Alexandria Real Estate Equities, Inc. Reports Second Quarter Ended June 30, 2016 Financial and Operating Results

PASADENA, Calif., Aug. 1, 2016 /PRNewswire/ -- Alexandria Real Estate Equities, Inc. (NYSE: ARE) announced financial and operating results for the second quarter ended June 30, 2016.

Key highlights:

Solid internal and external growth

• Total revenue of $226.1 million, up 11%, for 2Q16, compared to $204.2 million for 2Q15;
• Executed leases for 816,512 RSF during 2Q16, even with minimal contractual lease expirations in 2016 and our highly leased value-creation pipeline;
• Rental rate increases of 27.1% and 9.3% (cash basis) during 2Q16 for lease renewals and re-leasing of space aggregating 647,268 RSF (included in the 816,512 RSF above);
• Same property NOI growth of 4.9% and 6.4% (cash basis) for 2Q16, compared to 2Q15; and
• 2Q16 key development projects placed into service:
  • 295,609 RSF to Illumina, Inc. at 5200 Illumina Way
  • 51,040 RSF to Dana-Farber Cancer Institute, Inc. at 360 Longwood Avenue
  • 62,595 RSF, including 34,017 RSF of vacancy, at 430 East 29th Street; improvement of initial cash yield to 7.0% from originally disclosed yield of 6.6%.

 

Results

 

Balance sheet management and disciplined allocation of capital

• Repurchased 1.0 million shares of Series D cumulative convertible preferred stock for $33.7 million, or $33.69 per share;
• $348.4 million gross proceeds from issuance of common stock under our ATM program; we anticipate filing another ATM program in the future;
• Executed two separate joint ventures for sales of partial interests in two San Diego properties:
  • Aggregate proceeds of $256.3 million will be received primarily in 2016
  • Cash capitalization rate of 5.7% (reflects Eli Lilly and Company lease expiration and relocation)
  • One joint venture closed in June 2016 and one will close in 2H16;
• Completed issuance of $350 million, 3.95% 10-year unsecured senior note payable;
• Closed a $304.3 million secured construction loan for 100 Binney Street;
• In July, we amended our unsecured senior line of credit and increased aggregate commitments available for borrowing to $1.65 billion, extended the maturity date to October 2021, and reduced the interest rate by 10 bps to LIBOR+1.00%; and
• Disciplined allocation of capital to value-creation pipeline of highly leased Class A buildings in urban innovation clusters, representing 35% NOI growth over 2015:

 

Timely, fully funded strategic acquisition

• In June 2016, we entered into a definitive agreement to acquire One Kendall Square, a 644,771 rentable square feet ("RSF"), seven-building collaborative science and technology campus in our key East Cambridge urban innovation cluster submarket. The purchase price is $725 million, including the assumption of a $203.0 million secured note payable. We expect to obtain approval by the lender for the loan assumption in the coming months and complete the acquisition soon thereafter.
• In July 2016, we executed an offering, subject to forward sale agreements, to sell 7.5 million shares of common stock at a public offering price of $101.00 per share. The forward sale agreements allowed us to lock in the price of the shares (subject to certain adjustments) to fund the pending acquisition of One Kendall Square. We expect to settle the forward sale agreements after obtaining approval by the lender to assume the One Kendall Square loan and completing the acquisition of One Kendall Square (see "Subsequent Events" below).

Accelerated timing of lower leverage goal

• Accelerated timing of net debt to adjusted EBITDA goal with 0.3x improvement by 4Q16 with a portion of proceeds from the forward sale agreements. Revised 4Q16 annualized target range is from 6.2x to 6.6x and was improved from range from 6.5x to 6.9x; and
• In July, we completed the partial principal repayment of $200 million, and reduced the balance under our 2019 Unsecured Senior Bank Term Loan to $400 million.

Increased common stock dividend and earned second consecutive CARE award

• Common stock dividend for 2Q16 of $0.80 per common share, up 3 cents, or 4%, over 2Q15; continuation of our strategy to share growth in cash flows from operating activities with our stockholders, while also retaining a portion for reinvestment; and
• 2016 recipient of the NAREIT Investor CARE (Communications and Reporting Excellence) Gold Award as a best-in-class REIT that delivers transparency, quality, and efficient communications and reporting to the investment community; our second consecutive (2016 and 2015) NAREIT Investor CARE Gold Award.

