Alexandria Real Estate Equities, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 5, 2019. The filing also reports fourth-quarter results. Alexandria is a REIT focused on life science and technology properties in major North American innovation markets.
Business and operating context
At year-end, the company had 237 North American properties and 22.4 million RSF of operating space. Operating-property occupancy was 97.3%, versus 96.8% a year earlier. Its development and redevelopment pipeline included 3.9 million RSF under construction or pre-construction, with another 6.8 million SF of intermediate-term and future projects. Approximately 97% of leases were triple-net; 52% of annual rental revenue came from investment-grade or publicly traded large-cap tenants.
Financial and operating performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $1.327 billion | $1.128 billion |
| Net income attributable to common stockholders | $364.0 million; $3.52 diluted EPS | $145.4 million; $1.58 diluted EPS |
| Funds from operations, as adjusted, attributable to common stockholders | $682.0 million; $6.60 per diluted share | $554.5 million; $6.02 per diluted share |
| Net cash provided by operating activities | $570.3 million | $450.9 million |
| Net operating income (cash basis) | $830.5 million | $675.8 million |
| Dividends declared per common share | $3.73 | $3.45 |
Revenue increased 17.7%; rental revenue rose 17.1%, reflecting acquired properties and projects placed into service, as well as rent growth and occupancy gains in the same-property portfolio. Same-property NOI increased 3.7% (9.2% on a cash basis); the overall operating margin was 71%. Leasing totaled 4.7 million RSF, the company’s second-highest annual volume, with renewal and re-leasing rate increases of 24.1% (14.1% cash basis).
GAAP earnings included $136.8 million of investment income, including $99.6 million of unrealized gains, and a $35.7 million gain on sale of a joint-venture interest. The new investment accounting standard made fair-value changes flow through earnings, increasing volatility. Adjusted FFO per share, which excludes specified investment and other items, increased 9.6%.
In the fourth quarter, revenue was $340.5 million, while net loss attributable to common stockholders was $31.7 million, or $0.30 per diluted share. The quarter included $94.9 million of unrealized investment losses; these fair-value changes do not by themselves indicate the performance of rental properties.
Debt, liquidity, and capital allocation
Total debt was $5.48 billion at year-end, up from $4.76 billion. Total assets were $14.46 billion and total equity was $7.88 billion. Approximately 97% of debt was fixed-rate or hedged; unhedged variable-rate debt was 3%. Net debt to adjusted EBITDA was 5.4x on a quarter-annualized basis and 5.6x on a trailing-12-month basis. The company reported $2.45 billion of liquidity, including $1.99 billion available under its $2.2 billion unsecured credit facility, cash and restricted cash, and publicly traded investments.
Operating cash flow increased $119.5 million year over year. Investing activities used $2.16 billion, primarily for real estate acquisitions, construction, and investments; financing activities provided $1.59 billion, including common equity issuance. The company issued $900 million of senior notes in 2018 and extended its credit-line and term-loan maturities to January 2024. Common shares outstanding increased, in part due to equity issuance. The board declared $3.73 per common share for 2018, up 8% year over year.
Outlook, commentary, and material risks
For 2019, management’s February 4 guidance was diluted EPS of $1.95–$2.15 and adjusted FFO per diluted share of $6.85–$7.05. Assumptions included year-end operating occupancy of 97.7%–98.3%, same-property NOI growth of 1%–3% (6%–8% cash basis), and construction spending of $1.25–$1.35 billion. Management anticipated about $42 million of annual cash-rent growth as initial free-rent periods expire on recently delivered projects. Guidance is subject to market, leasing, financing, and construction uncertainty.
Key risks include development cost, timing, and lease-up; tenant credit and dependence on life science and technology funding; concentration in a limited number of innovation markets; interest-rate, refinancing, and capital-market risks; and environmental, natural-disaster, and insurance exposures. A new San Francisco commercial rent tax took effect January 1, 2019; the company estimated $3.7–$4.6 million of incremental annual expense, about 90% of which it expected to recover from tenants. PG&E’s Chapter 11 filing raised a potential utility-service risk for San Francisco properties, although management considered an extended disruption highly unlikely. The filing reported no material pending legal proceedings and stated that internal controls were effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Year-end contractual construction commitments were approximately $829.9 million. The company also had approximately $248.3 million of investment funding commitments. Lease accounting changes effective January 1, 2019 resulted in recognition of a $218.7 million lease liability for lessee arrangements.
Important facts for investors to verify
- Reconcile GAAP earnings growth with fair-value investment gains, property-sale gains, and the company’s adjusted FFO measure.
- Track delivery, leasing, total cost, and realized yields of the 3.9 million RSF active pipeline against 2019 guidance and the projected construction budget.
- Review debt maturities, variable-rate exposure, leverage, liquidity, and planned 2019 debt and equity issuance.
- Monitor occupancy, lease renewals, tenant credit, and the 2019 San Francisco tax recovery and PG&E-related service exposure.
- Confirm the outcome of the planned 75/125 Binney Street partial-interest sale and the use of proceeds; the transaction was expected to close in first-quarter 2019.