Alexandria Real Estate Equities, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; unaudited. Alexandria is a REIT focused on science and technology real estate in major North American innovation markets. At quarter-end, it reported 18.8 million RSF of North American operating and development/redevelopment properties, plus a 5.6 million-square-foot future development pipeline.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $226.1 million | $204.2 million | $442.2 million | $400.9 million |
| Net income (loss) attributable to common stockholders | $(127.6) million | $31.3 million | $(131.5) million | $49.1 million |
| Diluted EPS | $(1.72) | $0.44 | $(1.79) | $0.69 |
| FFO per share, diluted, as adjusted | $1.36 | $1.31 | $2.70 | $2.59 |
| AFFO per share, diluted | $1.28 | $1.08 | $2.49 | $2.18 |
Revenue rose 10.7% in Q2 and 10.3% year to date. GAAP losses were driven primarily by real estate impairment charges: $156.1 million in Q2 and $185.1 million year to date, principally related to dispositions of assets in Asia. The six-month loss also included a $12.5 million preferred-stock redemption charge. Adjusted FFO per share increased 3.8% in Q2 and 4.2% year to date.
- Property operations: Q2 same-property NOI increased 4.9% (6.4% cash basis); six-month growth was 5.2% (6.1% cash basis). North American operating-property occupancy was 97.0% at June 30, compared with 95.9% a year earlier.
- Leasing: Q2 renewals and re-leasing achieved rental-rate increases of 27.1% GAAP and 9.3% cash on 647,268 RSF. Six-month increases were 28.6% and 11.0%, respectively.
- Margins: Q2 adjusted EBITDA margin was 66%, versus 65% a year earlier; operating margin was reported at 70%.
- Cash flow: For the six months, operating cash flow was $172.1 million, up from $151.4 million. Investing used $374.0 million, including $363.1 million of real estate additions; financing provided $333.6 million. Cash and cash equivalents ended at $256.0 million, versus $125.1 million at year-end 2015.
Balance sheet, debt and liquidity
Total assets were $9.14 billion and total liabilities $4.78 billion at June 30, 2016. Consolidated debt was approximately $4.12 billion, with a weighted-average interest rate of 3.52% and remaining term of 5.8 years. About 90% was fixed-rate or hedged; 10% was unhedged variable-rate debt. Net debt to adjusted EBITDA was 6.8x on a quarter-annualized basis and 6.9x trailing 12 months, compared with 6.6x and 7.0x, respectively, at year-end 2015. Fixed-charge coverage was 3.5x for Q2 annualized and trailing 12 months.
Reported liquidity was approximately $2.4 billion, including cash, available-for-sale securities, and borrowing capacity. The company reported covenant compliance, including a 33.3% leverage ratio against a maximum 60.0% and 3.28x fixed-charge coverage against a minimum 1.50x under its bank facilities. Common dividends declared were $0.80 per share for Q2, up 4% year over year.
Material changes and management outlook
- Management attributed operating growth to higher rents and occupancy, along with development and redevelopment projects placed into service. Its development pipeline included 3.46 million RSF expected to deliver from 2016 through 2018, 81% leased overall, with projected incremental annual NOI of $195 million to $210 million upon stabilization.
- In June, Alexandria agreed to acquire One Kendall Square, a 644,771-RSF Cambridge campus, for $725 million, including assumption of a $203 million secured note. Closing remained subject to lender approval and customary conditions.
- For 2016, guidance as updated August 1 (after quarter-end) was diluted EPS of $(1.19) to $(1.13), FFO per share of $3.94 to $4.00, and adjusted FFO per share of $5.48 to $5.54. Forecast same-property NOI growth was 2.5%–4.5% (4.0%–6.0% cash basis); year-end operating occupancy was projected at 96.5%–97.1%. Guidance is based on management assumptions and is not a guarantee.
- Management targeted year-end annualized net debt/adjusted EBITDA of 6.2x–6.6x, with a longer-term goal below 6.0x. It expected 2016 construction spending of $760 million–$860 million and projected $300 million–$400 million of real estate sales.
- After quarter-end, Alexandria arranged forward sales of 7.5 million common shares at a public offering price of $101 per share, with estimated net proceeds of $724 million, intended to fund the pending acquisition. It also amended its credit line, increasing commitments to $1.65 billion, extending maturity to October 2021, and reducing the spread to LIBOR + 1.00%. A $200 million repayment of its 2019 bank term loan was also completed.
- Alexandria committed to exit its remaining Asia real estate holdings; the assets were classified held for sale and written down. Management expected dispositions over several quarters. The filing also identifies risks from LIBOR changes or replacement, market and tenant conditions, project execution and costs, access to capital, and foreign currency exposure.
Key facts for investors to verify
- Progress, pricing, and proceeds from the Asia asset sales, and whether further impairments or foreign-currency effects arise.
- Whether One Kendall Square closes on expected terms and timing, including lender consent and settlement of the forward share sales; assess resulting dilution and leverage.
- Leasing, delivery schedules, cost-to-complete, and stabilization assumptions for the development pipeline and the resulting NOI and cash flow.
- Execution against 2016 guidance, especially adjusted FFO, same-property NOI, year-end leverage, construction spending, and asset-sale targets.
- Exposure to variable rates and LIBOR transition or volatility, including the effectiveness and costs of hedges.