Core operating metrics

• Percentage of annualized base rent ("ABR") from investment-grade tenants as of 2Q16:
  • All tenants: 53%
  • Top 20 tenants: 82%
• Solid leasing activity, even with minimal contractual lease expiration in 2016 and our highly leased value-creation pipeline:

 

• Same property NOI growth:
  • 4.9% and 6.4% (cash basis) for 2Q16, compared to 2Q15
  • 5.2% and 6.1% (cash basis) for YTD 2Q16, compared to YTD 2Q15
• Occupancy for operating properties in North America of 97.0% as of 2Q16
• Operating margin at 70% for 2Q16
• Adjusted EBITDA margin at 66% for 2Q16

External growth

Visible, multiyear, highly leased value-creation pipeline

• Disciplined allocation of capital to value-creation pipeline of highly leased Class A buildings in urban innovation clusters, representing 35% NOI growth over 2015:

• 2Q16 key development projects placed into service:
  • 295,609 RSF to Illumina, Inc. at 5200 Illumina Way, in our University Town Center submarket in San Diego
  • 51,040 RSF to Dana-Farber Cancer Institute, Inc. at 360 Longwood Avenue in our Longwood Medical Area submarket in Greater Boston
  • 62,595 RSF, including 34,017 RSF of vacancy, at 430 East 29th Street in our Manhattan submarket in New York City; improvement of initial cash yield to 7.0% from originally disclosed yield of 6.6%
• 2Q16 commencement of development projects:
  • Additional building, 100% leased to Vertex Pharmaceuticals, Inc., located at 3215 Merryfield Row, aggregating 170,523 RSF at our ARE Spectrum project in our Torrey Pines submarket
  • Parking structure, 100% leased to Illumina, Inc., located at 5200 Illumina Way in our University Town Center submarket

One Kendall Square Acquisition

• In June 2016, we entered into a definitive agreement to acquire One Kendall Square, a 644,771 RSF, seven-building collaborative science and technology campus in our key East Cambridge urban innovation cluster submarket located in Greater Boston. The purchase price is $725 million, including the assumption of a $203.0 million secured note payable. We expect to obtain approval by the lender for the loan assumption in the coming months and complete the acquisition soon thereafter. See pages 5 - 7 for additional information.

Balance sheet

Sales of partial interests in properties located in our University Town Center submarket of San Diego

• In June 2016, we entered into a joint venture agreement with TIAA Global Asset Management ("TIAA") to sell a 45% partial interest in 10290 Campus Point Drive, a 304,326 RSF redevelopment project in San Diego 100% leased to Eli Lilly and Company. Our partner is expected to fund substantially all of the remaining costs to complete the redevelopment. This sale of a partial interest closed in June 2016.
• Additionally, in June 2016, we entered into a separate joint venture agreement with TIAA to sell a 45% partial interest in 10300 Campus Point Drive, consisting of 449,759 RSF, primarily leased to Celgene Corporation, Eli Lilly and Company, and The Regents of the University of California. This sale of a partial interest will close in 2H16.
• Total gross estimated proceeds from these two sales of partial interests are $256.3 million, representing a 5.7% cash capitalization rate. The cash capitalization rate reflects the near-term contractual lease expiration by Eli Lilly and Company of 125,409 RSF as they expand into 304,326 RSF at 10290 Campus Point Drive. Proceeds from the joint venture that closed in June 2016 were $31.0 million. Estimated proceeds of $45 million, $165 million, and $15 million are expected to be received by us in 3Q16, 4Q16, and 1Q17, respectively.

