Alexandria Real Estate Equities, Inc. Reports Fourth Quarter and Year Ended December 31, 2017, Financial and Operating Results Strong Internal and External Growth and Significant Strategic...

4Q17

2017

Total leasing activity – RSF

1,379,699

4,569,182

Lease renewals and re-leasing of space:

Rental rate increases

24.8%

25.1%

Rental rate increases (cash basis)

10.4%

12.7%

RSF (included in total leasing activity above)

593,622

2,525,099

Property

Submarket

RSF

Tenant

510 Townsend Street

Mission Bay/SoMa

295,333

Stripe, Inc.

ARE Spectrum

Torrey Pines

170,523

Vertex Pharmaceuticals Inc.

505 Brannan Street

Mission Bay/SoMa

148,146

Pinterest, Inc.

400 Dexter Avenue North

Lake Union

25,518

Juno Therapeutics, Inc.

Operating results

4Q17

4Q16

Change

2017

2016

Change

Net income (loss) attributable to Alexandria's common stockholders – diluted:

In millions

$

36.8

$

(25.1)

N/A

$

145.4

$

(151.1)

N/A

Per share

$

0.38

$

(0.31)

N/A

$

1.58

$

(1.99)

N/A

Funds from operations attributable to Alexandria's common stockholders – diluted, as adjusted:

In millions

$

147.0

$

115.5

27.2%

$

554.5

$

421.3

31.6%

Per share

$

1.53

$

1.42

7.7%

$

6.02

$

5.51

9.3%

Fourth Quarter and Year Ended December 31, 2017, Financial and Operating Results (continued)
December 31, 2017

Items included in net income (loss) attributable to Alexandria's common stockholders

(amounts are shown after deducting any amounts attributable to noncontrolling interests):

(In millions, except per share amounts)

Amount

Per Share –
Diluted

Amount

Per Share –
Diluted

4Q17

4Q16

4Q17

4Q16

2017

2016

2017

2016

Gain on sales of:

Real estate

$

—

$

3.7

$

—

$

0.05

$

14.5

$

3.8

$

0.15

$

0.05

Non-real estate investments

—

—

—

—

—

4.4

—

0.06

Impairment of:

Rental properties

—

(3.5)

—

(0.04)

(0.2)

(98.2)

—

(1.29)

Land parcels

—

(12.5)

—

(0.16)

—

(110.4)

—

(1.45)

Non-real estate investments

(3.8)

—

(0.04)

—

(8.3)

(3.1)

(0.09)

(0.04)

Loss on early extinguishment of debt

(2.8)

—

(0.03)

—

(3.5)

(3.2)

(0.03)

(0.04)

Preferred stock redemption charge

—

(35.7)

—

(0.44)

(11.3)

(61.3)

(0.12)

(0.81)

Total

$

(6.6)

$

(48.0)

$

(0.07)

$

(0.59)

$

(8.8)

$

(268.0)

$

(0.09)

$

(3.52)

Weighted-average shares of common stock outstanding – diluted

95.9

80.8

92.1

76.1

4Q16 and 2016 per share amounts above may not agree to funds from operations per share amounts due to the different weighted-average shares used in each period and the impact of per share amounts allocable to unvested restricted stock awards. See "Definitions and Reconciliations" on page 55 of our Supplemental Information for additional information.

Key metrics

4Q17

Total market capitalization

$

17.9 billion

Liquidity

$

2.0 billion

Net debt to Adjusted EBITDA:

     Quarter annualized

5.5x

     Trailing 12 months

5.9x

Fixed-charge coverage ratio:

     Quarter annualized

4.2x

     Trailing 12 months

4.1x

Unhedged variable-rate debt as a percentage of total debt

1%

Current and future value-creation pipeline as a percentage of gross investments in real estate in North America

9%

Acquisitions
December 31, 2017
(Dollars in thousands)

