Alexandria Real Estate Equities, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Business context
Alexandria is a self-managed REIT focused on office, laboratory, and technology properties in urban science and technology clusters. At year-end, its managed portfolio comprised 199 properties and approximately 20.1 million rentable square feet of operating, development, and redevelopment space, plus 12.0 million square feet of future development opportunities. North American operating-property occupancy was 97.2%; investment-grade tenants represented 54% of annualized base rent (ABR).
Financial and operating performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $843.5 million | $726.9 million | +16.0% |
| Income from continuing operations | $146.2 million | $99.1 million | +47.4% |
| Net income attributable to common stockholders | $116.9 million | $72.1 million | +62.1% |
| Diluted EPS | $1.63 | $1.01 | +$0.62 |
| FFO per diluted share, as adjusted | $5.25 | $4.80 | +9.4% |
| AFFO per diluted share | $4.43 | $4.20 | +5.5% |
| Net operating income (NOI), including share of JVs | $585.6 million | $508.6 million | +15.1% |
| Net cash provided by operating activities | $342.6 million | $334.3 million | +$8.3 million |
| Net cash used in investing activities | $722.4 million | $634.8 million | Use increased $87.6 million |
| Net cash provided by financing activities | $419.1 million | $331.3 million | +$87.8 million |
Same-property NOI increased 1.3% (4.7% on a cash basis); the same-property operating margin was 69%. Adjusted EBITDA margin was 65% in fourth-quarter 2015. The company executed leases covering 5.0 million square feet, a company record, and reported cash rental-rate increases of 9.9% on 2.2 million square feet of renewed or re-leased space. Common dividends declared were $3.05 per share, up 5.9% year over year.
Year-end total assets were $8.91 billion, total debt $3.97 billion, and total equity $4.28 billion. Cash and cash equivalents were $125.1 million. Reported liquidity was approximately $2.0 billion, including $1.35 billion available under the unsecured credit line, $349.4 million of remaining construction-loan commitments, $137.6 million of marketable equity securities, and cash. Net debt to Adjusted EBITDA was 6.6x on an annualized fourth-quarter basis and 7.0x on a trailing-12-month basis; fixed-charge coverage was 3.6x annualized.
Material changes and unusual items
- Revenue rose 16.0%, driven principally by development and redevelopment projects placed in service and acquisitions. Same-property rental revenue was nearly flat, increasing 0.1%; same-property operating expenses rose 5.3%.
- Interest expense increased 33.4% to $105.8 million, reflecting higher average debt and lower interest capitalization as projects entered service. The average debt balance increased to $4.11 billion from $3.40 billion.
- Real-estate impairment expense was $23.3 million, down from $51.7 million in 2014. The 2015 charge included $14.5 million for a Hyderabad property sold in March and $8.7 million for a Maryland property classified as held for sale.
- Alexandria sold partial interests in three core properties for approximately $443.4 million net proceeds. It retained control and continued consolidating the properties, accounting for the transactions as equity financing rather than property sales; $141.9 million was recorded in additional paid-in capital.
- Investment income increased to $18.9 million from $2.3 million, including gains and losses from equity investments. The company reported $117.6 million of unrealized gains on public investments at year-end; investment values are market-sensitive.
Outlook, risks, and contingencies
For 2016, management guided to diluted EPS of $1.44–$1.64 and adjusted diluted FFO per share of $5.41–$5.61. Guidance assumptions include 96.5%–97.1% year-end North American operating occupancy, 14%–17% rental-rate increases on renewals and re-leasing (6%–9% cash basis), and same-property NOI growth of 2%–4% (3.5%–5.5% cash basis). The company expects $800–$900 million of construction spending, approximately $150–$250 million of acquisitions, and $300–$400 million of real-estate sales. It expects 2016 year-end annualized net debt to Adjusted EBITDA of 6.5x–6.9x.
Projects targeted for 2016 delivery were 89% leased and expected to generate $75–$80 million of incremental annual NOI upon stabilization; 2017–2018 projects were 67% leased and expected to generate $105–$110 million. These are management estimates, dependent on construction, leasing, timing, costs, and market conditions.
Principal risks include tenant credit and concentration, dependence on science and technology sectors and their funding and research outcomes, geographic concentration, lease rollover and re-leasing costs, development execution and cost overruns, access to capital, leverage and refinancing, interest-rate exposure, joint-venture decision-making, environmental liabilities, natural disasters, foreign-currency exposure, and continued REIT qualification. The company had approximately $885.2 million of remaining construction costs under contract and approximately $87.6 million of commitments for non-real-estate investments. No material pending legal proceedings were reported. Management and the auditor concluded internal control over financial reporting was effective; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile stated liquidity and debt measures with debt maturities, covenant definitions, and the company’s pro-rata treatment of joint ventures.
- Track lease-up, delivery schedules, construction costs, and realized yields for the 2016–2018 development and redevelopment pipeline.
- Assess refinancing and funding needs against planned asset sales, construction spending, acquisitions, and the 2016 leverage targets.
- Review tenant credit, lease expirations, and the impact of science-sector funding or consolidation, especially for major tenants.
- Separate recurring property performance from investment gains, impairments, straight-line rent, and other adjustments underlying FFO, AFFO, and NOI.