equity issuance and debt financing supported investment and capital-structure actions.
- The company issued $425 million of 3.95% notes due 2028, repaid $200 million of its 2019 bank term loan, redeemed all $130 million of Series E preferred stock, and repurchased $17.9 million of Series D preferred stock. It also issued common shares and entered forward equity sales agreements.
Outlook, management commentary, risks and unusual items
- Updated 2017 guidance: Diluted EPS of $1.40–$1.46, reduced from $1.43–$1.53 in the May outlook; diluted FFO per share of $5.81–$5.87, versus $5.84–$5.94; and adjusted FFO per share of $5.99–$6.05, versus $5.97–$6.07. Adjusted FFO guidance includes a $0.05-per-share non-real-estate investment impairment adjustment.
- Management projected year-end North American operating occupancy of 96.6%–97.2%, same-property NOI growth of 2%–4% (5.5%–7.5% cash basis), and lease renewal/re-leasing rate increases of 19.5%–22.5% (7.5%–10.5% cash basis). These are forward-looking estimates, not assurances.
- 2017 construction spending guidance was $815–$915 million; acquisition spending guidance was $540–$640 million. The company expected $1.08–$1.35 billion from real-estate dispositions and common equity combined. The 4.8 million shares under forward equity agreements were expected to be settled no later than March 2018, with anticipated net proceeds of $495.5 million, subject to contractual adjustments.
- Near-term execution includes delivery and lease-up of a substantial development pipeline. Management said 100 Binney Street was 59% leased as of July and expected to reach 100% leasing during Q3 2017. It projected $74–$84 million of incremental annual NOI from 2H17 deliveries upon stabilization.
- Key exposures include interest-rate and counterparty risk, changes in life science and technology markets and tenant conditions, access to capital and refinancing, development and lease-up execution, and REIT qualification. A 1% rate increase was estimated to reduce annualized future earnings by $3.2 million after hedging. Contractual obligations included $582.2 million of ground-lease payments, $543.5 million of construction costs under contract, and approximately $143.6 million of commitments for non-real-estate investments. The filing reported no material environmental liability identified from assessments.
- The company stated that disclosure controls were effective as of June 30, 2017, and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Progress on 2017 project delivery, leasing and stabilization, especially the 100 Binney Street lease-up and the projected NOI contribution from 2H17 deliveries.
- Whether occupancy and same-property performance recover as vacant space is re-leased, and whether announced leasing gains translate into cash rent growth.
- Funding of the development and acquisition program, including planned asset sales, forward-equity settlement, potential new ATM issuance and any resulting dilution.
- Debt and liquidity trends, variable-rate exposure, covenant headroom, and the company’s ability to meet construction, investment and ground-lease obligations.
- The effect of the $4.5 million investment impairment and the distinction between GAAP earnings, FFO and adjusted FFO when assessing recurring performance.