4Q17 Acquisitions

Property

Submarket/Market

Date of Purchase

Number of
Properties

Occupancy

Square Footage

Purchase Price

Operating

Development/

Redevelopment

701 Gateway Boulevard⁽¹⁾

South San Francisco/San Francisco

12/19/17

1

90.6%

170,862

—

$

76,000

Menlo Gateway 
     (unconsolidated JV)⁽²⁾

Greater Stanford/San Francisco

11/27/17

3

100%

251,995

520,988

59,936

4110 Campus Point Court
(55% interest)⁽³⁾

University Town Center/San Diego

12/28/17

1

100%

44,034

—

10,450

466,891

520,988

$

146,386

We expect to provide total estimated costs at completion and related yields of development and redevelopment projects in the future.

(1)

Office building located within our Alexandria Technology Center^® – Gateway campus. The property is 90.6% leased as of December 31, 2017, to multiple tenants with minimal near-term lease expirations, and we expect initial stabilized yields of 7.2% and 6.3% (cash basis) upon lease-up of the existing vacant office space. In addition, the property provides future opportunities to enhance our returns through the conversion of existing office space to office/laboratory space through redevelopment, and development of a new building.

(2)

See page 5 of this Earnings Press Release for additional information on our acquisition in this real estate joint venture.

(3)

Represents a 55% interest in a real estate joint venture with TIAA, which owns a property that expands our Campus Pointe by Alexandria campus. The joint venture leased the existing 44,034 RSF property back to the seller for one year, after which the joint venture may consider options to redevelop the existing property into tech office or office/laboratory space.

1Q18 Acquisitions under purchase agreement/letter of intent

Property

Submarket/Market

Date of Purchase

Number of
Properties

Anticipated Use

Occupancy

Square Footage

Purchase Price

Operating

Development/

Redevelopment

Future Development

Mission Bay/SoMa/
San Francisco

N/A

2

Office

100%

 N/A  

—

—

$

37,800

1655 and 1715 Third Street 
     (10% interest in unconsolidated JV)⁽²⁾

Mission Bay/SoMa/
San Francisco

February 2018

2

Office

N/A

—

580,000

—

31,000

2100-2400 Geng Road⁽³⁾

Greater Stanford/
San Francisco

1/25/18

4

Office/lab

77%

165,811

31,687

—

136,000

9965-9995 Summers Ridge Road⁽⁴⁾

Sorrento Mesa/
San Diego

1/5/18

4

Office/lab

100%

316,531

—

50,000

148,650

Pending | San Diego

2Q18

—

Office or lab

N/A

—

—

120,000

17,000

Pending | Maryland

March 2018

1

Office/lab

31%

24,846

54,485

—

5,000

507,188

666,172

170,000

375,450

Additional projected acquisitions

295,000 - 395,000

2018 Guidance range

$670,000 - $770,000

(1)

The first installment of $18.9 million related to our November 2016 acquisition was paid in 2Q17, the second installment of $18.9 million was paid in January 2018, and we expect the final installment to be paid during 1H18.

(2)

Represents a 10% interest in a joint venture with Uber and the Golden State Warriors expected to be formed in February 2018. The joint venture is developing two office buildings aggregating 580,000 RSF, adjacent to the Golden State Warriors arena, which are 100% leased to Uber. Our initial equity contribution of $31.0 million will be funded at formation of the joint venture, and the project will transfer from pre-construction to under construction, with initial occupancy expected in 2019.

(3)

Four-building office campus on 11 acres with 14 in-place leases with a weighted-average remaining lease term of three years. We are evaluating options for the conversion of existing office space into office/laboratory space through redevelopment. We expect to provide total estimated costs at completion and related yields in the future.

(4)

A campus, with on-site amenities, consisting of four operating properties aggregating 316,531 RSF. The property also includes a future development opportunity for an additional 50,000 RSF building. The properties are 100% leased as of December 31, 2017, to Quidel Corporation and Abbott Laboratories, for aggregate terms of 15 years. We expect initial stabilized yields of 8.2% and 6.3% (cash basis) with an opportunity to enhance our initial return through future development.

