Alexandria Real Estate Equities, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report. The company is a REIT focused on life science, technology, and agtech properties in major North American innovation markets.
Business context and operating position
At year-end, Alexandria reported 39.2 million square feet across operating properties and its development pipeline, including 27.0 million operating square feet. North American operating-property occupancy was 96.8%, compared with 97.3% a year earlier; excluding vacancy at recent acquisitions, management reported 97.8%. The portfolio comprised 291 properties and 622 tenants. Investment-grade or publicly traded large-cap tenants represented 50% of annual rental revenue, and the weighted-average remaining lease term was 8.1 years.
Financial and operating metrics
| Metric | 2019 | 2018 | Change or context |
|---|---|---|---|
| Total revenue | $1.531 billion | $1.327 billion | Up 15.4% |
| Net income attributable to common stockholders | $351.0 million | $364.0 million | Diluted EPS fell to $3.12 from $3.52 |
| FFO per diluted share, as adjusted | $6.96 | $6.60 | Up 5.5%; non-GAAP measure |
| Net operating income (NOI) | $1.086 billion | $946.3 million | Up 14.7% |
| NOI, cash basis | $951.8 million | $830.5 million | Up 14.6% |
| Same-property NOI growth | 3.1% | 3.7% | Cash-basis growth was 7.1%, versus 9.2% |
| Net cash from operating activities | $683.9 million | $570.3 million | Up $113.5 million |
| Capital spending on construction | $1.317 billion | $927.2 million | Increased with development activity |
Leasing reached a company record of 5.1 million square feet. On 2.4 million square feet of renewals and re-leasing, rental rates increased 32.2% including straight-line rent effects and 17.6% on a cash basis. Approximately 97% of leases were triple net, 95% included annual rent escalations, and 96% allowed recovery of specified capital expenditures. The common dividend declared was $4.00 per share, up 7% from 2018.
Balance sheet, debt, and liquidity
- Total debt was $6.78 billion, up from $5.48 billion; 94% was fixed-rate, with a 3.91% weighted-average interest rate and 10.4-year weighted-average remaining term.
- Cash, cash equivalents, and restricted cash totaled $242.7 million. Reported liquidity was $2.38 billion, including $1.816 billion of availability on the $2.2 billion credit line and $318.6 million of publicly traded investments.
- Net debt and preferred stock to Adjusted EBITDA was 5.7x on a fourth-quarter annualized basis and 6.1x on a trailing-12-month basis. Management attributed a temporary fourth-quarter increase to acquisitions that closed in December.
- Debt covenants were reported as met. The company had no outstanding preferred stock or interest-rate hedges at year-end; $384 million was outstanding on its variable-rate credit line.
Material changes and unusual items
- Revenue growth reflected acquisitions and development projects placed in service, as well as rent increases. Acquisitions added 47 properties for approximately $2.3 billion during 2019.
- Common-stockholder net income declined despite revenue growth. Investment income of $194.6 million included $161.5 million of unrealized gains, while early debt extinguishment charges were $47.6 million and real-estate impairments were $12.3 million. These and other corporate-level items make GAAP earnings more volatile than property operating measures.
- In 2019, the company issued $2.7 billion of senior notes and repaid $1.6 billion of debt, including refinancing near-term notes and repaying its $350 million bank term loan. It also raised $1.2 billion in net proceeds from common-stock issuance and received about $1.0 billion in contributions from and sales of noncontrolling interests.
- Adoption of the new lease accounting standard in 2019 changed presentation and added a $3.5 million cumulative adjustment to retained earnings. It also resulted in recognition of an operating lease liability and right-of-use asset; prior-year rental revenue and tenant recoveries were combined for presentation.
Guidance and management commentary
As of February 3, 2020, management projected 2020 diluted EPS of $2.17–$2.37 and FFO per diluted share of $7.28–$7.48. It forecast year-end North American operating occupancy of 95.4%–96.0%, same-property NOI growth of 1.5%–3.5% (5.0%–7.0% cash basis), and rental-rate increases on renewals and re-leasing of 28%–31% (14%–17% cash basis). The filing cautions that actual results may differ materially from guidance.
Management projected 2020 construction spending of $1.55–$1.65 billion and planned to fund investment through operating cash after dividends, debt, asset and partial-interest sales, and equity. A January 2020 forward equity sale covering 6.9 million shares was expected to yield approximately $1.0 billion before specified adjustments. The company also set a 2020 leverage objective of no more than 5.2x net debt and preferred stock to Adjusted EBITDA, and fixed-charge coverage above 4.5x.
Principal risks and contingencies
- Development, redevelopment, acquisitions, and leasing require substantial capital and face construction-cost, schedule, permitting, pre-leasing, and tenant-retention risks.
- Results depend on demand and tenant financial health in life science, technology, and agtech, and are geographically concentrated in major innovation markets. Tenant research funding, regulatory outcomes, and access to capital can affect rent-paying capacity.
- Interest-rate, refinancing, credit-market, and capital-access risks remain relevant. The company had variable-rate debt and was preparing for the expected LIBOR transition, though it had substantially reduced LIBOR exposure.
- Environmental liabilities, hazardous materials used by tenants, earthquakes, wildfires, severe weather, and potentially inadequate insurance could affect properties and operations. The filing specifically discusses PG&E-related power shutoff risk for San Francisco-area properties.
- Other risks include joint-venture governance, REIT qualification, changes in tax or accounting rules, and valuation or liquidity risk in private-company investments. Management reported no pending legal proceedings expected to have a material adverse effect.
The company reported effective disclosure controls and internal control over financial reporting. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile GAAP EPS with FFO and adjusted FFO, particularly the effects of unrealized investment gains and debt-extinguishment costs.
- Track occupancy and lease-up at recent acquisitions, especially SD Tech, and compare actual 2020 leasing and rental-rate growth with guidance.
- Assess leverage, debt maturities, interest-rate exposure, and the effect of planned debt, equity, and asset-sale financing on per-share results.
- Monitor development spending, project delivery, pre-leasing, free-rent burn-off, and whether forecast yields and NOI materialize.
- Review tenant concentration and credit quality, joint-venture obligations, and material environmental, utility, and insurance exposures.