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 within this "Item 7. Management's discussion and analysis of financial condition and results of operations" 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," "ARE," "we," "us," and "our" refer to
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(1)Represents total equity capitalization for publicly traded U.S. REITs, from
Bloomberg Professional Services as of December 31, 2021 . Alexandria's total
equity capitalization is calculated using shares outstanding and the closing
stock price as of December 31, 2021 .
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As of December 31, 2021 .
(1)We also expect other projects to commence construction in 2022.
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Executive summary
Operating results
Year Ended December 31,
2021 2020
Net income attributable to Alexandria's common
stockholders - diluted:
In millions $ 563.4 $ 760.8
Per share $ 3.82 $ 6.01
Funds from operations attributable to Alexandria's common stockholders - diluted,
as adjusted:
In millions $ 1,144.9 $ 923.8
Per share $ 7.76 $ 7.30
The operating results shown above include certain items related to
corporate-level investing and financing decisions. For additional information,
refer to "Funds from operations and funds from operations, as adjusted,
attributable to Alexandria Real Estate Equities, Inc.'s common stockholders" in
the "Non-GAAP measures and definitions" section and to the tabular presentation
of these items in the "Results of operations" section within this Item 7 in this
annual report on Form 10-K.
Historic leasing volume and rental rate growth
•Historic demand for our high-quality office/laboratory space has translated into record leasing volume and rental rate growth in 2021 for our overall portfolio and our value-creation pipeline.
2021 Previous Annual Record
Total leasing activity - RSF 9,516,301 (1) 5,062,722
Leasing of development and redevelopment space - RSF 3,867,383 (1) 2,258,262
Lease renewals and re-leasing of space:
RSF (included in total leasing activity above) 4,614,040 (1) 2,562,178
Rental rate increases 37.9% (1) 37.6%
Rental rate increases (cash basis) 22.6% (1) 18.3%
(1)Represents the highest leasing volume and rental rate growth in Company history.
Continued strong net operating income and internal growth
•Total revenues of$2.1 billion , up 12.1%, for the year endedDecember 31, 2021 , compared to$1.9 billion for the year endedDecember 31, 2020 . •Net operating income (cash basis) of$1.3 billion for the year endedDecember 31, 2021 , increased by$119.2 million , or 9.9%, compared to the year endedDecember 31, 2020 . •95% of our leases contain contractual annual rent escalations approximating 3%. •Same property net operating income growth of 4.2% and 7.1% (cash basis) for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 . A REIT industry-leading high-quality tenant roster with high-quality revenues and cash flows, strong margins, and operational excellence; growth of 100 bps in occupancy overDecember 31, 2020 (1) Percentage of total annual rental revenue in effect from investment-grade or publicly traded large cap tenants 51 % Occupancy of operating properties inNorth America 94 %
Occupancy of operating properties in
(1)
recently acquired properties) 98.7 %
Operating margin 70 % (2)
Adjusted EBITDA margin 71 % (2)
Weighted-average remaining lease term:
All tenants 7.5 years
Top 20 tenants 10.9 years
(1)Excludes 1.8 million RSF, or 4.7%, of vacancy at recently acquired properties
representing lease-up opportunities that are expected to provide incremental
annual rental revenues. Excluding recently acquired vacancies, occupancy was
98.7% as of December 31, 2021 , up 100 bps from 97.7% as of December 31, 2020 .
Refer to the "Summary of occupancy percentages in North America " section under
Item 2 in this annual report on Form 10-K for additional information regarding
vacancy from recently acquired properties.
(2)For the three months ended December 31, 2021 .
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Historic high demand drives visibility for future growth aggregating
Our highly leased value-creation pipeline of current and near-term projects that are under construction or that will commence construction in the next six quarters is expected to generate greater than$610 million of incremental annual rental revenues, primarily commencing from the first quarter of 2022 through the fourth quarter of 2024. •7.4 million RSF of our value-creation projects are either under construction or expected to commence construction in the next six quarters. •83% leased/negotiating.
Continued dividend strategy to share growth in cash flows with stockholders
Common stock dividend declared for the three months endedDecember 31, 2021 of$1.15 per common share, aggregating$4.48 per common share for the year endedDecember 31, 2021 , up24 cents , or 6%, over the year endedDecember 31, 2020 . Our FFO payout ratio of 60% for the three months endedDecember 31, 2021 allows us to continue to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.
Alexandria at the vanguard of innovation for over 850 tenants, with a focus on accommodating current tenant needs and providing a path for their future growth
•During 2021, we completed acquisitions in our key life science cluster submarkets aggregating 18.4 million SF, comprising 15.2 million RSF of value-creation opportunities and 3.2 million RSF of operating space, for an aggregate purchase price of$5.5 billion , including our previously announced acquisition ofOne Rogers Street in ourCambridge submarket for a purchase price of$849.4 million . These acquisitions are primarily focused on future development or redevelopment opportunities to expand our mega campuses and accommodate the future growth of our tenants.
Delivery and commencement of value-creation projects
•Since the beginning of 2021, we placed into service development and redevelopment projects aggregating 2.0 million RSF that are 100% leased across multiple submarkets. •Annual net operating income (cash basis) is expected to increase by$39 million upon the burn-off of initial free rent from recently delivered projects. •We commenced development and redevelopment projects aggregating 3.4 million RSF during the year endedDecember 31, 2021 . •During the three months endedDecember 31, 2021 , we commenced construction on four value-creation projects aggregating 1.1 million RSF , including a 403,892 RSF recently acquired redevelopment project atOne Rogers Street , which expands our Alexandria Center® atKendall Square mega campus inCambridge . We pre-leased the entire building by executing leases aggregating 403,892 RSF prior to the closing of the acquisition inDecember 2021 . •InJanuary 2022 , we completed the acquisition of 202,997 SF additional development entitlements, for an aggregate of 507,997 SF, at our421 Park Drive future development site in our Alexandria Center® for Life Science - Fenway mega campus in our Fenway submarket.
Alexandria's disciplined management of our value-creation pipeline
Value-creation pipeline of new Class A development and redevelopment projects as a percentage of gross assets
December 31, 2021 Under construction projects 82% leased/negotiating 9% Pre-leased/negotiating near-term projects 89% leased/negotiating 2% Income-producing/potential cash flows/covered land play(1) 6% Land 2% (1)Includes projects that have existing buildings that are generating or can generate operating cash flows. Also includes development rights associated with existing operating campuses. 98
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Execution of capital strategy
2021 capital strategy
During 2021, we continued to execute on many of the long-term components of our capital strategy, as described below.
Maintained access to diverse sources of capital strategically important to our long-term capital structure
•Generated significant cash flows from operating activities
In 2021, we funded approximately
•Continued strategic value harvesting through real estate dispositions and partial interest sales In 2021, these sales generated a record$2.6 billion of capital for investment into our highly leased development and redevelopment projects and strategic acquisitions. In relation to these transactions, we recorded gains or consideration in excess of book value aggregating$1.1 billion . •Achieved significant growth in Adjusted EBITDA of$299.6 million , or 23%, during 2021, which allowed us to: •Improve our net debt to Adjusted EBITDA (fourth quarter of 2021 annualized) ratio to 5.2x from 5.3x, the lowest in 10 years, and fund$1.6 billion of growth on a leverage-neutral basis. •Take advantage of favorable capital market environment and opportunistically issue on a leverage-neutral basis unsecured senior notes payable aggregating$1.75 billion with a weighted-average interest rate of 2.49% and a weighted-average maturity of 20.4 years, a portion of the proceeds from which was used to refinance our 4.00% unsecured senior notes payable due in 2024. •Continued disciplined management of common equity issuances to support growth in FFO per share, as adjusted, and NAV In 2021, the aforementioned internally generated capital enabled us to meet our capital requirements while prudently limiting the amount of equity issuances to 20.8 million shares of common stock sold under our forward equity sales agreements and ATM common stock offering program for net proceeds of$3.5 billion .
Maintained a strong and flexible balance sheet with significant liquidity
•$3.8 billion liquidity as ofDecember 31, 2021 . •Net debt and preferred stock to Adjusted EBITDA of 5.2x and fixed-charge coverage ratio of 5.3x for the three months endedDecember 31, 2021 , annualized, representing the best ratios in the past 10 years. •Total debt and preferred stock to gross assets of 26% as ofDecember 31, 2021 . •Weighted-average remaining term of debt of 12.1 years as ofDecember 31, 2021 , with no debt maturing prior to 2024. •Total equity capitalization of$35.2 billion is in the top 10% among all publicly tradedU.S. REITs as ofDecember 31, 2021 .
Continued to strengthen our credit profile
•InOctober 2021 ,S&P Global Ratings upgraded our corporate issuer credit rating outlook to BBB+/Positive from BBB+/Stable. •As ofDecember 31, 2021 , our investment-grade credit ratings ranked in the top 10% among all publicly tradedU.S. REITs.