Dispositions
December 31, 2017
(Dollars in thousands)

Property/Market/Submarket

Date of Sale

RSF

Net Operating

Income⁽¹⁾

Net Operating Income

(Cash Basis)⁽¹⁾

Contractual

Sales Price

Gain

360 Longwood Avenue/Greater Boston/Longwood Medical Area

7/6/17

203,090

$

4,313

$

4,168

$

65,701

$

14,106

9625 Towne Centre Drive/San Diego/University Town Center 
     (sale of partial interest)⁽²⁾

12/19/17

163,648

N/A

N/A

13,470

N/A

Campus Point Drive, Development Rights/San Diego/University Town Center
      (sale of 45% interest)⁽³⁾

12/19/17

318,383

N/A

N/A

12,895

N/A

6146 Nancy Ridge Drive/San Diego/Sorrento Mesa

1/6/17

21,940

N/A

N/A

3,000

270

1401/1413 Research Boulevard/Maryland/Rockville⁽⁴⁾

5/17/17

90,000

N/A

N/A

7,937

111

Operating property in China

11/27/17

300,184

$

365

$

392

11,167

—

$

114,170

$

14,487

(1)

Represents annualized amounts for the quarter ended prior to the date of sale. Net operating income (cash basis) excludes straight-line rent and amortization of acquired below-market leases.

(2)

In December 2017, we entered into a joint venture agreement to sell to TIAA a 49.9% interest in 9625 Towne Centre Drive, a 163,648 RSF redevelopment project undergoing construction in our University Town Center submarket, which is 100% leased to Takeda Pharmaceutical Company Ltd. We received an initial contribution of $13.5 million from TIAA for a 35.9% initial ownership interest as of December 31, 2017, and expect TIAA's ownership interest to increase to 49.9% by the end of 2Q18 through additional capital contributions to fund construction.

(3)

In connection with the agreement to sell a 45% partial interest in 10290 Campus Point Drive to TIAA in 2016, we also agreed to sell to TIAA a 45% partial interest in the related development rights aggregating 318,383 RSF in our Campus Pointe by Alexandria campus at a sales price of $90 per SF. The sale of the development rights was contingent upon the completion of certain entitlement milestones. Upon completion of the entitlement milestones, we completed the 45% partial interest sale of the related development rights in December 2017.

(4)

Joint venture with a distinguished retail real estate developer for the development of a 90,000 RSF retail shopping center, with remaining construction costs to be funded from a $25.0 million non-recourse secured construction loan.

Guidance
December 31, 2017
(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, 2018. 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 8 of this Earnings Press Release.

Earnings per Share and Funds From Operations per Share Attributable to Alexandria's
     Common Stockholders – Diluted

(1)

Depreciation and amortization

4.45

Allocation to unvested restricted stock awards

(0.04)

Funds from operations per share

$6.45 to $6.65

(1)

Key Assumptions

Low

High

Occupancy percentage in North America as of December 31, 2018

96.9%

97.5%

Lease renewals and re-leasing of space:

Rental rate increases

13.0%

16.0%

Rental rate increases (cash basis)

7.5%

10.5%

Same property performance:

Net operating income increase

2.5%

4.5%

Net operating income increase (cash basis)

9.0%

11.0%

Straight-line rent revenue

$

92

$

102

(3)

General and administrative expenses

$

85

$

90

Capitalization of interest

$

55

$

65

Interest expense

$

155

$

165

Key Credit Metrics

2018 Guidance

Net debt to Adjusted EBITDA – 4Q18 annualized

Less than 5.5x

Net debt and preferred stock to Adjusted EBITDA – 4Q18 annualized

Less than 5.5x

Fixed-charge coverage ratio – 4Q18 annualized

Greater than 4.0x

Value-creation pipeline as a percentage of gross real estate as of
    December 31, 2018

