Alexandria Real Estate Equities, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Alexandria is a REIT focused on life science and technology office campuses in major U.S. innovation markets. The filing is an annual report, not a standalone fourth-quarter filing.
Business and operating context
At year-end, the company reported 213 North American properties and 22.0 million RSF of operating, development, and redevelopment space. Operating-property occupancy was 96.8%, compared with 96.6% a year earlier. Investment-grade or large-cap tenants generated 55% of annual rental revenue; no individual tenant exceeded 3.7%. Approximately 97% of leases were triple net.
Financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $1.128 billion | $921.7 million |
| Rental revenue | $863.2 million | $673.8 million |
| Net income attributable to common stockholders | $145.4 million; diluted EPS $1.58 | $(151.1) million; diluted EPS $(1.99) |
| Adjusted FFO attributable to common stockholders | $554.5 million; $6.02 per diluted share | $421.3 million; $5.51 per diluted share |
| Net cash from operating activities | $450.3 million | $392.5 million |
| Net operating income | $802.5 million | $643.3 million |
| Same-property NOI growth | 3.1%; 6.8% cash basis | 4.7%; 6.0% cash basis |
| Adjusted EBITDA margin | 68% | 66% |
| Total debt at year-end | $4.765 billion | $4.164 billion |
| Common dividends declared per share | $3.45 | $3.23 |
Fourth-quarter 2017 revenue was $298.8 million and net income attributable to common stockholders was $36.8 million, or diluted EPS of $0.38.
Year-end total assets were $12.104 billion; cash and cash equivalents were $254.4 million, with another $22.8 million of restricted cash. Reported liquidity was approximately $2.0 billion, including undrawn credit capacity, a construction-loan commitment, available-for-sale securities, and cash. Net debt to Adjusted EBITDA was 5.9x on a trailing-12-month basis and 5.5x using annualized fourth-quarter EBITDA. Fixed-charge coverage was 4.1x trailing and 4.2x annualized fourth quarter. Approximately 99% of debt was fixed-rate or hedged; weighted-average debt interest was 3.87%.
Changes versus the prior year
- Revenue rose 22.4%, with rental revenue up 28.1%. Most rental growth came from properties acquired or placed into service after the start of 2016; same-property rental revenue increased 2.8%.
- Adjusted FFO per diluted share increased 9.3%. Operating cash flow grew 14.7%.
- GAAP common-stockholder results swung to positive income from a 2016 loss. The comparison is affected by 2016 real estate impairment charges of $209.3 million and preferred-stock redemption charges of $61.3 million; 2017 included $11.3 million of preferred-stock redemption charges and $8.3 million of non-real-estate investment impairments.
- Occupancy in operating properties improved slightly, while average same-property occupancy declined to 96.0% from 97.1%. Same-property NOI growth slowed to 3.1% from 4.7%, though cash-basis growth increased to 6.8% from 6.0%.
- Debt increased by approximately $600.8 million. The company issued $1.025 billion of unsecured notes, repaid $389.8 million of secured construction loans and repaid $200 million of its 2019 bank term loan. Common-share issuance provided $1.275 billion of net proceeds.
Management outlook, risks, and notable items
For 2018, management guided to diluted EPS of $2.04–$2.24 and diluted FFO per share of $6.45–$6.65, excluding changes in fair value of equity investments under the new accounting standard. Guidance assumptions include year-end operating occupancy of 96.9%–97.5%, same-property NOI growth of 2.5%–4.5% (9%–11% cash basis), and renewal/re-leasing rent increases of 13%–16% (7.5%–10.5% cash basis). Management also forecast $1.05–$1.15 billion of 2018 construction spending and $670–$770 million of acquisitions.
Management cited $96 million of contractual near-term annual cash-rent growth, of which $78 million was expected to commence through 2018, and an 80%-leased development/redevelopment pipeline. The 2018 capital plan anticipates $1.72–$1.92 billion of sources and uses, including $1.1–$1.3 billion from dispositions, partial-interest sales, and common equity. It assumes favorable capital markets and successful project delivery and leasing. In January 2018, the company entered forward equity sales agreements for 6.9 million shares, with expected net proceeds of approximately $817 million.
- Development and funding: Construction delays, cost overruns, leasing shortfalls, financing access, and the large planned capital program could affect returns and leverage. Remaining contracted construction costs were approximately $633 million at year-end; Menlo Gateway also carried a $269 million equity commitment, of which $76.2 million had been contributed.
- Tenant and market concentration: Results depend heavily on life science and technology tenants and concentrated innovation markets. Tenant funding, research outcomes, regulation, industry consolidation, and government research budgets could affect rent collection and leasing demand.
- Interest rates and refinancing: Risks include rate increases, refinancing access, covenant compliance, hedge-counterparty performance, and the transition away from LIBOR. The company reported 1% unhedged variable-rate debt.
- Other exposures: Risks include ground leases, joint-venture governance, environmental liabilities involving laboratory tenants, earthquakes and other natural disasters, insurance limits, foreign currency, and REIT qualification. The filing reported no material pending legal proceeding and no material environmental liability identified to date.
- Accounting and tax changes: New equity-investment accounting effective January 1, 2018 moves fair-value changes into earnings and may increase reported earnings volatility. The 2019 lease standard and the 2017 Tax Cuts and Jobs Act also require monitoring.
Important facts for investors to verify
- Confirm the definitions and reconciliations of non-GAAP measures, particularly adjusted FFO, NOI, and Adjusted EBITDA, and distinguish them from GAAP earnings and cash flow.
- Track actual 2018 lease commencements, occupancy, development costs, delivery dates, pre-leasing, and realized project yields against management assumptions.
- Assess the planned equity issuance and asset sales against capital needs, per-share growth, dilution, and leverage targets.
- Review upcoming debt maturities, refinancing terms, covenant headroom, interest-rate exposure, and the company’s progress toward its 2018 leverage and coverage guidance.
- Monitor tenant credit and concentration, lease expirations, and the effect of equity-investment fair-value accounting on reported earnings.