Alexandria Real Estate Equities, Inc. Reports Fourth Quarter and Year Ended December 31, 2016 Financial and Operating Results

PASADENA, Calif., Jan. 30, 2017 /PRNewswire/ -- Alexandria Real Estate Equities, Inc. (NYSE:ARE) announced financial and operating results for the fourth quarter and year ended December 31, 2016.

Key highlights:

Solid internal growth

• Total revenues of $249.2 million, up 11.3%, for 4Q16, compared to $224.0 million for 4Q15 and total revenues of $921.7 million, up 9.3%, for 2016, compared to $843.5 million for 2015;
• Solid leasing activity in light of minimal contractual lease expirations at the beginning of 2016 and a highly leased value-creation pipeline:

• Same property net operating income growth:
  • 3.2% and 4.9% (cash basis) for 4Q16, compared to 4Q15
  • 4.7% and 6.0% (cash basis) for 2016, compared to 2015

Solid external growth; disciplined allocation of capital to highly leased value-creation pipeline

• Deliveries of Class A properties in urban innovation clusters from our value-creation pipeline is expected to significantly increase net operating income:

• 4Q16 key development, redevelopment, and other projects placed into service:
  • 422,980 RSF, 100% leased to Uber Technologies, Inc. at 1455 and 1515 Third Street;
  • 305,006 RSF, 100% leased to Eli Lilly and Company at 10290 Campus Point Drive;
  • 61,755 RSF, 100% leased to Otonomy, Inc. at 4796 Executive Drive; and
• Executed a 293,855 RSF 15-year build-to-suit lease with Merck & Co., Inc. at 213 East Grand Avenue in our South San Francisco submarket; we anticipate commencing development 2Q17.

Increased common stock dividend

• Common stock dividend for 2016 of $3.23 per common share, up 18 cents, or 6%, over 2015; continuation of our strategy to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.

Core operating metrics and internal growth

• Percentage of annual rental revenue from investment-grade tenants as of 4Q16: 49%
• Percentage of annual rental revenue from Class A properties in AAA locations as of 4Q16: 79%
• Occupancy for operating properties in North America at 96.6% as of 4Q16
• Operating margin at 71% for 4Q16
• Adjusted EBITDA margin at 67% for 4Q16
• See "Solid internal growth" in the Key Highlights section (left side of page) of this Earnings Press Release for information on our leasing activity and same property net operating income growth.

External growth

Disciplined allocation of capital to visible, multiyear, highly leased value-creation pipeline

• See page 1 of this earnings press release for key highlights.

Strategic acquisitions

• In November 2016, we acquired the remaining 49% interest in our real estate joint venture with Uber Technologies, Inc. for $90.1 million. The real estate joint venture owned land parcels located at 1455 and 1515 Third Street and a parking garage structure in our Mission Bay/SoMa submarket of San Francisco.
  • The former real estate joint venture was expected to complete the development of two new Class A properties in 2018, pursuant to leases with Uber.
  • As a result of the acquisition of the remaining 49% ownership interest, we own a 100% fee simple interest in both land parcels and the parking garage and are no longer obligated to fund the development of the two Class A properties.
  • In connection with the acquisition of the remaining interest in the land and parking garage, we leased these assets to Uber for 75 years, beginning in November 2016. Uber will develop and own 100% of the two Class A properties on the land parcels.
  • The $90.1 million purchase price includes $56.8 million payable in 2017.
  • Initial stabilized yields on our total project investment of $155.0 million (including our investment in our initial 51% interest) are 14.4% and 7.0% (cash basis). Cash rents commence in February 2017.
• In November 2016, we acquired One Kendall Square, a 644,771 RSF, nine-building collaborative life science and technology campus located in the east side of our Cambridge submarket of Greater Boston, for a purchase price of $725.0 million, including the assumption of a $203.0 million secured note payable. The campus is 97.3% occupied, and we expect to achieve an initial stabilized yield (cash basis) of 6.2% upon completion of near-term renewals and re-leasing of space (see below). This acquisition provides us with a significant opportunity to increase cash flows through the following:
  • $47/RSF average in-place annual rents (mix of office gross rents and lab triple net rents), significantly below-market;
  • 55% contractual lease expirations through 2019;
  • Conversion of campus office space into office/laboratory space through redevelopment; and
  • Entitled land parcel for near-term ground-up development of an additional building aggregating 172,500 square feet.
• In October 2016, we acquired Torrey Ridge Science Center, a 294,993 RSF, three-building collaborative life science campus located in the heart of our Torrey Pines submarket of San Diego, for a purchase price of $182.5 million. The campus is 87.1% occupied, and we expect to achieve an initial stabilized yield (cash basis) of 6.8% at stabilization in 1H18 upon completion of near-term renewals/re-leasing of acquired below-market leases and the conversion of 75,953 RSF of existing shell and office space into office/laboratory space.