8% to 12%

Key Sources and Uses of Capital

Range

Midpoint

Key Completed Items

Sources of capital:

Net cash provided by operating activities after dividends

$

140

$

180

$

160

Incremental debt

470

430

450

Real estate dispositions, partial interest sales, and common 
     equity

1,110

1,310

1,210

$

817

⁽²⁾

Total sources of capital

$

1,720

$

1,920

$

1,820

Uses of capital:

Construction

$

1,050

$

1,150

$

1,100

Acquisitions

670

770

720

(4)

Total uses of capital

$

1,720

$

1,920

$

1,820

Incremental debt (included above):

Issuance of unsecured senior notes payable

$

550

$

650

$

600

Repayments of secured notes payable

(10)

(15)

(13)

Repayment of unsecured senior bank term loan

(200)

(200)

(200)

$1.65 billion unsecured senior line of credit/other

130

(5)

63

Incremental debt

$

470

$

430

$

450

(1)

Excludes the impact of changes in fair value for equity investments pursuant to a new accounting standard effective January 1, 2018. For a comprehensive discussion on the new accounting standard update, refer to the "Recent Accounting Pronouncements" section in Note 2 – "Summary of Significant Accounting Policies" in our September 30, 2017, Form 10-Q filed on October 31, 2017, and our 2017 annual report on Form 10-K.

(2)

Represents 6.9 million shares of our common stock subject to forward equity sales agreements executed in January 2018, with anticipated aggregate net proceeds of $817.3 million, subject to adjustments as provided in the forward equity sales agreements. The forward equity sales agreements expire no later than April 2019, and we expect to settle these agreements in 2018.

(3)

Approximately 50% of straight-line rent revenue represents initial free rent on recently delivered and expected 2018 deliveries of new Class A properties from our development and redevelopment pipeline.

(4)

See "Acquisitions" on page 4 of this Earnings Press Release.

Consolidated Statements of Income
December 31, 2017
(In thousands, except per share amounts)

Three Months Ended

Year Ended

12/31/17

9/30/17

6/30/17

3/31/17

12/31/16

12/31/17

12/31/16

Revenues:

Rental

$

228,025

$

216,021

$

211,942

$

207,193

$

187,315

$

863,181

$

673,820

Tenant recoveries

70,270

67,058

60,470

61,346

58,270

259,144

223,655

Other income

496

⁽¹⁾

2,291

647

2,338

3,577

5,772

24,231

Total revenues

298,791

285,370

273,059

270,877

249,162

1,128,097

921,706

Expenses:

Rental operations

88,073

83,469

76,980

77,087

73,244

325,609

278,408

General and administrative

18,910

17,636

19,234

19,229

17,458

75,009

63,884

Interest

36,082

31,031

31,748

29,784

31,223

128,645

106,953

Depreciation and amortization

107,714

107,788

104,098

97,183

95,222

416,783

313,390

Impairment of real estate

—

—

203

—

16,024

203

209,261

Loss on early extinguishment of debt

2,781

—

—

670

—

3,451

3,230

Total expenses

253,560

239,924

232,263

223,953

233,171

949,700

975,126

Equity in earnings (losses) of unconsolidated real estate joint ventures

376

14,100

589

361

86

15,426

(184)

Gain on sales of real estate – rental properties

—

—

—

270

3,715

270

3,715

Gain on sales of real estate – land parcels

—

—

111

—

—

111

90

Net income (loss)

45,607

59,546

41,496

47,555

19,792

194,204

(49,799)

Net income attributable to noncontrolling interests

(6,219)

(5,773)

(7,275)

(5,844)

(4,488)

(25,111)

(16,102)

Net income (loss) attributable to Alexandria Real Estate Equities, Inc.'s stockholders

39,388

53,773

34,221

41,711

15,304

169,093

(65,901)

