ALEXANDRIA REAL ESTATE EQUITIES, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto under "Item 15. Exhibits and Financial Statement Schedules" in this annual report on Form 10-K. Forward -looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by such forward-looking statements, including, but not limited to, those described under "Item 1A. Risk Factors" in this annual report on Form 10-K. We do not undertake any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events, or otherwise.
As used in this annual report on Form 10-K, references to the "Company,"
"Alexandria," "we," "us," and "our" refer to
Executive summary
Operating results
Year Ended December 31,
2019 2018
Net income attributable to Alexandria's common
stockholders - diluted:
In millions $ 351.0 $ 364.0
Per share $ 3.12 $ 3.52
Funds from operations attributable to Alexandria's common stockholders
-
diluted, as adjusted:
In millions $ 783.0 $ 682.0
Per share $ 6.96 $ 6.60 The operating results shown above include certain items related to corporate-level investing and financing decisions. Refer to the tabular presentation of these items in the "Results of Operations" section under this Item 7 for additional information.
Celebrating our 25th Anniversary; an important milestone in company history
Since our initial launch inJanuary 1994 as a garage startup with a strategic business plan,$19 million in Series A capital, and a unique vision to create a new kind of real estate company focused on serving the life science industry, we have grown into an investment-grade rated S&P 500® company, a recognized leader in life science cluster development, and a trusted partner to innovative companies, highly respected cities, and renowned institutions. From our initial public offering inMay 1997 throughDecember 31, 2019 , we have generated a total shareholder return of 1,714% and a total market capitalization of$26.3 billion as ofDecember 31, 2019 .
A REIT industry-leading, high-quality tenant roster
• 50% of annual rental revenue from investment-grade or publicly traded
large cap tenants.
• Weighted-average remaining lease term of 8.1 years.
Continued growth in common stock dividend
Common stock dividend declared for the three months endedDecember 31, 2019 of$1.03 per common share, aggregating$4.00 per common share for the year endedDecember 31, 2019 , up27 cents , or 7%, over the year endedDecember 31, 2018 ; continuation of our strategy to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment. 71
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Strong internal growth; highest leasing activity in our history and highest annual rental rate increases during the past 10 years
• Total revenues of$1.5 billion , up 15.4%, for the year endedDecember 31, 2019 , compared to$1.3 billion for the year endedDecember 31, 2018 . • Continued strong internal growth; acquired vacancy from recent acquisitions provide opportunity to increase income from rentals and net operating income.
• Net operating income (cash basis) of
the year ended
• Same property net operating income growth of 3.1% and 7.1% (cash basis)
for the year ended December 31, 2019 , compared to the year ended
December 31, 2018 .
• Continued strong leasing activity during 2019, representing the highest
leasing activity in our history and rental rate growth over expiring
rates on renewed and re-leased space during 2019, representing our
highest annual rental rate increases during the past 10 years:
2019
Total leasing activity - RSF 5,062,722
Lease renewals and re-leasing of space: RSF (included in total leasing activity above) 2,427,108 Rental rate increases
32.2%
Rental rate increases (cash basis) 17.6%
Strong external growth; disciplined allocation of capital to visible, highly leased value-creation pipeline
• Since the beginning of 2019, we have placed into service 2.1 million
RSF of development and redevelopment projects, with weighted-average
initial stabilized yields of 7.4% and 6.9% (cash basis).
• Significant near-term growth of annual net operating income (cash
basis), including our share of unconsolidated real estate joint
ventures, of $55 million upon the burn-off of initial free rent on
recently delivered projects.
• We commenced development and redevelopment projects aggregating 1.9
million RSF during the year ended December 31, 2019 .
• During the year ended December 31, 2019 , we leased 1.4 million RSF of
development and redevelopment space.
Completed acquisitions
Refer to the "Acquisitions" subsection of the "Investments in Real Estate" section under "Item 2. Properties" in this annual report on Form 10-K for information on our opportunistic acquisitions.
Core operating metrics as of
76
Occupancy of operating properties in
70
Adjusted EBITDA margin(2) 68 (3)
Weighted-average remaining lease term:
All tenants 8.1 years
Top 20 tenants 11.6 years
(1) Includes 259,616 RSF, or 1.0%, of vacancy representing lease-up opportunities
at properties recently acquired during the second half of 2019, primarily
related to our SD Tech by Alexandria campus. Excluding these vacancies,
occupancy of operating properties in
of
America" section under Item 2 in this annual report on Form 10-K for
additional information.
(2) Fourth quarter of 2019, annualized.
(3) Represents an increase of 400 bps since the beginning of 2013.
72
--------------------------------------------------------------------------------Balance sheet management
Refer to the "Execution of Capital Strategy" section below under this Item 7 in this annual report on Form 10-K.
Industry leadership, strategic initiatives, and corporate responsibility
• In
Sciences, LLC , Alphabet's life science division, to build a tech-focused rehabilitation campus inDayton, Ohio , for the full and sustained recovery of people living with opioid addiction. The campus will provide a comprehensive model of care that will include a behavioral health treatment center, rehabilitation housing, and wrap-around services, and will act as a state of the art model for opioid addiction treatment nationwide. • InFebruary 2019 , we were recognized by theCenter for Active Design ,
which operates Fitwel®, as the inaugural
Fitwel's 2018 Best in Building Health . We were selected based on our
3-Star Fitwel certification (the highest rating possible); our
leadership in promoting and educating the real estate industry on the
opportunities for and benefits of building design, construction, and
operational practices that support high levels of occupant health and
wellness; and our #1 global ranking in the 2018 GRESB Health &
Well-Being Module.
• In March 2019 , Alexandria LaunchLabs® - Cambridge , located at the
Alexandria Center® at One Kendall Square in Greater Boston , achieved
LEED gold certification and a Fitwel 3-Star certification.
• In
technology (agtech) business initiative and the opening of Phase I of
the Alexandria Center® for AgTech - Research Triangle, the first and
only fully integrated, amenity-rich, multi-tenant agtech R&D and
greenhouse campus, in the heart of Research Triangle, the most
important, dense, and diverse agtech cluster in the U.S. The campus
opened with a 97% leased, 180,400 RSF first phase redevelopment at 5
Laboratory Drive .
• In
open our second Alexandria LaunchLabs® in
of 2020. The full-service platform will offer member companies 13,298
RSF of highly flexible, turnkey office/laboratory space and feature a
high-tech event center to host workshops, networking events, and
educational opportunities for the entrepreneurial life science
community.
• In
the tech-focused opioid rehabilitation campus in
partnership with
and development of this 59,000 RSF state-of-the-art campus to provide a
comprehensive model of care dedicated to the recovery of people
suffering from opioid addiction.
• In
Estate Assessment: (i) GRESB 5 Star Rating (out of 5 stars), (ii) our
third consecutive "
consecutive "A" disclosure score.
• In
annually honors the development company that best exemplifies
leadership and innovation as demonstrated by the outstanding quality of
projects and services, financial consistency and stability, ability to
adapt to market conditions, and support for the local community.
• In November 2019 , Alexandria, in collaboration with academicinstitutions, research hospitals, and life science industry partners,
including Harvard University , the Massachusetts Institute of
Technology , FUJIFILM Diosynth Biotechnologies, and GE Healthcare Life
Sciences , announced the launch of a first-of-its-kind consortium to
catalyze advanced biological innovation and manufacturing in Greater
Boston with an aim to treat, prevent, and cure diseases.
• In January 2020 , we announced our first national $100,000 AgTech
Innovation Prize competition to recognize startup and early-stage
agtech and foodtech companies that demonstrate novel approaches to
addressing agriculture-, food-, and nutrition-related challenges.
• In January 2020 , Alexandria Venture Investments, the company's venture
capital arm, was recognized for a third consecutive year as the most
active biopharma investor by new deal volume by Silicon Valley Bank in
its "2020 Annual Report: Healthcare Investments and Exits."
Alexandria's venture activity provides us with, among other things,
mission-critical data and knowledge on innovations and trends.
• Our philanthropy and volunteerism efforts provide mission-critical
support to non-profit organizations doing meaningful work in areas of
medical research, STEM education, military support services, and
serving local communities. During 2019, our team members volunteered
more than 4,500 hours to support over 250 non-profit organizations
across the country.
• We value both the health and wellness of our team members as well assupporting organizations on the leading edge of medical innovation. In
November 2019 , we were honored to support 59 of our team members who completed the 2019 New York City Marathon on behalf of Fred's Team and
raised approximately
research at Memorial Sloan Kettering Cancer Center .
73--------------------------------------------------------------------------------
Subsequent events
• As of the date of this report, we completed acquisitions of four
properties in 2020 for an aggregate purchase price of $341.2 million ,comprising 800,346 RSF of operating and redevelopment opportunities
strategically located across multiple markets.
• In January 2020 , we formed a real estate joint venture with Boston
Properties, Inc., in which we are targeting a 51% ownership interest
over time. We are the managing member with the power to direct theactivities that most significantly affect the economic performance of
the joint venture, and will consolidate this joint venture pursuant to
the applicable accounting standards. Our partner contributed three
office buildings and land supporting 260,000 square feet of future
development, and we contributed one office building, one
office/laboratory building, one amenity building, at 701, 681, and 685
feet of future development. This future mega campus in our South San
Francisco submarket will aggregate 1.7 million RSF, approximately 50%of which represents future development and redevelopment opportunities.
• In
sell an aggregate of 6.9 million shares of our common stock (including
the exercise of an underwriters' option) at a public offering price of
these forward equity sales agreements in 2020, and receive proceeds of
approximately
sales agreements, which will fund pending and recently completed
acquisitions and the construction of our highly leased development
projects.
• We expect to file a new ATM program in the first quarter of 2020.
Operating summary
Same Property Net Operating
Income Growth Favorable Lease Structure(1)
Strategic Lease Structure by Owner and Operator of
Collaborative Life Science, Technology, and AgTech
Campuses
Increasing cash flows
Percentage of leases containing 95%
[[Image Removed:q419samepropb.jpg]] annual rent escalations
[[Image Removed: q419samepropa.jpg]] Stable cash flows
Percentage of triple 97%
net leases
Lower capex burden
Percentage of leases providing for 96%
the recapture of capital expenditures
Rental Rate Growth:
Renewed/Re-Leased Space Margins(2)
Operating Adjusted EBITDA[[Image Removed: q419rentalratea.jpg]] [[Image Removed: q419rentalrateb.jpg]]
70% 68%
(1) Percentages calculated based on RSF as of
(2) Represents percentages for the three months ended
74
--------------------------------------------------------------------------------Execution of capital strategy
During 2019, we continued to execute on many of the long-term components of our capital strategy. Some of our key accomplishments include the following:
2019 capital strategy
Key metrics as ofDecember 31, 2019 •$26.3 billion of total market capitalization
•
•
(1) In
agreements. Including the outstanding forward equity agreements, we had
proforma liquidity of $3.4 billion .
As of December 31, 2019 Goal for Fourth
Trailing 12 Quarter of 2020,
Quarter Annualized Months Annualized
Net debt and preferred stock to 5.7x (1) 6.1x Less than or equal
Adjusted EBITDA to 5.2x
Fixed-charge coverage ratio 4.2x 4.2x Greater than 4.5x
(1) Due to the timing of two acquisitions that closed in
temporary 0.4x increase above our projected net debt and preferred stock to
Adjusted EBITDA - fourth quarter of 2019, annualized, for
We remain committed to our guidance of net debt and preferred stock to
Adjusted EBITDA - fourth quarter of 2020, annualized, of less than or equal
to 5.2x.
Value-creation pipeline of new Class A development and redevelopment projects as a percentage of gross investments in
As of
real estateDecember 31, 2019 Under construction and 63% leased/negotiating
6%
Income-producing/potential cash flows/covered land play(1) 5% Land 2%
(1) Includes projects that have existing buildings which are generating or can
generate operating cash flows. Also includes development rights associated
with existing operating campuses.
Key capital events in 2019
• We had the following dispositions and sales of partial interests in
core Class A properties (dollars in millions, except per RSF):
Sales Price Capitalization Rate
Property Submarket RSF Interest Sold Total Per RSF (Cash)
Center
75/125 Binney Street Cambridge 388,270 60% 438.0 $ 1,880 4.3 %
500 Forbes Boulevard South San 155,685 90% 139.5 $ 996 4.4 %
Francisco
10260 Campus Point University Town 269,048 45% 36.0 N/A N/A
Drive and 4161 Center
Campus Point Court
6138/6150 Nancy Sorrento Mesa 56,698 100% 6.6 $ 117 N/A
Ridge Drive
1,662,388 $ 906.8
(1) Represents $264.6 million , or $681 per RSF, for the operating buildings and $22.1 million , or $100 per RSF, for the
developable land parcel. This transaction values 100% of the campus at $585.2 million and represents a value in excess
of book basis aggregating $269.1 million .
75
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• Our issuances and repayments of debt included the following (dollars in
millions):
Effective Principal Loss on Early
Date Interest Rate Maturity Date Amount Extinguishment of Debt
Issuances
Unsecured senior notes payable - March 4.03 % 1/15/24 $ 200
green bond
Unsecured senior notes payable - March 3.96 4/15/26 350
green bond
Unsecured senior notes payable March 4.93 4/15/49 300
Unsecured senior notes payable July 3.48 8/15/31 750
Unsecured senior notes payable July/Sept 3.91 2/1/50 700
Unsecured senior notes payable Sept 2.87 12/15/29 400
Weighted average/total 3.77 % 16.9 years $ 2,700 (1)
Repayments of debt
Secured notes payable Jan 8.15 % 4/1/20 $ 107 $ 7.1
Secured construction loan March 3.29 1/28/20 193 0.3
Unsecured senior notes payable July/Aug 2.96 1/15/20 400 37.4
Unsecured senior notes payable July/Aug 4.75 4/1/22 550
Unsecured senior bank term loan July/Sept 3.62 1/2/25 350 2.8
Weighted average/total 4.11 % 2.4 years $ 1,600 (1) $ 47.6
(1) The remaining proceeds received from our debt issuances, after
repayments of debt, were used to fund the construction of our
value-creation pipeline and acquisitions completed during 2019. Referto Note 3 - "Investments in Real Estate" to our consolidated financial
statements under Item 15 in this annual report on Form 10-K for
additional information.
• In conjunction with the
senior bank term loan, during the three months ended
2019, we also terminated all of our interest rate hedge agreements
aggregating $350.0 million with a weighted-average interest pay rate of
2.57% and reclassified the entire loss on our interest rate hedge
agreements aggregating $1.7 million from accumulated othercomprehensive loss into interest expense in our consolidated statements
of operations.
• In September 2019 , we established a commercial paper program with the
ability to issue up to $750.0 million of commercial paper notes with amaximum maturity of 397 days from the date of issue. Our commercial
paper program is backed by our $2.2 billion unsecured senior line of
credit, and at all times we expect to retain a minimum undrawn amount
of borrowing capacity under our unsecured senior line of credit equal
to any outstanding balance on our commercial paper program. We use
borrowings under the program to fund short-term capital needs. As of
December 31, 2019 , we had no borrowings outstanding under our
commercial paper program.
• During the year ended December 31, 2019 , we issued 8.7 million shares
of common stock and received net proceeds of $1.2 billion , as follows:
• Issued an aggregate of 8.1 million shares of common stock, at a
weighted-average price of $139.32 per share, for aggregate proceeds
(net of underwriters' discounts) of approximately $1.1 billion .
During the year ended December 31, 2019 , we incurred initial
issuance costs aggregating $700 thousand in connection with these
forward equity sales agreements.
• Issued 602,484 shares of common stock under our ATM program, at a
weighted-average price of $145.58 per share, for net proceeds of
$86.1 million , during the three months ended June 30, 2019 . As of
December 31, 2019 , we had approximately $22.5 million of gross
proceeds available to be issued under our ATM program.
• The proceeds were used to fund construction projects and 2019
acquisitions completed prior to December 2019 .
• During the year ended December 31, 2019 , we repurchased, in privatelynegotiated transactions, 275,000 outstanding shares of our Series D
Convertible Preferred Stock at an aggregate price of
$2.6 million . • InSeptember 2019 , we elected to convert the remaining 2.3 million outstanding shares of our Series D Convertible Preferred Stock into shares of our common stock. The Series D Convertible Preferred Stock became eligible for mandatory conversion at our discretion, at a set conversion rate of 0.2513 shares of common stock to one share of preferred stock, upon our common stock price exceeding$149.46 per
share for the specified period of time required to cause the mandatory
conversion. In
Preferred Stock into 578 thousand shares of common stock. This
conversion was accounted for as an equity transaction, and we did not
recognize a gain or loss. As of December 31, 2019 , we had no
outstanding shares of Series D Convertible Preferred Stock.
76--------------------------------------------------------------------------------
Investments
We carry our investments in publicly traded companies and certain privately held entities at fair value. During the year endedDecember 31, 2019 , we had investment income of$194.6 million , comprising$50.3 million in realized gains,$17.1 million in impairments related to non-real estate investments in privately held entities, and$161.5 million in unrealized gains.
2020 Capital strategy
During 2020, we intend to continue to execute our capital strategy to achieve
further improvements to our credit rating, which will allow us to further
improve our cost of capital and continue our disciplined approach to capital
allocation. For further information, refer to the "Projected Results" section
below under this Item 7 in this annual report on Form 10-K.
