Alexandria Real Estate Equities, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; quarterly Q4 figures are identified separately below. The company is a REIT focused on Class A life-science and technology properties in urban innovation clusters.
Business context and operating portfolio
- At year-end, the portfolio included 193 properties and 18.7 million rentable square feet (RSF) of operating, development, and redevelopment space; an additional 12.8 million square feet was identified as near-term or future development capacity.
- North American operating-property occupancy was 97.0%, up from 95.9% in 2013. Investment-grade tenants accounted for 56% of annualized base rent (ABR); the three largest tenants represented 14.6% combined.
- Approximately 95% of leases were triple-net, 94% included contractual rent escalations, and 93% provided for recovery of certain capital expenditures.
Financial results and key metrics
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Total revenue | $726.9 million | $631.2 million | +15.2% |
| Income from continuing operations | $99.1 million | $134.5 million | -26.3% |
| Net income attributable to common stockholders | $72.1 million | $108.8 million | -33.7% |
| Basic and diluted EPS | $1.01 | $1.60 | Down $0.59 |
| Net operating income (NOI) | $508.6 million | $442.1 million | +15.0% |
| Same-property NOI growth | 4.5% (5.5% cash basis) | 1.8% (5.4% cash basis) | Cash growth broadly steady |
| Adjusted FFO per diluted share | $4.80 | $4.40 | +9.1% |
| AFFO per diluted share | $4.20 | $4.07 | +3.2% |
| Cash provided by operating activities | $334.3 million | $312.7 million | +$21.6 million |
Reported operating margin was 70%. Adjusted EBITDA was $468.5 million, with a 65% margin. These are company-defined non-GAAP measures and may not be comparable with similarly named measures at other REITs.
Q4 detail: Revenue was $188.7 million. Net loss attributable to common stockholders was $16.2 million, or a loss of $0.23 per share, versus net income of $36.2 million, or $0.51 per share, in Q4 2013. The Q4 2014 result included a reported net loss of $46.2 million, or $0.65 per share, from real-estate impairments and a preferred-stock redemption charge, partly offset by real-estate gains.
Balance sheet, debt, and liquidity
- Year-end total assets were $8.14 billion and total debt was $3.68 billion, compared with $3.06 billion of debt at year-end 2013. Cash and cash equivalents were $86.0 million; restricted cash was $26.9 million.
- Management reported approximately $1.45 billion of liquidity, including cash and undrawn credit and construction-loan commitments. Net debt to annualized Q4 Adjusted EBITDA was 7.2x; fixed-charge coverage was 3.3x.
- Weighted-average debt interest rate was 3.23%, average remaining debt term was 5.6 years, and 84% of debt was fixed-rate or hedged. Unhedged variable-rate debt was 16% of total debt.
- In July 2014, the company issued $700 million of senior notes at a weighted-average rate of 3.50% and average maturity of 9.6 years, using proceeds in part to reduce variable-rate bank debt.
- Common dividends declared were $2.88 per share, up from $2.61 in 2013. The board determines future distributions; REIT status generally requires distribution of at least 90% of taxable income.
Material changes and unusual items
- Revenue and NOI growth reflected property deliveries, acquisitions, higher occupancy, and same-property performance. Leasing activity covered 2.77 million RSF; renewal and re-leasing rent increases were 13.3% on a straight-line basis and 5.4% cash basis.
- Real-estate impairment charges totaled $51.7 million in 2014, versus none in 2013. The filing identifies, among other items, impairments related to land parcels and assets held for sale. A $24.7 million charge related to South San Francisco land parcels was followed by their sale for $31.0 million; a $9.6 million charge reduced the carrying value of 500 Forbes Boulevard to estimated fair value less selling costs.
- Interest expense rose 16.7% to $79.3 million, primarily because less interest was capitalized as projects were delivered. Gross interest incurred declined, while outstanding debt increased.
- Non-income-producing assets were 16% of gross real-estate investments at year-end. Management expected this to decline to 13% by March 31, 2015, as pre-leased projects were delivered.
Outlook, risks, and commitments
- 2015 guidance: diluted EPS of $1.60–$1.80 and adjusted FFO per diluted share of $5.10–$5.30. Assumptions include year-end North American operating occupancy of 96.9%–97.4%, same-property cash NOI growth of 5%–7%, and cash rent increases on renewals and re-leasing of 8%–10%.
- Projected 2015 construction spending was $645–$745 million. Planned capital sources also included $115–$135 million of operating cash flow after dividends, $390–$470 million of incremental debt, and $340–$440 million from asset sales. These projections depend on leasing, project delivery, asset-sale execution, operating performance, and capital-market conditions.
- Management cited a current value-creation pipeline of 2.3 million RSF that was 90% leased or under negotiation. It expressed confidence in further FFO and net asset value growth, while noting that development completions will increase expensed interest and other project costs.
- Risks include tenant credit and funding pressures in the science and technology industries; lease rollover and re-leasing costs; geographic concentration in urban innovation markets; development delays, cost overruns, and lease-up risk; rising interest rates, refinancing and capital access; and environmental, natural-disaster, foreign-currency, and regulatory exposures.
- Construction and redevelopment costs under contract were approximately $525 million, with payments expected over one to two years. The filing also reports approximately $75 million of investment funding commitments, $667.1 million of future ground-lease obligations, and development-agreement requirements for approximately 300,000 RSF by 2016 and 100,000 RSF by 2017.
- Management reported no pending legal proceedings expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Review the reconciliation and assumptions behind adjusted FFO, AFFO, NOI, and Adjusted EBITDA; these non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.
- Track delivery, lease commencement, costs, and tenant occupancy for the development pipeline, including any changes to project yields or budgets.
- Assess whether projected 2015 asset sales and construction spending were achieved, and how those transactions affected leverage and recurring NOI.
- Monitor debt maturities, variable-rate exposure, interest-rate hedges, and leverage against management’s 2015 guidance.
- Examine the causes and valuation assumptions behind the 2014 impairments, and the remaining assets held for sale.
- Review tenant concentration, upcoming lease expirations, and the sustainability of dividends relative to operating cash flow and capital needs.