Dividends on preferred stock

(1,302)

(1,302)

(1,278)

(3,784)

(3,835)

(7,666)

(20,223)

Preferred stock redemption charge

—

—

—

(11,279)

(35,653)

(11,279)

(61,267)

Net income attributable to unvested restricted stock awards

(1,255)

(1,198)

(1,313)

(987)

(943)

(4,753)

(3,750)

Net income (loss) attributable to Alexandria Real Estate Equities, Inc.'s common stockholders

$

36,831

$

51,273

$

31,630

$

25,661

$

(25,127)

$

145,395

$

(151,141)

Net income (loss) per share attributable to Alexandria Real Estate Equities, Inc.'s common stockholders:

Basic

$

0.39

$

0.55

$

0.35

$

0.29

$

(0.31)

$

1.59

$

(1.99)

Diluted

$

0.38

$

0.55

$

0.35

$

0.29

$

(0.31)

$

1.58

$

(1.99)

Weighted-average shares of common stock outstanding:

Basic

95,138

92,598

90,215

88,147

80,800

91,546

76,103

Diluted

95,914

93,296

90,745

88,200

80,800

92,063

76,103

Dividends declared per share of common stock

$

0.90

$

0.86

$

0.86

$

0.83

$

0.83

$

3.45

$

3.23

(1)    Includes an impairment charge of $3.8 million related to one publicly traded non-real estate investment.

Consolidated Balance Sheets
December 31, 2017
(In thousands)

12/31/17

9/30/17

6/30/17

3/31/17

12/31/16

Assets

Investments in real estate

$

10,298,019

$

10,046,521

$

9,819,413

$

9,470,667

$

9,077,972

Investments in unconsolidated real estate joint ventures

110,618

33,692

58,083

50,457

50,221

Cash and cash equivalents

254,381

118,562

124,877

151,209

125,032

Restricted cash

22,805

27,713

20,002

18,320

16,334

Tenant receivables

10,262

9,899

8,393

9,979

9,744

Deferred rent

434,731

402,353

383,062

364,348

335,974

Deferred leasing costs

221,430

208,265

201,908

202,613

195,937

Investments

523,254

485,262

424,920

394,471

342,477

Other assets

228,453

213,056

205,009

206,562

201,197

Total assets

$

12,103,953

$

11,545,323

$

11,245,667

$

10,868,626

$

10,354,888

Liabilities, Noncontrolling Interests, and Equity

Secured notes payable

$

771,061

$

1,153,890

$

1,127,348

$

1,083,758

$

1,011,292

Unsecured senior notes payable

3,395,804

2,801,290

2,800,398

2,799,508

2,378,262

Unsecured senior line of credit

50,000

314,000

300,000

—

28,000

Unsecured senior bank term loans

547,942

547,860

547,639

547,420

746,471

Accounts payable, accrued expenses, and tenant 
     security deposits

763,832

740,070

734,189

782,637

731,671

Dividends payable

92,145

83,402

81,602

78,976

76,914

Preferred stock redemption liability

—

—

—

130,000

—

Total liabilities

5,620,784

5,640,512

5,591,176

5,422,299

4,972,610

Commitments and contingencies

Redeemable noncontrolling interests

11,509

11,418

11,410

11,320

11,307

Alexandria Real Estate Equities, Inc.'s stockholders' equity:

7.00% Series D cumulative convertible preferred stock

74,386

74,386

74,386

74,386

86,914

6.45% Series E cumulative redeemable preferred stock

—

—

—

—

130,000

Common stock

998

943

921

899

877

Additional paid-in capital

5,824,258

5,287,777

5,059,180

4,855,686

4,672,650

Accumulated other comprehensive income

50,024

43,864

22,677

21,460

5,355

Alexandria Real Estate Equities, Inc.'s stockholders' equity

5,949,666

5,406,970

5,157,164

4,952,431