Consistent with 2019, our capital strategy for 2020 includes the following
elements:
• Allocate capital to Class A properties located in collaborative life
science, technology, and agtech campuses in AAA urban innovation
clusters;
• Continue to improve our credit profile;
• Maintain prudent access to diverse sources of capital, which include
cash flows from operating activities after dividends, incremental debt
supported by our growth in EBITDA, real estate asset sales, non-real
estate investment sales, joint venture capital, and other capital such
as sales of equity;
• Maintain commitment to long-term capital to fund growth;
• Prudently ladder debt maturities;
• Reduce short-term variable-rate debt;
• Prudently manage equity investments to support corporate-level
investment strategies;
• Maintain significant balance sheet liquidity; and
• Maintain a stable and flexible balance sheet.
Given the anticipated delivery of significant incremental EBITDA from our development and redevelopment of new Class A properties, we expect to be able to debt fund a significant portion of construction on a leverage-neutral basis. We expect to continue to maintain access to a diverse source of debt, including unsecured senior notes payable, as well as secured construction loans for our development and redevelopment projects from time to time. We expect to continue to maintain a significant proportion of our net operating income on an unencumbered basis to allow for future flexibility for accessing both unsecured and secured debt markets, although we expect traditional secured mortgage notes payable will remain a small component of our capital structure. In addition to debt funding on a leverage-neutral basis, we intend to supplement our remaining capital needs with net cash flows from operating activities, after dividends and proceeds from real estate asset sales, non-real estate investment sales, partial interest sales, and other debt and equity capital.
Improved cost of capital
As part of our capital strategy to continue strengthening our credit profile, we expect to complete and place into service development and redevelopment projects currently under construction, which we expect will deliver significant incremental EBITDA. The expected growth in our EBITDA in 2020 and beyond should allow us to obtain debt funding on a leverage-neutral basis and provide significant capital to fund our development and redevelopment projects. Additionally, the resulting expected improvement in our balance sheet leverage ratio should allow us to access diverse sources of capital, strengthen our credit profile, and reduce our cost of capital. In addition, we expect to continue to maintain a significant proportion of unencumbered net operating income. For the year endedDecember 31, 2019 , our unencumbered net operating income as a percentage of total net operating income was 94%. 77 --------------------------------------------------------------------------------
Investments
We present our equity investments at fair value whenever fair value or NAV is
readily available. Adjustments for our limited partnership investments represent
changes in reported NAV as a practical expedient to estimate fair value. For
investments without readily available fair values, we adjust the carrying amount
whenever such investments have an observable price change, and further
adjustments are not made until another price change, if any, is observed. Refer
to Note 7 - "Investments" to our consolidated financial statements under Item 15
in this annual report on Form 10-K for additional information.
December 31, 2019
(In thousands) Three Months Ended Year Ended Year Ended December 31, 2018
Realized gains $ 4,399 (1) $ 33,158 (1) $ 37,129 (2)
Unrealized gains 148,268 161,489 99,634
Investment income $ 152,667 $ 194,647 $ 136,763
Investments Cost Adjustments Carrying Amount
Fair value:
Publicly traded companies $ 148,109 $ 170,528 (3) $ 318,637
Entities that report NAV 271,276 162,626 433,902
Entities that do not report NAV: Entities with observable price changes since 1/1/18 42,045 68,489 110,534 Entities without observable price changes 277,521 - 277,521 December 31, 2019$ 738,951 $ 401,643 $ 1,140,594 September 30, 2019$ 737,078 $ 253,376 $ 990,454
(1) Includes realized gains for the three months and year ended
2019, of $14.4 million and $50.3 million , respectively, and impairments
related to non-real estate investments in privately held entities of
$10.0 million and $17.1 million , respectively.
(2) Includes realized gains of
non-real estate investments and impairment of
to one non-real estate investment in a privately held entity. Excluding these
gains and impairment, our realized gains on non-real estate investments were
(3) Includes gross unrealized gains and losses of
million, respectively.
Public/Private
Mix (Cost)
[[Image Removed: q419pubprivmix.jpg]]
Tenant/Non-Tenant
Mix (Cost)
[[Image Removed: q419tenantmix.jpg]]
78--------------------------------------------------------------------------------
Results of operations
We present a tabular comparison of items, whether gain or loss, that may
facilitate a high-level understanding of our results and provide context for the
disclosures included in our annual report on Form 10-K. We believe such tabular
presentation promotes a better understanding for investors of the
corporate-level decisions made and activities performed that significantly
affect comparison of our operating results from period to period. We also
believe this tabular presentation will supplement for investors an understanding
of our disclosures and real estate operating results. Gains or losses on sales
of real estate and impairments of held for sale assets are related to
corporate-level decisions to dispose of real estate. Gains or losses on early
extinguishment of debt, gains or losses on early termination of interest rate
hedge agreements, and preferred stock redemption charges are related to
corporate-level financing decisions focused on our capital structure strategy.
Significant realized and unrealized gains or losses on non-real estate
investments and impairments of real estate and non-real estate investments are
not related to the operating performance of our real estate assets as they
result from strategic, corporate-level non-real estate investment decisions and
external market conditions. Impairments of non-real estate investments are not
related to the operating performance of our real estate as they represent the
write-down of non-real estate investments when their fair values decline below
their respective carrying values due to changes in general market or other
conditions outside of our control. Significant items, whether a gain or loss,
included in the tabular disclosure, for current periods are described in further
detail under this Item 7 in this annual report on Form 10-K. Items included in
net income attributable to Alexandria's common stockholders were as follows:
Year Ended December 31,
2019 2018 2019 2018
(In millions, except per share amounts) Amount Per Share - Diluted
Gains on non-real estate investments(1):
Unrealized $ 161.5 $ 99.6 $ 1.44 $ 0.96
Realized - 14.7 - 0.14
Gain on sales of real estate 0.5 44.4 - 0.43
Impairment of:
Real estate(2) (12.3 ) (6.3 ) (0.11 ) (0.06 )
Non-real estate investments(1) (17.1 ) (5.5 ) (0.15 ) (0.05 )
Early extinguishment of debt:
Loss(3) (47.6 ) (1.1 ) (0.42 ) (0.01 )
Our share of gain - 0.8 - 0.01
Loss on early termination of interest rate
hedge agreements (1.7 ) - (0.02 ) -
Preferred stock redemption charge(4) (2.6 ) (4.2 ) (0.02 ) (0.04 )
Allocation to unvested restricted stock awards - (2.2 ) - (0.02 )
Total $ 80.7 $ 140.2 $ 0.72 $ 1.36
Weighted-average shares of common stock
outstanding for calculation of
EPS - diluted 112.5 103.3
(1) Refer to Note 7 - "Investments" to our consolidated financial statements
under Item 15 in this annual report on Form 10-K for more information.
(2) Refer to Note 3 - "Investments in Real Estate" to our consolidated financial
statements under Item 15 in this annual report on Form 10-K for more
information.
(3) Refer to Note 10 - "Secured and Unsecured Senior Debt" to our consolidated
financial statements under Item 15 in this annual report on Form 10-K for
more information.
(4) Refer to Note 16 - "Stockholders' Equity" to our consolidated financial
statements under Item 15 in this annual report on Form 10-K for more
information.
79--------------------------------------------------------------------------------
Same properties
We supplement an evaluation of our results of operations with an evaluation of operating performance of certain of our properties, referred to as "Same Properties ." For more information on the determination of ourSame Properties portfolio, refer to the definition of "Same Property Comparisons" in the "Non-GAAP Measures and Definitions" section under this Item 7 in this annual report on Form 10-K. The following table presents information regarding ourSame Properties as ofDecember 31, 2019 and 2018: December
31,
2019 2018
Percentage change in net operating income over comparable period from prior year
3.1% 3.7 % Percentage change in net operating income (cash basis) over comparable period from prior year
7.1% 9.2 %
Operating margin 71% 71%
Number of Same Properties 192 185
RSF 18,519,783 17,221,297
Occupancy - current-period average 96.6% 96.6 %
Occupancy - same-period prior-year average 96.3% 96.1 %
The following table reconciles the number ofSame Properties to total properties for the year endedDecember 31, 2019 : Development - under construction Properties9800 Medical Center Drive 19950 Medical Center Drive 1Alexandria District for Science and Technology 2201 Haskins Way 11165 Eastlake Avenue East 14150 Campus Point Court 1 7 Development - placed into service afterJanuary 1, 2018 Properties100 Binney Street 1399 Binney Street 1213 East Grand Avenue 1279 East Grand Avenue 1188 East Blaine Street 1 5 Redevelopment - under construction Properties Alexandria Center® -Long Island City 1945 Market Street 13160 Porter Drive 1 The Arsenal on the Charles 4 7 Redevelopment - placed into service afterJanuary 1, 2018 Properties9625 Towne Centre Drive 1 Alexandria PARC 4681 and 685 Gateway Boulevard 29900 Medical Center Drive 1266 and 275 Second Avenue 2 Alexandria Center® for AgTech, Phase I 1 11 Acquisitions afterJanuary 1, 2018 Properties100 Tech Drive 1219 East 42nd Street 1Summers Ridge Science Park 42301 5th Avenue 1 9704, 9708, 9712, and9714 Medical Center Drive 49920 Belward Campus Drive 121 Firstfield Road 1 25, 35, 45, 50, and55 West Watkins Mill Road 510260 Campus Point Drive and4161 Campus Point Court 23170 Porter Drive 1Shoreway Science Center 2 3911, 3931, and4075 Sorrento Valley Boulevard 3260 Townsend Street 15 Necco Street 1601 Dexter Avenue North 1 4224/4242 Campus Point Court and10210 Campus Point Drive 33825 and 3875 Fabian Way 2 SD Tech by Alexandria 10 The Arsenal on the Charles 7 Other 9 60 Unconsolidated real estate JV 6 Properties held for sale 3 Total properties excluded fromSame Properties 99Same Properties 192 (1)
Total properties in
(1) Includes 9880 Campus Point Drive and
Drive building was occupied through
development, and 3545 Cray Court is currently undergoing renovations.
80--------------------------------------------------------------------------------
Comparison of results for the year ended
The following table presents a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 . Refer to the "Non-GAAP Measures and Definitions" section under this Item 7 in this annual report on Form 10-K for definitions of "Tenant Recoveries" and "Net Operating Income" and their reconciliations from the most directly comparable financial measures presented in accordance with GAAP, income from rentals and net income, respectively. We provide a comparison of the results for the year endedDecember 31, 2018 to the year endedDecember 31, 2017 , including a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the year endedDecember 31, 2018 , compared to the year endedDecember 31, 2017 , within the "Results of Operations" section in Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2018 . Year Ended December 31, (Dollars in thousands) 2019 2018 $ Change % Change Income from rentals: Same Properties$ 927,077 $ 897,522 $ 29,555 3.3 % Non-Same Properties 238,711 113,196 125,515 110.9 Rental revenues 1,165,788 1,010,718 155,070 15.3 Same Properties 299,325 281,092 18,233 6.5 Non-Same Properties 51,751 22,971 28,780 125.3 Tenant recoveries 351,076 304,063 47,013 15.5 Income from rentals 1,516,864 1,314,781 202,083 15.4 Same Properties 448 298 150 50.3 Non-Same Properties 13,984 12,380 1,604 13.0 Other income 14,432 12,678 1,754 13.8 Same Properties 1,226,850 1,178,912 47,938 4.1 Non-Same Properties 304,446 148,547 155,899 104.9 Total revenues 1,531,296 1,327,459 203,837 15.4 Same Properties 353,431 332,051 21,380 6.4 Non-Same Properties 92,061 49,069 42,992 87.6 Rental operations 445,492 381,120 64,372 16.9 Same Properties 873,419 846,861 26,558 3.1 Non-Same Properties 212,385 99,478 112,907 113.5 Net operating income$ 1,085,804 $ 946,339 $ 139,465 14.7 %
Net operating income -
(55,393 ) (79,475 ) 24,082 (30.3 )
Amortization of acquired below-market
leases (7,249 ) (10,196 ) 2,947 (28.9 )
Net operating income - Same Properties
(cash basis) $ 810,777 $ 757,190 $ 53,587 7.1 %
81-------------------------------------------------------------------------------- Income from rentals Total income from rentals for the year endedDecember 31, 2019 , increased by$202.1 million , or 15.4%, to$1.5 billion , compared to$1.3 billion for the year endedDecember 31, 2018 , as a result of increases in rental revenues and tenant recoveries, as discussed below.
Rental revenues
Total rental revenues for the year endedDecember 31, 2019 , increased by$155.1 million , or 15.3%, to$1.2 billion , compared to$1.0 billion for the year endedDecember 31, 2018 . The increase was primarily due to an increase in rental revenues from ourNon-Same Properties aggregating$125.5 million related to 1.6 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2018 , and 60 operating properties aggregating 4.5 million RSF acquired subsequent toJanuary 1, 2018 . Rental revenues from ourSame Properties for the year endedDecember 31, 2019 , increased by$29.6 million , or 3.3%, to$927.1 million , compared to$897.5 million for the year endedDecember 31, 2018 . The increase was primarily due to significant rental rate increases on lease renewals and re-leasing of space sinceJanuary 1, 2018 and an increase inSame Properties' occupancy to 96.6% for the year endedDecember 31, 2019 , from 96.3% for the year endedDecember 31, 2018 . Refer to the "Leasing Activity" section under Item 2 in this annual report on Form 10-K for additional information.
Tenant recoveries
Tenant recoveries for the year endedDecember 31, 2019 , increased by$47.0 million , or 15.5%, to$351.1 million , compared to$304.1 million for the year endedDecember 31, 2018 . This increase is relatively consistent with the increase in our rental operating expenses of$64.4 million , or 16.9%, as discussed under "Rental Operations" below.Same Properties' tenant recoveries for the year endedDecember 31, 2019 , increased by$18.2 million , or 6.5%, primarily due to the increase in recoverable operating expenses for the year endedDecember 31, 2019 , as discussed below. As ofDecember 31, 2019 , 97% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Other income Other income for the years endedDecember 31, 2019 and 2018, was$14.4 million and$12.7 million , respectively, primarily consisting of construction management fees and interest income earned during each respective period. Rental operations Total rental operating expenses for the year endedDecember 31, 2019 , increased by$64.4 million , or 16.9%, to$445.5 million , compared to$381.1 million for the year endedDecember 31, 2018 . Approximately$43.0 million of the increase was due to an increase in rental operating expenses from ourNon-Same Properties , primarily related to 1.6 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2018 , and 60 operating properties aggregating 4.5 million RSF acquired subsequent toJanuary 1, 2018 .Same Properties' rental operating expenses increased by$21.4 million , or 6.4%, to$353.4 million during the year endedDecember 31, 2019 , compared to the$332.1 million for the year endedDecember 31, 2018 . Approximately$6.9 million of the increase was due to the higher tax expense stemming from a new 3.5% gross receipts tax on rental revenues by the city ofSan Francisco that went into effect onJanuary 1, 2019 , and an increase in property tax expense resulting from higher assessed values of certain of our properties inGreater Boston . The remaining$14.5 million increase was mainly a result of the higher repairs and maintenance expenses, payroll, and additional contract services incurred during the year endedDecember 31, 2019 . General and administrative expenses General and administrative expenses for the year endedDecember 31, 2019 , increased by$18.4 million , or 20.4%, to$108.8 million , compared to$90.4 million for the year endedDecember 31, 2018 . Approximately$5 million of the increase reflects incremental leasing costs recognized in expense in the current period, resulting from our adoption of a new accounting standard on leases onJanuary 1, 2019 . For a detailed discussion related to this new standard, refer to the "Lease Accounting" section in Note 2 - "Summary of Significant Accounting Policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. The remaining increase of approximately$13.4 million of general and administrative expenses was due to a 35.9% increase in our employee headcount sinceJanuary 1, 2018 , to accommodate the continued growth in the depth and breadth of our operations in multiple markets, including development and redevelopment projects placed into service and properties acquired subsequent toJanuary 1, 2018 , as discussed under "Income from Rentals" above. As a percentage of net operating income, our general and administrative expenses for the years endedDecember 31, 2019 and 2018, were 10.0% and 9.6%, respectively. 82 -------------------------------------------------------------------------------- Interest expense Interest expense for the years endedDecember 31, 2019 and 2018, consisted of the following (dollars in thousands): Year Ended December 31, Component 2019 2018 Change Interest incurred$ 262,238 $ 223,715 $ 38,523 Capitalized interest (88,563 ) (66,220 ) (22,343 ) Interest expense$ 173,675 $ 157,495 $ 16,180
Average debt balance outstanding(1)
4.1 % 4.1 % - %
(1) Represents the average debt balance outstanding during the respective
periods.
(2) Represents total interest incurred divided by the average debt balance
outstanding in the respective periods.