Improvement in balance sheet leverage and liquidity

• Net debt to adjusted EBITDA
  • 2Q16 annualized: 6.8x
  • 2Q16 trailing 12 months: 6.9x
  • 4Q16 annualized target range: 6.2x to 6.6x
  • Goal: less than 6.0x;
• 3.5x fixed-charge coverage ratio for 2Q16 annualized and trailing 12 months;
• $2.4 billion of liquidity;
• Repurchased 1.0 million outstanding shares of our Series D cumulative convertible preferred stock at an aggregate price of $33.7 million, or $33.69 per share, and recognized a preferred stock redemption charge of $9.5 million in 2Q16;
• Sold an aggregate of 3.7 million shares of common stock under our ATM program for gross proceeds of $348.4 million, or $95.31 per share, and net proceeds of $342.5 million in 2Q16;
• In April 2016, we closed a secured construction loan for our development project at 100 Binney Street in our Cambridge submarket:
  • Commitments available for borrowing of $304.3 million
  • Outstanding borrowings bear interest at a rate of LIBOR+200 bps
  • Executed 2.00% LIBOR rate cap agreements for notional up to $150 million;
• In June 2016, we executed the offering of $350.0 million of unsecured senior notes, due in 2027, at an interest rate of 3.95%. Net proceeds were used initially to reduce outstanding borrowings on our unsecured senior line of credit;
• $12.4 billion total market capitalization as of 2Q16;
• 16% of gross investments in real estate in North America in value-creation pipeline as of 2Q16, with 4Q16 target range from 10% to 13%;
• Limited debt maturities through 2018 and well-laddered maturity profile;
• 10% unhedged variable-rate debt as a percentage of total debt as of 2Q16; and
• During 2Q16, we repaid two secured notes payable aggregating $173.8 million with a weighted average interest rate of 5.59%.

LEED certifications

• 57% of total ABR expected from LEED projects upon completion of in-process projects.

Subsequent events

• In July 2016, we repurchased 1.1 million outstanding shares of our 7.0% Series D cumulative convertible preferred stock at an aggregate price of $39.3 million, or $36.31 per share.
• In July 2016, we executed an offering, subject to forward sale agreements, to sell an aggregate of 7.5 million shares of common stock, including 975,000 shares sold pursuant to the exercise in full of the underwriters' option to purchase additional shares of our common stock, at a public offering price of $101.00 per share. Net proceeds, after issuance costs and underwriters' discount, of $724.0 million, will be further adjusted as provided in the forward sale agreements. The forward sale agreements allowed us to lock in the price of the shares (subject to certain adjustments) to fund the pending acquisition of One Kendall Square. We expect to settle the forward sale agreements by issuing the common stock after obtaining approval by the lender to assume the One Kendall Square loan and completing the acquisition of One Kendall Square.
• In July 2016, we executed two interest rate swap agreements, with notional amounts aggregating $200 million at a fixed pay rate of 0.95%, effective on March 29, 2018.
• On July 29, 2016, we amended our unsecured senior line of credit and recognized a loss on early extinguishment of debt of $2.4 million related to the write-off of unamortized loan fees. Key changes are summarized below:

 

• On July 29, 2016, we completed a partial principal repayment of $200 million of our 2019 Unsecured Senior Bank Term Loan and reduced the total outstanding balance from $600 million to $400 million and recognized a loss on early extinguishment of debt of $869 thousand related to the write-off of unamortized loan fees.

Incremental Annual NOI from Development and Redevelopment Projects June 30, 2016

(1) Represents incremental annual NOI upon stabilization of our development and redevelopment projects, including only our share of real estate joint venture projects. RSF and percentage leased represents 100% of each property.

(2) Incremental annual NOI for 2016 of $65 million to $70 million (including $14 million of incremental NOI for 1H16) decreased from a range of $75 million to $80 million previously disclosed primarily due to the sale in June 2016 of a 45% partial interest in 10290 Campus Point Drive.

(3) Incremental annual NOI for 2017-2018 of $130 million to $140 million increased from range of a $120 million to $130 million previously disclosed due to adding the development of a new parking structure, 100% leased to Illumina, Inc., located at 5200 Illumina Way in our University Town Center submarket.

 

 

 

 

 

Disciplined Allocation of Capital and Management of Value-Creation Pipeline June 30, 2016

 

 

 

 

 

Dispositions June 30, 2016 (Dollars in thousands)

 

Guidance June 30, 2016 (Dollars in thousands, except per share amounts)

The following updated guidance is based on our current view of existing market conditions and other assumptions for the year ending December 31, 2016. There can be no assurance that actual amounts will be materially higher or lower than these expectations. See our discussion of "forward-looking statements" on page 11.