2022 capital strategy
During 2022, we intend to continue to execute our capital strategy to achieve further improvements to our credit profile, which will allow us to further improve our cost of capital and continue our disciplined approach to capital allocation. Consistent with 2021, our capital strategy for 2022 includes the following elements: •Allocate capital to Class A properties located in life science, agtech, and tech campuses inAAA urban innovation clusters; •Maintain prudent access to diverse sources of capital, which include cash flows from operating activities after dividends, incremental leverage-neutral debt supported by growth in EBITDA, strategic value harvesting and asset recycling through real estate disposition and partial interest sales, non-real estate investment sales, sales of equity, and other capital; •Continue to improve our credit profile; •Maintain commitment to long-term capital to fund growth; •Prudently ladder debt maturities and manage short-term variable-rate debt; •Prudently manage equity investments to support corporate-level investment strategies; •Maintain a stable and flexible balance sheet with significant liquidity. The anticipated delivery of significant incremental EBITDA from our development and redevelopment of new Class A properties is expected to enable us to continue to debt fund a significant portion of our development and redevelopment projects on a leverage-neutral basis. We expect to continue to maintain access to diverse sources of capital, including unsecured senior notes payable, and 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. 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 equity capital. For further information, refer to the "Projected results", "Sources of Capital," and "Uses of Capital" sections under this Item 7. Our ability to meet our 2022 capital strategy objectives and expectations will depend in part on capital market conditions, real estate market conditions, and other factors beyond our control. Accordingly, there can be no assurance that we will be able to achieve these objectives and expectations. Refer to our discussion of "Forward-looking statements" in this annual report on Form 10-K. 99 --------------------------------------------------------------------------------
Operating summary
Same Property Net Operating
Income Growth Favorable Lease Structure(1)
Strategic Lease Structure by Owner andOperator of Collaborative Life Science, Agtech, and Technology
Campuses
Increasing cash flows
Percentage of leases containing annual rent escalations 95%
[[Image Removed: are-20211231_g43.jpg]] [[Image Removed:
are-20211231_g44.jpg]] Stable cash flows
Percentage of triple 91% (2)
net leases
Lower capex burden
Percentage of leases providing for the recapture of capital expenditures 94%
Rental Rate Growth:
Renewed/Re-Leased Space Margins(3)
Operating Adjusted EBITDA
[[Image Removed: are-20211231_g45.jpg]] [[Image Removed:
are-20211231_g46.jpg]] 70% 71%
Net Debt and Preferred Stock
to Adjusted EBITDA(4) Fixed-Charge Coverage Ratio(4)
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(1)Percentages calculated based on RSF as ofDecember 31, 2021 . (2)Decline to 91% from 94% as ofDecember 31, 2020 is primarily related to non-triple net leases in place at operating properties with future development or redevelopment opportunities acquired during the year endedDecember 31, 2021 . We expect to transition these properties to our triple net lease structure in conjunction with our future development or redevelopment activities. (3)Represents percentages for the three months endedDecember 31, 2021 . (4)Quarter annualized. Refer to the definitions of "Net debt and preferred stock to Adjusted EBITDA" and "Fixed-charge coverage ratio" in the "Non-GAAP measures and definitions" section within this Item 7 for additional details. 100 --------------------------------------------------------------------------------
Industry and ESG leadership: catalyzing and leading the way for positive change to benefit human health and society
•InJanuary 2021 , Alexandria Venture Investments, our strategic venture capital platform, was recognized for a fourth consecutive year as the most active biopharma corporate investor by new deal volume bySilicon Valley Bank in its "Healthcare Investments and Exits: Annual Report 2021." InFebruary 2021 , Alexandria Venture Investments was also recognized as one of the five most active U.S. investors in agrifoodtech by deal volume in 2020 by AgFunder in its "2021 AgFunder AgriFoodTech Investment Report." •InFebruary 2021 , Alexandria was ranked as the third most sustainable REIT, as featured in Barron's "The 10 Most Sustainable REITs, According toCalvert ." •InMarch 2021 , Alexandria LaunchLabs® at the Alexandria Center® atOne Kendall Square in ourCambridge submarket was awarded the Fitwel Impact Award for achieving the highest-scoring project of all time. This is the second year in a row that Alexandria has held this distinction, demonstrating our commitment to optimizing projects to advance health and wellness. •InMay 2021 , Alexandria was ranked in the top 10 of the world's largest and most impactful real estate firms on the Forbes 2021 Global 2000 list determined based on sales, profits, assets, and market value. •InJune 2021 , we released our 2020 Environmental, Social & Governance Report, which showcases our longstanding ESG commitment and leadership. Key highlights in the report include the company's critical efforts to tackle climate change by pioneering low-carbon and climate-resilient design solutions, mitigating climate-related risk in our asset base, and investing in and providing essential infrastructure for sustainable agrifoodtech companies; continuing strong progress toward our 2025 environmental impact goals, including further reducing carbon emissions; and catalyzing the health, wellness, safety, and productivity of our employees and tenants, local communities, and the world at large through the built environment and our social responsibility initiatives. •InSeptember 2021 , OneFifteen, an innovative, data-driven non-profit evidence-based healthcare ecosystem dedicated to the full and sustained recovery of people living with addiction, received an honorable mention inFast Company's 2021 Innovation by Design Awards in the Impact category. Alexandria led the design and development of the pioneering campus inDayton, Ohio , which houses a unique, evidence-based model encompassing a full continuum of care in one location, from intake, medication-assisted treatment, and residential living to family reunification, job training, and community transition. •InSeptember 2021 , the NationalSeptember 11 Memorial & Museum honoredJoel S. Marcus , our executive chairman and founder, for Distinction in Civic Engagement and Renewal, recognizing his meaningful contributions to and unwavering support of the 9/11Memorial & Museum and its mission. As an active supporter of theMemorial & Museum since it opened in 2014,Mr. Marcus has served as a member of its board of trustees since his appointment in 2018 by formerNew York City MayorMichael Bloomberg . •InSeptember 2021 , Alexandria achieved the Fitwel Viral Response Certification With Distinction, the highest certification level within the Fitwel Viral Response module, for the second consecutive year. This evidence-based, third-party certification recognizes the Company's comprehensive and rigorous approach to protecting the health of its building occupants. •InOctober 2021 , Alexandria received an ESG Rating of A from MSCI as a result of our continued advancement of green building opportunities, recognition of talent management programs, and below-industry-average turnover rate, among other achievements. Our MSCI ESG Rating of A is in the top 10% among all publicly tradedU.S. equity REITs. •InOctober 2021 , our ESG commitment and leadership was recognized in the 2021 Global Real Estate Sustainability Benchmark ("GRESB") Real Estate Assessment, including for the following achievements: (i) Global Sector Leader and a 5 Star rating - GRESB's highest rating - in the Diversified Listed sector for buildings in development, (ii) #2 ranking in theU.S. in the Science & Technology sector for buildings in operation, and (iii) fourth consecutive "A" disclosure score. •InOctober 2021 , OneFifteen celebrated its second anniversary. Since seeing its first patients inOctober 2019 at its pioneering campus inDayton, Ohio , which was designed and developed by Alexandria, OneFifteen has treated over 4,000 patients and conducted over 11,500 telehealth visits as ofDecember 31, 2021 . •InOctober 2021 , STEAM:Coders honored Alexandria with the Corporate Vanguard Award, recognizing our longstanding commitment to the non-profit's mission to inspire underrepresented and underserved students and their families through science, technology, engineering, art, and math ("STEAM") education in preparation for academic and career opportunities. •As a testament to Alexandria's operational excellence and exceptional team, inNovember 2021 , we were recognized at the 2021 BOMA Boston TOBY (The Outstanding Building of the Year) & Industry Awards for theLaboratory Building of the Year (100 Binney Street ) and the Corporate Facility of the Year (200 Technology Square ). Five members from ourGreater Boston team were also honored for their individual achievements. The TOBY & Industry Awards recognize excellence in property management, building operations, and service in the commercial real estate industry. •InNovember 2021 , Alexandria's executive chairman and founder,Joel S. Marcus , joined theNational Medal of Honor Museum Foundation at theDallas Cowboys' "Salute to Service" game to support the future National Medal ofHonor Museum inArlington, Texas and its mission to inspire visitors with the stories of our country's Medal of Honor recipients for generations to come.Mr. Marcus has served on the foundation's board of directors since 2019. •InDecember 2021 , Alexandria established a new social responsibility pillar to address America's growing mental health crisis, with a focus on helping children cope with the loss of a parent or family member to suicide. By partnering withCamp Kita , a tuition-free summer camp for 8- to 17-year-olds who are impacted by the loss of a family member to suicide, we have enabled the non-profit to have long-term access to 28 acres inActon, Maine that will serve as the camp's future home. The dedicated space will allowCamp Kita to expand its programming, advance its mission, and support the mental health of a community of young survivors. 101 -------------------------------------------------------------------------------- [[Image Removed: are-20211231_g49.jpg]] 102 --------------------------------------------------------------------------------
Climate Change and Sustainability
We cannot predict the rate at which climate change will progress. However, the physical effects of climate change could have a material adverse effect on our properties, operations, and business. For example, most of our properties are located along the east and west coasts of theU.S. and some of our properties are located in close proximity to shorelines. To the extent that climate change impacts weather patterns, our markets could experience severe weather, including hurricanes, severe winter storms, wild fires, droughts, and coastal flooding due to increases in storm intensity and rising sea levels. Over time, these conditions could result in declining demand for space at our properties, delays in construction and resulting increased construction costs, or in our inability to operate the buildings at all. Climate change and severe weather may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable, and by increasing the costs of energy, maintenance, repair of water and/or wind damage, and snow removal at our properties. We continue to evaluate our asset base for potential exposure to the following climate-related risks: sea level rise and increases in heavy rain, flood, drought, extreme heat, and wildfire. As a part of Alexandria's risk management program, we purchase property insurance to mitigate the risk of extreme weather events and natural disasters. However, our insurance may not adequately cover all of our potential losses. As a result, there can be no assurance that climate change and severe weather will not have a material adverse effect on our properties, operations, or business.
Board of Directors and Leadership Oversight
The Audit Committee of Alexandria's Board of Directors oversees the management of the company's financial and other systemic risks, including those related to climate. At a management level, Alexandria's Sustainability Committee, which comprises members of the executive team and senior decision makers spanning the company's Real Estate Development, Asset Management, Risk, and Sustainability teams, leads the development and execution of our approach to climate-related risk.
Proactively Managing and Mitigating Climate Risk
The resilience of our properties under a changing climate is paramount both for our business and our tenants' mission-critical research, development, manufacturing, and commercialization efforts. We consider the potential impacts associated with climate change and extreme weather conditions in the acquisition, design, development, and operation of our buildings and campuses. We align our climate change management efforts with the guidelines issued by theTask Force on Climate-related Financial Disclosures ("TCFD"), which we endorsed in 2018. Our industry-leading environmental initiatives, programs, and policies and our proactive approach to the identification and management of evolving physical conditions and transition issues continue to raise the bar in the industry for mitigating greenhouse gas ("GHG") emissions and bolstering climate resilience. As further detailed in the "Monitoring and Preparing for Transition" subsection below, over the past few years, regulatory bodies in most of our regions have either passed or proposed legislation to limit the carbon footprint of buildings, require procurement of clean power, or eliminate natural gas from new construction projects. Additionally, certainU.S. jurisdictions incorporated guidelines into their building codes to address the up-front impacts of building materials such as concrete. Moreover, our tenant preferences for green, efficient, and healthy buildings continue to rise. As ofDecember 31, 2021 , 80% of Alexandria's top 20 tenants (by annual rental revenue) have set net-zero carbon and/or carbon neutrality goals, compared to 50% of our top 20 tenants as ofDecember 31, 2020 . As a result of our own sustainability mission compelling us to reduce carbon emissions and mitigate climate risk, as well as the changing regulatory environment and our tenants' expectations, we have implemented a comprehensive approach to assessing and mitigating physical risk to our properties as well as to preparing for the transition, as described below.
Assessing and Mitigating Physical Risk to Our Properties
In accordance with TCFD methodology, we consider a range of scenarios for 2030
and 2050 when evaluating physical risk to our properties: (1) a
business-as-usual scenario in which GHG emissions continue to increase with time
(Representative Concentration Pathways ("RCP") 8.5); and (2) a mitigation
scenario in which GHG emissions level off by 2050 and decline thereafter (RCP
4.5). To ensure a conservative evaluation of potential risk at the asset level,
we use the RCP 8.5 scenario, which has greater climate hazard impacts than RCP
4.5. These climate change assessments covering both acute and chronic risks
enable us to assess preparedness for climate-related risks across the real
estate life cycle.
For our property acquisitions, our risk management and sustainability teams conduct climate change evaluations and advise the transactions and property teams of any need for potential property upgrades, which are evaluated in our financial modeling and transactional decisions.
For our developments and redevelopments of new Class A properties, we evaluate
the potential impact of sea level rise, storm surges in coastal or tidal
locations, and changing temperatures out to the year 2050. As feasible, we
design for the potential need to add cooling infrastructure to meet future
building needs while maintaining flexibility and optimizing infrastructure funds
for more immediate needs. In water-scarce areas, we aim to plant
drought-resistant vegetation and prepare buildings to connect to a municipal
recycled-water infrastructure where available and feasible. In areas prone to
wildfire, we incorporate brush management practices into landscape design and
may also include enhanced air filtration systems to support safe, healthy indoor
air under extreme air pollution conditions.
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At our buildings in operation, we evaluate to what extent we have mitigations in
place and which operational and physical improvements can be made where
potential concerns have been identified. For example, resilience measures
implemented at some of our properties include the following: in areas prone to
floods we position critical building mechanical equipment on the roofs or
significantly above the projected potential flood elevations; we purchase
temporary flood barriers that we store on-site and can deploy at building
entrances prior to a flood event; we elevate property entrances or the first
floor above projected present day and future flood elevations; we install
backflow preventors on storm/sewer utilities that discharge from the building;
and we waterproof the building envelope up to the projected flood elevation. In
areas prone to fire, and to the extent feasible, we locate our properties away
from large fire hazards, such as large grassy or brush areas; our landscaping
vegetation consists of less flammable vegetation species that are positioned in
a reasonable distance from a property; our building envelopes are constructed
with fire-resistant materials and are sealed; and in the event of fire, our HVAC
systems are able to filtrate smoke particulates in the air.