The net change in interest expense during the year ended
Interest Rate(1) Effective Date Change
Increases in interest incurred due to:
Issuances of debt:
$650 million unsecured senior notes payable 4.03 % June 2018/ $ 13,857
- green bond March 2019
$750 million unsecured senior notes payable 3.48 % July 2019 11,708
$300 million unsecured senior notes payable 4.93 % March 2019 11,323
$700 million unsecured senior notes payable 3.91 % July/September 2019 11,108
$350 million unsecured senior notes payable 3.96 % March 2019 10,386
- green bond
$450 million unsecured senior notes payable 4.81 % June 2018 10,003
$400 million unsecured senior notes payable 2.87 % September 2019 3,349
Fluctuations in interest rate and average
balance:
Commercial paper program 2,937
Reclassification of losses related to 1,702 (2)
termination of interest rate hedge
agreements
Higher rates for interest rate hedge 3,134
agreements in effect
Total increases 79,507
Decreases in interest incurred due to:
Repayments of debt:
$550 million unsecured senior notes payable 4.75 % July/August 2019 (10,931 )
$400 million unsecured senior notes payable 2.96 % July/August 2019 (4,905 )
Secured construction loan 3.29 % March 2019 (7,288 )
Secured notes payable 8.15 % January 2019 (8,337 )
Unsecured senior bank term loans Various Various (8,057 )
Fluctuations in interest rate and average
balance:
Unsecured senior line of credit (1,007 )
Other decrease in interest (459 )
Total decreases (40,984 )
Change in interest incurred 38,523
Increase in capitalized interest (22,343 )
Total change in interest expense $ 16,180 (1) Represents the weighted-average interest rate as of the end of the applicable
period, including amortization of loan fees, amortization of debt premiums
(discounts), and other bank fees.
(2) During the year ended
rate hedge agreements aggregating
Refer to Note 11 - "Interest Rate Hedge Agreements" to our consolidated
financial statements under Item 15 in this annual report on Form 10-K for
additional information.
83-------------------------------------------------------------------------------- In anticipation of LIBOR cessation at the end of 2021, we have been actively reducing LIBOR-based borrowings outstanding on our loans. As ofDecember 31, 2019 , our only outstanding LIBOR-based debt, excluding debt held by our unconsolidated joint ventures, included an outstanding balance of$384.0 million on our unsecured senior line of credit, which represented approximately 6% of our total debt balance outstanding as ofDecember 31, 2019 .
Depreciation and amortization
Depreciation and amortization expense for the year endedDecember 31, 2019 , increased by$67.0 million , or 14.0%, to$544.6 million , compared to$477.7 million for the year endedDecember 31, 2018 . The increase is primarily due to additional depreciation from 1.6 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2018 , and 60 operating properties aggregating 4.5 million RSF acquired subsequent toJanuary 1, 2018 .
Investment income
During the year endedDecember 31, 2019 , we recognized investment income of$194.6 million , which included$33.2 million of realized gains and$161.5 million of unrealized gains. Realized gains consisted of$50.3 million of realized gains, partially offset by impairment charges of$17.1 million related to investments in privately held entities that do not report NAV. Unrealized gains of$161.5 million during the year endedDecember 31, 2019 , primarily consisted of increases in fair values of our investments in publicly traded companies. For more information about our investments, refer to Note 7 - "Investments" to our consolidated financial statements under Item 15 in this annual report Form 10-K. For our impairments accounting policy, refer to the "Investments" section in Note 2 - "Summary of Significant Accounting Policies" to our consolidated financial statements under Item 15 in this annual report From 10-K. During the year endedDecember 31, 2018 , we recognized investment income aggregating$136.7 million , which included$37.1 million of realized gains and$99.6 million of unrealized gains. Realized gains consisted of$42.6 million of realized gains, partially offset by impairment charges of$5.5 million related to investments in privately held entities that do not report NAV. Unrealized gains of$99.6 million during the year endedDecember 31, 2018 , primarily consisted of observable price increases in our equity investments in privately held entities that do not report NAV aggregating$64.1 million , increases in fair values of our investments in privately held entities that report NAV aggregating$22.4 million , and increases in fair values of our investments in publicly traded companies aggregating$13.1 million .
Sales of real estate assets and impairment charges
During the three months endedJune 30, 2019 , we classified as held for sale our property at 6138/6150 Nancy Ridge Drive aggregating 56,698 RSF, located in our Sorrento Mesa submarket. InDecember 2019 , we completed the sale of the property for a sales price of$6.6 million , or$117 per RSF, and recognized a gain of$474 thousand . During the three months endedDecember 31, 2019 , we decided to sell two of our real estate assets aggregating 123,862 RSF located in non-cluster markets to allow for reinvestment of this capital into our highly leased value-creation pipeline. Upon classification as held for sale, we recognized impairment charges aggregating$12.3 million to lower the carrying amounts of these real estate assets to their respective estimated fair value less cost to sell. For additional information, refer to Note 19 - "Assets Classified as Held for Sale" to our consolidated financial statements under Item 15 in this annual report on Form 10-K. During the year endedDecember 31, 2018 , we recognized an impairment of real estate of$6.3 million related to one land parcel located inNorthern Virginia that was classified as held for sale and was subsequently sold during 2018 for a sales price of$6.0 million with no gain or loss.
Loss on early extinguishment of debt
During the year endedDecember 31, 2019 , we repaid early one secured note payable aggregating$106.7 million , which was originally due in 2020 and bore interest at 7.75%, and recognized a loss on early extinguishment of debt of$7.1 million , including the write-off of unamortized loan fees. Additionally during the year endedDecember 31, 2019 , we repaid early the remaining outstanding balance of$193.1 million under our secured construction loan related to 50/60 Binney Street and recognized a loss on early extinguishment of debt of$269 thousand . During the year endedDecember 31, 2019 , we also repaid outstanding balance of our unsecured senior bank term loan of$350.0 million and refinanced an aggregate of$950.0 million of unsecured senior notes payable which included$400.0 million of 2.75% unsecured senior notes payable due 2020 and$550.0 million of 4.60% unsecured senior notes payable due 2022. As a result, we recognized losses of$40.2 million related to the early extinguishment of debt, including the write-off of unamortized loan fees. 84 -------------------------------------------------------------------------------- During the year endedDecember 31, 2018 , we amended our unsecured senior line of credit and our unsecured senior bank term loan to, among other changes, extend the maturity dates of each toJanuary 28, 2024 . We recognized a loss on early extinguishment of debt of approximately$634 thousand related to the write-off of unamortized loan fees associated with these amendments. In addition, during the year endedDecember 31, 2018 , we repaid the remaining$200.0 million and$150.0 million outstanding balances under our 2019 unsecured senior bank term loan and one secured construction loan, respectively, and recognized a loss on early extinguishment of debt of$189 thousand and$299 thousand , respectively, related to the write-off of unamortized loan fees.
Equity in earnings of unconsolidated real estate joint ventures
During the year endedDecember 31, 2018 , we sold our remaining 27.5% ownership interest in the unconsolidated real estate joint venture that owned360 Longwood Avenue , located in our Longwood Medical Area submarket, and recognized a gain of$35.7 million . This gain is reflected in equity in earnings of unconsolidated real estate joint ventures in our consolidated statements of operations.
Preferred stock redemption charge
During the year endedDecember 31, 2019 , we repurchased, in privately negotiated transactions, 275,000 outstanding shares of our Series D Convertible Preferred Stock and recognized a preferred stock redemption charge of$2.6 million . InSeptember 2019 , we elected to convert the remaining 2.3 million outstanding shares of our Series D Convertible Preferred Stock into shares of our common stock. The Series D Convertible Preferred Stock became eligible for mandatory conversion at our discretion, at a set conversion rate of 0.2513 shares of common stock to one share of preferred stock, upon our common stock price exceeding$149.46 per share for the specified period of time required to cause the mandatory conversion. InOctober 2019 , we converted the Series D Convertible Preferred Stock into 578 thousand shares of common stock. This conversion was accounted for as an equity transaction, and we did not recognize a gain or loss. As ofDecember 31, 2019 , we had no outstanding shares of Series D Convertible Preferred Stock. During the year endedDecember 31, 2018 , we repurchased, in privately negotiated transactions, 402,000 outstanding shares of our Series D Convertible Preferred Stock and recognized a preferred stock redemption charge of$4.2 million .
Inflation
We do not believe that our revenues and earnings from real estate operations are
subject to significant risks from inflation. Refer to the "Inflation" subsection
of the "Cash Flows" section under this Item 7 for additional information.
85
--------------------------------------------------------------------------------Projected results
Based on our current view of existing market conditions and certain current assumptions, we present guidance for EPS attributable to Alexandria's common stockholders - diluted and funds from operations per share attributable to Alexandria's common stockholders - diluted for the year endingDecember 31, 2020 , as set forth in the table below. The tables below also provide a reconciliation of EPS attributable to Alexandria's common stockholders - diluted, the most directly comparable GAAP measure, to funds from operations per share, non-GAAP measure, and other key assumptions included in our updated guidance for the year endingDecember 31, 2020 . There can be no assurance that actual amounts will be materially higher or lower than these expectations. Refer to our discussion of "Forward-Looking Statements" under this Item 1A. Guidance Summary of Key Changes in Guidance As of 2/3/20 As
of
95.4% to 96.0% 95.7% to 96.3%
Projected 2020 Earnings per Share and Funds From Operations per Share Attributable to Alexandria's Common Stockholders - Diluted Earnings per share(2)$2.17 to$2.37 Depreciation and amortization of real estate assets
5.15
Allocation of unvested restricted stock awards
(0.04)
Funds from operations per share(3)$7.28 to$7.48 Midpoint$7.38
(1) The 0.3% reduction in occupancy guidance is attributable to vacancy
aggregating 71,016 RSF representing lease-up opportunities at one acquisition
completed in
additional information.
(2) Excludes unrealized gains or losses after
required to be recognized in earnings and are excluded from funds from
operations per share, as adjusted.
(3) Calculated in accordance with standards established by the
Governors of Nareit (the "Nareit Board of Governors"). Refer to the
definition of "Funds From Operations and Funds From Operations, As Adjusted,
Attributable to Alexandria's Common Stockholders" in the "Non-GAAP Measures
and Definitions" section under this Item 7 in this annual report on Form 10-K
for additional information.
Key Assumptions(1) 2020 Guidance (Dollars in millions) Low High
Occupancy percentage for operating properties in
95.4% 96.0%
Lease renewals and re-leasing of space: Rental rate increases 28.0%
31.0%
Rental rate increases (cash basis) 14.0%
17.0%
Same property performance: Net operating income increase 1.5%
3.5%
Net operating income increase (cash basis) 5.0%
7.0%
Straight-line rent revenue$ 113 $ 123 General and administrative expenses$ 121 $ 126 Capitalization of interest$ 108 $ 118 Interest expense$ 169 $ 179
(1) The completion of our development and redevelopment projects will result in
an increase in interest expense and other project costs, because these
project costs will no longer qualify for capitalization and will therefore be
expensed as incurred. Our key assumptions, included in the tables above, and
are subject to a number of variables and uncertainties, including those
discussed under Item 1A and this Item 7 in this annual report on Form 10-K.
To the extent our full-year earnings guidance is updated during the year, we
will provide additional disclosure supporting reasons for any significant
changes to such guidance.
(2) The 0.3% reduction in occupancy guidance is attributable to vacancy
aggregating 71,016 RSF representing lease-up opportunities at one acquisition
completed in
North America " section under Item 2 in this annual report on Form 10-K for additional information. Key Credit Metrics 2020 Guidance
Net debt and preferred stock to Adjusted EBITDA - fourth Less than or equal quarter of 2020, annualized
to 5.2x
Fixed-charge coverage ratio - fourth quarter of 2020,
annualized Greater than 4.5x
86--------------------------------------------------------------------------------
Consolidated and unconsolidated real estate joint ventures
We present components of balance sheet and operating results information for the noncontrolling interests' share of our consolidated real estate joint ventures and for our share of investments in unconsolidated real estate joint ventures to help investors estimate balance sheet and operating results information related to our partially owned entities. These amounts are estimated by computing, for each joint venture that we consolidate in our financial statements, the noncontrolling interest percentage of each financial item to arrive at the cumulative noncontrolling interest share of each component presented. In addition, for our real estate joint ventures that we do not control and do not consolidate, we apply our economic ownership percentage to the unconsolidated real estate joint ventures to arrive at our proportionate share of each component presented.Consolidated Real Estate Joint Ventures
Noncontrolling(1)
Property/Market/Submarket Interest Share
225 Binney Street /Greater Boston /Cambridge 70.0 %
75/125 Binney Street /Greater Boston /Cambridge 60.0 %
409 and 499 Illinois Street /San Francisco/Mission Bay/SoMa 40.0 %
1500 Owens Street /San Francisco/Mission Bay/SoMa 49.9 %
500 Forbes Boulevard /San Francisco /South San Francisco 90.0 %
Campus Pointe by Alexandria/San Diego/University Town Center (2) 45.0 %
5200 Illumina Way /San Diego/University Town Center 49.0 %
9625 Towne Centre Drive /San Diego/University Town Center 49.9 %
SD Tech by Alexandria/San Diego /Sorrento Mesa 50.0 %
Property/Market/Submarket Our Ownership Share(3)
1655 and 1725 Third Street/San Francisco/Mission Bay/SoMa 10.0 %
Menlo Gateway/San Francisco/Greater Stanford 49.0 %
1401/1413 Research Boulevard/Maryland/Rockville 65.0 % (4)
704 Quince Orchard Road /Maryland /Gaithersburg 56.8 % (4)
(1) In addition to the consolidated real estate joint ventures listed, various
partners hold insignificant noncontrolling interests in six other joint
ventures in
(2) Excludes 9880 Campus Point Drive in our
(3) In addition to the unconsolidated real estate joint ventures listed, we hold
an interest in one other insignificant unconsolidated real estate joint
venture in
(4) Represents our ownership interest; our voting interest is limited to 50%.
Our unconsolidated real estate joint ventures have the following non-recourse
secured loans that include the following key terms as of
Stated 100% at Joint Venture Level
Unconsolidated Joint Interest Interest Remaining
Venture Our Share Maturity Date Rate Rate(1) Debt Balance(2) Commitments
1401/1413 Research 5/17/20 L+2.50% 5.18% $ 26,158 $ 2,619
Boulevard 65.0%
1655 and 1725 Third
Street(3) 10.0% 6/29/21 L+3.70% 5.41% 309,275 65,725
704 Quince Orchard
Road 56.8% 3/16/23 L+1.95% 3.94% 9,172 5,709
Menlo Gateway, Phase
II 49.0% 5/1/35 4.53% 4.59% 56,321 99,529
Menlo Gateway, Phase
I 49.0% 8/10/35 4.15% 4.18% 142,101 -
$ 543,027 $ 173,582 (1) Includes interest expense and amortization of loan fees.
(2) Represents outstanding principal, net of unamortized deferred financing
costs, as of
(3) This unconsolidated joint venture is in the process of refinancing this loan
to, among other changes, extend the maturity date and fix the interest rate.
We expect to complete the refinancing next quarter.
87
--------------------------------------------------------------------------------
The following tables present information related to the operating results and
financial positions of our consolidated and unconsolidated real estate joint
ventures (in thousands):
Noncontrolling Interest Share of Consolidated Real Our Share of Unconsolidated
Estate Joint Ventures Real Estate Joint Ventures
December 31, 2019 December 31, 2019
Three Months Ended Year Ended Three Months Ended Year EndedTotal revenues $ 32,629 $ 97,989 $ 10,388$ 22,710 Rental operations (8,935 ) (26,675 ) (1,174 ) (3,070 ) 23,694 71,314 9,214 19,640 General and administrative (127 ) (347 ) (67 ) (158 ) Interest - - (1,668 ) (2,980 ) Depreciation and amortization (10,176 ) (30,960 ) (2,702 ) (6,366 ) Fixed returns allocated to redeemable noncontrolling interests(1) 221 875 - - $ 13,612 $ 40,882 $ 4,777$ 10,136 Straight-line rent and below-market lease revenue $ 1,948 $ 5,347 $ 5,843$ 10,172 Funds from operations(2) $ 23,788 $ 71,842 $ 7,479$ 16,502
(1) Represents an allocation of joint venture earnings to redeemable
noncontrolling interests primarily in one property in our
submarket. These redeemable noncontrolling interests earn a fixed return on
their investment rather than participate in the operating results of the
property.
(2) Refer to the definition of "Funds From Operations and Funds From Operations,
As Adjusted, Attributable to Alexandria's Common Stockholders" in the
"Non-GAAP Measures and Definitions" section under this Item 7 for the
definition and the reconciliation from the most directly comparable GAAP
measure.
December 31, 2019
Noncontrolling Interest Our Share of
Share of Consolidated Unconsolidated
Real Estate Joint Real Estate Joint
Ventures Ventures
Investments in real estate $ 1,186,585 $ 466,334
Cash, cash equivalents, and restricted cash 40,128 7,865
Other assets 142,669 41,741
Secured notes payable - (149,240 )
Other liabilities (68,730 ) (19,810 )
Redeemable noncontrolling interests (12,300 ) -
$ 1,288,352 $ 346,890
During the years ended
88
--------------------------------------------------------------------------------Liquidity
Net Debt and Preferred Stock to Significant Availability on Unsecured Senior
Adjusted EBITDA(1) Line of Credit
(in millions)
[[Image Removed: q419netdebtpreferred.jpg]]
[[Image Removed: q419lineofcredit.jpg]]
Fixed-Charge Coverage Ratio(1) Liquidity(3)
$2.4B
[[Image Removed: q419fixedcharge.jpg]] (In millions)
Availability under our $2.2 billion
unsecured senior line of credit $ 1,816
Cash, cash equivalents, and restricted
cash 243
Investments in publicly traded
companies 319
$ 2,378 (4)
(1) Quarter annualized.