Strategic dispositions

• During 4Q16, we completed the dispositions of our remaining operating properties and land parcels in India for an aggregate sales price of approximately $53.4 million. As of December 31, 2016, we had no remaining investments in real estate in India.

Balance sheet management

Improvement in balance sheet leverage and liquidity

• $14.2 billion total market capitalization as of 4Q16;
• $2.2 billion of liquidity as of 4Q16;
• Net debt to Adjusted EBITDA:
  • 4Q16 annualized: 6.1x; 4Q16 trailing 12 months: 6.6x;
  • 4Q17 annualized target range: 5.5x to 6.0x;
• Fixed-charge coverage ratio:
  • 4Q16 annualized: 3.8x; 4Q16 trailing 12 months: 3.6x;
  • 4Q17 annualized target: greater than 4.0x;
• Repurchased 3.0 million shares of our 7.00% Series D cumulative convertible preferred stock at an aggregate price of $108.2 million, or $36.12 per share, and recognized a preferred stock redemption charge of $35.7 million in 4Q16;
• In October 2016, we filed an "at the market" common stock offering program, which allows us to sell up to an aggregate of $600.0 million of our common stock. During 4Q16, we sold an aggregate of 3.4 million shares of common stock for gross proceeds of $354.2 million, or $105.73 per share, and net proceeds of approximately $348.4 million;
• In December 2016, we sold an aggregate of 7.5 million shares of our common stock to settle our forward equity sales agreements executed in July 2016. Net proceeds, after issuance costs and underwriters' discount, of $715.9 million were used to fund the acquisition of One Kendall Square, located in East Cambridge, to lower net debt to Adjusted EBITDA by 0.3x, and fund construction;
• Raised $380.9 million in 2016 from (i) completed dispositions aggregating $274.6 million and (ii) funding from our joint venture partner aggregating $106.3 million, primarily in 2016, related to the sale of a partial interest in 10290 Campus Point Drive. See page 4 of this earnings press release for additional information;
• Current and future value-creation pipeline was 10% of gross investments in real estate in North America as of 4Q16, with a 4Q17 target of less than 10%; and
• 4% unhedged variable-rate debt as a percentage of total debt as of 4Q16.

Sustainability and health and wellness

• 51% of annual rental revenue expected from Leadership in Energy and Environmental Design ("LEED") certified projects upon completion of in-process projects.
• In November 2016, we became the first REIT to be named a first-in-class Fitwel Champion to promote health and wellness in the workplace and to earn Fitwel building certifications.

Subsequent events in January 2017

• Acquired land parcels aggregating 2.6 acres at 88 Bluxome Street in our Mission Bay/SoMa submarket of San Francisco for a purchase price of $130.0 million. We are currently obtaining entitlements for the development of this site and anticipate an aggregate of 1,070,925 RSF to be available for construction of two buildings in separate phases. We have leased the property back to the seller until we obtain entitlements.
• Executed lease extensions with Novartis AG aggregating 302,626 RSF at 100 and 200 Technology Square in our Cambridge submarket of Greater Boston.