COMPREHENSIVE APPROACH TO ASSESSING & MITIGATING PHYSICAL RISK
Acquisitions
•Conduct climate change assessment.
•Incorporate potential mitigation strategies, where applicable, into financial modeling
and transactional decisions.
Developments and Redevelopments
•Review climate change assessment.
•Assess potential risks and account for 2050 climate projections and an RCP 8.5 scenario.
•Consider physical and operational measures in design to increase the property's
resilience.
•Identify operational mitigation measures and ongoing monitoring opportunities.
Buildings in Operation
•For new and redeveloped assets transitioning into operations:
•Consider implementation and prioritization of operational mitigation measures and ongoing
monitoring.
•For existing assets:
•Review climate change assessment.
•Where potential risks have been identified, assess to what extent mitigation measures are
in place and which operational and physical improvements can be made to increase the
property's resilience.
•Develop an implementation plan.
Monitoring and Preparing for Transition
Globally, public concern regarding climate change has been growing rapidly. To join efforts and to accelerate action to reduce GHG emissions, onNovember 13, 2021 , nearly 200 countries attended theUnited Nations' annual climate summit,COP26 , and adopted the Glasgow Climate Pact (the "Pact"), which includes terms to strengthen efforts to address climate change by building resilience, reducing GHG emissions, providing additional funding from developed to developing countries, and limiting global temperature increase to 1.5 Celsius above pre-industrial levels. The Pact for the first time includes language that calls upon countries to reduce their reliance on coal power and roll back inefficient fossil fuel subsidies. A number of other notable agreements were made during theCOP26 summit, including, among others, an agreement between theU.S. and the EU to spearhead an initiative to reduce methane emissions by 30% by 2030. It is unknown how or if the Pact's measures will be carried out effectively or whether these measures will be sufficient to mitigate the effects of climate change over time. InAugust 2021 , theUnited Nations' Intergovernmental Panel on Climate Change issued a detailed report titled "Climate Change 2021: The Physical Science Basis" that provides a comprehensive evidence of the catastrophic impact of GHG emissions on climate change, including increases in severe and dangerous weather conditions. According to the latest data provided by theU.S. Environmental Protection Agency ("U.S. EPA "), theU.S. is responsible for approximately 15% of the global GHG emissions. To combat the cause of global warming domestically,President Biden identified climate change as one of his top priorities and pledged to seek measures that would pave the path for theU.S. to eliminate net GHG pollution by 2050. InApril 2021 ,President Biden announced his plan to reduce theU.S. GHG emissions by at least 50% by 2030. These environmental goals earned a prominent place inPresident Biden's $1.2 trillion infrastructure bill, which was signed into law onNovember 15, 2021 . It is not yet known what impact this law may have on our properties, business operations, or our tenants. 104 --------------------------------------------------------------------------------
Numerous states and municipalities have adopted laws and policies on climate change and emission reduction targets, including, but not limited to, the following:
•In California, State GovernorGavin Newsom signed legislation inSeptember 2021 aimed at achieving net-zero GHG emissions associated with cement used within the state no later than 2045. InNovember 2020 , theSan Francisco Board of Supervisors adopted an All-Electric New Construction Ordinance that will require all new buildings (residential and non-residential) with initial building permit applications made on or afterJune 1, 2021 to have all-electric indoor and outdoor space-conditioning, water heating, cooking, and clothes drying systems. In addition, inSeptember 2020 ,Mr. Newsom signed an executive order requiring all new passenger cars and trucks sold in the state to be emission free by 2035. Also inSeptember 2018 , Senate Bill 100 was signed into law inCalifornia , accelerating the state's renewable portfolio standard target dates and setting a policy of meeting 100% of retail electricity sales from eligible renewables and zero-carbon resources byDecember 31, 2045 . •In Massachusetts, Senate Bill 9 was signed into law inMarch 2021 , updating the state's climate policy to ensure net-zero GHG emissions by 2050 and establishing interim emission reduction targets for several sectors, including commercial and industrial buildings. •In New York, the Climate Leadership and Community Protection Act was signed into law inJuly 2019 , establishing a statewide framework to reduce net GHG emissions to no less than 85% below 1990 levels by 2050. Also, inMay 2019 ,New York City enacted Local Law 97 as a part of the Climate Mobilization Act aimed at reducing GHG emissions by 80% from commercial and residential buildings by 2050. Starting in 2024, this law will place carbon caps on most buildings larger than 25,000 square feet. In addition, inDecember 2021 ,New York City passed Local Law 154 of 2021, which will phase out fossil fuel usage in newly constructed residential and commercial buildings starting in 2024 for lower-rise buildings, and in 2027 for taller buildings. With few exceptions, all buildings constructed inNew York City must be fully electric by 2027. •In Washington, theState Legislature has passed a number of bills since 2019 focused on phasing out fossil fuels, achieving carbon neutrality, reducing GHG emissions, supporting the sale of zero-emissions vehicles, and establishing clean fuel standards. In support of these efforts, in 2020,Washington updated its GHG emission goals to require a reduction of 45% below 1990 levels by 2030, of 70% below 1990 levels by 2040, and net-zero emissions by 2050. •In North Carolina, State GovernorRoy Cooper signed an executive order inJanuary 2022 that updates the state's GHG emission goals to require a reduction of 50% below 2005 levels by 2030, and achievement of net-zero emissions by 2050.
Alexandria has implemented a comprehensive approach to responding to transition risk through the following strategies:
Decarbonizing construction
Alexandria targets LEED Gold or Platinum certification for new ground-up developments. Through our sustainability goals for new developments, we deliver energy- and resource-efficient buildings that meet or exceed tenant, city, and state requirements for energy and water efficiency, material sourcing, biodiversity, and alternative transportation. We are also revolutionizing the design of our buildings through innovative low-carbon solutions. At325 Binney Street , on our Alexandria Center atOne Kendall Square mega campus inCambridge , the building design is expected to yield a 95% reduction in fossil fuel consumption. The project is targeting LEED Platinum Core & Shell and LEED Zero Energy certifications. At685 Gateway Boulevard inSouth San Francisco , we are targeting Zero Energy Certification through theInternational Living Future Institute (ILFI) by leveraging design strategies such as building envelope optimization, high-performance features, and on-site energy generation. With several jurisdictions shifting (or with plans to shift soon) from fossil fuels for heating and requiring all electric buildings as a strategy to reduce carbon emissions associated with building operations, we have proactively incorporated electrification into building designs, with one project completed and two currently in progress. Embodied carbon in building materials and construction accounts for 11% of annual global GHG emissions and Alexandria is playing a leadership role in the industry's effort to measure and ultimately reduce carbon associated with the construction process. In 2019, Alexandria became a sponsor and the first REIT to use theCarbon Leadership Forum's Embodied Carbon in Construction Calculator (EC3) tool. For new construction projects, Alexandria seeks to procure products with Environmental Product Declarations (EPDs), which provide information on product composition and environmental impact. Using such EPDs, Alexandria aims to reduce embodied carbon by 10% for new ground-up development projects. As ofDecember 31, 2021 , Alexandria has completed three embodied carbon assessments and others are in progress for 15 development projects. 105 --------------------------------------------------------------------------------
Leveraging renewable energy
We are pursuing opportunities to power our buildings with renewable energy as another means to reduce our carbon footprint. Properties such as3215 Merryfield Row inSan Diego are generating solar energy, and our development pipeline will scale our ability to source additional clean energy on-site. We also procure renewable energy generated off-site from local utilities and from power service providers for some of our operating assets.
Reducing the environmental footprint of buildings in operation
Our sustainability mission compels us toward industry-leading sustainability
practices and performance that can help reduce operating expenses and result in
higher occupancy levels, longer lease terms, higher rental income, higher
returns, and greater long-term asset value, and thus enable us to capture
climate-related opportunities. Our ongoing efforts to reduce consumption are
driven by our commitment to operational excellence in sustainability, building
efficiency, and service to our tenants. Alexandria's 2025 sustainability goals
for buildings in operation and new ground-up construction projects provide the
framework, metrics, and targets that guide the Company's focus on continuous,
long-term improvement. For buildings in operation, we set goals to reduce carbon
emissions, energy consumption, and potable water consumption and increase waste
diversion by 2025. From 2019 to 2020, we reduced energy use by 1.7%, carbon
emissions by 1.7%, and water use by 6.9% and achieved a 38.5% waste diversion
rate in 2020 alone.
[[Image Removed: are-20211231_g50.jpg]]
(1)Relative to a 2015 baseline for buildings in operation that Alexandria
directly manages.
(2)For buildings in operation that Alexandria indirectly and directly manages.
(3)Reflects sum of annual like-for-like progress from 2015 to 2020.
(4)Reflects progress for all buildings in operation in 2020 that Alexandria
indirectly and directly manages.
As we look to the future, we are creating our long-term strategy and plan for
the net zero-carbon transition. We are developing an approach to set
industry-leading science-based targets that will provide a pathway to reduce
scope 1, 2, and 3 GHG emissions and continue our leadership in sustainability.
Refer to "Item 1A. Risk factors" of this annual report on Form 10-K for discussion of the risks posed by climate change.