 

 

 

 

 

 

Earnings Call Information and About the Company June 30, 2016

We will host a conference call on Tuesday, August 2, 2016, at noon Eastern Time ("ET")/9:00 a.m. Pacific Time ("PT"), which is open to the general public to discuss our financial and operating results for the second quarter ended June 30, 2016. To participate in this conference call, dial 877-548-7905 or 719-325-4929 and confirmation code 4797929 shortly before noon ET/9:00 a.m. PT. The audio webcast can be accessed at www.are.com, in the "For Investors" section. A replay of the call will be available for a limited time from 3:00 p.m. ET/noon PT on Tuesday, August 2, 2016. The replay number is 888-203-1112 or 719-457-0820, and the confirmation code is 4797929.

Additionally, a copy of this Earnings Press Release and Supplemental Information for the second quarter ended June 30, 2016, is available in the "For Investors" section of our website at www.are.com or by following this link: http://www.are.com/fs/2016q2.pdf.

About the Company

Alexandria Real Estate Equities, Inc. (NYSE: ARE) is a fully integrated, self-administered, and self-managed urban office real estate investment trust ("REIT") uniquely focused on world-class collaborative science and technology campuses in AAA innovation cluster locations, with a total market capitalization of $12.4 billion and an asset base in North America of 24.4 million square feet as of June 30, 2016. The asset base in North America includes 18.8 million RSF of operating properties and development and redevelopment projects (under construction or pre-construction) and 5.6 million square feet of future ground-up development projects. Alexandria pioneered this niche in 1994 and has since established a significant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park.

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This document includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding our 2016 earnings per share attributable to Alexandria's common stockholders – diluted, 2016 FFO per share attributable to Alexandria's common stockholders – diluted, NOI, and our projected sources and uses of capital. You can identify the forward-looking statements by their use of forward-looking words, such as "forecast," "guidance," "projects," "estimates," "anticipates," "believes," "expects," "intends," "may," "plans," "seeks," "should," or "will," or the negative of those words or similar words. These forward-looking statements are based on our current expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts, as well as a number of assumptions concerning future events. There can be no assurance that actual results will not be materially higher or lower than these expectations. These statements are subject to risks, uncertainties, assumptions, and other important factors that could cause actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital (debt, construction financing, and/or equity) or refinance debt maturities, increased interest rates and operating costs, adverse economic or real estate developments in our markets, our failure to successfully place into service and lease any properties undergoing development or redevelopment and our existing space held for future development or redevelopment (including new properties acquired for that purpose), our failure to successfully operate or lease acquired properties, decreased rental rates, increased vacancy rates or failure to renew or replace expiring leases, defaults on or non-renewal of leases by tenants, general and local economic conditions, a favorable capital market environment, leasing activity, lease renewals, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission ("SEC"). Accordingly, you are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements are made as of the date of this earnings press release, and unless otherwise stated, we assume no obligation to update this information and expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, and risks to our business in general, please refer to our SEC filings, including our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

 

Consolidated Statements of Income June 30, 2016 (Dollars in thousands, except per share amounts)

 

 

Consolidated Balance Sheets June 30, 2016 (In thousands)

 

Funds From Operations and Adjusted Funds From Operations June 30, 2016 (In thousands)

The following table presents a reconciliation of net (loss) income attributable to Alexandria's common stockholders – basic, the most directly comparable financial measure presented in accordance with generally accepted accounting principles ("GAAP"), including our share of amounts from consolidated and unconsolidated real estate joint ventures, to FFO attributable to Alexandria's common stockholders – basic and diluted, FFO attributable to Alexandria's common stockholders – diluted, as adjusted, and adjusted funds from operations ("AFFO") attributable to Alexandria's common stockholders – diluted.

 

 

Funds From Operations Per Share and Adjusted Funds From Operations Per Share June 30, 2016 (In thousands, except per share amounts)

The following table presents a reconciliation of earnings per share attributable to Alexandria's common stockholders – basic, the most directly comparable financial measure presented in accordance with GAAP, including our share of amounts from consolidated and unconsolidated real estate joint ventures, to FFO per share attributable to Alexandria's common stockholders – diluted, FFO per share attributable to Alexandria's common stockholders – diluted, as adjusted, and AFFO per share attributable to Alexandria's common stockholders – diluted. Amounts allocable to unvested restricted stock awards are not material and are not presented separately within the table below. Per share amounts may not add due to rounding.

 

See footnotes on prior page.

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SOURCE Alexandria Real Estate Equities, Inc.