ALEXANDRIA REAL ESTATE EQUITIES, INC. quarterly report, Q2 FY2014

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Alexandria Real Estate Equities, Inc. — Q2 2014 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2014. Alexandria is a REIT focused on Class A life-science and technology properties in major innovation markets. Its portfolio included 187 properties and 17.9 million rentable square feet in operating, development, and redevelopment projects; 52% of annualized base rent came from investment-grade tenants.

Financial performance and position

Amounts are in millions of dollars unless stated otherwise. Income statement and cash-flow figures are unaudited.

  • Q2 revenue: $176.4, up 14.6% year over year; rental revenue was $135.0, up 17.9%. Six-month revenue: $352.6, up 16.0%.
  • Q2 net income attributable to common stockholders: $27.9, or $0.39 per diluted share, versus $25.5, or $0.38, in Q2 2013. Six-month results were $60.6, or $0.85 per share, versus $47.9, or $0.74.
  • Q2 income from continuing operations: $35.5, up 9.7%. Total expenses rose 15.9% to $140.9, including depreciation and amortization of $57.3, up 23.7%, and interest expense of $17.4, up 9.1%.
  • Property operations: Q2 NOI was $124.0, up 15.2%; same-property NOI rose 5.3% (5.7% cash basis). Six-month NOI was $247.7, up 16.6%; same-property NOI rose 4.5% (5.0% cash basis). Management reported a 70% Q2 operating margin.
  • REIT supplemental measures: Adjusted diluted FFO per share was $1.19 for Q2, up 11.2%, and $2.36 for six months, up 8.3%. Adjusted diluted AFFO per share was $1.02 for Q2 versus $1.00, and $2.02 for six months versus $2.07. These non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.
  • Cash flow: Six-month operating cash flow was $144.5, essentially flat year over year. Investing used $273.2, including $210.8 of property additions and $97.8 of property purchases; financing provided $131.9. Cash and equivalents ended at $61.7, versus $57.7 at year-end.
  • Balance sheet and debt: Total assets were $7.82 billion, versus $7.53 billion at December 31, 2013. Consolidated debt was $3.33 billion, versus $3.06 billion; net debt was $3.25 billion. Debt was 72% fixed or hedged and 28% unhedged variable-rate at quarter-end; weighted average interest rate was 3.03% and remaining term 5.1 years. Net debt/adjusted EBITDA was 7.2x on a quarter-annualized basis and 7.4x trailing 12 months, compared with 6.6x and 7.2x, respectively, at year-end.
  • Liquidity: At June 30, cash plus available credit and construction-loan commitments totaled approximately $1.21 billion. After the July debt offering and related repayments, management cited pro forma liquidity of $1.8 billion and unhedged variable-rate debt of 7% of total debt.

Material changes and operating trends

  • Revenue growth reflected properties acquired or delivered since early 2013 as well as improved same-property occupancy and rents. Same-property occupancy was 96.6% for Q2 versus 93.4% a year earlier; North American operating-property occupancy was 96.9% at June 30.
  • Development and redevelopment deliveries and acquisitions expanded the income-producing portfolio. During the first half, acquisitions included operating and redevelopment properties in San Diego and Greater Boston, plus the $50.0 million 500 Townsend Street land purchase in San Francisco.
  • Interest expense increased despite lower gross interest costs, primarily because less interest was capitalized as projects were completed and placed in service. Depreciation also rose with acquisitions and delivered projects.
  • Six-month other income declined to $4.4 from $6.6, including lower investment income. Q2 investment losses were $1.4 versus investment income of $2.1 a year earlier. Separately, unrealized marketable-security gains increased other comprehensive income by $16.5 for the first half and were not recognized in earnings.
  • Common dividends declared for Q2 were $0.72 per share. Six-month common dividends paid were $98.9; preferred dividends paid were $12.9.

Guidance, outlook, risks, and unusual items

  • 2014 guidance: Diluted EPS of $1.63–$1.69; adjusted diluted FFO per share of $4.74–$4.80. Assumptions included year-end North American operating occupancy of 96.7%–97.2%, same-property NOI growth of 3%–5% (4%–6% cash basis), and renewal/re-leasing rate increases of 11%–14% (4%–6% cash basis).
  • Capital plans: 2014 construction spending guidance was $560–$620 million and acquisitions guidance $100–$200 million. Management expected $500–$600 million of growth, including construction, could be funded in 2015 through operating cash flow after dividends and EBITDA growth, while targeting net debt to adjusted EBITDA of 6.5x by year-end 2015.
  • Post-quarter financing: In July, Alexandria issued $700 million of senior notes at a weighted average rate of 3.5% and average maturity of 9.6 years. Net proceeds of $694 million repaid $125 million of the 2016 term loan and $569 million of line-of-credit borrowings; the term-loan repayment generated a $0.5 million debt-extinguishment loss.
  • Development execution: Management said 79% of North American development and redevelopment projects were leased or under negotiation. The 360 Longwood Avenue joint venture project was 37% pre-leased, with estimated total completion cost of $350 million. At 75/125 Binney Street, tenant ARIAD was reassessing plans for the facility; design and budget approvals were delayed, and management expected to update cost and yield estimates.
  • Commitments and exposures: Remaining contracted construction costs were approximately $323.4 million; the company also had $50.4 million of investment commitments and $13.8 million of letters of credit and performance obligations. Certain development agreements require about 300,000 square feet of construction by 2016, with estimated development cost of $125–$175 per square foot; failure to satisfy, extend, or amend obligations could result in default.
  • Key risks include life-science tenant and industry conditions, development costs and lease-up, access to capital and refinancing, variable interest rates, REIT qualification, foreign operations, and broader economic or credit-market conditions. A 1% rate increase was estimated to reduce annualized future earnings by $5.7 million after hedging.
  • A $19.0 million land sale generated a $0.8 million gain in the first half. Four properties with $7.7 million of book value were classified as held for sale. Management cautioned that interim results are not necessarily indicative of full-year results.

Investor verification points

  • Verify leasing, occupancy, and delivery progress against the company’s development schedule, especially ARIAD’s plans at 75/125 Binney Street and lease-up of newly delivered space.
  • Track net leverage, variable-rate exposure, debt maturities, and whether the July refinancing produces the stated liquidity and credit-metric improvements.
  • Assess whether 2014 construction and acquisition spending, land-sale proceeds, and 2015 funding expectations remain consistent with guidance and cash generation.
  • Review construction commitments, joint-venture funding and loan terms, and the development-agreement deadlines and potential remedies.
  • Distinguish recurring property performance from non-GAAP FFO/AFFO, land-sale gains, investment gains or losses, and unrealized investment marks.