(2) Due to the timing of two acquisitions that closed in
temporary 0.4x increase above our target for
debt and preferred stock to Adjusted EBITDA - fourth quarter of 2019,
annualized. We remain committed to our guidance for net debt and preferred
stock to Adjusted EBITDA - fourth quarter of 2020, annualized, of less than
or equal to 5.2x.
(3) As of
(4) In
agreements. Including the outstanding forward equity agreements, we had
proforma liquidity of $3.4 billion .
We expect to meet certain long-term liquidity requirements, such as requirements
for development, redevelopment, other construction projects, capital
improvements, tenant improvements, property acquisitions, leasing costs,
non-revenue-enhancing capital expenditures, scheduled debt maturities,
distributions to noncontrolling interests, repurchases/redemptions of preferred
stock, and payment of dividends through net cash provided by operating
activities, periodic asset sales, strategic real estate joint venture capital,
and long-term secured and unsecured indebtedness, including borrowings under our
unsecured senior line of credit, commercial paper program, and issuance of
additional debt and/or equity securities.
89
--------------------------------------------------------------------------------
We expect to continue meeting our short-term liquidity and capital requirements,
as further detailed in this section, generally through our working capital and
net cash provided by operating activities. We believe that the net cash provided
by operating activities will continue to be sufficient to enable us to make the
distributions necessary to continue qualifying as a REIT.
Over the next several years, our balance sheet, capital structure, and liquidity objectives are as follows:
• Retain positive cash flows from operating activities after payment of
dividends and distributions to noncontrolling interests for investment
in development and redevelopment projects and/or acquisitions;
• Improve credit profile and relative long-term cost of capital;
• Maintain diverse sources of capital, including sources from net cash
provided by operating activities, unsecured debt, secured debt,
selective real estate asset sales, partial interest sales, non-real
estate investment sales, preferred stock, and common stock;
• Maintain commitment to long-term capital to fund growth;
• Maintain prudent laddering of debt maturities;
• Maintain solid credit metrics;
• Maintain significant balance sheet liquidity;
• Mitigate variable-rate debt exposure through the reduction of
short-term and medium-term variable-rate bank debt;
• Maintain a large unencumbered asset pool to provide financial flexibility;
• Fund common stock dividends and distributions to noncontrolling
interests from net cash provided by operating activities;
• Manage a disciplined level of value-creation projects as a percentage
of our gross investments in real estate; and
• Maintain high levels of pre-leasing and percentage leased in
value-creation projects.
The following table presents the availability under our unsecured senior line of
credit less amounts outstanding on our commercial paper program; cash, cash
equivalents, and restricted cash; and investments in publicly traded companies
as of December 31, 2019 (dollars in thousands):
Stated Aggregate Outstanding Remaining
Description Rate Commitments
Balance Commitments/Liquidity
Availability under our unsecured senior L+0.825%
1,816,000
line of credit
Cash, cash equivalents, and restricted
cash 242,689
Investments in publicly traded
companies 318,637
Total liquidity $ 2,377,326
Refer to Note 10 - "Secured and Unsecured Senior Debt" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for a discussion of our secured construction loans.
Cash, cash equivalents, and restricted cash
As ofDecember 31, 2019 andDecember 31, 2018 , we had$242.7 million and$272.1 million , respectively, of cash, cash equivalents, and restricted cash. We expect existing cash, cash equivalents, and restricted cash, cash flows from operating activities, proceeds from real estate asset sales, non-real estate investment sales, borrowings under our unsecured senior line of credit and commercial paper program, issuances of unsecured notes payable, and issuances of common stock to continue to be sufficient to fund our operating activities and cash commitments for investing and financing activities, such as regular quarterly dividends, distributions to noncontrolling interests, scheduled debt repayments, acquisitions, and certain capital expenditures, including expenditures related to construction activities. 90
--------------------------------------------------------------------------------
Cash flows
We report and analyze our cash flows based on operating activities, investing activities, and financing activities. The following table summarizes changes in our cash flows for the years endedDecember 31, 2019 and 2018 (in thousands): Year EndedDecember 31, 2019 2018
Change
Net cash provided by operating activities$ 683,857 $ 570,339 $ 113,518 Net cash used in investing activities$ (3,641,320 ) $ (2,161,760 ) $ (1,479,560 ) Net cash provided by financing activities$ 2,927,482 $ 1,588,433 $ 1,339,049 Operating activities Cash flows provided by operating activities are primarily dependent upon the occupancy level of our asset base, the rental rates of our leases, the collectibility of rent and recovery of operating expenses from our tenants, the timing of completion of development and redevelopment projects, and the timing of acquisitions and dispositions of operating properties. Net cash provided by operating activities for the year endedDecember 31, 2019 , increased to$683.9 million , compared to$570.3 million for the year endedDecember 31, 2018 . This increase was primarily attributable to (i) cash flows generated from our highly leased development and redevelopment projects recently placed into service, (ii) income-producing acquisitions sinceJanuary 1, 2018 , and (iii) increases in rental rates on lease renewals and re-leasing of space sinceJanuary 1, 2018 .
Investing activities
Cash used in investing activities for the years ended
Year Ended December 31,
2019 2018 Increase (Decrease)
Sources of cash from investing activities:
Sales of non-real estate investments $ 147,332 $ 103,679 $ 43,653
Return of capital from unconsolidated real
estate joint ventures 14 68,592 (68,578 )
Proceeds from sales of real estate 6,619 20,190 (13,571 )
153,965 192,461 (38,496 )
Uses of cash for investing activities:
Purchases of real estate 2,259,778 1,037,180 1,222,598
Additions to real estate 1,224,541 927,168 297,373
Deposits for investing activities 18,107 2,000 16,107
Acquisitions of interest in unconsolidated
real estate joint ventures - 35,922 (35,922 )
Investments in unconsolidated real estate
joint ventures 102,081 116,008 (13,927 )
Additions to non-real estate investments 190,778 235,943
(45,165 )
3,795,285 2,354,221 1,441,064
Net cash used in investing activities
$ 1,479,560
The change in net cash used in investing activities for the year endedDecember 31, 2019 , is primarily due to an increased use of cash for property acquisitions and for investments in unconsolidated real estate joint ventures, partially offset by proceeds from sale of investments. Refer to Note 3 - "Investments in Real Estate" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for further information. 91 --------------------------------------------------------------------------------
Financing activities
Cash flows provided by financing activities for the years ended
Year Ended December 31,
2019 2018 Change
Proceeds from issuance of unsecured senior notes payable$ 2,721,169 $ 899,321 $ 1,821,848 Repayments of unsecured senior notes payable (950,000 ) - (950,000 ) Repayments of borrowings from unsecured senior bank term loan (350,000 ) (200,000 ) (150,000 ) Borrowings from secured notes payable - 17,784 (17,784 ) Repayments of borrowings from secured notes payable (306,199 ) (156,888 ) (149,311 ) Borrowings from unsecured senior line of credit 5,056,000 4,741,000
315,000
Repayments of borrowings from unsecured senior line of credit (4,880,000 ) (4,583,000 ) (297,000 ) Proceeds from issuance of commercial paper program 2,233,000 -
2,233,000
Repayments of borrowings from commercial paper program (2,233,000 ) - (2,233,000 ) Premium paid for early extinguishment of debt (41,351 ) - (41,351 ) Payments of loan fees (27,182 ) (19,292 ) (7,890 ) Changes related to debt 1,222,437 698,925 523,512 Contributions from and sales of noncontrolling interests 1,022,712 28,275
994,437
Distributions to and purchases of noncontrolling interests (48,225 ) (32,253 ) (15,972 ) Proceeds from the issuance of common stock 1,216,445 1,293,301 (76,856 ) Dividend payments (451,170 ) (385,839 ) (65,331 ) Taxes paid related to net settlement of equity awards (25,477 ) - (25,477 ) Repurchase of 7.00% Series D cumulative convertible preferred stock (9,240 ) (13,976 ) 4,736 Net cash provided by financing activities$ 2,927,482 $ 1,588,433 $ 1,339,049 Inflation As ofDecember 31, 2019 , approximately 97% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Approximately 95% of our leases (on an RSF basis) contained effective annual rent escalations that were either fixed (generally ranging from 3.0% to 3.5%) or indexed based on a consumer price index or other indices. Accordingly, we do not believe that our cash flows or earnings from real estate operations are subject to significant risks from inflation. A period of inflation, however, could cause an increase in the cost of our variable-rate borrowings, including borrowings related to our unsecured senior line of credit and secured construction loans held by our unconsolidated joint ventures. 92 --------------------------------------------------------------------------------
Capital resources
We expect that our principal liquidity needs for the year endingDecember 31, 2020 , will be satisfied by the following multiple sources of capital, as shown in the table below. There can be no assurance that our sources and uses of capital will not be materially higher or lower than these expectations. Key Sources and Uses of Capital 2020 Guidance Certain (In millions) Range Midpoint Completed Items Sources of capital: Net cash provided by operating activities after dividends$ 200 $ 240 $
220
Incremental debt 400 360
380
Real estate dispositions, partial interest (2) sales, and common equity(1) 1,850 2,050 1,950$ 1,025 Total sources of capital$ 2,450 $ 2,650 $ 2,550 Uses of capital: Construction$ 1,550 $ 1,650 $ 1,600 Acquisitions(1) 900 1,000 950$ 341 Total uses of capital$ 2,450 $ 2,650 $ 2,550 Incremental debt (included above): Issuance of unsecured senior notes payable$ 550 $ 650 $
600
$2.2 billion unsecured senior line of credit and commercial paper program/other (150 ) (290 ) (220 ) Incremental debt$ 400 $ 360 $ 380
(1) Excludes the formation of a consolidated joint venture with
"Subsequent Events" under the "Executive Summary" section of this Item 7 in
this annual report on Form 10-K for additional information.
(2) In
aggregate of 6.9 million shares of our common stock (including the exercise
of underwriters' option) at a public offering price of
before underwriting discounts. We expect to settle these forward equity sales
agreements in 2020 and receive proceeds of approximately
further adjusted as provided in the sales agreements.
The key assumptions behind the sources and uses of capital in the table above
include a favorable capital market environment, performance of our core
operating properties, lease-up and delivery of current and future development
and redevelopment projects, and leasing activity. Our expected sources and uses
of capital are subject to a number of variables and uncertainties, including
those discussed under Item 1A and under this Item 7 in this annual report on
Form 10-K. We expect to update our forecast of sources and uses of capital on a
quarterly basis.
93--------------------------------------------------------------------------------
Sources of capital
Net cash provided by operating activities after dividends
We expect to retain$200.0 million to$240.0 million of net cash flows from operating activities after payment of common stock dividends, and distributions to noncontrolling interests. For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences. For the year endingDecember 31, 2020 , we expect our recently delivered projects, our highly pre-leased value-creation projects expected to be completed, along with contributions fromSame Properties and recently acquired properties, to contribute significant increases in rental revenue, net operating income, and cash flows. We anticipate significant contractual near-term growth in annual cash rents of$55 million related to the commencement of contractual rents on the projects recently placed into service that are near the end of their initial free rent period. Refer to the "Cash Flows" section under this Item 7 in this annual report on Form 10-K for a discussion of net cash provided by operating activities for the year endedDecember 31, 2019 .
Debt
InFebruary 2019 , S&P Global Ratings raised our corporate issuer credit rating to BBB+/Stable from BBB/Positive. The rating upgrade reflects our consistently strong operating performance and continued successful delivery of our value-creation pipeline.
The table below reflects the maximum borrowings, outstanding balances,
applicable rates, maturity dates, and facility fees for our unsecured senior
line of credit and commercial paper program as of
Maximum Outstanding
Borrowings Balance(1) Applicable Rate Maturity Date Facility Fee
Commercial paper $750
program million $- N/A N/A N/A
Unsecured senior $2.2 $384
line of credit billion million L+0.825% January 2024(2) 0.15%
(1) Excludes loan fees as of
(2) Includes two six-month extension options that we control.
InSeptember 2019 , we established a commercial paper program with the ability to issue up to$750.0 million of commercial paper notes with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is backed by our$2.2 billion unsecured senior line of credit, and at all times we expect to retain a minimum undrawn amount of borrowing capacity under our unsecured senior line of credit equal to any outstanding balance on our commercial paper program. We use borrowings under the program to fund short-term capital needs. The notes issued under our commercial paper program are sold under customary terms in the commercial paper market. They are typically issued at a discount to par, representing a yield to maturity dictated by market conditions at the time of issuance. We use our unsecured senior line of credit to fund working capital, construction activities, and, from time to time, acquisition of properties. Borrowings under the unsecured senior line of credit will bear interest at a "Eurocurrency Rate," a "LIBOR Floating Rate," or a "Base Rate" specified in the amended unsecured senior line of credit agreement plus, in any case, the Applicable Margin. The Eurocurrency Rate specified in the amended unsecured senior line of credit agreement is, as applicable, the rate per annum equal to either (i) the LIBOR or a successor rate thereto as agreed to by the administrative agent and the Company for loans denominated in a LIBOR quoted currency (i.e.,U.S. dollars, euro, sterling, or yen), (ii) the average annual yield rates applicable to Canadian dollar bankers' acceptances for loans denominated in Canadian dollars, (iii) the Bank Bill Swap Reference Bid rate for loans denominated in Australian dollars, or (iv) the rate designated with respect to the applicable alternative currency for loans denominated in a non-LIBOR quoted currency (other than Canadian or Australian dollars). The LIBOR Floating Rate means, for any day, one month LIBOR, or a successor rate thereto as agreed to by the administrative agent and the Company for loans denominated inU.S. dollars. The Base Rate means, for any day, a fluctuating rate per annum equal to the highest of (i) the federal funds rate plus 1/2 of 1.00%, (ii) the rate of interest in effect for such day as publicly announced from time to time byBank of America as its "prime rate," and (iii) the Eurocurrency Rate plus 1.00%. Our unsecured senior line of credit contains a feature that allows lenders to competitively bid on the interest rate for borrowings under the facility. This may result in an interest rate that is below the stated rate. In addition to the cost of borrowing, the unsecured senior line of credit is subject to an annual facility fee of 0.15% based on the aggregate commitments outstanding. We expect to fund a portion of our capital needs in 2020 from the issuance of unsecured senior notes payable and from borrowings under our unsecured senior line of credit and commercial paper program. 94 -------------------------------------------------------------------------------- During the year endedDecember 31, 2019 , our issuances of unsecured senior notes payable and repayments of debt included the following (dollars in millions): Stated Issuance Interest Effective Principal Date Rate Interest Rate Maturity Date Amount Net Proceeds Issuances
Unsecured senior notes payable March 4.00 % 4.03 %
1/15/24$ 200 $ 203.0 - green bond Unsecured senior notes payable March 3.80 3.96 4/15/26 350 346.6 - green bond Unsecured senior notes payable March 4.85 4.93 4/15/49 300 296.5 Unsecured senior notes payable July 3.375 3.48 8/15/31 750 742.5 Unsecured senior notes payable July/Sept 4.00 3.91 2/1/50 700 711.1 Unsecured senior notes payable Sept 2.75 2.87 12/15/29 400 395.8 Weighted average/total 3.71 % 3.77 % 16.9 years$ 2,700 (1)$ 2,695.5 Repayments of debt Secured notes payable Jan 7.75 % 8.15 % 4/1/20$ 107 N/A Secured construction loan March 3.29 3.29 1/28/20 193 N/A Unsecured senior notes payable July/Aug 2.75 2.96 1/15/20 400 N/A Unsecured senior notes payable July/Aug 4.60 4.75 4/1/22 550 N/A Unsecured senior bank term loan July/Sept 3.62 3.62 1/2/25 350 N/A Weighted average/total 3.97 % 4.11 % 2.4 years$ 1,600 (1)
(1) The remaining proceeds received from our debt issuances, after repayments of
debt, were used to fund the construction of our value-creation pipeline and
acquisitions completed during 2019. Refer to Note 3 - "Investments in Real
Estate" to our consolidated financial statements under Item 15 in this annual
report on Form 10-K for additional information.
Our$350.0 million of 3.80% unsecured senior notes payable and our$200.0 million of 4.00% unsecured senior notes payable issued inMarch 2019 were allocated to fund recently completed and future eligible green development and redevelopment projects, and to the repayment of the outstanding balance of$193.1 million under our secured construction loan related to 50/60 Binney Street , a recently completed Class A property, which was awarded LEED® Gold certification. The proceeds from our$300.0 million of 4.85% unsecured senior notes payable issued inMarch 2019 were primarily allocated to fund acquisitions completed during 2019. Refer to Note 3 - "Investments in Real Estate" to our consolidated financial statements under Item 15 of this report for additional information. The proceeds from our$750.0 million of 3.375% unsecured senior notes payable issued inJuly 2019 and partial proceeds from our$700.0 million of 4.00% unsecured senior notes payable, which were issued in two tranches of$500.0 million duringJuly 2019 and$200.0 million duringSeptember 2019 , were primarily used to refinance$400.0 million of 2.75% unsecured senior notes payable due 2020 and$550.0 million of 4.60% unsecured senior notes payable due 2022, pursuant to a partial cash tender offer completed onJuly 17, 2019 . We tendered$318.6 million , or 79.64%, of our outstanding 2.75% unsecured senior notes payable, and$384.9 million , including$135 thousand tendered via guaranteed deliveries, or 69.98%, of our outstanding 4.60% unsecured senior notes payable. A subsequent call for redemption for the remaining outstanding amounts was settled onAugust 16, 2019 . Additionally, a portion of the proceeds from our$750.0 million of 3.375% unsecured senior notes payable,$700.0 million of 4.00% unsecured senior notes payable, and$400.0 million of 2.75% unsecured senior notes payable issued inSeptember 2019 were used to complete the repayment of the remaining principal balance on our unsecured senior bank term loan of$350.0 million . As a result of our debt issuances and repayments of debt, we recognized losses of$47.6 million related to the early extinguishment of debt during the year endedDecember 31, 2019 , including$40.2 million related to the refinancing of our 2.75% unsecured senior notes payable due 2020 and 4.60% unsecured senior notes payable and the repayment of our unsecured senior bank term loan. 95 -------------------------------------------------------------------------------- InSeptember 2019 , we established a commercial paper program, which received credit ratings of A-2 from S&P Global Ratings and Prime-2 from Moody's Investors Service. Under this program, we have the ability to issue up to$750.0 million of commercial paper notes with varying maturity lengths, with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is backed by our$2.2 billion unsecured senior line of credit, and at all times we expect to retain a minimum undrawn amount of borrowing capacity under our unsecured senior line of credit equal to any outstanding balance on our commercial paper program. We use and expect to continue to use net proceeds from the issuances of the commercial paper notes for general working capital and other general corporate purposes. General corporate purposes may include the repayment of other debt and selective development, redevelopment, or acquisition of properties. The commercial paper notes sold during the year endedDecember 31, 2019 , were issued at a yield to maturity of between 1.83% and 2.29%. As ofDecember 31, 2019 , we had no outstanding borrowings under our commercial paper program.