106
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[[Image Removed: are-20211231_g52.jpg]]
108
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(1)Source: Barron's, "The 10 Most Sustainable REITs, According to
109
--------------------------------------------------------------------------------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 this 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, impairments of real estate and non-real estate investments, and
significant termination fees are not related to the operating performance of our
real estate assets as they result from strategic corporate-level 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 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
2021 2020 2021 2020
(In millions, except per share amounts) Amount Per Share - Diluted
Unrealized gains on non-real estate investments $ 43.6 $ 374.0 $ 0.30 $ 2.96
Significant realized gains on non-real estate
investments 110.1 - 0.75 -
Gain on sales of real estate(1) 126.6 154.1 0.86 1.22
Impairment of real estate (52.7) (55.7) (0.35) (0.44)
Impairment of non-real estate investments - (24.5) - (0.19)
Loss on early extinguishment of debt (67.3) (60.7) (0.46) (0.48)
Termination fee - 86.2 - 0.68
Acceleration of stock compensation expense due to
executive officer resignation - (4.5) - (0.04)
Total $ 160.3 $ 468.9 $ 1.10 $ 3.71 (1)Refer to "Funds from operations and funds from operations, as adjusted,
attributable to
110
--------------------------------------------------------------------------------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 additional 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, 2021 and 2020:December 31, 2021 2020
Percentage change in net operating income over comparable period from prior year
4.2% 2.6 %
Percentage change in net operating income (cash basis) over comparable period from prior year
7.1% 5.1 %
Operating margin 72% 73%
Number of Same Properties 247 209
RSF 23,490,412 20,707,818
Occupancy - current-period average 96.6% 96.6 %
Occupancy - same-period prior-year average 96.3% 96.7 %
The following table reconciles the number of
Development - under construction Properties9950 Medical Center Drive 1825 and 835 Industrial Road 23115 Merryfield Row 1201 Haskins Way 15 and 9 Laboratory Drive 28 and 10 Davis Drive 2201 Brookline Avenue 110055 Barnes Canyon Road 1751 Gateway Boulevard 1325 Binney Street 11150 Eastlake Avenue East 110102 Hoyt Park Drive 1 15
Development - placed into service after
1
1165 Eastlake Avenue East 1
2
Redevelopment - under construction Properties
5505 Morehouse Drive 1
30-02 48th Avenue 1
3160 Porter Drive 1
The Arsenal on the Charles 11
2400 Ellis Road , 40 Moore Drive , and 14 TW Alexander Drive 3
840 Winter Street 1
20400 Century Boulevard 1
10277 Scripps Ranch Boulevard 1
9601 and 9603 Medical Center Drive 2
One Rogers Street 1
40, 50, and 60 Sylvan Road 3
3301, 3555, and 3755 Monte Villa Parkway 3
Other 2
31
Redevelopment - placed into service after January 1, 2020 Properties
9877 Waples Street 1
700 Quince Orchard Road 1
Other 1
3
Acquisitions after January 1, 2020 Properties
3181 Porter Drive 1
275 Grove Street 1
601, 611, and 651 Gateway Boulevard 3
3330, 3412, 3420, 3440, 3450, and 3460 Hillview Avenue 6
9605, 9609, 9613, and 9615 Medical Center Drive 4
9808 and 9868 Scranton Road 2
Alexandria Center® for Life Science - Durham 13
One Upland Road 1
830 4th Avenue South 1
11255 and 11355 North Torrey Pines Road 2
Sequence District by Alexandria 7
380 and 420 E Street 2
Alexandria Center® for Life Science - Fenway 1
550 Arsenal Street 1
1501-1599 Industrial Road 6
One Investors Way 2
2475 Hanover Street 1
10975 and 10995 Torreyana Road 2
Pacific Technology Park 6
1122 El Camino Real 1
12 Davis Drive 1
7360 Carroll Road 1
3303, 3305, and 3307 Monte Villa Parkway 3
Other 44
112
Unconsolidated real estate JVs 4
Properties held for sale -
Total properties excluded from Same Properties 167
Same Properties 247
Total properties in North America as of December 31, 2021 414
111
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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, 2021 , compared to the year endedDecember 31, 2020 . 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, 2020 to the year endedDecember 31, 2019 , including a comparison of the components of net operating income for ourSame Properties andNon-Same Properties for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , within the "Results of operations" section in Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2020 . Year Ended December 31, (Dollars in thousands) 2021 2020 $ Change % Change Income from rentals: Same Properties$ 1,220,160 $ 1,171,595 $ 48,565 4.1 % Non-Same Properties 398,432 300,245 98,187 32.7 Rental revenues 1,618,592 1,471,840 146,752 10.0 Same Properties 406,162 370,895 35,267 9.5 Non-Same Properties 83,495 35,473 48,022 135.4 Tenant recoveries 489,657 406,368 83,289 20.5 Income from rentals 2,108,249 1,878,208 230,041 12.2 Same Properties 475 366 109 29.8 Non-Same Properties 5,426 7,063 (1,637) (23.2) Other income 5,901 7,429 (1,528) (20.6) Same Properties 1,626,797 1,542,856 83,941 5.4 Non-Same Properties 487,353 342,781 144,572 42.2 Total revenues 2,114,150 1,885,637 228,513 12.1 Same Properties 456,705 420,264 36,441 8.7 Non-Same Properties 166,850 109,960 56,890 51.7 Rental operations 623,555 530,224 93,331 17.6 Same Properties 1,170,092 1,122,592 47,500 4.2 Non-Same Properties 320,503 232,821 87,682 37.7 Net operating income$ 1,490,595 $ 1,355,413 $ 135,182 10.0 % Net operating income - Same Properties$ 1,170,092 $ 1,122,592 $ 47,500 4.2 % Straight-line rent revenue (60,157) (82,681) 22,524 (27.2) Amortization of acquired below-market leases (12,357) (15,348) 2,991 (19.5) Net operating income -Same Properties (cash basis)$ 1,097,578 $ 1,024,563 $ 73,015 7.1 % 112
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Income from rentals
Total income from rentals for the year endedDecember 31, 2021 increased by$230.0 million , or 12.2%, to$2.1 billion , compared to$1.9 billion for the year endedDecember 31, 2020 as a result of increases in rental revenues and tenant recoveries, as discussed below.
Rental revenues
Total rental revenues for the year endedDecember 31, 2021 , increased by$146.8 million , or 10.0%, to$1.6 billion , compared to$1.5 billion for the year endedDecember 31, 2020 . Excluding a termination fee of$89.5 million recognized during the year endedDecember 31, 2020 , our total rental revenues increased by$236.3 million , or 17.1%, which was primarily due to an increase in rental revenues from ourNon-Same Properties related to 2.1 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2020 , and 112 operating properties aggregating 11.2 million RSF acquired subsequent toJanuary 1, 2020 . Rental revenues from ourSame Properties for the year endedDecember 31, 2021 increased by$48.6 million , or 4.1%, to$1.2 billion , compared to$1.2 billion for the year endedDecember 31, 2020 . The increase was primarily due to rental rate increases on lease renewals and re-leasing of space sinceJanuary 1, 2020 . Refer to the "Leasing activity" section of "Item 2. Properties" within Part I of this annual report on Form 10-K for additional details.
For further details, refer to the "Lease accounting" section in Note 2 - "Summary of significant accounting policies."
Tenant recoveries
Tenant recoveries for the year endedDecember 31, 2021 increased by$83.3 million , or 20.5%, to$489.7 million , compared to$406.4 million for the year endedDecember 31, 2020 . This increase was primarily from ourNon-Same Properties related to our development and redevelopment projects placed into service and properties acquired subsequent toJanuary 1, 2020 , as discussed under "Rental revenues" above.Same Properties' tenant recoveries for the year endedDecember 31, 2021 increased by$35.3 million , or 9.5%, primarily due to higher property insurance, contract services, and utilities expenses, and an increase in property tax expenses resulting from higher assessed values of our properties during the year endedDecember 31, 2021 , as discussed under "Rental operations" below. As ofDecember 31, 2021 , 91% 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, 2021 and 2020 was$5.9 million and$7.4 million , respectively, which primarily consisted of construction management fees and interest income earned during each respective period.
Rental operations
Total rental operating expenses for the year endedDecember 31, 2021 increased by$93.3 million , or 17.6%, to$623.6 million , compared to$530.2 million for the year endedDecember 31, 2020 . The increase was primarily due to incremental expenses related to ourNon-Same Properties , which consisted of development and redevelopment projects placed into service and acquired properties, as discussed under "Income from rentals" above.Same Properties' rental operating expenses increased by$36.4 million , or 8.7%, to$456.7 million during the year endedDecember 31, 2021 , compared to$420.3 million for the year endedDecember 31, 2020 . The increase was primarily the result of higher property insurance, contract services, and utilities expenses, and increased recoverable property tax expenses driven by higher assessed values of our properties.
General and administrative expenses
General and administrative expenses for the year endedDecember 31, 2021 increased by$18.1 million , or 13.6%, to$151.5 million , compared to$133.3 million for the year endedDecember 31, 2020 . The increase was primarily due to 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, as discussed under "Income from rentals" above. As a percentage of net operating income, our general and administrative expenses for the years endedDecember 31, 2021 and 2020 were 10.2% and 9.8%, respectively. 113 --------------------------------------------------------------------------------
Interest expense
Interest expense for the years ended
Year Ended December 31,
Component 2021 2020 Change
Interest incurred $ 312,806 $ 297,227 $ 15,579
Capitalized interest (170,641) (125,618) (45,023)
Interest expense $ 142,165 $ 171,609 $ (29,444)
Average debt balance outstanding(1) $ 9,071,513 $
7,762,498
Weighted-average annual interest rate(2) 3.4 % 3.8 % (0.4) %
(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
Component Interest Rate(1) Effective Date Change Increases in interest incurred due to: Issuances of debt:$700 million unsecured senior notes payable 5.05 % March 2020$ 8,110 $1.0 billion unsecured senior notes payable 1.97 % August 2020 11,231$900 million unsecured senior notes payable - 2.12 % February 2021 15,848 green bond$850 million unsecured senior notes payable 3.08 % February 2021 22,239 Other increase in interest 630 Total increases 58,058 Decreases in interest incurred due to: Repayments of debt: Secured notes payable Various December 2020 (3,740)$500 million unsecured senior notes payable 4.04 % September 2020 (12,489)$650 million unsecured senior notes payable - 4.03 % March 2021 (22,217) green bond Fluctuations in interest rate and average balance: Unsecured senior line of credit (1,581)$1.5 billion commercial paper program (2,452) Total decreases (42,479) Change in gross interest 15,579 Increase in capitalized interest (45,023) Total change in interest expense$ (29,444)
(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.
Depreciation and amortization
Depreciation and amortization expense for the year endedDecember 31, 2021 increased by$123.0 million , or 17.6%, to$821.1 million , compared to$698.1 million for the year endedDecember 31, 2020 . The increase was primarily due to additional depreciation from 2.1 million RSF of development and redevelopment projects placed into service subsequent toJanuary 1, 2020 , and 112 operating properties aggregating 11.2 million RSF acquired subsequent toJanuary 1, 2020 . 114 --------------------------------------------------------------------------------
Impairment of real estate
During the year ended
•Impairment charge of$22.5 million during the three months endedSeptember 30, 2021 , upon classification as held for sale of an option to purchase a land parcel in our SoMa submarket for the development of an office property, to reduce the option's carrying amount to its estimated fair value less costs to sell. We completed the sales of the option during the three months endedDecember 31, 2021 , at no gain or loss. •Impairment charge of$18.6 million during the three months endedSeptember 30, 2021 , to reduce the carrying amount of a property located in a non-core submarket to its estimated fair value less costs to sell, upon our review of the current local market conditions. •Impairment charges aggregating$6.9 million during the six months endedJune 30, 2021 , to further reduce the carrying amounts of three office properties located in ourSan Francisco Bay Area andSeattle markets to their estimated fair values less costs to sell, based on the sales price negotiated for each property during this period. We completed the sales of these properties during the three months endedSeptember 30, 2021 . These properties met the held-for-sale classification during 2020, as discussed below.
During the year ended
•Impairment charges aggregating$25.2 million during the three months endedDecember 31, 2020 to reduce the carrying amounts of three office properties located in ourSan Francisco Bay Area andSeattle markets to their estimated fair values less costs to sell, upon classification of these properties as held for sale. As discussed above, we completed the sales of these properties during the three months endedSeptember 30, 2021 . •Impairment charge of$6.8 million recognized during the three months endedSeptember 30, 2020 , upon classification of our real estate asset located at945 Market Street in our SoMa submarket as held for sale. We completed the sale of this real estate asset inSeptember 2020 . •Impairment charges aggregating$15.2 million , which mainly consisted of a$10 million write-off of the pre-acquisition deposit for a previously pending acquisition of an operating tech office property for which our revised economic projections declined from our initial underwriting. We recognized this impairment charge inApril 2020 concurrently with the submission of our notice to terminate the transaction.
Loss on early extinguishment of debt
During the year endedDecember 31, 2021 , we recognized a loss on early extinguishment of debt of$67.3 million , including the write-off of unamortized loan fees primarily related to the refinancing of our 4.00% unsecured senior notes payable aggregating$650.0 million due in 2024 pursuant to a partial cash tender offer completed onFebruary 10, 2021 , and a subsequent call for redemption for the remaining outstanding amounts completed onMarch 12, 2021 . During the year endedDecember 31, 2020 , we refinanced our 3.90% unsecured senior notes payable due in 2023 aggregating$500.0 million and recognized a loss on early extinguishment of debt of$50.8 million , including the write-off of unamortized loan fees. Additionally, we recognized a loss on early extinguishment of debt of$1.9 million due to the termination of our$750.0 million unsecured senior line of credit.
Equity in earnings of unconsolidated real estate joint ventures
During the year ended
During the year endedDecember 31, 2020 , we recognized equity in earnings of unconsolidated real estate joint ventures aggregating$8.1 million . This balance consisted of earnings from our unconsolidated real estate joint ventures of approximately$15.8 million , partially offset by an impairment charge on one of our unconsolidated real estate joint ventures. InMarch 2020 , the impact of COVID-19 pandemic led to the temporary closure of a retail center owned by our 1401/1413 Research Boulevard unconsolidated real estate joint venture. We evaluated the recoverability of our investment in this joint venture and recognized a$7.6 million impairment charge to lower the carrying amount of our investment balance, which primarily consisted of real estate, to zero. 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 additional information. 115 --------------------------------------------------------------------------------
Investment income
During the year endedDecember 31, 2021 , we recognized investment income aggregating$259.5 million , which consisted of$215.8 million of realized gains and$43.6 million of unrealized gains. Realized gains of$215.8 million primarily consisted of sales of investments and distributions received. Unrealized gains of$43.6 million during the year endedDecember 31, 2021 , primarily consisted of increases in fair values of our investments in privately held entities that report NAV.
During the year ended
For more information about our investments, refer to Note 7 - "Investments" to our consolidated financial statements under Item 15 in this annual report on 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 on Form 10-K. Gain on sales of real estate During the year endedDecember 31, 2021 , we recognized gain on sales of real estate aggregating$126.6 million , which included a$101.1 million gain recognized in connection with the sale of our entire 49.0% interest in the unconsolidated real estate joint venture at Menlo Gateway and a$23.2 million gain recognized in connection with the sale of our2301 5th Avenue property aggregating 197,135 RSF located in ourLake Union submarket ofSeattle . The gains were classified in gain on sales of real estate within our consolidated statements of operations for the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , we recognized gain on sales of real estate aggregating$154.1 million , which included$151.9 million of gains recognized in connection with the sale of two tech office properties at510 Townsend Street and505 Brannan Street in our SoMa submarket and$1.6 million of gains recognized in connection with the sale of30 Bearfoot Road in ourRoute 495 submarket. Other comprehensive income Total other comprehensive income for the year endedDecember 31, 2021 , decreased by$3.8 million to aggregate net unrealized losses of$0.7 million , compared to net unrealized gains of$3.1 million for the year endedDecember 31, 2020 , primarily due to the unrealized gains (losses) on foreign currency translation related to our operations inCanada andChina . 116 --------------------------------------------------------------------------------
Summary of capital expenditures
Our construction spending for the year ended
Year Ended
Construction Spending December
31, 2021
Additions to real estate - consolidated projects $
2,089,849
Investments in unconsolidated real estate joint ventures
13,666
Contributions from noncontrolling interests
(94,285)
Construction spending (cash basis)
2,009,230
Change in accrued construction 149,939 Construction spending$ 2,159,169
The following table summarizes the total projected construction spending for the
year ending
Year Ending
Projected Construction Spending December 31, 2022
Development, redevelopment, and pre-construction projects
(220,000)
Revenue-enhancing and repositioning capital expenditures 98,000
Non-revenue-enhancing capital expenditures 82,000
Guidance midpoint $ 2,950,000
117--------------------------------------------------------------------------------
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, 2022 , 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 financial measure presented in accordance with GAAP, to funds from operations per share, a non-GAAP measure, and other key assumptions included in our updated guidance for the year endingDecember 31, 2022 . There can be no assurance that actual amounts will not be materially higher or lower than these expectations. Refer to our discussion of "Forward-looking statements" in this annual report on Form 10-K. Projected 2022 Earnings per Share and Funds From Operations per Share Attributable to Alexandria's Common Stockholders - Diluted Earnings per share(1)$2.65 to$2.85 Depreciation and amortization of real estate assets 5.65 Allocation of unvested restricted stock awards (0.04) Funds from operations per share(2)$8.26 to$8.46 Midpoint$8.36 (1)Excludes unrealized gains or losses afterDecember 31, 2021 that are required to be recognized in earnings and are excluded from funds from operations per share, as adjusted. (2)Calculated in accordance with standards established by theAdvisory Board of Governors of Nareit (the "Nareit Board of Governors"). Refer to the definition of "Funds from operations and funds from operations, as adjusted, attributable toAlexandria Real Estate Equities, Inc.'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) 2022 Guidance (Dollars in millions) Low High
Occupancy percentage for operating properties in
95.2% 95.8%
Lease renewals and re-leasing of space:
Rental rate increases 30.0% 35.0%
Rental rate increases (cash basis) 18.0% 23.0%
Same property performance:
Net operating income increase 5.5% 7.5%
Net operating income increase (cash basis) 6.5% 8.5%
Straight-line rent revenue $ 150 $ 160
General and administrative expenses $ 168 $ 176
Capitalization of interest $ 269 $ 279
Interest expense $ 90 $ 100
(1)Our assumptions presented in the table above are subject to a number of
variables and uncertainties, including those discussed as "Forward-looking
statements" under Part I; "Item 1A. Risk factors"; and Item 7. Management's
discussion and analysis of financial condition and results of operations 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.
Key Credit Metrics 2022 Guidance
Net debt and preferred stock to Adjusted EBITDA - fourth quarter Less than or equal to
of 2022, annualized 5.1x
Greater than or equal to
Fixed-charge coverage ratio - fourth quarter of 2022, annualized 5.1x
118
--------------------------------------------------------------------------------Consolidated and unconsolidated real estate joint ventures
We present components of balance sheet and operating results information for the noncontrolling interest 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. 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 further discussion.Consolidated Real Estate Joint Ventures Noncontrolling(1) Operating RSF Property/Market/Submarket Interest Share at 100% 50 and 60 Binney Street/Greater Boston/Cambridge/Inner Suburbs 66.0 % (2) 532,395 75/125 Binney Street/Greater Boston/Cambridge/Inner Suburbs 60.0 % 388,270 225 Binney Street/Greater Boston/Cambridge/Inner Suburbs 70.0 % 305,212 99 Coolidge Avenue/Greater Boston/Cambridge/Inner Suburbs 25.0 % -
(3)
409 and 499 Illinois Street/San Francisco Bay Area/Mission Bay 75.0 % (2) 455,069 1500 Owens Street/San Francisco Bay Area/Mission Bay 75.0 % (2) 158,267 1700 Owens Street/San Francisco Bay Area/Mission Bay 75.0 % (2) 164,513
75.0 % (2) 228,140
Alexandria Technology Center® -
50.1 % 1,089,852
213 East Grand Avenue/San Francisco Bay Area/South San Francisco 70.0 % (2) 300,930
500 Forbes Boulevard/San Francisco Bay Area/South San Francisco 90.0 % 155,685
Alexandria Center® for Life Science -
59.7 % - Area/South San Francisco Alexandria Point/San Diego/University Town Center(5) 45.0 % 1,337,916 5200 Illumina Way/San Diego/University Town Center 49.0 % 792,687 9625 Towne Centre Drive/San Diego/University Town Center 49.9 % 163,648 SD Tech by Alexandria/San Diego/Sorrento Mesa(6) 50.0 % 679,801 Pacific Technology Park/San Diego/Sorrento Mesa 50.0 % (2) 632,732
1201 and 1208 Eastlake Avenue East and
70.0 % 321,218
400 Dexter Avenue North/Seattle/Lake Union 70.0 % (2) 290,111
Operating RSF
Property/Market/Submarket Our Ownership Share(7) at 100%
1655 and 1725 Third Street/San Francisco Bay Area/Mission Bay 10.0 % 586,208
1401/1413 Research Boulevard/Maryland/Rockville 65.0 % (8) (9) 1450 Research Boulevard/Maryland/Rockville 73.2 % (10) 42,679 101 West Dickman Street/Maryland/Beltsville 57.9 % (10) 135,423 (1)In addition to the consolidated real estate joint ventures listed, various partners hold insignificant noncontrolling interests in three other real estate joint ventures inNorth America . (2)Refer to "Formation of consolidated real estate joint ventures and sales of partial interest" subsection in Note 4 - "Consolidated and unconsolidated real estate joint ventures" under Item 15 in this annual report on Form 10-K for additional information. (3)We expect to commence vertical construction of 275,000 RSF during 2022. (4)Includes 601, 611, 651, 681, 685, 701, and751 Gateway Boulevard in ourSouth San Francisco submarket. Noncontrolling interest share is anticipated to be 49% as we make further contributions into the joint venture over time. (5)Includes 10210, 10260, 10290, and10300 Campus Point Drive and 4161, 4224, and4242 Campus Point Court in ourUniversity Town Center submarket. (6)Includes 9605, 9645, 9675, 9685, 9725, 9735, 9808, 9855, and9868 Scranton Road and10055 and 10065 Barnes Canyon Road in our Sorrento Mesa submarket. (7)In addition to the unconsolidated real estate joint ventures listed, we hold an interest in one other insignificant unconsolidated real estate joint venture inNorth America . (8)Represents our ownership interest; our voting interest is limited to 50%. (9)Represents a joint venture with a distinguished retail real estate developer for an approximate 90,000 RSF retail shopping center. (10)Represent joint ventures with local real estate operators. Each of these joint ventures operates one office property which are expected to be redeveloped into office/lab. Our investments into101 West Dickman Street and1450 Research Boulevard joint ventures were$8.3 million and$4.0 million , respectively. The joint ventures each have a construction loan in place which is expected to fund future redevelopment cost; therefore, we expect minimal equity contributions to be required in the future. Our partners manage the day-to-day activities that most significantly affect the economic performance of each joint venture; therefore, we account for these investments under the equity method of accounting. 119 -------------------------------------------------------------------------------- The following table presents key terms related to our unconsolidated real estate joint ventures' secured loans as ofDecember 31, 2021 (dollars in thousands): Aggregate Commitment Debt Balance Unconsolidated Joint Venture Our Share
Maturity Date Stated Rate Interest Rate(1) at 100% at 100%(2) 1401/1413 Research Boulevard 65.0% 12/23/24 2.70% 3.14 %$ 28,500 $ 28,124 1655 and 1725 Third Street 10.0% 3/10/25 4.50% 4.57 % 600,000 598,657 101 West Dickman Street 57.9% 11/10/26 SOFR + 1.95% (3) 2.81 % 26,750 9,947 1450 Research Boulevard 73.2% 12/10/26 SOFR + 1.95% (3) N/A 13,000 -$ 668,250 $ 636,728
(1)Includes interest expense and amortization of loan fees.
(2)Represents outstanding principal, net of unamortized deferred financing
costs, as of
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 Our Share of Unconsolidated
Consolidated Real Estate Joint Ventures Real Estate Joint Ventures
December 31, 2021 December 31, 2021
Three Months
Three Months Ended Year Ended Ended Year Ended
Total revenues $ 64,273 $ 211,807 $ 9,962 $ 43,557
Rental operations (18,278) (58,123) (1,469) (7,079)
45,995 153,684 8,493 36,478
General and administrative (36) (635) (113) (298)
Interest - - (2,304) (10,191)
Depreciation and amortization (21,265) (70,880) (3,058) (13,734)
Fixed returns allocated to
redeemable noncontrolling
interests(1) 207 866 - -
$ 24,901 $ 83,035 $ 3,018 $ 12,255
Straight-line rent and
below-market lease revenue $ 1,859 $ 5,318 $ 170 $ 3,094
Funds from operations(2) $ 46,166 $ 153,915 $ 6,076 $ 25,989
(1)Represents an allocation of joint venture earnings to redeemable
noncontrolling interests primarily in one property in our South San Francisco
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 Real Estate Equities, Inc.'s common
stockholders" in the "Non-GAAP measures and definitions" section under this Item
7 in this annual report on Form 10-K for the definition and the reconciliation
from the most directly comparable financial measure presented in accordance with
GAAP.
As of December 31, 2021
Noncontrolling
Interest Share of Our Share of
Consolidated Real Unconsolidated
Estate Joint Real Estate Joint
Ventures Ventures
Investments in real estate $ 2,580,819 $ 110,432
Cash, cash equivalents, and restricted cash 92,703 4,993
Other assets 290,389 10,168
Secured notes payable (1,998) (83,910)
Other liabilities (118,205) (3,200)
Redeemable noncontrolling interests (9,612) -
$ 2,834,096 $ 38,483
During the years ended December 31, 2021 and 2020, our consolidated real estate
joint ventures distributed an aggregate of $112.4 million and $87.3 million ,
respectively, to our joint venture partners. Refer to our consolidated
statements of cash flows and 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 additional information.
120
--------------------------------------------------------------------------------Investments
We hold investments in publicly traded companies and privately held entities
primarily involved in the life science, agtech, and technology industries. The
tables below summarize components of our non-real estate investments and
investment income. 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, 2021
Year Ended December 31,
(In thousands) Three Months Ended Year Ended 2020
Realized gains $ 26,832 $ 215,845 (1) $ 47,288 (2)
Unrealized (losses) gains (139,716) 43,632 374,033
Investment (loss) income $ (112,884) $ 259,477 $ 421,321
Investments Unrealized
(In thousands) Cost Gains Carrying Amount
Publicly traded companies $ 203,290 $ 280,527 (3) $ 483,817
Entities that report NAV 385,692 444,172 829,864
Entities that do not report NAV:
Entities with observable price changes 56,257 72,974 129,231
Entities without observable price changes 362,064 - 362,064
Investments accounted for under the equity
method of accounting N/A N/A 71,588
December 31, 2021 $ 1,007,303 (4) $ 797,673 $ 1,876,564
December 31, 2020 $ 835,438 $ 775,676 $ 1,611,114
(1)Includes six separate significant realized gains aggregating $110.1 million
related to the following transactions: (i) the sales of investments in three
publicly traded biotechnology companies, (ii) a distribution received from a
limited partnership investment, and (iii) the acquisition of two of our
privately held non-real estate investments in a biopharmaceutical company and
biotechnology company.
(2)Includes impairments of $24.5 million related to investments in privately
held entities that do not report NAV.
(3)Includes gross unrealized gains and losses of $310.0 million and $29.5
million , respectively, as of December 31, 2021 .
(4)Represents 3.0% of gross assets as of December 31, 2021 .
Public/Private
Mix (Cost)
[[Image Removed: are-20211231_g54.jpg]]
Tenant/Non-Tenant
Mix (Cost)
[[Image Removed: are-20211231_g55.jpg]]
121--------------------------------------------------------------------------------
Liquidity
Minimal Outstanding Borrowings and Significant Availability on Unsecured Senior
Liquidity Line of Credit
(in millions)
$5.4B
(In millions)
Availability under our unsecured senior line [[Image Removed: are-20211231_g56.jpg]]
of credit, net of amounts outstanding under
our commercial paper program $ 2,730
Remaining construction loan commitments 185
Cash, cash equivalents, and restricted cash 415
Investments in publicly traded companies 484
Liquidity as of
3,814
Outstanding forward equity sales
agreements(1) 1,621
Total $ 5,435 (1)Represents expected net proceeds from the future settlement of 8.1 million
shares of forward equity sales agreements entered into in
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, and payment of dividends through net cash provided by operating activities, periodic asset sales, strategic real estate joint venture capital, long-term secured and unsecured indebtedness, borrowings under our unsecured senior line of credit, issuances under our commercial paper program, and issuances of additional debt and/or equity securities. We also 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. For additional information on our liquidity requirements related to our contractual obligations and commitments, refer to Note 5 - "Leases" and 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.
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, 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;
•Prudently manage variable-rate debt exposure through the reduction of
short-term and medium-term variable-rate 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 real estate assets; and
•Maintain high levels of pre-leasing and percentage leased in value-creation
projects.
122
--------------------------------------------------------------------------------
The following table presents the availability under our unsecured senior line of
credit, net of amounts outstanding under our commercial paper program;
availability under our secured construction loan; outstanding forward equity
sales agreements; cash, cash equivalents, and restricted cash; and investments
in publicly traded companies as of December 31, 2021 (dollars in thousands):
Stated Aggregate Outstanding Remaining
Description Rate Commitments Balance(1) Commitments/Liquidity
Availability under our unsecured senior
line of credit, net of amounts
outstanding under our commercial paper
program L+0.815% $ 3,000,000 $ 269,990 $ 2,730,000
Remaining construction loan commitments SOFR + 2.70 % $ 195,300 $ 7,991 185,298
Cash, cash equivalents, and restricted
cash 415,227
Investments in publicly traded companies 483,817
Liquidity as of December 31, 2021 3,814,342
Outstanding forward equity sales
agreements(2) 1,621,180
Total $ 5,435,522
(1)Represents outstanding principal, net of unamortized deferred financing
costs, as of December 31, 2021 .
(2)Represents expected net proceeds from the future settlement of 8.1 million
shares of forward equity sales agreements entered into in January 2022 .
Cash, cash equivalents, and restricted cash
As ofDecember 31, 2021 and 2020, we had$415.2 million and$597.7 million , respectively, of cash, cash equivalents, and restricted cash. We expect existing cash, cash equivalents, and restricted cash, net cash from operating activities, proceeds from real estate asset sales and partial interest sales, non-real estate investment sales, borrowings under our unsecured senior line of credit, issuances under our commercial paper program, issuances of unsecured notes payable, borrowings under secured construction loans, 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. 123 --------------------------------------------------------------------------------
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, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 Change
Net cash provided by operating activities
$ 127,687 Net cash used in investing activities$ (7,107,324) $ (3,278,161) $ (3,829,163) Net cash provided by financing activities$ 5,916,361 $ 2,750,356 $ 3,166,005 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, 2021 increased by$127.7 million to$1.0 billion , compared to$882.5 million for the year endedDecember 31, 2020 . 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, 2020 , and (iii) increases in rental rates on lease renewals and re-leasing of space sinceJanuary 1, 2020 . Investing activities
Cash used in investing activities for the years ended
Year Ended December 31,
Increase
2021 2020 (Decrease)
Sources of cash from investing activities:
Sales of and distributions from non-real estate
investments $ 424,623 $ 141,149 $ 283,474
Proceeds from sales of real estate 190,576 747,020 (556,444)
Return of capital from unconsolidated real estate joint ventures
- 20,225 (20,225)
Sale of interests in unconsolidated real estate joint
ventures 394,952 - 394,952
Change in escrow deposits - 7,408 (7,408)
1,010,151 915,802 94,349
Uses of cash for investing activities:
Purchases of real estate 5,434,652 2,570,693 2,863,959
Additions to real estate 2,089,849 1,445,171 644,678
Acquisition of interest in unconsolidated real estate joint venture
9,048 - 9,048
Investments in unconsolidated real estate joint
ventures 13,666 3,444 10,222
Additions to non-real estate investments 408,564 174,655 233,909
Change in escrow deposits 161,696 - 161,696
8,117,475 4,193,963 3,923,512
Net cash used in investing activities $ 7,107,324 The increase in net cash used in investing activities for the year endedDecember 31, 2021 was primarily due to an increased use of cash for property acquisitions, additions to real estate, and additions to non-real estate 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. 124 --------------------------------------------------------------------------------
Financing activities
Cash flows provided by financing activities for the years ended
Year Ended
2021 2020 Change
Borrowings from secured notes payable $ 10,005 $ - $ 10,005
Repayments of borrowings from secured notes payable (17,979) (84,104) 66,125
Payment for the defeasance of secured note payable - (32,865) 32,865
Proceeds from issuance of unsecured senior notes
payable 1,743,716 1,697,651 46,065
Repayments of unsecured senior notes payable (650,000) (500,000) (150,000)
Premium paid for early extinguishment of debt (66,829) (54,385) (12,444)
Borrowings from unsecured senior line of credit 3,521,000
2,700,000 821,000
Repayments of borrowings from unsecured senior line of credit
(3,521,000) (3,084,000) (437,000)
Proceeds from issuance under commercial paper program 30,951,300
23,539,400 7,411,900 Repayments of borrowings from commercial paper program (30,781,300) (23,439,400) (7,341,900) Payments of loan fees (18,938) (32,309) 13,371 Changes related to debt 1,169,975 709,988 459,987 Contributions from and sales of noncontrolling interests 2,026,486 367,613 1,658,873 Distributions to and purchases of noncontrolling interests (118,891) (88,805) (30,086) Proceeds from the issuance of common stock 3,529,097 2,315,862 1,213,235 Dividend payments (655,968) (532,980) (122,988)
Taxes paid related to net settlement of equity awards (34,338)
(21,322) (13,016)
Net cash provided by financing activities $ 5,916,361 $ 2,750,356 $ 3,166,005
125--------------------------------------------------------------------------------
Capital resources
We expect that our principal liquidity needs for the year endingDecember 31, 2022 , 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 2022 Guidance Certain Completed (In millions) Range Midpoint Items Sources of capital: Net cash provided by operating activities after dividends$ 275 $ 325 $ 300 Incremental debt 1,375 1,025 1,200 Real estate dispositions and partial interest 1,300 2,100 1,700 sales Common equity 2,250 3,250 2,750$ 1,691 Total sources of capital$ 5,200 $ 6,700 $ 5,950 Uses of capital: Construction$ 2,700 $ 3,200 $ 2,950 Acquisitions 2,500 3,500 3,000$ 1,220 Total uses of capital$ 5,200 $ 6,700 $ 5,950 Incremental debt (included above): Issuance of unsecured senior notes payable$ 1,200 $
1,700
Unsecured senior line of credit, commercial paper program, and other 175 (675) (250) Incremental debt$ 1,375 $ 1,025 $ 1,200 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 as "Forward-looking statements" under Part I; "Item 1A. Risk factors"; and "Item 7. Management's discussion and analysis of financial condition and results of operations" in this annual report on Form 10-K. We expect to update our forecast of sources and uses of capital on a quarterly basis. 126 --------------------------------------------------------------------------------
Sources of capital
Net cash provided by operating activities after dividends
We expect to retain$275.0 million to$325.0 million of net cash flows from operating activities after payment of common stock dividends, and distributions to noncontrolling interests for the year endingDecember 31, 2022 . For purposes of this calculation, changes in operating assets and liabilities are excluded as they represent timing differences. For the year endingDecember 31, 2022 , we expect our recently delivered projects, our highly pre-leased value-creation projects expected to be completed, and contributions fromSame Properties and recently acquired properties to contribute significant increases in income from rentals, net operating income, and cash flows. We anticipate significant contractual near-term growth in annual cash rents of$39 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 within this Item 7 in this annual report on Form 10-K for a discussion of cash flows provided by operating activities for the year endedDecember 31, 2021 . Debt We expect to fund a portion of our capital needs in 2022 from the real estate dispositions and partial interest sales, settlement of our outstanding forward equity sales agreements, sales of our common stock under our ATM program, issuances under our commercial paper program discussed below, borrowings under our unsecured senior line of credit, and issuances of unsecured senior notes payable. As ofDecember 31, 2021 , we have no outstanding balance on our unsecured senior line of credit. Our unsecured senior line of credit has an aggregate commitment of$3.0 billion and bears an interest rate of LIBOR plus 0.825% with a 0% LIBOR floor and is subject to certain annual sustainability measures entitling us to a temporary reduction in the interest rate margin of one basis point, but not below zero percent per year. During the year endedDecember 31, 2020 , we achieved certain sustainability measures, as described in our unsecured senior line of credit agreement, which reduced our borrowing rate to LIBOR plus 0.815% for a one-year period. 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 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 bear interest at a "Eurocurrency Rate," a "LIBOR Floating Rate," or a "Base Rate" specified in the unsecured senior line of credit agreement plus, in any case, the Applicable Margin. The Eurocurrency Rate specified in the 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 by the Administrative Agent 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. We established a commercial paper program that provides us with the ability to issue up to$1.5 billion of commercial paper notes with a maturity of generally 30 days or less and with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is backed by our 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. In the event we are unable to issue commercial paper notes or refinance outstanding commercial paper notes under terms equal to or more favorable than those under the unsecured senior line of credit, we expect to borrow under the unsecured senior line of credit at LIBOR plus 0.815%. The commercial paper notes sold during the three months endedDecember 31, 2021 were issued at a weighted-average yield to maturity of 0.24%. As ofDecember 31, 2021 , we had an aggregate of$270.0 million of notes outstanding under our commercial paper program. InFebruary 2021 , we opportunistically issued$1.75 billion of unsecured senior notes payable with a weighted-average interest rate of 2.49% and a weighted-average maturity of 20.4 years. The unsecured senior notes consisted of$900.0 million of 2.00% unsecured senior notes due 2032 ("2.00% Unsecured Senior Notes") and$850.0 million of 3.00% unsecured senior notes due 2051. The proceeds from our 2.00% Unsecured Senior Notes are expected to be allocated to eligible green projects and were initially used to refinance$650.0 million of our 4.00% unsecured senior notes payable due in 2024, pursuant to a partial cash tender offer completed onFebruary 10, 2021 , and a subsequent call for redemption for the remaining outstanding amounts that settled onMarch 12, 2021 . 127 --------------------------------------------------------------------------------
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, based on an announcement made by theFinancial Conduct Authority ("FCA") onMarch 5, 2021 , one-week and two-month LIBOR rates ceased to be published afterDecember 31, 2021 , and all other LIBOR settings will effectively cease afterJune 30, 2023 , and it is expected that LIBOR will no longer be used after this date. In addition, it is expected that LIBOR will no longer be used in new contracts entered into afterDecember 31, 2021 . To address the impending discontinuation of LIBOR, in theU.S. the Alternative Reference Rates Committee ("ARRC") was established to help ensure the successful transition from LIBOR. InJune 2017 , the ARRC selected SOFR, a new index calculated by reference to short-term repurchase agreements backed byU.S. Treasury 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 eliminated outstanding LIBOR-based borrowings under our unsecured senior bank term loans and secured construction loans through repayments. FromJanuary 2017 throughDecember 2021 , we retired approximately$1.5 billion of all such debt. •During 2020, we increased the aggregate amount of our commercial paper program to$1.5 billion from$750.0 million . This program provides us with ability to issue commercial paper notes bearing interest at short-term fixed rates, with a maturity of generally 30 days or less and with a maximum maturity of 397 days from the date of issuance. Our commercial paper program is not subject to LIBOR and is used for funding short-term working capital needs. As ofDecember 31, 2021 , we had an aggregate of$270.0 million of notes outstanding under our commercial paper program. •We continue to prudently manage outstanding borrowings under our unsecured senior line of credit. As ofDecember 31, 2021 , we had no borrowings outstanding under our unsecured senior line of credit. Additionally, new loans that we've entered into recently are SOFR-based rather than LIBOR-based. Our consolidated real estate joint venture at99 Coolidge Avenue holds a SOFR-based construction loan with an outstanding balance of$8.0 million . In addition, two of our unconsolidated real estate joint ventures at1450 Research Boulevard and101 West Dickman Street each hold a SOFR-based construction loan. As ofDecember 31, 2021 ,1450 Research Boulevard had no outstanding balance on its construction loan and101 West Dickman Street had an outstanding balance of$9.9 million . •Our unsecured senior line of credit contains fallback language generally consistent with the ARRC's Amendment Approach, which provides a streamlined amendment approach for negotiating a benchmark replacement. •We continue to monitor developments by theFCA , the ARRC, and other governing bodies involved in LIBOR transition. Refer to Note 10 - "Secured and unsecured senior debt" and Note 4 - "Consolidated and unconsolidated real estate joint ventures" to our consolidated financial statements under Item 15 and "Item 1A. Risk factors" in this annual report on Form 10-K for additional information about our management of risks related to the transition away from LIBOR.
Real estate dispositions and partial interest sales
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 pending and recently completed opportunistic acquisitions and our highly leased value-creation development and redevelopment projects, and also provide significant capital for growth. We may also consider additional sales of partial interests in core Class A properties and/or development projects. For 2022, we expect real estate dispositions and partial interest sales ranging from$1.3 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.
During the year ended
As a REIT, we are generally subject to a 100% tax on the net income from real estate asset sales that theIRS characterizes as "prohibited transactions." We do not expect our sales will be categorized as prohibited transactions. However, unless we meet certain "safe harbor" requirements, whether a real estate asset sale is a prohibited transaction will be based on the facts and circumstances of the sale. Our real estate asset sales may not always meet such safe harbor requirements. Refer to "Item 1A. Risk factors" in this annual report on Form 10-K for additional information about the "prohibited transaction" tax. 128 --------------------------------------------------------------------------------
Common equity transactions
During the year endedDecember 31, 2021 , we completed issuances and executed forward equity sales agreements for an aggregate 20.8 million shares of common stock, including the exercise of underwriters' option, for an aggregate net proceeds of approximately$3.5 billion , as follows: •InJanuary 2021 andJune 2021 , we entered into forward equity sales agreements aggregating$1.1 billion and$1.5 billion , respectively, to sell an aggregate of 6.9 million and 8.1 million of our common stock, respectively, including the exercise of underwriters' options, at pubic offering price of$164.00 and$184.00 , respectively, before underwriting discounts and commissions. During 2021, we issued all 15.0 million shares under these forward equity sales agreements and received net proceeds of$2.5 billion . •InMarch 2021 , we issued the remaining 362 thousand shares of common stock to settle our forward equity sales agreements that were outstanding as ofDecember 31, 2020 , and received net proceeds of$56.2 million . •InFebruary 2021 , we entered into a new ATM common stock offering program, which allowed us to sell up to an aggregate of$1.0 billion of our common stock. •We issued 5.5 million shares under our ATM program and received net proceeds of$984.6 million . •As ofDecember 31, 2021 , we have no amounts remaining under this ATM program. •InDecember 2021 , we entered into a new ATM common stock offering program, which allows us to sell up to an aggregate of$1.0 billion of our common stock. As ofDecember 31, 2021 , the full amount remains available for future sales of our common stock.
In
Other sources
Under our current shelf registration statement filed with theSEC , 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 real estate 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 endedDecember 31, 2021 , we received$2.0 billion of contributions from and sales of noncontrolling interests. 129 --------------------------------------------------------------------------------
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 4.8 million RSF of Class A office/laboratory, agtech, and technology office space undergoing construction, 8.7 million RSF of near-term and intermediate-term development and redevelopment projects, and 14.7 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: current projects" 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 in 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, 2021 and 2020 of$170.6 million and$125.6 million , respectively, was classified in investments in real estate. Property taxes, insurance on real estate, and indirect project costs, such as 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 costs related to development, redevelopment, pre-construction, and construction projects, aggregating$69.8 million and$61.0 million , and property taxes, insurance on real estate and other operating costs aggregating$73.8 million and$52.6 million during the years endedDecember 31, 2021 and 2020, respectively. The increase in capitalized costs for the year endedDecember 31, 2021 , compared to the same period in 2020 was primarily due to an increase in our value-creation pipeline projects undergoing construction and pre-construction activities in 2021 over 2020. 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 and indirect project costs related to the asset would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred. 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$24.0 million for the year endedDecember 31, 2021 . 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, 2021 , we capitalized total initial direct leasing costs of$189.3 million . 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, and the "Acquisitions" subsection of the "Investments in real estate" section in "Item 2. Properties" in this annual report on Form 10-K for information on our acquisitions.
Dividends
During the years endedDecember 31, 2021 and 2020, we paid common stock dividends of$656.0 million and$533.0 million , respectively. The increase of$123.0 million in dividends paid on our common stock during the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , was primarily due to an increase in number of common shares outstanding subsequent toJanuary 1, 2020 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$4.42 per common share paid during the year endedDecember 31, 2021 from$4.18 per common share paid during the year endedDecember 31, 2020 . 130 --------------------------------------------------------------------------------
Secured notes payable
Secured notes payable as ofDecember 31, 2021 consisted of four notes secured by eight properties. Our secured notes payable typically require monthly payments of principal and interest and had a weighted-average interest rate of approximately 3.40%. As ofDecember 31, 2021 , the total book value of our investments in real estate securing debt was approximately$936.0 million . As ofDecember 31, 2021 , our secured notes payable, including unamortized discounts and deferred financing costs, comprised approximately$195.2 million and$10.0 million of fixed-rate debt and unhedged variable-debt, respectively. 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 of
Covenant Ratios(1) Requirement December 31, 2021
Total Debt to Total Assets Less than or equal to 60% 28%
Secured Debt to Total Assets Less than or equal to 40% 1%
Consolidated EBITDA(2) to Interest Expense Greater than or equal to 1.5x
11.4x
Unencumbered Total Asset Value to
Unsecured Debt Greater than or equal to 150% 343%
(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, 2021
Leverage Ratio Less than or equal to 60.0% 26.7%
Secured Debt Ratio Less than or equal to 45.0% 0.6%
Greater than or equal to
Fixed-Charge Coverage Ratio 1.50x 4.51x
Greater than or equal to
Unsecured Interest Coverage Ratio 1.75x 9.16x
(1)All covenant ratio titles utilize terms as defined in the credit agreement.
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, 2021 , 97% 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
Operating lease agreements
Ground lease obligations as ofDecember 31, 2021 , included leases for 39 of our properties, which accounted for approximately 9% of our total number of properties. Excluding one ground lease that expires in 2036 related to one operating property with a net book value of$6.9 million as ofDecember 31, 2021 , our ground lease obligations have remaining lease terms ranging from approximately 32 to 93 years, including available extension options that we are reasonably certain to exercise. 131 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , the remaining contractual payments under ground and office lease agreements in which we are the lessee aggregated$927.9 million and$25.4 million , respectively. 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, 2021 , the present value of the remaining contractual payments, aggregating$953.3 million , under our operating lease agreements, including our extension options that we are reasonably certain to exercise, was$434.7 million , which was classified in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. As ofDecember 31, 2021 , the weighted-average remaining lease term of operating leases in which we are the lessee was approximately 42 years, and the weighted-average discount rate was 4.57%. 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$474.3 million . We classify the right-of-use asset in other assets in our consolidated balance sheets. 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 for additional information.
Commitments
As ofDecember 31, 2021 , remaining aggregate costs under contract for the construction of properties undergoing development, redevelopment, and improvements under the terms of leases approximated$2.8 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$106.8 million primarily related to deposits for acquisitions in ourGreater Boston andSan Francisco Bay Area markets, including one$77.5 million letter of credit we issued during the three months endedJune 30, 2021 . The$77.5 million letter of credit served to secure our performance under the purchase and sale agreement of our acquisition ofOne Rogers Street in ourCambridge /Inner Suburbs submarket for a purchase price of$849.4 million . We completed this acquisition inDecember 2021 and terminated the letter of credit inJanuary 2022 . We are committed to funding approximately$391.0 million related to our non-real estate investments. These funding commitments are primarily associated with our investments in privately held entities that report NAV, which expire at various dates over the next 11 years, with a weighted-average expiration of 9.0 years as ofDecember 31, 2021 .
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.
