Alexandria Real Estate Equities, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are noted separately below. Alexandria is a REIT focused on owning, developing, redeveloping, and operating life-science laboratory properties.
Business context and operating performance
At year-end, the portfolio comprised 178 properties and approximately 17.1 million rentable square feet, including 15.0 million square feet of operating space, 1.6 million under development, and 0.5 million under redevelopment. Operating properties were 93.4% leased. Investment-grade tenants represented 47% of annualized base rent (ABR); the three largest tenants together represented 14.7%.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $586.1 million | $548.2 million |
| Income from continuing operations | $101.4 million | $124.6 million |
| Net income attributable to common stockholders | $67.6 million | $102.0 million |
| Diluted EPS | $1.09 | $1.73 |
| Net operating income (NOI) | $411.6 million | $388.7 million |
| Operating margin | 70% | 71% |
| Cash provided by operating activities | $305.5 million | $247.0 million |
| Cash used in investing activities | $558.1 million | $733.6 million |
| Cash provided by financing activities | $314.9 million | $479.2 million |
Revenue increased 7%, and NOI increased 6%, while common-stockholder net income and diluted EPS declined. Higher depreciation and amortization, interest expense, general and administrative costs, impairments, and preferred-stock redemption costs contributed to the decline. Same-property NOI rose 3.5% on a cash basis but fell 0.5% on a GAAP basis. Adjusted EBITDA margin was 67%, versus 69% in 2011.
Fourth-quarter revenue was $154.2 million, compared with $139.2 million a year earlier; net income attributable to common stockholders was $21.0 million versus $27.0 million, and diluted EPS was $0.33 versus $0.44.
Year-end total debt was $3.18 billion, up from $2.78 billion. Cash and cash equivalents were $141.0 million, restricted cash was $39.9 million, and availability under the $1.5 billion unsecured credit line was approximately $0.9 billion. Management reported approximately $1.1 billion of liquidity, including credit-line availability and unrestricted cash. Net debt to annualized fourth-quarter Adjusted EBITDA was 7.3x (7.6x on a trailing-12-month basis), compared with 7.1x on the annualized fourth-quarter measure in 2011. Unhedged variable-rate debt was 30% of total debt, versus 21%; the weighted-average debt interest rate was 3.65%.
Material changes, financing, and unusual items
- Growth in revenue and NOI primarily reflected properties acquired or delivered since the start of 2011; total property area grew from 15.3 million to 17.1 million square feet.
- Operating-property occupancy declined to 93.4% from 94.9%, while occupancy including redevelopment properties improved to 89.8% from 88.5%.
- Leasing activity was the second-highest in company history: 187 leases covering 3.281 million square feet. Renewed or re-leased rents were down 2.0% on a cash basis and up 5.2% on a GAAP basis, on average.
- The company issued $550 million of 4.60% senior notes due 2022, amended and extended its credit line, issued $124.9 million net of Series E preferred stock, redeemed $129.6 million of Series C preferred stock, and raised $97.9 million net through common-stock sales under its at-the-market program.
- Reported unusual items included $11.4 million of real-estate impairment in discontinued operations, a $2.1 million land impairment, a $6.0 million preferred-stock redemption charge, and $2.2 million of debt-extinguishment losses. Investment income included a realized gain of approximately $5.8 million on an equity investment.
- 2012 asset sales totaled $75.1 million. Subsequent to year-end, sales included 1124 Columbia Street for approximately $42.6 million and Washington-area properties for approximately $41.4 million.
Outlook, risks, and contingencies
For 2013, management projected diluted EPS of $1.41–$1.61 and diluted FFO per share of $4.44–$4.64. Assumptions included cash same-property NOI growth of 4%–7%, GAAP same-property NOI growth of 0%–3%, year-end operating occupancy of 93.9%–94.3%, and net debt to Adjusted EBITDA of 6.5x. The leverage target depends on development deliveries, operating cash flow, asset sales, and other capital sources.
Projected 2013 development, redevelopment, and construction spending was $545–$595 million. Management also projected $325–$425 million of asset sales and common-stock issuance of $125–$175 million; these plans depend on market access, transaction execution, construction costs, leasing, and project timing. The company expects to reduce non-income-producing assets to 15%–17% of gross real estate by year-end 2013.
Principal risks include the concentration in life-science tenants and markets; tenant funding and research-spending pressures, including possible NIH and government budget reductions; lease rollover and re-leasing economics; development costs, timing, and lease-up; refinancing and covenant compliance; interest-rate exposure; and access to capital. Environmental, hazardous-material, weather, insurance, foreign-currency, cyber, and REIT-qualification risks are also disclosed. Approximately 7.9% and 8.4% of portfolio square footage was scheduled to expire in 2013 and 2014, respectively. Management reported no pending legal proceedings expected to have a material adverse effect. The independent auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2013 development deliveries and leasing support the stated EPS, FFO, occupancy, and NOI assumptions.
- Whether planned asset sales and capital issuance are completed on acceptable terms and deliver the targeted 6.5x leverage.
- How cash rents, tenant concessions, expirations, and occupancy evolve, particularly in properties under development or redevelopment.
- Debt maturities, credit-line capacity, covenant headroom, and sensitivity to interest rates given 30% unhedged variable-rate debt.
- Tenant concentration and exposure to life-science funding conditions, including government and NIH budget decisions.