Alexandria Real Estate Equities, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed March 1, 2011. The filing also reports fourth-quarter results. Alexandria is a REIT focused on life-science laboratory properties.
Business context and portfolio
- Owned 167 properties with approximately 13.7 million rentable square feet across U.S. markets and Canada; operating properties were 94.3% leased. Including redevelopment space, occupancy was 88.9%.
- Had 453 leases with 373 tenants. The three largest tenants represented 14.1% of annualized base rent; no tenant exceeded 10% of annual revenue.
- Approximately 96% of leases were triple-net, 91% included rent escalations, and 93% provided for recovery of certain capital expenditures.
Financial performance
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Total revenue | $487.3 million | $483.2 million | Up 0.9%; rental revenue was nearly flat, while tenant recoveries rose 10.0%. |
| Income from continuing operations before debt-extinguishment gain/loss | $124.5 million | $124.6 million | Essentially unchanged. |
| Net income attributable to common stockholders | $105.9 million | $105.0 million | Up slightly; 2010 included a $59.4 million land-sale gain and $45.2 million of debt-extinguishment losses. |
| Basic and diluted EPS | $2.19 | $2.72 | Down; 2010 continuing-operations EPS was $2.18 versus $2.57. |
| FFO attributable to common stockholders | $172.0 million | $222.6 million | Down 22.7%; FFO is a non-GAAP measure and not a substitute for operating cash flow. |
| Cash from operating activities | $219.3 million | $211.0 million | Up $8.3 million. |
| Cash used in investing activities | $(436.7) million | $(409.9) million | Greater investment outflow, including acquisitions and property additions. |
| Cash from financing activities | $237.9 million | $198.4 million | Included equity proceeds and net borrowing activity. |
Fourth quarter: Revenue was $132.2 million; net income attributable to common stockholders was $83.2 million and EPS was $1.52. The filing’s quarterly results reflect material nonrecurring items; investors should review the quarterly reconciliation before treating Q4 earnings as a run rate.
Balance sheet, debt, and liquidity
- Year-end total assets were $5.91 billion and total debt was $2.58 billion, down from $2.75 billion in 2009. Debt comprised approximately $790.9 million of secured notes, $1.498 billion under the unsecured line and term loan, and $295.3 million of convertible notes.
- Cash and cash equivalents were $91.2 million; restricted cash was $28.4 million. The company reported $219.3 million of operating cash flow for the year.
- Approximately 63% of debt was fixed-rate or hedged; 37% was unhedged variable-rate debt. A 1-percentage-point interest-rate increase was estimated to reduce annual future earnings by approximately $5.4 million.
- At December 31, 2010, reported covenant measures included a 36% leverage ratio, 39% unsecured leverage ratio, 2.0 fixed-charge coverage ratio, 14% unsecured debt yield, and 11% secured debt ratio. The company reported covenant compliance.
- In January 2011, the unsecured facility was expanded from $1.9 billion to $2.25 billion, with an additional $300 million accordion option. A $250 million unsecured term loan closed in February 2011; proceeds reduced line-of-credit borrowings. The $750 million term loan was due October 2012, subject to an extension option.
- Contractual obligations totaled $3.58 billion, including debt, estimated interest, and ground leases. The company also cited $107.5 million of remaining construction-contract costs and $52.1 million of investment commitments.
Material changes and unusual items
- Sold Mission Bay land parcels for approximately $278 million, recognizing a $59.4 million gain; proceeds were used to repay the unsecured line of credit. Also sold one Seattle property for approximately $11.8 million.
- Acquired seven properties totaling approximately 980,000 square feet for an aggregate purchase price of about $318 million.
- Retired substantially all $240 million of 8.00% convertible notes through an exchange and repurchase, and repurchased $82.8 million of 3.70% convertible notes. These transactions generated $45.2 million of debt-extinguishment losses in 2010.
- Issued 5.175 million common shares in a follow-on offering, generating approximately $342.3 million net proceeds; the 8.00% note exchange also issued 5.62 million common shares.
- Completed 303,000 square feet of redevelopment and 553,000 square feet of ground-up development; began two fully leased projects totaling approximately 220,000 square feet.
- Common distributions were $1.50 per share in 2010 versus $1.85 in 2009. The 2010 quarterly distribution increased to $0.45 in Q4 from $0.35 in each of the first three quarters.
Outlook, risks, and contingencies
- Management described core operations as steady but remained cautious about economic and credit-market conditions. It planned to complete active redevelopment of 755,463 square feet and active development of 475,818 square feet, while requiring substantial preleasing for future ground-up projects.
- Management intended to reduce debt as a proportion of capitalization over multiple years. Planned funding sources included operating cash flow, property sales, joint ventures, debt, and equity issuance. No formal earnings or FFO guidance is provided in the supplied filing text.
- Estimated remaining costs were approximately $110 million for active redevelopment and $70 million for active U.S. development. Management estimated $55 million to $65 million of 2011 construction spending in Asia.
- Key risks include refinancing and variable-rate exposure, covenant compliance, lease renewals and tenant credit, concentration in life sciences and selected geographic markets, construction cost and leasing execution, and environmental, regulatory, and REIT-qualification risks. Approximately 13.3% of rentable space was scheduled to expire in 2011; the company said about 523,000 square feet had been leased as of or after year-end and about 392,000 square feet was targeted for redevelopment.
- The company reported no pending legal proceedings expected to have a material adverse effect. It reported approximately $10.3 million of conditional asset-retirement obligations, primarily related to asbestos; environmental reviews had not identified material liabilities, though assessments may not reveal all conditions.
- Proposed lease-accounting and investment-property accounting changes were identified as potential sources of future volatility in reported results, balance-sheet measures, and debt-covenant calculations.
Important facts for investors to verify
- Reconcile annual and Q4 earnings, EPS, and FFO for the land-sale gain, debt-extinguishment losses, and other nonrecurring items.
- Review debt maturities, extension conditions, covenant definitions, and the effect of the 2011 credit amendments and term loan.
- Track leasing and occupancy progress, particularly 2011 expirations, redevelopment space, and the Illumina campus lease and development commitments.
- Assess development spending, preleasing, cost-to-complete estimates, and international project exposure.
- Confirm future common distributions: they are board-discretionary, and REIT distribution requirements do not guarantee a particular cash dividend.