Alexandria Real Estate Equities, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Alexandria is a REIT focused on science and technology properties in urban innovation clusters. This unaudited filing covers the three and six months ended June 30, 2015, compared with the same periods in 2014. At quarter-end, the company reported 18.8 million rentable square feet of operating properties and current value-creation projects, plus a 12.3 million-square-foot near-term and future development pipeline.
Financial and operating highlights
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $204.2 million | $176.4 million | $400.9 million | $352.6 million |
| Income from continuing operations | $38.4 million | $35.5 million | $63.5 million | $76.4 million |
| Net income attributable to common stockholders | $31.3 million; $0.44/share | $27.9 million; $0.39/share | $49.1 million; $0.69/share | $60.6 million; $0.85/share |
| FFO per diluted share | $1.31 | $1.19 | $2.59 | $2.36 |
| Operating cash flow | Not separately presented for the quarter | $151.4 million | $144.5 million |
- Quarterly revenue rose 15.7%; reported management drivers included development and redevelopment projects placed in service, acquisitions, and higher tenant recoveries. Six-month revenue increased 13.7%.
- Q2 same-property NOI increased 0.5% on a GAAP basis and 4.7% on a cash basis; six-month growth was 1.4% and 6.2%, respectively. Q2 operating margin was 70% and adjusted EBITDA margin was 65%.
- North American operating-property occupancy was 95.9% at June 30, down from 97.0% at December 31, 2014. The filing cites large lease expirations at properties in Greater Boston and Research Triangle Park as factors in declines in those markets.
- Leasing activity was strong: 1.9 million square feet leased in Q2, described as the company’s highest quarterly volume, and 2.9 million square feet in the first half. Q2 rent increases on renewals and re-leasing were 14.5% including straight-line rent and 7.0% cash basis.
- Cash and cash equivalents were $68.6 million, down from $86.0 million at year-end. Restricted cash was $44.2 million. Reported total liquidity, including available credit and construction-loan commitments, was $1.071 billion.
- Consolidated debt was approximately $4.093 billion, up from approximately $3.679 billion at December 31, 2014. Weighted-average debt interest rate was 3.07%, and weighted-average remaining term was 5.4 years. The company reported 22% of debt as unhedged variable-rate debt.
- Net debt to adjusted EBITDA was 7.5x on a Q2 annualized basis; fixed-charge coverage was 3.4x. The filing’s net-debt calculation includes Alexandria’s share of unconsolidated joint-venture debt and cash.
- Six-month investing cash outflow was $316.0 million, including $226.3 million of real-estate additions and $137.5 million of property purchases, partly offset by $92.5 million of real-estate sale proceeds. Dividends declared were $0.77 per common share for Q2, versus $0.72 in Q2 2014.
Material changes versus the prior comparable period
- Q2 common-stockholder net income rose to $31.3 million from $27.9 million, while six-month common-stockholder net income fell to $49.1 million from $60.6 million. The first-half comparison includes a $14.5 million real-estate impairment in 2015; 2014 included a $0.8 million gain on land sales.
- First-half interest expense increased 36.5% to $49.9 million. Management attributed the increase primarily to higher outstanding debt and reduced interest capitalization as development projects entered service. Depreciation and amortization also increased, reflecting acquired and newly placed-in-service properties.
- Other comprehensive income was $84.7 million for the first half, primarily reflecting unrealized gains on marketable securities; this is distinct from operating income. The fair value of available-for-sale marketable securities rose to $172.6 million from $74.3 million at year-end.
- In June, Alexandria repaid $25 million of a bank term loan, extended the remaining $350 million loan maturity and reduced its margin to LIBOR plus 1.10%. It also extended a $47.2 million secured construction loan by one year.
Guidance, outlook, risks and unusual items
- 2015 diluted EPS guidance was $1.44–$1.50; diluted FFO guidance was $5.21–$5.27 per share, with the midpoint increased by $0.02 to $5.24. Key assumptions included year-end North American operating occupancy of 96.9%–97.4%, same-property NOI growth of 0.5%–2.5% (5%–7% cash basis), and renewal/re-leasing rent increases of 14%–17% (8%–10% cash basis).
- Full-year 2015 construction-spending guidance was $600–$700 million. Management forecast year-end net debt to adjusted EBITDA below 7.0x and a fixed-charge coverage ratio of 3.0x–3.5x, subject to market conditions, leasing, development completion, and asset sales.
- Management expects highly leased development projects and recently completed projects to contribute future rent, NOI, and cash flow. It also cautioned that project completion will shift certain costs, including interest, from capitalization to expense.
- As of June 30, remaining contracted construction and improvement costs were approximately $651.6 million; the company also reported approximately $83.7 million of investment funding commitments. Certain government-agreement development obligations require approximately 300,000 square feet by 2016 and 100,000 square feet by 2017; failure to satisfy, extend, or amend them could result in default under those agreements.
- Unusual items included the $14.5 million impairment and subsequent sale of a vacant Hyderabad building, and $9.2 million of realized foreign-currency translation losses from sales in Canada and India. A $189,000 debt-extinguishment loss arose from loan-fee write-offs.
- Subsequent events: Alexandria agreed to sell a 70% interest in 225 Binney Street for $190.1 million, expected to close in Q4 2015; began development of 100 Binney Street; and acquired 10290 Campus Point Drive for $105 million, with a 15.5-year lease to Eli Lilly.
- Risks identified include refinancing and capital availability, interest-rate and counterparty exposure, tenant and science-sector conditions, development execution, foreign exchange, and regulatory or economic changes. A 1% interest-rate increase was estimated to reduce annualized future earnings by $7.2 million, after swaps. Management stated disclosure controls were effective as of June 30, 2015.
Important facts for investors to verify
- Review the reconciliation and definitions of FFO, AFFO, NOI, and adjusted EBITDA; these are non-GAAP measures and may not be comparable across REITs.
- Track occupancy, lease expirations, concessions, and conversion of signed or negotiated development leases into rent and cash flow.
- Verify delivery dates, total costs, and yields for the development pipeline, particularly projects with costs or yields still listed as TBD.
- Monitor execution and proceeds from planned asset sales, including the 225 Binney Street transaction, and the use of proceeds to fund acquisitions, construction, and debt.
- Assess leverage, variable-rate exposure, refinancing needs, covenant headroom, and whether management’s year-end leverage and liquidity objectives are achieved.
- Consider the effects of the Hyderabad impairment, foreign-currency exposures, and the large unrealized securities gains on reported results and equity.