Refer to Note 10 - "Secured and Unsecured Senior Debt" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information regarding our unsecured senior notes payable.
Proactive management of transition away from LIBOR
LIBOR has been used extensively in theU.S. and globally as a reference rate for various commercial and financial contracts, including variable-rate debt and interest rate swap contracts. However, it is expected that LIBOR will no longer be used after 2021. To address the increased risk of LIBOR discontinuation, in theU.S. the Alternative Reference Rates Committee ("ARRC") was established to help ensure the successful transition from LIBOR. InJune 2017 , the ARRC selected the SOFR, a new index calculated by reference to short-term repurchase agreements backed byTreasury securities, as its preferred replacement forU.S. dollar LIBOR. We have been closely monitoring developments related to the transition away from LIBOR and have implemented numerous proactive measures to minimize the potential impact of the transition to the Company, specifically: • We have proactively reduced outstanding LIBOR-based borrowings under our unsecured senior bank term loans and secured construction loans through repayments. FromJanuary 2017 toDecember 2018 , we retired approximately$942.0 million of such debt. • During the year endedDecember 31, 2019 , we further reduced our exposure to LIBOR as follows: • Repaid the$350.0 million balance and extinguished our unsecured senior bank term loan. • Terminated our LIBOR-based interest rate hedge agreements aggregating$350.0 million in conjunction with the
extinguishment of
our unsecured senior bank term loan. As a result, we had no
outstanding interest rate hedge agreements as of December 31, 2019 .
• Fully repaid outstanding balances aggregating $193.1 million under
our LIBOR-based construction loans.
• During the three months ended
commercial paper program, under which we have the ability to issue up
to $750.0 million of commercial paper notes, which bear interest at
short-term fixed rates, with a maximum maturity of 397 days from the
date of issuance. Our commercial paper program is not subjected to
LIBOR and is used for funding short-term working capital needs. As of
December 31, 2019 , we had no borrowings outstanding under our
commercial paper program.
• We continue to prudently manage outstanding borrowings under our
unsecured senior line of credit, which represented less than 6% of our
total debt balance outstanding as of December 31, 2019 . ExcludingLIBOR-based debt held by our unconsolidated joint ventures, borrowings
under our unsecured senior line of credit represented our only
LIBOR-based debt outstanding as of December 31, 2019 .
• Our unsecured senior line of credit contains fallback languagegenerally consistent with the ARRC's Amendment Approach, which provides
a streamlined amendment approach for negotiating a benchmark
replacement and introduces clarity with respect to the fallback trigger
events and an adjustment to be applied to the successor rate.
• We continue to monitor developments by the ARRC and other governing
bodies involved in LIBOR transition.
For additional information, refer to Note 10 - "Secured and Unsecured Senior Debt" and Note 11 - "Interest Rate Hedge Agreements" to our consolidated financial statements under Item 15 and "Item 1A. Risk Factors" in this annual report on Form 10-K.
Real estate dispositions and common equity
We expect to continue the disciplined execution of select sales of operating assets. Future sales will provide an important source of capital to fund a portion of our highly leased value-creation development and redevelopment projects. We may also consider additional sales of partial interests in core Class A properties and/or development projects. For 2020, we expect real estate dispositions, partial interest sales, and issuances of common equity ranging from$1.9 billion to$2.1 billion . The amount of asset sales necessary to meet our forecasted sources of capital will vary depending upon the amount of EBITDA associated with the assets sold. In addition, the amount of common equity issued will be subject to market conditions.
For additional information, refer to the "Sales of Partial Interests and
Formation of
96
--------------------------------------------------------------------------------Common equity transactions
During the year ended
• Issued an aggregate of 8.1 million shares of common stock, at a
weighted-average price of
of underwriters' discounts) of approximately
ended
• Issued 602,484 shares of common stock under our ATM program, at a
weighted-average price of $145.58 per share, for net proceeds of $86.1
million , during the three months ended June 30, 2019 . As of December 31,
2019 , we had approximately $22.5 million of gross proceeds available to be
issued under our ATM program. We expect to file a new ATM program in the
first quarter of 2020.
• The proceeds were used to fund construction projects and to fund 2019
acquisitions.
In January 2020 , we entered into forward equity sales agreements to sell an
aggregate of 6.9 million shares of our common stock (including the exercise of
an underwriters' option) at a public offering price of $155.00 per share, before
underwriting discounts. We expect to settle these forward equity sales
agreements in 2020, and receive proceeds of approximately $1.0 billion , to be
further adjusted as provided in the sales agreements, which will fund pending
and recently completed acquisitions and the construction of our highly leased
development projects.
Other sources
Under our current shelf registration statement filed with the SEC , we may offer
common stock, preferred stock, debt, and other securities. These securities may
be issued, from time to time, at our discretion based on our needs and market
conditions, including, as necessary, to balance our use of incremental debt
capital.
Additionally, we hold interests, together with joint venture partners, in joint
ventures that we consolidate in our financial statements. These joint venture
partners may contribute equity into these entities primarily related to their
share of funds for construction and financing-related activities. During the
year ended December 31, 2019 , we received $1.0 billion in contributions from and
sales of noncontrolling interests.
Uses of capital
Summary of capital expenditures
One of our primary uses of capital relates to the development, redevelopment, pre-construction, and construction of properties. We currently have projects in our growth pipeline aggregating 2.1 million RSF of Class A office/laboratory and tech office space undergoing construction, 6.3 million RSF of near-term and intermediate-term development and redevelopment projects, and 3.8 million SF of future development projects inNorth America . We incur capitalized construction costs related to development, redevelopment, pre-construction, and other construction activities. We also incur additional capitalized project costs, including interest, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, pre-construction, or construction of a project, during periods when activities necessary to prepare an asset for its intended use are in progress. Refer to the "New Class A Development and Redevelopment Properties :Projects Under Construction " and "Summary of Capital Expenditures" subsections of the "Investments in Real Estate" section under Item 2 in this annual report on Form 10-K for more information on our capital expenditures. We capitalize interest cost as a cost of the project only during the period for which activities necessary to prepare an asset for its intended use are ongoing, provided that expenditures for the asset have been made and interest cost has been incurred. Capitalized interest for the years endedDecember 31, 2019 and 2018, of$88.6 million and$66.2 million , respectively, is classified in investments in real estate. Indirect project costs, including construction administration, legal fees, and office costs that clearly relate to projects under development or construction, are capitalized as incurred during the period an asset is undergoing activities to prepare it for its intended use. We capitalized payroll and other indirect project costs related to development, redevelopment, pre-construction, and construction projects, which aggregated$43.2 million and$32.5 million for the years endedDecember 31, 2019 and 2018, respectively. The increase in capitalized payroll and other indirect project costs for the year endedDecember 31, 2019 , compared to the same period in 2018 was primarily due to an increase in our value-creation pipeline projects undergoing construction and pre-construction activities aggregating 15 projects with 3.7 million RSF in 2019 over 2018. Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective tenants. These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings. Should we cease activities necessary to prepare an asset for its intended use, the interest, taxes, insurance, and certain other direct project costs related to this asset would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred. 97 -------------------------------------------------------------------------------- Fluctuations in our development, redevelopment, and construction activities could result in significant changes to total expenses and net income. For example, had we experienced a 10% reduction in development, redevelopment, and construction activities without a corresponding decrease in indirect project costs, including interest and payroll, total expenses would have increased by approximately$13.2 million for the year endedDecember 31, 2019 . We use third-party brokers to assist in our leasing activity, who are paid on a contingent basis upon successful leasing. We are required to capitalize initial direct costs related to successful leasing transactions that result directly from and are essential to the lease transaction and would not have been incurred had that lease transaction not been successfully executed. During the year endedDecember 31, 2019 , we capitalized total initial direct leasing costs of$73.6 million . EffectiveJanuary 1, 2019 , costs that we incur to negotiate or arrange a lease regardless of its outcome, such as fixed employee compensation, tax, or legal advice to negotiate lease terms, and other costs, are expensed as incurred.
Acquisitions
Refer to the "Acquisitions" section in Note 3 - "Investments in Real Estate" and to Note 4 - "Consolidated and Unconsolidated Real Estate Joint Ventures " to our consolidated financial statements under Item 15 in this annual report on Form 10-K for detailed information on our acquisitions.
7.00% Series D cumulative convertible preferred stock repurchases and conversion
During the year endedDecember 31, 2019 , we repurchased, in privately negotiated transactions, 275,000 shares of our Series D Convertible Preferred Stock at an aggregate price of$9.2 million , or$33.60 per share, and recognized a preferred stock redemption charge of$2.6 million . Additionally, we elected to convert 2.3 million outstanding shares of our Series D Convertible Preferred Stock into shares of our common stock. The Series D Convertible Preferred Stock became eligible for mandatory conversion at our discretion, at a set conversion rate of 0.2513 shares of common stock to one share of preferred stock, upon our common stock price exceeding$149.46 per share for the specified period of time required to cause the mandatory conversion. We converted the Series D Convertible Preferred Stock into 578 thousand shares of common stock. This conversion was accounted for as an equity transaction, and we did not recognize a gain or loss. As ofDecember 31, 2019 , we had no shares of our Series D Convertible Preferred Stock outstanding.
Dividends
During the years endedDecember 31, 2019 and 2018, we paid the following dividends (in thousands): Year Ended December 31, 2019 2018 Change Common stock dividends$ 447,029 $ 380,632 $ 66,397 7.00% Series D cumulative convertible preferred stock dividends 4,141 5,207 (1,066 )$ 451,170 $ 385,839 $ 65,331 The increase in dividends paid on our common stock for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , was primarily due to an increase in number of common shares outstanding subsequent toJanuary 1, 2018 , as a result of issuances of common stock under our ATM program and settlement of forward equity sales agreements, and partially due to the increase in the related dividends to$3.94 per common share paid during the year endedDecember 31, 2019 , from$3.66 per common share paid during the year endedDecember 31, 2018 . The decrease in dividends paid on our Series D Convertible Preferred Stock during the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , was due to a decrease in number of shares outstanding as a result of the repurchase of 402,000 and 275,000 outstanding shares of our Series D Convertible Preferred Stock in 2018 and 2019, respectively, and the conversion of the remaining 2.3 million outstanding shares of our Series D Convertible Preferred Stock into shares of our common stock during 2019. As ofDecember 31, 2019 , we had no outstanding shares of Series D Convertible Preferred Stock. 98 --------------------------------------------------------------------------------
Contractual obligations and commitments
Contractual obligations as ofDecember 31, 2019 , consisted of the following (in thousands): Payments by Period Total 2020 2021-2022 2023-2024 Thereafter Secured and unsecured debt(1)(2)$ 6,796,440 $ 6,418 $ 14,128 $ 1,822,107 $ 4,953,787 Estimated interest payments on fixed-rate debt(3) 2,815,902 256,996 500,601 442,455 1,615,850 Ground lease obligations 674,741 13,879 28,410 28,979 603,473 Other obligations 25,198 1,253 3,988 4,506 15,451 Total$ 10,312,281 $ 278,546 $ 547,127 $ 2,298,047 $ 7,188,561
(1) Amounts represent principal amounts due and exclude unamortized premiums
(discounts) and deferred financing costs reflected on the consolidated
balance sheets under Item 15 in this annual report on Form 10-K.
(2) Payment dates reflect any extension options that we control.
(3) Amounts are based upon contractual interest rates, including interest payment
dates and scheduled maturity dates.
Secured notes payable
Secured notes payable as ofDecember 31, 2019 , consisted of six notes secured by 11 properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 3.57%. As ofDecember 31, 2019 , the total book value of our investments in real estate securing debt was approximately$1.1 billion . As ofDecember 31, 2019 , our entire secured notes payable balance of$349.4 million , including unamortized discounts and deferred financing costs, was fixed-rate debt.
Unsecured senior notes payable and unsecured senior line of credit
The requirements of, and our actual performance with respect to, the key financial covenants under our unsecured senior notes payable as ofDecember 31, 2019 , were as follows: Covenant Ratios(1) Requirement December 31, 2019 Less than or equal to Total Debt to Total Assets 60% 34% Less than or equal to Secured Debt to Total Assets 40% 2%
Consolidated EBITDA(2) to Interest Greater than or equal Expense
to 1.5x 7.0x
Unencumbered Total Asset Value to Greater than or equal Unsecured Debt
to 150% 277%
(1) All covenant ratio titles utilize terms as defined in the respective debt
agreements.
(2) The calculation of consolidated EBITDA is based on the definitions contained
in our loan agreements and is not directly comparable to the computation of
EBITDA as described in Exchange Act Release No. 47226.
In addition, the terms of the indentures, among other things, limit the ability of the Company,Alexandria Real Estate Equities, L.P. , and the Company's subsidiaries to (i) consummate a merger, or consolidate or sell all or substantially all of the Company's assets, and (ii) incur certain secured or unsecured indebtedness.
The requirements of, and our actual performance with respect to, the key
financial covenants under our unsecured senior line of credit as of
Covenant Ratios (1) Requirement December
31, 2019
Less than or equal to
Leverage Ratio 60.0% 29.7%
Less than or equal to
Secured Debt Ratio 45.0% 1.5%
Greater than or equal
Fixed-Charge Coverage Ratio to 1.50x 3.85x
Greater than or equal
Unsecured Interest Coverage Ratio to 1.75x 5.99x
(1) All covenant ratio titles utilize terms as defined in the respective debt
agreements.
99--------------------------------------------------------------------------------
Estimated interest payments
Estimated interest payments on our fixed-rate debt were calculated based upon contractual interest rates, including interest payment dates and scheduled maturity dates. As ofDecember 31, 2019 , 94% of our debt was fixed-rate debt. For additional information regarding our debt, refer to Note 10 - "Secured and Unsecured Senior Debt" to our consolidated financial statements under Item 15 in this annual report on Form 10-K.
Ground lease obligations
Ground lease obligations as ofDecember 31, 2019 , included leases for 31 of our properties, which accounted for approximately 11% of our total number of properties. Excluding one ground lease related to one operating property that expires in 2036 with a net book value of$7.7 million as ofDecember 31, 2019 , our ground lease obligations have remaining lease terms ranging from approximately 34 to 95 years, including extension options. Refer to Note 5 - "Leases" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for further information on our ground leases. As ofDecember 31, 2019 , the remaining contractual payments under ground and office lease agreements in which we are the lessee aggregated$674.7 million and$25.2 million , respectively. As ofDecember 31, 2019 , all of our ground and office leases in which we are the lessee were classified as operating leases. Under the new lease accounting standard effective onJanuary 1, 2019 , described in detail under the "Lease Accounting" section in Note 2 - "Summary of Significant Accounting Policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K, we are required to recognize a right-of-use asset and a related liability to account for our future obligations under operating lease arrangements in which we are the lessee. The operating lease liability is measured based on the present value of the remaining lease payments, including payments during the term under our extension options that we are reasonably certain to exercise. The right-of-use asset is equal to the corresponding operating lease liability, adjusted for the initial direct leasing cost and any other consideration exchanged with the landlord prior to the commencement of the lease, as well as adjustments to reflect favorable or unfavorable terms of an acquired lease when compared with market terms at the time of acquisition. As ofDecember 31, 2019 , the present value of the remaining contractual payments, aggregating$699.9 million , under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was$271.8 million , which is classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheet. As ofDecember 31, 2019 , the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 44 years, and the weighted-average discount rate was 5.24%. Our corresponding operating lease right-of-use assets, adjusted for initial direct leasing costs and other consideration exchanged with the landlord prior to the commencement of the lease, aggregated$264.7 million . We classify the right-of-use asset in other assets in our consolidated balance sheets. Commitments As ofDecember 31, 2019 , remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated$1.1 billion . We expect payments for these obligations to occur over one to three years, subject to capital planning adjustments from time to time. We may have the ability to cease the construction of certain properties, which would result in the reduction of our commitments. In addition, we have letters of credit and performance obligations aggregating$11.1 million primarily related to construction projects. We are committed to funding approximately$229.5 million for non-real estate investments primarily related to our investments in limited partnerships. Our funding commitments expire at various dates over the next 12 years, with a weighted-average expiration of 8.6 years as ofDecember 31, 2019 .
Exposure to environmental liabilities
In connection with the acquisition of all of our properties, we have obtained
Phase I environmental assessments to ascertain the existence of any
environmental liabilities or other issues. The Phase I environmental assessments
of our properties have not revealed any environmental liabilities that we
believe would have a material adverse effect on our financial condition or
results of operations taken as a whole, nor are we aware of any material
environmental liabilities that have occurred since the Phase I environmental
assessments were completed. In addition, we carry a policy of pollution legal
liability insurance covering exposure to certain environmental losses at
substantially all of our properties.
100
--------------------------------------------------------------------------------Accumulated other comprehensive income (loss)
The following table presents the changes in each component of accumulated other comprehensive income (loss) attributable toAlexandria Real Estate Equities, Inc.'s stockholders during the year endedDecember 31, 2019 (in thousands): Net Unrealized Gains (Losses) on: Interest Rate Foreign Currency Hedge Agreements Translation Total Balance as of December 31, 2018 $ 1,838 $
(12,273 )
Other comprehensive (loss) income before reclassifications (1,763 ) 2,524 761 Reclassification of amortization income to interest expense (1,777 ) - (1,777 ) Reclassification of losses in accumulated other comprehensive income to interest expense upon swap termination 1,702 - 1,702 Net other comprehensive (loss) income (1,838 ) 2,524 686 Balance as of December 31, 2019 $ - $
(9,749 )
Interest rate hedge agreements
Changes in our accumulated other comprehensive income (loss) balance included the reclassification adjustments relate to our interest rate hedge agreements. Upon termination of our hedged variable-rate debt instruments and related interest rate hedge agreements during the year endedDecember 31, 2019 , we reclassified the entire accumulated other comprehensive loss balance related to the terminated interest rate hedge agreements to interest expense in our consolidated statements of operations. Refer to Note 11 - "Interest Rate Hedge Agreements" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Foreign currency translation
Changes in our accumulated other comprehensive income (loss) balance relate to changes in the foreign exchange rates for our real estate investments inCanada andAsia . Additionally, we reclassify unrealized foreign currency translation gains and losses into net income as we dispose of these holdings.
Critical accounting policies
Our consolidated financial statements have been prepared in accordance with
GAAP. The preparation of these financial statements in conformity with GAAP
requires us to make estimates, judgments, and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses. We base these
estimates, judgments, and assumptions on historical experience and on various
other factors that we believe to be reasonable under the circumstances.
We continually evaluate the policies and estimates we use to prepare our
consolidated financial statements. Changes in estimates or policies applied
could affect our financial position and specific items in our results of
operations that are used by our stockholders, potential investors, industry
analysts, and lenders in their evaluation of our performance. Our significant
accounting policies are described in Note 2 - "Summary of Significant Accounting
Policies" to our consolidated financial statements under Item 15 in this annual
report on Form 10-K.
REIT compliance
We have elected to be taxed as a REIT under the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex
provisions of the Internal Revenue Code to our operations and financial results,
and the determination of various factual matters and circumstances not entirely
within our control. We believe that our current organization and method of
operation comply with the rules and regulations promulgated under the Internal
Revenue Code to enable us to qualify, and continue to qualify, as a REIT.
However, it is possible that we have been organized or have operated in a manner
that would not allow us to qualify as a REIT, or that our future operations
could cause us to fail to qualify.
If we fail to qualify as a REIT in any taxable year, then we will be required to
pay federal and state income taxes on our taxable income at regular corporate
rates. If we lose our REIT status, then our net earnings available for
investment or distribution to our stockholders will be significantly reduced for
each of the years involved and we will no longer be required to make
distributions to our stockholders.
101
--------------------------------------------------------------------------------Investments in real estate
Recognition of real estate acquired
We evaluate each acquisition of real estate or in-substance real estate (including equity interests in entities that predominantly hold real estate assets) to determine whether the integrated set of assets and activities acquired meets the definition of a business and needs to be accounted for as a business combination. An acquisition of an integrated set of assets and activities that does not meet the definition of a business is accounted for as an asset acquisition. For acquisitions of real estate or in-substance real estate that are accounted for as business combinations, we allocate the acquisition consideration (excluding acquisition costs) to the assets acquired, liabilities assumed, noncontrolling interests, and previously existing ownership interests at fair value as of the acquisition date. Assets include intangible assets such as tenant relationships, acquired in-place leases, and favorable intangibles associated with in-place leases in which we are the lessor. Liabilities include unfavorable intangibles associated with in-place leases in which we are the lessor. In addition, for acquired in-place finance or operating leases in which we are the lessee, acquisition consideration is allocated to lease liabilities and related right-of-use assets, adjusted to reflect favorable or unfavorable terms of the lease when compared with market terms. Any excess (deficit) of the consideration transferred relative to the fair value of the net assets acquired is accounted for as goodwill (bargain purchase gain). Acquisition costs related to business combinations are expensed as incurred. Generally, we expect that acquisitions of real estate or in-substance real estate will not meet the definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e., land, buildings, and related intangible assets). The accounting model for asset acquisitions is similar to the accounting model for business combinations except that the acquisition consideration (including acquisition costs) is allocated to the individual assets acquired and liabilities assumed on a relative fair value basis. Any excess (deficit) of the consideration transferred relative to the sum of the fair value of the assets acquired and liabilities assumed is allocated to the individual assets and liabilities based on their relative fair values. As a result, asset acquisitions do not result in the recognition of goodwill or a bargain purchase gain. Incremental and external direct acquisition costs (such as legal and third-party services) are capitalized. We exercise judgment to determine the key assumptions used to allocate the purchase price of real estate acquired among its components. The allocation of the consideration to the various components of properties acquired during the year can have an effect on our net income due to the useful depreciable and amortizable lives applicable to each component and the recognition of the related depreciation and amortization expense in our consolidated statements of operations. We apply judgment in utilizing available comparable market information to assess relative fair value. We assess the relative fair values of tangible and intangible assets and liabilities based on available comparable market information, including estimated replacement costs, rental rates, and recent market transactions. In addition, we may use estimated cash flow projections that utilize appropriate discount and capitalization rates. Estimates of future cash flows are based on a number of factors, including the historical operating results, known and anticipated trends, and market/economic conditions that may affect the property. The value of tangible assets acquired is based upon our estimation of fair value on an "as if vacant" basis. The value of acquired in-place leases includes the estimated costs during the hypothetical lease-up period and other costs that would have been incurred in the execution of similar leases under the market conditions at the acquisition date of the acquired in-place lease. The value of above-market lease assets and below-market lease liabilities reflects the difference between (i) the contractual rents to be paid over the remaining term for each in-place lease and (ii) the estimated current market lease rates using available comparable market information and tenant credit quality. If there is a bargain fixed-rate renewal option for the period beyond the non-cancelable lease term of an in-place lease, we evaluate intangible factors such as the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, in order to determine the likelihood that the lessee will renew. When we determine there is reasonable assurance that such bargain purchase option will be exercised, we consider the option in determining the intangible value of such lease and its related amortization period. We also recognize the relative fair values of assets acquired, the liabilities assumed, and any noncontrolling interest in acquisitions of less than a 100% interest when the acquisition constitutes a change in control of the acquired entity. We completed acquisitions of 47 properties for a total purchase price of$2.3 billion during the year endedDecember 31, 2019 . These transactions were accounted for as asset acquisitions, and the purchase price of each was allocated based on the relative fair value of the asset acquired and liabilities assumed. 102
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Depreciation and amortization
The values allocated to buildings and building improvements, land improvements, tenant improvements, and equipment are depreciated on a straight-line basis using the shorter of the respective ground lease term, estimated useful life, or up to 40 years, for buildings and building improvements; an estimated life, or up to 20 years, for land improvements; the respective lease term or estimated useful life for tenant improvements; and the shorter of the lease term or estimated useful life for equipment. The values of acquired in-place leases and associated favorable intangibles (i.e., acquired above-market leases) are classified in other assets in the accompanying consolidated balance sheets and are amortized over the remaining terms of the related leases, as a reduction of income from rentals in our consolidated statements of operations. The values of unfavorable intangibles (i.e., acquired below-market leases associated with acquired in-place leases are classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets and are amortized over the remaining terms of the related leases, as an increase in income from rentals in our consolidated statements of operations.
Capitalized project costs
We capitalize project costs, including pre-construction costs, interest, property taxes, insurance, and other costs directly related and essential to the development, redevelopment, pre-construction, or construction of a project. Capitalization of development, redevelopment, pre-construction, and construction costs is required while activities are ongoing to prepare an asset for its intended use. Fluctuations in our development, redevelopment, pre-construction, and construction activities could result in significant changes to total expenses and net income. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Should development, redevelopment, pre-construction, or construction activity cease, interest, property taxes, insurance, and certain other costs would no longer be eligible for capitalization and would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred.
Properties classified as held for sale
A property is classified as held for sale when all of the following criteria for a plan of sale have been met: (i) management, having the authority to approve the action, commits to a plan to sell the property; (ii) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale of the property is probable and is expected to be completed within one year; (v) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Depreciation of assets ceases upon designation of a property as held for sale. If the disposal of a property represents a strategic shift that has (or will have) a major effect on our operations or financial results, such as (i) a major line of business, (ii) a major geographic area, (iii) a major equity method investment, or (iv) other major parts of an entity, then the operations of the property, including any interest expense directly attributable to it, are classified as discontinued operations in our consolidated statements of operations, and amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. The disposal of an individual property generally will not represent a strategic shift and therefore will typically not meet the criteria for classification as a discontinued operation.
Impairment of long-lived assets
Prior to and subsequent to the end of each quarter, we review current activities
and changes in the business conditions of all of our long-lived assets to
determine the existence of any triggering events or impairment indicators
requiring an impairment analysis. If triggering events or impairment indicators
are identified, we review an estimate of the future undiscounted cash flows,
including, if necessary, a probability-weighted approach if multiple outcomes
are under consideration.
Long-lived assets to be held and used, including our rental properties, CIP,
land held for development, right-of-use assets related to operating leases in
which we are the lessee, and intangibles, are individually evaluated for
impairment when conditions exist that may indicate that the carrying amount of a
long-lived asset may not be recoverable. The carrying amount of a long-lived
asset to be held and used is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition
of the asset. Triggering events or impairment indicators for long-lived assets
to be held and used, including our rental properties, CIP, land held for
development, and intangibles, are assessed by project and include significant
fluctuations in estimated net operating income, occupancy changes, significant
near-term lease expirations, current and historical operating and/or cash flow
losses, construction costs, estimated completion dates, rental rates, and other
market factors. We assess the expected undiscounted cash flows based upon
numerous factors, including, but not limited to, construction costs, available
market information, current and historical operating results, known trends,
current market/economic conditions that may affect the property, and our
assumptions about the use of the asset, including, if necessary, a
probability-weighted approach if multiple outcomes are under consideration.
Upon determination that an impairment has occurred, a write-down is recognized
to reduce the carrying amount to its estimated fair value. If an impairment loss
is not required to be recognized, the recognition of depreciation or
amortization is adjusted prospectively, as necessary, to reduce the carrying
amount of the real estate to its estimated disposition value over the remaining
period
103
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that the asset is expected to be held and used. We may adjust depreciation of
properties that are expected to be disposed of or redeveloped prior to the end
of their useful lives.
We use the held for sale impairment model for our properties classified as held
for sale. The held for sale impairment model is different from the held and used
impairment model. Under the held for sale impairment model, an impairment loss
is recognized if the carrying amount of the long-lived asset classified as held
for sale exceeds its fair value less cost to sell. Because of these two
different models, it is possible for a long-lived asset previously classified as
held and used to require the recognition of an impairment charge upon
classification as held for sale.
Equity investments
We hold investments in publicly traded companies and privately held entities primarily involved in the life science, technology, and agtech industries. As a REIT, we generally limit our ownership percentage in the voting stock of each individual entity to less than 10%. Our investments in publicly traded companies are classified as investments with readily determinable fair values and are carried at fair value, with changes in fair value recognized in net income. The fair values for our investments in publicly traded companies are determined based on sales prices/quotes available on securities exchanges and therefore generally require no judgment to determine fair value. Investments in privately held entities that report NAV per share, such as our privately held investments in limited partnerships, are carried at fair value using NAV as a practical expedient, with changes in fair value recognized in net income. As a result, fair value estimation for these investments generally requires limited judgment. Investments in privately held entities that do not report NAV are measured at cost, adjusted for observable price changes and impairments, with changes recognized in net income. Observable price changes result from, among other things, equity transactions for the same issuer executed during the reporting period, including subsequent equity offerings or other reported equity transactions related to the same issuer. For these equity transactions to be considered observable price changes of the same issuer, we evaluate whether these transactions have similar rights and obligations, including voting rights, distribution preferences, conversion rights, and other factors, to the investments we hold. We monitor investments in privately held entities that do not report NAV per share throughout the year for new developments, including operating results, prospects and results of clinical trials, new product initiatives, new collaborative agreements, capital-raising events, and merger and acquisition activities. These investments are evaluated on the basis of a qualitative assessment for indicators of impairment by monitoring the presence of the following triggering events or impairment indicators: (i) a significant deterioration in the earnings performance, asset quality, or business prospects of the investee; (ii) a significant adverse change in the regulatory, economic, or technological environment of the investee, (iii) a significant adverse change in the general market condition, including the research and development of technology and products that the investee is bringing or attempting to bring to the market, or (iv) significant concerns about the investee's ability to continue as a going concern. If such indicators are present, we are required to estimate the investment's fair value and immediately recognize an impairment loss in an amount equal to the investment's carrying value in excess of its estimated fair value.
Interest rate hedge agreements
From time to time, we utilize interest rate hedge agreements to manage a portion of our exposure to variable interest rates. Historically, our interest rate hedge agreements primarily related to our borrowings with variable interest rates based on LIBOR. However, in connection with the LIBOR cessation projected by the end of 2021 and the potential replacement of this rate in theU.S. with the Secured Overnight Financing Rate, we have paid down the majority of our outstanding borrowings of LIBOR-based debt and terminated our related interest rate hedge agreements. We classify our interest rate hedge agreements as either assets or liabilities on the balance sheet at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based on the hedged exposure, as a fair value hedge, a cash flow hedge, or a hedge of a net investment in a foreign operation. Our interest rate hedge agreements are typically considered cash flow hedges because they are designated and qualify as hedges of the exposure to variability in expected future cash flows. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the earnings effect of the hedged transactions in a cash flow hedge. We formally document all relationships between interest rate hedge agreements and hedged items, including the method for evaluating effectiveness and the risk strategy. Our interest rate hedge agreements generally meet the criteria to be deemed "highly effective" in reducing our exposure to variable interest rates. We make a quantitative assessment at the inception of each interest rate hedge agreement, and qualitatively on an ongoing basis, to determine whether these instruments are "highly effective" in offsetting changes in cash flows associated with the hedged items. The entire change in the fair value of our highly effective interest rate hedge agreements that are designated and that qualify as cash flow hedges is recognized in accumulated other comprehensive income. Amounts classified in accumulated other comprehensive income are reclassified into earnings in the period during which the hedged transactions affect earnings. If our interest rate hedges did not qualify as "highly effective," the changes in the fair values of the 104 --------------------------------------------------------------------------------
derivatives used as hedges would be reflected in earnings.
The fair value of an interest rate hedge agreement is determined using widely accepted valuation techniques, including discounted cash flow analyses on the expected cash flows of each derivative. These analyses reflect the contractual terms of the derivatives, including the period to maturity, and use observable market-based inputs, including interest rate curves and implied volatilities. The fair values of our interest rate hedge agreements are determined using the market-standard methodology of netting the discounted future fixed-cash payments and the discounted expected variable-cash receipts. The variable-cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair value calculation also includes an amount for risk of non-performance of our counterparties using "significant unobservable inputs," such as estimates of current credit spreads, to evaluate the likelihood of default, which we have determined to be insignificant to the overall fair value of our interest rate hedge agreements. As ofDecember 31, 2019 , we had no outstanding interest rate hedge agreements.
Liability and right-of-use assets related to operating leases in which we are the lessee
We have operating lease agreements in which we are the lessee consisting of ground and office leases. At the lease commencement date (or at the acquisition date if the lease is acquired as part of a real estate acquisition), we are required to recognize a liability to account for our future obligations under these operating leases, and a corresponding right-of-use asset. The lease liability is measured based on the present value of the future lease payments, including payments during the term under our extension options that we are reasonably certain to exercise. The present value of the future lease payments is calculated for each operating lease using each respective remaining lease term and a corresponding estimated incremental borrowing rate, which is the interest rate that we estimate we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments. Subsequently, the lease liability is accreted by applying a discount rate established at the lease commencement date to the lease liability balance as of the beginning of the period and is reduced by the payments made during the period. We classify the operating lease liability in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. The right-of-use asset is measured based on the corresponding lease liability, adjusted for initial direct leasing costs and any other consideration exchanged with the landlord prior to the commencement of the lease, as well as adjustments to reflect favorable or unfavorable terms of an acquired lease when compared with market terms at the time of acquisition. Subsequently, the right-of-use asset is amortized on a straight-line basis during the lease term. We classify the right-of-use asset in other assets in our consolidated balance sheets. Refer to the "Lessee Accounting" subsection of "Lease Accounting" section within Note 2 - "Summary of Significant Accounting Policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K.
Monitoring of tenant credit quality
During the term of each lease, we monitor the credit quality and any related
material changes of our tenants by (i) monitoring the credit rating of tenants
that are rated by a nationally recognized credit rating agency, (ii) reviewing
financial statements of the tenants that are publicly available or that are
required to be delivered to us pursuant to the applicable lease, (iii)
monitoring news reports regarding our tenants and their respective businesses,
and (iv) monitoring the timeliness of lease payments.
105
--------------------------------------------------------------------------------Non-GAAP measures and definitions
This section contains additional information of certain non-GAAP financial measures and the reasons why we use these supplemental measures of performance and believe they provide useful information to investors, as well as the definitions of other terms used in this annual report on Form 10-K.
Funds from operations and funds from operations, as adjusted, attributable to
GAAP-basis accounting for real estate assets utilizes historical cost accounting and assumes that real estate values diminish over time. In an effort to overcome the difference between real estate values and historical cost accounting for real estate assets, the Nareit Board of Governors established funds from operations as an improved measurement tool. Since its introduction, funds from operations has become a widely used non-GAAP financial measure among equity REITs. We believe that funds from operations is helpful to investors as an additional measure of the performance of an equity REIT. Moreover, we believe that funds from operations, as adjusted, allows investors to compare our performance to the performance of other real estate companies on a consistent basis, without having to account for differences recognized because of real estate investment and disposition decisions, financing decisions, capital structure, capital market transactions, and variances resulting from the volatility of market conditions outside of our control. OnJanuary 1, 2019 , we adopted standards established by the Nareit Board of Governors in itsNovember 2018 White Paper (the "Nareit White Paper") on a prospective basis. The Nareit White Paper defines funds from operations as net income (computed in accordance with GAAP), excluding gains or losses on sales of real estate, and impairments of real estate, plus depreciation and amortization of operating real estate assets, and after adjustments for our share of consolidated and unconsolidated partnerships and real estate joint ventures. Impairments represent the write-down of assets when fair value over the recoverability period is less than the carrying value due to changes in general market conditions and do not necessarily reflect the operating performance of the properties during the corresponding period. We compute funds from operations, as adjusted, as funds from operations calculated in accordance with the Nareit White Paper, excluding significant gains, losses, and impairments realized on non-real estate investments, unrealized gains or losses on non-real estate investments, gains or losses on early extinguishment of debt, gains or losses on early termination of interest rate hedge agreements, preferred stock redemption charges, deal costs, the income tax effect related to such items, and the amount of such items that is allocable to our unvested restricted stock awards. Neither funds from operations nor funds from operations, as adjusted, should be considered as alternatives to net income (determined in accordance with GAAP) as indications of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as measures of liquidity, nor are they indicative of the availability of funds for our cash needs, including our ability to make distributions. The following table reconciles net income to funds from operations for the share of consolidated real estate joint ventures attributable to noncontrolling interests and our share of unconsolidated real estate joint ventures for the year endedDecember 31, 2019 (in thousands): Noncontrolling Interest Share of Our
Share of Unconsolidated
Consolidated Real Estate Joint Ventures Real Estate Joint Ventures
December 31, 2019 December 31, 2019
Three Months
Three Months Ended Year Ended Ended
Year Ended
Net income $ 13,612 $ 40,882 $ 4,777 $ 10,136
Depreciation and
amortization 10,176 30,960 2,702 6,366
Funds from
operations $ 23,788 $ 71,842 $ 7,479 $ 16,502
106-------------------------------------------------------------------------------- The following tables present a reconciliation of net income (loss) attributable toAlexandria Real Estate Equities, Inc.'s common stockholders, the most directly comparable financial measure presented in accordance with GAAP, including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, and funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted, and the related per share amounts for the years endedDecember 31, 2019 , 2018, and 2017. Per share amounts may not add due to rounding. Year Ended December 31, (In thousands) 2019 2018 2017 Net income attributable to Alexandria Real Estate Equities, Inc.'s common stockholders$ 350,995 $ 363,983 $ 145,395 Depreciation and amortization of real estate assets(1) 541,855 477,661 416,783 Noncontrolling share of depreciation and amortization from consolidated real estate JVs (30,960 ) (16,077 ) (14,762 ) Our share of depreciation and amortization from unconsolidated real estate JVs 6,366 3,181 1,551 Gain on sales of real estate - rental properties (474 ) (8,704 ) (270 ) Our share of gain on sales of real estate from unconsolidated real estate JVs - (35,678 ) (14,106 ) Gain on sales of real estate - land parcels - - (111 ) Impairment of real estate - rental properties 12,334 - 203 Assumed conversion of 7.00% Series D cumulative convertible preferred stock 3,204 5,060 - Allocation to unvested restricted stock awards (5,904 ) (5,961 ) (2,920 ) Funds from operations attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted(1) 877,416
783,465 531,763 Unrealized gains on non-real estate investments (161,489 ) (99,634 )
-
Realized gains on non-real estate investments - (14,680 ) -
Impairment of real estate - land parcels - 6,311 -
Impairment of non-real estate investments 17,124 (2) 5,483 8,296
Loss on early extinguishment of debt 47,570 (3) 1,122 3,451
Loss on early termination of interest rate
hedge agreements 1,702 (4) - -
Our share of gain on early extinguishment of
debt from unconsolidated real estate JVs - (761 ) -
Preferred stock redemption charge 2,580 4,240 11,279
Removal of assumed conversion of 7.00% Series D
cumulative convertible preferred stock (3,204 ) (5,060 ) -
Allocation to unvested restricted stock awards 1,307 1,517 (321 )
Funds from operations attributable to
Alexandria Real Estate Equities, Inc.'s common
stockholders - diluted, as adjusted $ 783,006 $
682,003
(1) Calculated in accordance with standards established by the Nareit Board of
Governors.
(2) Relates to non-real estate investments in privately held entities.
(3) Relates to the repayment of our unsecured senior notes payable due 2020 and
2022, unsecured senior bank term loan, and one secured note payable.
(4) Represents loss on early termination of our interest rate hedge agreements.
The loss is included within interest expense in our consolidated statements
of operations. Refer to Note 11 - "Interest Rate Hedge Agreements" to our
consolidated financial statements under Item 15 in this annual report on Form
10-K for additional information.
107
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Year Ended December 31,
(Dollars per share) 2019 2018 2017
Net income per share attributable to
Alexandria Real Estate Equities, Inc.'s common
stockholders - diluted $ 3.12 $ 3.52 $ 1.58
Depreciation and amortization of real estate
assets(1) 4.60 4.50 4.35
Gain on sales of real estate - rental
properties - (0.08 ) -
Our share of gain on sales of real estate from
unconsolidated real estate JVs - (0.35 ) (0.15 )
Impairment of real estate - rental properties 0.11 - -
Allocation to unvested restricted stock awards (0.06 ) (0.06 ) -
Funds from operations per share attributable
to Alexandria Real Estate Equities, Inc.'s
common stockholders - basic and diluted(1) 7.77 7.53 5.78
Unrealized gains on non-real estate
investments (1.44 ) (0.96 ) -
Realized gains on non-real estate investments - (0.14 ) -
Impairment of real estate - land parcels - 0.06 -
Impairment of non-real estate investments 0.15 (2) 0.05 0.09
Loss on early extinguishment of debt 0.42 (2) 0.01 0.03
Loss on early termination of interest rate
hedge agreements 0.02 (2) - -
Our share of gain on early extinguishment of
debt from unconsolidated real estate JVs - (0.01 ) -
Preferred stock redemption charge 0.02 0.04 0.12
Allocation to unvested restricted stock awards 0.02 0.02 -
Funds from operations per share attributable
to Alexandria Real Estate Equities, Inc.'s
common stockholders - diluted, as adjusted $ 6.96 $ 6.60 $ 6.02
Weighted-average shares of common stock
outstanding(3) for calculations of:
EPS - diluted 112,524 103,321 92,063
Funds from operations - diluted, per share 112,966 104,048 92,063
Funds from operations - diluted, as adjusted,
per share 112,524 103,321 92,063
(1) Calculated in accordance with standards established by the Nareit Board of
Governors.
(2) Refer to footnotes 2, 3, and 4, respectively, on the previous page for
additional information.
(3) Refer to the definition of "Weighted-Average Shares of Common Stock
Outstanding - Diluted" within this section of this Item 7 for additional
information.
Adjusted EBITDA and Adjusted EBITDA margin
We use Adjusted EBITDA as a supplemental performance measure of our operations,
for financial and operational decision-making, and as a supplemental means of
evaluating period-to-period comparisons on a consistent basis. Adjusted EBITDA
is calculated as earnings before interest, taxes, depreciation, and amortization
("EBITDA"), excluding stock compensation expense, gains or losses on early
extinguishment of debt, gains or losses on sales of real estate, and impairments
of real estate. Adjusted EBITDA also excludes unrealized gains or losses and
significant realized gains and impairments that result from our non-real estate
investments. These non-real estate investment amounts are classified in our
consolidated statements of operations outside of revenues.
We believe Adjusted EBITDA provides investors with relevant and useful
information as it allows investors to evaluate the operating performance of our
business activities without having to account for differences recognized because
of real estate and non-real estate investment and disposition decisions,
financing decisions, capital structure, capital market transactions, and
variances resulting from the volatility of market conditions outside of our
control. For example, we exclude gains or losses on the early extinguishment of
debt to allow investors to measure our performance independent of our
indebtedness and capital structure. We believe that adjusting for the effects of
impairments and gains or losses on sales of real estate, and significant
impairments and significant gains on the sale of non-real estate investments
allows investors to evaluate performance from period to period on a consistent
basis without having to account for differences recognized because of real
estate and non-real estate investment and disposition decisions. We believe that
excluding charges related to stock compensation and unrealized gains or losses
facilitates for investors a comparison of our business activities across periods
without the volatility resulting from market forces outside of our control.
Adjusted EBITDA has limitations as a measure of our performance. Adjusted EBITDA
does not reflect our historical expenditures or future requirements for capital
expenditures or contractual commitments. While Adjusted EBITDA is a relevant
measure of performance, it does not represent net income or cash flows from
operations calculated and presented in accordance with GAAP, and it should not
be considered as an alternative to those indicators in evaluating performance or
liquidity.
108
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Our calculation of Adjusted EBITDA margin divides Adjusted EBITDA by our
revenues, as adjusted. We believe that revenues, as adjusted, provides a
denominator for Adjusted EBITDA margin that is calculated on a basis more
consistent with that of the Adjusted EBITDA numerator. Specifically, revenues,
as adjusted, includes the same realized gains on, and impairments of, non-real
estate investments that are included in the reconciliation of Adjusted EBITDA.
We believe that the consistent application of results from our non-real estate
investments to both the numerator and denominator of Adjusted EBITDA margin
provides a more useful calculation for the comparison across periods.
The following table reconciles net income (loss) and revenues, the most directly
comparable financial measures calculated and presented in accordance with GAAP,
to Adjusted EBITDA and revenues, as adjusted, respectively, for the three months
and years ended December 31, 2019 and 2018 (dollars in thousands):
Three Months Ended December 31, Year Ended December 31,
2019 2018 2019 2018
Net income (loss) $ 216,053 $ (18,631 ) $ 404,047 $ 402,793
Interest expense 45,493 40,239 173,675 157,495
Income taxes 1,269 613 4,343 3,227
Depreciation and amortization 140,518 124,990 544,612 477,661
Stock compensation expense 10,239 9,810 43,640 35,019
Loss on early extinguishment of
debt - - 47,570 1,122
Our share of gain on early
extinguishment of debt from
unconsolidated real estate JVs - - - (761 )
Gain on sales of real estate (474 ) (8,704 ) (474 ) (8,704 )
Our share of gain on sales of
real estate from unconsolidated
real estate JVs - - - (35,678 )
Significant realized gains on
non-real estate investments - (6,428 ) - (6,428 )
Unrealized (gains) losses on
non-real estate investments (148,268 ) 94,850 (161,489 ) (99,634 )
Impairment of real estate 12,334 - 12,334 6,311
Impairment of non-real estate
investments 9,991 5,483 17,124 5,483
Adjusted EBITDA $ 287,155 $ 242,222 $ 1,085,382 $ 937,906
Revenues $ 408,114 $ 340,463 $ 1,531,296 $ 1,327,459
Non-real estate investments -
total realized gains 4,399 11,319 33,158 37,129
Significant realized gains on
non-real estate investments - (6,428 ) - (6,428 )
Impairment of non-real estate
investments 9,991 5,483 17,124 5,483
Revenues, as adjusted $ 422,504 $ 350,837 Adjusted EBITDA margin 68% 69% 69% 69% Annual rental revenue Annual rental revenue represents the annualized fixed base rental amount, in effect as of the end of the period, related to our operating RSF. Annual rental revenue is presented using 100% of the annual rental revenue of our consolidated properties and our share of annual rental revenue for our unconsolidated real estate joint ventures. Annual rental revenue per RSF is computed by dividing annual rental revenue by the sum of 100% of the RSF of our consolidated properties and our share of the RSF of properties held in unconsolidated real estate joint ventures. As ofDecember 31, 2019 , approximately 97% of our leases (on an RSF basis) were triple net leases, which require tenants to pay substantially all real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Annual rental revenue excludes these operating expenses recovered from our tenants. Amounts recovered from our tenants related to these operating expenses, along with base rent, are classified in income from rentals in our consolidated statements of operations. 109 --------------------------------------------------------------------------------
Cash interest
Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums (discounts). Refer to the definition of "Fixed-Charge Coverage Ratio" in this section under this Item 7 in this annual report on 10-K for a reconciliation of interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest.
Class A properties and
Class A properties are properties clustered inAAA locations that provide 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. Class A properties generally command higher annual rental rates than other classes of similar properties.AAA locations are in close proximity to concentrations of specialized skills, knowledge, institutions, and related businesses. Such locations are generally characterized by high barriers to entry for new landlords, high barriers to exit for tenants, and a limited supply of available space.
Development, redevelopment, and pre-construction
A key component of our business model is our disciplined allocation of capital to the development and redevelopment of new Class A properties, and property enhancements identified during the underwriting of certain acquired properties, located in collaborative life science, technology, and agtech campuses inAAA urban innovation clusters. These projects are generally focused on providing high-quality, generic, and reusable spaces that meet the real estate requirements of, and are reusable by, a wide range of tenants. Upon completion, each value-creation project is expected to generate a significant increase in rental income, net operating income, and cash flows. Our development and redevelopment projects are generally in locations that are highly desirable to high-quality entities, which we believe results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. Development projects generally consist of the ground-up development of generic and reusable facilities. Redevelopment projects consist of the permanent change in use of office, warehouse, and shell space into office/laboratory, tech office, or agtech space. We generally will not commence new development projects for aboveground construction of new Class A office/laboratory, tech office, and agtech space without first securing significant pre-leasing for such space, except when there is solid market demand for high-quality Class A properties. Pre-construction activities include entitlements, permitting, design, site work, and other activities preceding commencement of construction of aboveground building improvements. The advancement of pre-construction efforts is focused on reducing the time required to deliver projects to prospective tenants. These critical activities add significant value for future ground-up development and are required for the vertical construction of buildings. Ultimately, these projects will provide high-quality facilities and are expected to generate significant revenue and cash flows. 110 --------------------------------------------------------------------------------
Fixed-charge coverage ratio
Fixed-charge coverage ratio is a non-GAAP financial measure representing the ratio of Adjusted EBITDA to fixed charges. We believe this ratio is useful to investors as a supplemental measure of our ability to satisfy fixed financing obligations and preferred stock dividends. Cash interest is equal to interest expense calculated in accordance with GAAP plus capitalized interest, less amortization of loan fees and debt premiums (discounts). The following table reconciles interest expense, the most directly comparable financial measure calculated and presented in accordance with GAAP, to cash interest and fixed charges for the three months endedDecember 31, 2019 and 2018 (dollars in thousands): Three Months Ended December 31, 2019 2018 Adjusted EBITDA$ 287,155 $ 242,222 Interest expense$ 45,493 $ 40,239 Capitalized interest 23,822 19,902 Amortization of loan fees (2,241 ) (2,401 ) Amortization of debt premiums 907 611 Cash interest 67,981 58,351 Dividends on preferred stock - 1,155 Fixed charges$ 67,981 $ 59,506 Fixed-charge coverage ratio: - period annualized 4.2x 4.1x - trailing 12 months 4.2x 4.2x
Initial stabilized yield (unlevered)
Initial stabilized yield is calculated as the estimated amounts of net operating income at stabilization divided by our investment in the property. Our initial stabilized yield excludes the benefit of leverage. Our cash rents related to our value-creation projects are generally expected to increase over time due to contractual annual rent escalations. Our estimates for initial stabilized yields, initial stabilized yields (cash basis), and total costs at completion represent our initial estimates at the commencement of the project. We expect to update this information upon completion of the project, or sooner if there are significant changes to the expected project yields or costs.
• Initial stabilized yield reflects rental income, including contractual
rent escalations and any rent concessions over the term(s) of the
lease(s), calculated on a straight-line basis.
• Initial stabilized yield (cash basis) reflects cash rents at the
stabilization date after initial rental concessions, if any, have
elapsed and our total cash investment in the property.