Incremental Annual Net Operating Income from Development and Redevelopment of New Class A Properties
December 31, 2016

Dispositions in 2016
December 31, 2016
(Dollars in thousands)

Acquisitions in 2016
December 31, 2016
(Dollars in thousands)

Guidance
December 31, 2016
(Dollars in millions, except per share amounts)

The following updated guidance is based on our current view of existing market conditions and assumptions for the year ending December 31, 2017. There can be no assurance that actual amounts will be materially higher or lower than these expectations. See our discussion of "forward-looking statements" on page 7.

Earnings Call Information and About the Company
December 31, 2016

We will host a conference call on Tuesday, January 31, 2017, at 3:00 p.m. Eastern Time ("ET")/noon Pacific Time ("PT"), which is open to the general public to discuss our financial and operating results for the fourth quarter and year ended December 31, 2016. To participate in this conference call, dial (866) 524-3160 or (412) 317-6760 shortly before 3:00 p.m. ET/noon PT and ask the operator to join the Alexandria Real Estate Equities, Inc. call. The audio webcast can be accessed at www.are.com, in the "For Investors" section. A replay of the call will be available for a limited time from 5:00 p.m. ET/2:00 p.m. PT on Tuesday, January 31, 2017. The replay number is (877) 344-7529 or (412) 317-0088, and the confirmation code is 10096814.

Additionally, a copy of this Earnings Press Release and Supplemental Information for the fourth quarter and year ended December 31, 2016, is available in the "For Investors" section of our website at www.are.com or by following this link: http://www.are.com/fs/2016q4.pdf.

About the Company

Alexandria Real Estate Equities, Inc. (NYSE:ARE) is an urban office real estate investment trust ("REIT") uniquely focused on collaborative life science and technology campuses in AAA innovation cluster locations, with a total market capitalization of $14.2 billion and an asset base in North America of 25.2 million square feet as of December 31, 2016. The asset base in North America includes 19.9 million RSF of operating properties and development and redevelopment of new Class A properties (under construction or pre-construction), and 5.3 million square feet of future ground-up development projects. Alexandria pioneered this niche in 1994 and has since established a significant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria has a longstanding and proven track record of developing Class A properties clustered in urban life science and technology campuses that provide its innovative tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity and success. We believe these advantages result in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.

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This document includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding our 2017 earnings per share attributable to Alexandria's common stockholders – diluted, 2017 funds from operations per share attributable to Alexandria's common stockholders – diluted, net operating income, and our projected sources and uses of capital. You can identify the forward-looking statements by their use of forward-looking words, such as "forecast," "guidance," "projects," "estimates," "anticipates," "believes," "expects," "intends," "may," "plans," "seeks," "should," or "will," or the negative of those words or similar words. These forward-looking statements are based on our current expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts, as well as a number of assumptions concerning future events. There can be no assurance that actual results will not be materially higher or lower than these expectations. These statements are subject to risks, uncertainties, assumptions, and other important factors that could cause actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital (debt, construction financing, and/or equity) or refinance debt maturities, increased interest rates and operating costs, adverse economic or real estate developments in our markets, our failure to successfully place into service and lease any properties undergoing development or redevelopment and our existing space held for future development or redevelopment (including new properties acquired for that purpose), our failure to successfully operate or lease acquired properties, decreased rental rates, increased vacancy rates or failure to renew or replace expiring leases, defaults on or non-renewal of leases by tenants, adverse general and local economic conditions, an unfavorable capital market environment, decreased leasing activity or lease renewals, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission ("SEC"). Accordingly, you are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements are made as of the date of this earnings press release, and unless otherwise stated, we assume no obligation to update this information and expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, and risks to our business in general, please refer to our SEC filings, including our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

Consolidated Statements of Income
December 31, 2016
(In thousands, except per share amounts)

Consolidated Balance Sheets
December 31, 2016
(In thousands)

Funds From Operations and Funds From Operations Per Share
December 31, 2016
(In thousands, except per share amounts)

The following tables present a reconciliation of net (loss) income attributable to Alexandria's common stockholders – basic, the most directly comparable financial measure presented in accordance with generally accepted accounting principles ("GAAP"), including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable to Alexandria's common stockholders – diluted, and funds from operations attributable to Alexandria's common stockholders – diluted, as adjusted, for the periods below: