Alexandria Real Estate Equities, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing also reports fourth-quarter results. Alexandria is a REIT focused on owning, operating, developing, and redeveloping life-science laboratory properties.
Business context and operating performance
- At year-end, the portfolio comprised 173 properties and approximately 15.3 million rentable square feet, including 818,020 square feet in active development and 919,857 square feet in redevelopment. Operating properties were 94.9% leased.
- Revenue is primarily rent and tenant expense recoveries. Approximately 95% of leases were triple-net; 94% included effective annual rent escalations.
- The company signed 190 leases covering approximately 3.4 million square feet, its highest annual leased volume to date. Renewal and re-leasing rates were 4.2% higher on a GAAP basis than expiring rents; cash rents were 1.9% lower. Average concessions were about two months.
Financial results and key metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $573.4 million | $485.7 million |
| Income from continuing operations | $136.2 million | $78.5 million |
| Net income attributable to common stockholders | $102.0 million | $105.9 million |
| Diluted EPS | $1.73 | $2.19 |
| Net operating income (NOI; non-GAAP) | $404.8 million | $353.6 million |
| Same-property NOI | $281.7 million | $283.5 million |
| FFO attributable to common stockholders (non-GAAP) | $258.6 million | $172.0 million |
| AFFO attributable to common stockholders (non-GAAP) | $250.5 million | $217.7 million |
| Cash from operating activities | $247.0 million | $227.4 million |
| Cash used in investing activities | $733.6 million | $445.2 million |
| Cash from financing activities | $479.2 million | $237.9 million |
- Revenue increased 18%; NOI increased 14%, primarily reflecting acquired properties and completed development projects. Same-property NOI declined 1%, mainly due to slightly lower occupancy; increased operating costs were largely recoverable from tenants.
- GAAP common-stockholder net income edged down despite higher continuing-operations income. Results included a $6.5 million debt-extinguishment loss in 2011, versus $45.2 million in 2010, while 2010 included $59.4 million of gains on Mission Bay land sales. Common shares outstanding also increased following the 2011 equity offering.
- Fourth-quarter 2011 revenue was $145.8 million; net income attributable to common stockholders was $27.0 million and diluted EPS was $0.44.
- Year-end total assets were $6.57 billion; total debt was $2.78 billion, versus $2.58 billion in 2010. Cash and cash equivalents were $78.5 million, with another $23.3 million restricted. Management reported approximately $1.2 billion of liquidity, including available credit and unrestricted cash.
- Net debt to Adjusted EBITDA improved to 7.1x from 7.4x; net debt to gross assets improved to 37% from 39%; fixed-charge coverage rose to 2.7x from 2.2x; and interest coverage rose to 3.4x from 2.7x. These are non-GAAP measures.
Material changes and financing
- In July 2011, the company received investment-grade credit ratings from two major agencies. During the year it amended or entered into unsecured bank facilities, including a $750 million term loan and a $600 million term loan, and increased its revolving credit commitment to $1.5 billion.
- Debt included $724.3 million of secured notes, $1.97 billion under the credit line and bank term loans, and $85.0 million of convertible notes at year-end. The $250 million 2012 bank term loan was due in October 2012. In January 2012, holders exercised repurchase rights on about $83.8 million of convertible notes; approximately $1.0 million remained outstanding by February 21, 2012.
- Unhedged variable-rate debt exposure fell to 21% at year-end from 51% at September 30, 2011; management targeted approximately 20% or less. The company expected that transitioning toward long-term fixed-rate unsecured debt would increase near- to medium-term interest costs.
- A May 2011 common-stock offering raised approximately $451.5 million net from 6.25 million shares, primarily to fund the $293 million acquisition of 409 and 499 Illinois Street and construction. Total common shares outstanding rose to 61.6 million from 55.0 million.
- Common dividends declared were $1.86 per share for 2011, versus $1.50 in 2010. Future distributions remain at the board’s discretion and are subject to liquidity, capital needs, REIT requirements, and preferred-dividend obligations.
Outlook, risks, and unusual items
- Management projected quarterly NOI to increase from $101.8 million in fourth-quarter 2011 to $111–$113 million in fourth-quarter 2012, mainly as development and redevelopment projects are completed and leased. The company expected approximately $553 million of 2012 development, redevelopment, and construction spending.
- The 2012 sources-and-uses plan estimated $899 million of sources and uses, including $250 million to repay the 2012 term loan and $85 million to retire convertible notes. Sources included $698 million of debt, equity, or joint-venture capital and $112 million of asset and land sales; unsecured-note proceeds were unspecified. Actual funding and requirements could differ materially.
- Management aimed to reduce non-income-producing assets from 24% of gross real estate assets toward 15% or less over time. It planned to be selective on acquisitions and generally require significant pre-leasing before new ground-up construction.
- Key risks include capital-market access and refinancing, covenant compliance, interest rates and hedge counterparties, project completion and lease-up, tenant credit and life-science-sector funding or regulatory pressures, lease expirations, geographic concentration, and environmental, regulatory, and REIT-qualification matters. Approximately 9.5% of portfolio square footage was scheduled to expire in 2012 and 9.8% in 2013.
- 2011 included a $1.0 million impairment charge on a property later sold, a $6.5 million debt-extinguishment loss, and a $46,000 gain on a land sale. No material adverse effect was expected from routine legal proceedings. The financial-statement and internal-control audits were unqualified; management reported effective disclosure and financial-reporting controls.
Important facts for investors to verify
- Whether projected 2012 NOI growth and delivery timelines for the active development and redevelopment pipeline are achieved.
- How the $250 million October 2012 term-loan maturity and remaining construction commitments are funded, and whether planned asset sales and capital raising occur on acceptable terms.
- Debt covenant headroom, borrowing costs, and the effectiveness and counterparty risk of interest-rate hedges as the debt mix changes.
- Lease renewals, actual cash rent spreads, tenant concessions, and exposure to the 2012–2013 lease expirations and major tenants.
- How common distributions compare with operating cash flow and capital requirements; FFO and AFFO are non-GAAP measures and are not substitutes for cash flow or available distributions.