Investment-grade or publicly traded large cap tenants
Investment-grade or publicly traded large cap tenants represent tenants that are investment-grade rated or publicly traded companies with an average daily market capitalization greater than$10 billion for the twelve months endedDecember 31, 2019 , as reported by Bloomberg Professional Services. In addition, we monitor the credit quality and related material changes of our tenants. Material changes that cause a tenant's market capitalization to decline below$10 billion , which are not immediately reflected in the twelvemonth average, may result in their exclusion from this measure. 111 --------------------------------------------------------------------------------
Investments in real estate - value-creation square footage currently in rental properties
The following table represents RSF of buildings in operation as ofDecember 31, 2019 , that will be redeveloped or replaced with new development RSF upon commencement of future construction: Property/Submarket RSF Intermediate-term projects:3825 Fabian Way /Greater Stanford
250,000
960 Industrial Road /Greater Stanford
110,000
9363, 9373, and
109,164
10931 and 10933 North Torrey Pines Road /Torrey Pines
92,450
702,012
Future projects:3875 Fabian Way /Greater Stanford
228,000
219 East 42nd Street /New York City
349,947
4161 Campus Point Court /University Town Center
159,884
4110 Campus Point Court /University Town Center
15,667
4045 Sorrento Valley Boulevard /Sorrento Valley
10,926
4075 Sorrento Valley Boulevard /Sorrento Valley
40,000
601 Dexter Avenue North /Lake Union
18,680
823,104
Total value-creation RSF currently included in rental properties 1,525,116
Joint venture financial information
We present components of balance sheet and operating results information related to our joint ventures, which are not presented, or intended to be presented, in accordance with GAAP. We present the proportionate share of certain financial line items as follows: (i) for each real estate joint venture that we consolidate in our financial statements, which are controlled by us through contractual rights or majority voting rights, but of which we own less than 100%, we apply the noncontrolling interest economic ownership percentage to each financial item to arrive at the amount of such cumulative noncontrolling interest share of each component presented; and (ii) for each real estate joint venture that we do not control and do not consolidate, and are instead controlled jointly or by our joint venture partners through contractual rights or majority voting rights, we apply our economic ownership percentage to each financial item to arrive at our proportionate share of each component presented. The components of balance sheet and operating results information related to joint ventures do not represent our legal claim to those items. For each entity that we do not wholly own, the joint venture agreement generally determines what equity holders can receive upon capital events, such as sales or refinancing, or in the event of a liquidation. Equity holders are normally entitled to their respective legal ownership of any residual cash from a joint venture only after all liabilities, priority distributions, and claims have been repaid or satisfied. We believe this information can help investors estimate the balance sheet and operating results information related to our partially owned entities. Presenting this information provides a perspective not immediately available from consolidated financial statements and one that can supplement an understanding of the joint venture assets, liabilities, revenues, and expenses included in our consolidated results. The components of balance sheet and operating results information related to joint ventures are limited as an analytical tool as the overall economic ownership interest does not represent our legal claim to each of our joint ventures' assets, liabilities, or results of operations. In addition, joint venture financial information may include financial information related to the unconsolidated real estate joint ventures that we do not control. Refer to Note 4 - "Consolidated and Unconsolidated Real Estate Joint Ventures " to our consolidated financial statements under Item 15 in this annual report on Form 10-K for more information on our unconsolidated real estate joint ventures. We believe that in order to facilitate for investors a clear understanding of our operating results and our total assets and liabilities, joint venture financial information should be examined in conjunction with our consolidated statements of operations and balance sheets. Joint venture financial information should not be considered an alternative to our consolidated financial statements, which are prepared in accordance with GAAP. 112 --------------------------------------------------------------------------------
Net cash provided by operating activities after dividends
Net cash provided by operating activities after dividends includes the deduction for distributions to noncontrolling interests. For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences.
Net debt to Adjusted EBITDA and net debt and preferred stock to Adjusted EBITDA
Net debt to Adjusted EBITDA and net debt and preferred stock to Adjusted EBITDA are non-GAAP financial measures that we believe are useful to investors as supplemental measures in evaluating our balance sheet leverage. Net debt is equal to the sum of total consolidated debt less cash, cash equivalents, and restricted cash. Net debt and preferred stock is equal to the sum of net debt, as discussed above, plus preferred stock outstanding as of the end of the period. Refer to the definition of "Adjusted EBITDA and Adjusted EBITDA Margin" in this section under this Item 7 for further information on the calculation of Adjusted EBITDA. The following table reconciles debt to net debt, and to net debt and preferred stock, and computes the ratio of each to Adjusted EBITDA as ofDecember 31, 2019 and 2018 (dollars in thousands): December 31, 2019 2018 Secured notes payable$ 349,352 $ 630,547 Unsecured senior notes payable 6,044,127
4,292,293
Unsecured senior line of credit 384,000 208,000 Unsecured senior bank term loan - 347,415 Unamortized deferred financing costs 47,299 31,413 Cash and cash equivalents (189,681 ) (234,181 ) Restricted cash (53,008 ) (37,949 ) Net debt$ 6,582,089 $ 5,237,538 Net debt$ 6,582,089 $ 5,237,538 7.00% Series D cumulative convertible preferred stock - (1 ) 64,336 Net debt and preferred stock$ 6,582,089 $ 5,301,874 Adjusted EBITDA: - quarter annualized$ 1,148,620 $ 968,888 - trailing 12 months$ 1,085,382 $ 937,906 Net debt to Adjusted EBITDA: - quarter annualized 5.7 x 5.4 x - trailing 12 months 6.1 x 5.6 x Net debt and preferred stock to Adjusted EBITDA: - quarter annualized 5.7 x 5.5 x - trailing 12 months 6.1 x 5.7 x
(1) In
shares of our Series D Convertible Preferred Stock into shares of our common
stock. Refer to the "7.00% Series D Convertible Preferred Stock Repurchases
and Conversion" section in Note 16 - "Stockholders' Equity" to our
consolidated financial statements under Item 15 in this annual report for
additional information.
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Net operating income, net operating income (cash basis), and operating margin
The following table reconciles net income to net operating income, and to net operating income (cash basis) for the years endedDecember 31, 2019 , 2018, and 2017 (dollars in thousands): Year Ended December 31, 2019 2018 2017 Net income$ 404,047 $ 402,793 $ 194,204 Equity in earnings of unconsolidated real estate joint ventures (10,136 ) (43,981 ) (15,426 ) General and administrative expenses 108,823 90,405 75,009 Interest expense 173,675 157,495 128,645 Depreciation and amortization 544,612 477,661 416,783 Impairment of real estate 12,334 6,311 203 Loss on early extinguishment of debt 47,570 1,122 3,451 Gain on sales of real estate - rental properties (474 ) (8,704 ) (270 ) Gain on sales of real estate - land parcels - - (111 ) Investment income (194,647 ) (136,763 ) - Net operating income 1,085,804 946,339 802,488 Straight-line rent revenue (104,235 ) (93,883 ) (107,643 ) Amortization of acquired below-market leases (29,813 ) (21,938 ) (19,055 ) Net operating income (cash basis)$ 951,756 $ 830,518
Net operating income (from above)$ 1,085,804 $ 946,339 $ 802,488 Total revenues$ 1,531,296 $ 1,327,459 $ 1,128,097 Operating margin 71% 71% 71% Net operating income is a non-GAAP financial measure calculated as net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, excluding equity in the earnings of our unconsolidated real estate joint ventures, general and administrative expenses, interest expense, depreciation and amortization, impairments of real estate, gains or losses on early extinguishment of debt, gains or losses on sales of real estate, and investment income or loss. We believe net operating income provides useful information to investors regarding our financial condition and results of operations because it primarily reflects those income and expense items that are incurred at the property level. Therefore, we believe net operating income is a useful measure for investors to evaluate the operating performance of our consolidated real estate assets. Net operating income on a cash basis is net operating income adjusted to exclude the effect of straight-line rent and amortization of acquired above- and below-market lease revenue adjustments required by GAAP. We believe that net operating income on a cash basis is helpful to investors as an additional measure of operating performance because it eliminates straight-line rent revenue and the amortization of acquired above- and below-market leases. Furthermore, we believe net operating income is useful to investors as a performance measure for our consolidated properties because, when compared across periods, net operating income reflects trends in occupancy rates, rental rates, and operating costs, which provide a perspective not immediately apparent from net income or loss. Net operating income can be used to measure the initial stabilized yields of our properties by calculating net operating income generated by a property divided by our investment in the property. Net operating income excludes certain components from net income in order to provide results that are more closely related to the results of operations of our properties. For example, interest expense is not necessarily linked to the operating performance of a real estate asset and is often incurred at the corporate level rather than at the property level. In addition, depreciation and amortization, because of historical cost accounting and useful life estimates, may distort comparability of operating performance at the property level. Impairments of real estate have been excluded in deriving net operating income because we do not consider impairments of real estate to be property-level operating expenses. Impairments of real estate relate to changes in the values of our assets and do not reflect the current operating performance with respect to related revenues or expenses. Our impairments of real estate represent the write-down in the value of the assets to the estimated fair value less cost to sell. These impairments result from investing decisions or a deterioration in market conditions. We also exclude realized and unrealized investment income or loss, which results from investment decisions that occur at the corporate level related to non-real estate investments in publicly traded companies and certain privately held entities. Therefore, we do not consider these activities to be an indication of operating performance of our real estate assets at the property level. Our calculation of net operating income also excludes charges incurred from changes in certain financing decisions, such as losses on early extinguishment of debt, as these charges often relate to corporate strategy. Property operating expenses included in determining net operating income primarily consist of costs that are related to our operating properties, such as utilities, repairs, and 114 -------------------------------------------------------------------------------- maintenance; rental expense related to ground leases; contracted services, such as janitorial, engineering, and landscaping; property taxes and insurance; and property-level salaries. General and administrative expenses consist primarily of accounting and corporate compensation, corporate insurance, professional fees, office rent, and office supplies that are incurred as part of corporate office management. We calculate operating margin as net operating income divided by total revenues. We believe that in order to facilitate for investors a clear understanding of our operating results, net operating income should be examined in conjunction with net income or loss as presented in our consolidated statements of operations. Net operating income should not be considered as an alternative to net income or loss as an indication of our performance, nor as an alternative to cash flows as a measure of our liquidity or our ability to make distributions.
Operating statistics
We present certain operating statistics related to our properties, including number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations as of the end of the period. We believe these measures are useful to investors because they facilitate an understanding of certain trends for our properties. We compute the number of properties, RSF, occupancy percentage, leasing activity, and contractual lease expirations at 100% for all properties in which we have an investment, including properties owned by our consolidated and unconsolidated real estate joint ventures. For operating metrics based on annual rental revenue, refer to the definition of "Annual Rental Revenue" in this "Non-GAAP Measures and Definitions" section.
Same property comparisons
As a result of changes within our total property portfolio during the comparative periods presented, including changes from assets acquired or sold, properties placed into development or redevelopment, and development or redevelopment properties recently placed into service, the consolidated total income from rentals, as well as rental operating expenses in our operating results, can show significant changes from period to period. In order to supplement an evaluation of our results of operations over a given quarterly or annual period, we analyze the operating performance for all consolidated properties that were fully operating for the entirety of the comparative periods presented, referred to as same properties. We separately present quarterly and year-to-date same property results to align with the interim financial information required by theSEC in our management's discussion and analysis of our financial condition and results of operations. These same properties are analyzed separately from properties acquired subsequent to the first day in the earliest comparable quarterly or year-to-date period presented, properties that underwent development or redevelopment at any time during the comparative periods, unconsolidated real estate joint ventures, properties classified as held for sale, and corporate entities (legal entities performing general and administrative functions), which are excluded from same property results. Additionally, lease termination fees, if any, are excluded from the results of same properties. Refer to "Same Properties " in the "Results of Operations" under this Item 7 in this annual report on Form 10-K for additional information.
Stabilized occupancy date
The stabilized occupancy date represents the estimated date on which the project is expected to reach occupancy of 95% or greater.
Tenant recoveries
Tenant recoveries represent revenues comprising reimbursement of real estate taxes, insurance, utilities, repairs and maintenance, common area expenses, and other operating expenses and earned in the period during which the applicable expenses are incurred and the tenant's obligation to reimburse us arises. OnJanuary 1, 2019 , we adopted a new lease accounting standard, among other practical expedients and policies, and elected the single component accounting policy. As a result of our election of the single component accounting policy, we account for rental revenues and tenant recoveries generated through the leasing of real estate assets that qualify for this policy as a single component and classify associated revenue in income from rentals in our consolidated statements of operations. Prior to the adoption of the new lease accounting standard, we presented rental revenues and tenant recoveries separately in our consolidated statements of operations. Refer to the "Lease Accounting" section in Note 2 - "Summary of Significant Accounting Policies" in our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information. We continue to provide investors with a separate presentation of rental revenues and tenant recoveries in the "Comparison of Results for the Year EndedDecember 31, 2019 , to the Year EndedDecember 31, 2018 " subsections of the "Results of Operations" section under this Item 7 because we believe it promotes investors' understanding of the changes in our operating results. We believe that the presentation of tenant recoveries is useful to investors as a supplemental measure of our ability to recover operating expenses under our triple net leases, including recoveries of utilities, repairs and maintenance, insurance, property taxes, common area expenses, and other operating expenses, and of our ability to mitigate the effect to net income for any significant variability to components of our operating expenses. 115 --------------------------------------------------------------------------------
The following table reconciles income from rentals to tenant recoveries for the
years ended
Year Ended December 31,
2019 2018 2017
Income from rentals
Total market capitalization Total market capitalization is equal to the outstanding shares of common stock at the end of the period multiplied by the closing price on the last trading day of the period (i.e., total equity capitalization), plus total debt outstanding at period-end.
Unencumbered net operating income as a percentage of total net operating income
Unencumbered net operating income as a percentage of total net operating income is a non-GAAP financial measure that we believe is useful to investors as a performance measure of the results of operations of our unencumbered real estate assets as it reflects those income and expense items that are incurred at the unencumbered property level. Unencumbered net operating income is derived from assets classified in continuing operations, which are not subject to any mortgage, deed of trust, lien, or other security interest, as of the period for which income is presented. The following table summarizes unencumbered net operating income as a percentage of total net operating income for the years endedDecember 31, 2019 and 2018 (dollars in thousands): Year Ended December 31, 2019 2018 Unencumbered net operating income$ 1,024,619 $
829,834
Encumbered net operating income 61,185
116,505
Total net operating income$ 1,085,804 $
946,339
Unencumbered net operating income as a percentage of total net operating income 94%
88%
Weighted-average shares of common stock outstanding - diluted
From time to time, we enter into capital market transactions, including forward equity sales agreements, to fund acquisitions, to fund construction of our highly leased development and redevelopment projects, and for general working capital purposes. We are required to consider the potential dilutive effect of our forward equity sales agreements under the treasury stock method while the forward equity sales agreements are outstanding. As ofDecember 31, 2019 , we had no forward equity sales agreements outstanding. Prior to the conversion of our remaining outstanding shares inOctober 2019 , we considered the effect of assumed conversion of our outstanding Series D Convertible Preferred Stock when determining potentially dilutive incremental shares to our common stock. When calculating the assumed conversion, we add back to net income or loss the dividends paid on our Series D Convertible Preferred Stock to the numerator and then include additional common shares assumed to have been issued (as displayed in the table below) to the denominator of the per share calculation. The effect of the assumed conversion is considered separately for our per share calculations of net income or loss; funds from operations, computed in accordance with the definition in the Nareit White Paper; and funds from operations, as adjusted. Prior to the conversion of our remaining outstanding shares inOctober 2019 , our Series D Convertible Preferred Stock was dilutive and assumed to be converted when quarterly and annual basic EPS, funds from operations, or funds from operations, as adjusted, exceeded approximately$1.75 and$7.00 per share, respectively, subject to conversion ratio adjustments and the impact of repurchases of our Series D Convertible Preferred Stock. The effect of the assumed conversion was included when it was dilutive on a per share basis. The dilutive effect of less than a half cent per share appears as zero in our reconciliation of EPS - diluted to funds from operations per share - diluted, and funds from operations per share - diluted, as adjusted, even when the dilutive effect to the numerator alone appears in our reconciliation. Refer to Note 13 - "Earnings per Share" and Note 16 - "Stockholders' Equity" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for more information related to our forward equity sales agreements and our Series D Convertible Preferred Stock. 116 -------------------------------------------------------------------------------- The weighted-average shares of common stock outstanding used in calculating EPS - diluted, funds from operations per share - diluted, and funds from operations per share - diluted, as adjusted, for the years endedDecember 31, 2019 , 2018 and 2017, are calculated as follows (in thousands): Year Ended December
31,
2019 2018 2017
Weighted-average shares of common stock outstanding: Basic shares for EPS
112,204 103,010 91,546
Outstanding forward equity sales agreements 320 311
517
Series D Convertible Preferred Stock - - - Diluted for EPS 112,524 103,321 92,063 Basic shares for EPS 112,204 103,010 91,546 Outstanding forward equity sales agreements 320 311
517
Series D Convertible Preferred Stock 442 727 - Diluted for FFO 112,966 104,048 92,063 Basic shares for EPS 112,204 103,010 91,546 Outstanding forward equity sales agreements 320 311
517
Series D Convertible Preferred Stock - - -
Diluted for FFO, as adjusted 112,524 103,321 92,063
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