Foreign currency translation gains and losses
The following table presents the change in accumulated other comprehensive loss attributable toAlexandria Real Estate Equities, Inc.'s stockholders during the year endedDecember 31, 2021 , due to the changes in the foreign exchange rates for our real estate investments inCanada andAsia . We reclassify unrealized foreign currency translation gains and losses into net income (loss) as we dispose of these holdings. (In thousands) Total Balance as ofDecember 31, 2020 $ (6,625) Other comprehensive loss before reclassifications (669) Net other comprehensive loss (669) Balance as ofDecember 31, 2021 $ (7,294) 132 --------------------------------------------------------------------------------
Issuer and guarantor subsidiary summarized financial information
Alexandria Real Estate Equities, Inc. (the "Issuer") has sold certain debt securities registered under the Securities Act of 1933, as amended, that are fully and unconditionally guaranteed byAlexandria Real Estate Equities, L.P. (the "LP" or the "Guarantor Subsidiary"), an indirectly 100% owned subsidiary of the Issuer. The Issuer's other subsidiaries, including, but not limited to, the subsidiaries that own substantially all of its real estate (collectively, the "Combined Non-Guarantor Subsidiaries"), will not provide a guarantee of such securities, including the subsidiaries that are partially or 100% owned by the LP. The following summarized financial information presents on a combined basis for the Issuer and the Guarantor Subsidiary balance sheet financial information as ofDecember 31, 2021 and 2020, and results of operations and comprehensive income for the years endedDecember 31, 2021 and 2020. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to (i) the Issuer's interests in the Guarantor Subsidiary, (ii) the Guarantor Subsidiary's interests in the Combined Non-Guarantor Subsidiaries, and (iii) the Combined Non-Guarantor Subsidiaries' interests in the Guarantor Subsidiary, where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All assets and liabilities have been allocated to the Issuer and the Guarantor Subsidiary generally based on legal entity ownership. The following tables present combined summarized financial information as ofDecember 31, 2021 and 2020, and for the years endedDecember 31, 2021 and 2020, for the Issuer and Guarantor Subsidiary. Amounts provided do not represent our total consolidated amounts (in thousands): December 31, 2021 2020 Assets: Cash, cash equivalents, and restricted cash$ 78,856 $ 404,802 Other assets 101,956 100,689 Total assets$ 180,812 $ 505,491 Liabilities: Unsecured senior notes payable$ 8,316,678 $ 7,232,370 Unsecured senior line of credit and commercial paper 269,990 99,991 Other liabilities 401,721 341,621 Total liabilities$ 8,988,389 $ 7,673,982 Year Ended December 31, 2021 2020 Total revenues$ 26,798 $ 22,946 Total expenses (363,525) (355,370) Net loss (336,727) (332,424)
Net income attributable to unvested restricted stock awards
(7,848) (10,168)
Net loss attributable to
$
(344,575)
As ofDecember 31, 2021 , 401 of our 414 properties were held indirectly by the REIT's wholly owned consolidated subsidiary,Alexandria Real Estate Equities, LP . 133 --------------------------------------------------------------------------------
Critical accounting estimates
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, current trends, and various other factors that we believe to be reasonable under the circumstances. We continually evaluate the estimates, judgments, and assumptions we use to prepare our consolidated financial statements. Changes in estimates, judgments, or assumptions could affect our financial position and our results of operations, which are used by our stockholders, potential investors, industry analysts, and lenders in their evaluation of our performance. Our critical accounting estimates are defined as accounting estimates or assumptions made in accordance with GAAP, which involve a significant level of estimation uncertainty or subjectivity and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our significant accounting policies, which utilize these critical accounting estimates, 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. Our critical accounting estimates are described below.
Recognition of real estate acquired
Generally, our acquisitions of real estate or in-substance real estate are accounted for as asset acquisitions and not business combinations 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 requires that the acquisition consideration (including acquisition costs) be 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.
We assess the relative fair values of tangible and intangible assets and liabilities based on:
(i)Available comparable market information, (ii)Estimated replacement costs, or (iii)Discounted cash flow analysis/estimated net operating income and capitalization rates. In certain instances, we may use multiple valuation techniques and estimate fair value based on an average of multiple valuation results. We exercise judgement to determine key assumptions used in each valuation technique. For example, to estimate future cash flows in the discounted cash flow analysis, we are required to use judgment and make a number of assumptions, including those related to projected growth in rental rates and operating expenses, and anticipated trends and market/economic conditions. The use of different assumptions in the discounted cash flow analysis can affect the amount of consideration allocated to the acquired depreciable/amortizable asset, which in turn can impact our net income due to the recognition of the related depreciation/amortization expense in our consolidated statements of operations. We completed acquisitions of 87 properties for a total purchase price of$5.5 billion during the year endedDecember 31, 2021 . 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. Refer to the "Investments in real estate" section of Note 2 - "Summary of significant accounting policies" to our consolidated financial statements under Item 15 in this annual report on Form 10-K for additional information.
Impairment of long-lived assets
Impairment of real estate assets classified as held for sale
A property is classified as held for sale when all of the accounting criteria
for a plan of sale have been met. These criteria are described in the
"Investments in real estate" section of Note 2 - "Summary of significant
accounting policies" to our consolidated financial statements under Item 15 in
this annual report on Form 10-K. Upon classification as held for sale, we
recognize an impairment charge, if necessary, to lower the carrying amount of
the real estate asset to its estimated fair value less cost to sell. The
determination of fair value can involve significant judgments and assumptions.
We develop key assumptions based on the following available factors: (i)
contractual sales price, (ii) preliminary non-binding letters of intent, or
(iii) other available comparable market information. If this information is not
available, we use estimated replacement costs or estimated cash flow projections
that utilize estimated discount and capitalization rates. These estimates are
subject to uncertainty and therefore require significant judgment by us. We
review all assets held for sale each reporting period to determine whether the
existing carrying amounts are fully recoverable in comparison to their estimated
fair values less costs to sell. Subsequently, as a result of our quarterly
assessment, we may recognize an incremental impairment charge for any decrease
in the asset's fair value less cost to sell. Conversely, we may recognize a gain
for a subsequent increase in fair value less cost to sell, limited to the
cumulative net loss previously recognized.
134
--------------------------------------------------------------------------------Impairment of other long-lived assets
For each reporting period, we review current activities and changes in the business conditions of all of our long-lived assets, 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, 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, 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 that the asset is expected to be held and used. We may also adjust depreciation of properties that are expected to be disposed of or redeveloped prior to the end of their useful lives.
The evaluation for impairment and calculation of the carrying amount of a long-lived asset to be held and used involves consideration of factors and calculations that are different than the estimate of fair value of assets classified as held for sale. 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.
Impairment of real estate joint ventures accounted for under the equity method of accounting
We generally account for our investments in real estate joint ventures that do not meet the consolidation criteria under the equity method. Under the equity method of accounting, we initially recognize our investment at cost and subsequently adjust the carrying amount of the investment for our share of the investee's earnings or losses, distributions received, and other-than-temporary impairments. Our unconsolidated real estate joint ventures are individually evaluated for impairment when conditions exist that may indicate that the decrease in the carrying amount of our investment has occurred and is other than temporary. Triggering events or impairment indicators for an unconsolidated joint venture include its recurring operating losses, and other events such as occupancy changes, significant near-term lease expirations, significant changes in construction costs, estimated completion dates, rental rates, and other factors related to the properties owned by the real estate joint venture, or a decision by investors to cease providing support or reduce their financial commitment to the joint venture. Upon determination that an other-than-temporary impairment has occurred, a write-down is recognized to reduce the carrying amount of investment to its estimated fair value. As ofDecember 31, 2021 , the carrying amounts of our investments in unconsolidated real estate joint ventures aggregated$38.5 million , or approximately 0.1% of our total assets. During the year endedDecember 31, 2021 , no other-than-temporary impairments related to our unconsolidated real estate joint ventures were identified. Refer to the "Unconsolidated real estate joint ventures" section within 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 the information regarding the impairment recognized during the year endedDecember 31, 2020 , in connection with the retail shopping center located in ourRockville submarket ofMaryland owned by our 1401/1413 Research Boulevard unconsolidated real estate joint venture.
Impairment of non-real estate investments
We hold investments in publicly traded companies and privately held entities
primarily involved in the life science, agtech, and technology 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 privately held entities that do not report NAV per share
require our evaluation for impairment when changes in these entities' conditions
may indicate that an impairment exists. We closely monitor these investments
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. We
evaluate these investees on the basis of a qualitative assessment for
135
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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. As of each December 31, 2021 , 2020, and 2019, the carrying amounts of our
investments in privately held entities that do not report NAV per share
accounted for approximately 2% of our total assets and aggregated
$491.3 million , $389.2 million , and $388.1 million , respectively. During the
years ended December 31, 2021 , 2020, and 2019, we recognized impairment charges
aggregating 0%, 6%, and 4% of the carrying amounts of our investments in
privately held entities that do not report NAV, respectively.
Monitoring of tenant credit quality
We monitor, on an ongoing basis, 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 industries in which they conduct business, and (iv) monitoring the timeliness of lease payments. We have a team of employees who, among them, have an extensive educational background or experience in biology, chemistry, industrial biotechnology, agtech, and the life science industry, as well as knowledge in finance. This team is responsible for timely assessment, monitoring, and communication of our tenants' credit quality and any material changes therein. During the fiscal years ended 2021, 2020, and 2019, specific write-offs and a general allowance related to deferred rent balances of tenants recognized in our consolidated statements of operations have not exceeded 0.3% of our income from rentals for each respective year. Our general allowance was$6.8 million as ofDecember 31, 2021 . Allowance for credit losses For the financial assets in scope of the accounting standard on credit losses, we are required to estimate and recognize lifetime expected losses, rather than incurred losses, which results in the earlier recognition of credit losses even if the expected risk of credit loss is remote. As ofDecember 31, 2021 , all of our 414 properties were subject to the operating lease agreements, which are excluded from the scope of the standard on credit losses. As ofDecember 31, 2021 , we had one direct financing lease agreement for a parking structure and two sales-type ground leases subject to this standard, with an aggregate net investment balance of$70.7 million , which represented approximately 0.2% of our total assets. At each reporting date, we estimate the current credit loss related to these assets by assessing the probability of default on these leases based on the lessees' financial condition, credit rating, business prospects, remaining lease term, and, in the case of the direct financing lease, the expected value of the underlying collateral upon its repossession, and, if necessary, we recognize a credit loss adjustment. Since the adoption of this standard onJanuary 1, 2020 , and as of eachDecember 31, 2021 and 2020, our allowance for credit losses has not exceeded$2.8 million , or 0.01% of our total assets. For further details, refer to refer to the "Allowance for credit losses" section in Note 2 - "Summary of significant accounting policies" and to Note 5 - "Leases" to our consolidated financial statements. 136 --------------------------------------------------------------------------------
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 acquisition and disposition decisions, financing decisions, capital structure, capital market transactions, variances resulting from the volatility of market conditions outside of our control, or other corporate activities that may not be representative of the operating performance of our properties. The 2018 White Paper published by the Nareit Board of Governors (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, significant termination fees, acceleration of stock compensation expense due to the resignation of an executive officer, 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 three and twelve months endedDecember 31, 2021 (in thousands): Noncontrolling Interest Share of Our Share of Unconsolidated Consolidated Real Estate Joint Ventures Real Estate Joint Ventures December 31, 2021 December 31, 2021 Three Months Three Months Ended Year Ended Ended Year Ended Net income $ 24,901$ 83,035 $ 3,018 $ 12,255 Depreciation and amortization 21,265 70,880 3,058 13,734 Funds from operations $ 46,166$ 153,915 $ 6,076 $ 25,989 137
-------------------------------------------------------------------------------- The following tables present a reconciliation of net income 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, 2021 , 2020, and 2019. Per share amounts may not add due to rounding. Year Ended December 31, (In thousands) 2021 2020 2019 Net income attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - basic and diluted$ 563,399 $ 760,791 $ 350,995 Depreciation and amortization of real estate assets 804,633 684,682 541,855
Noncontrolling share of depreciation and amortization from consolidated real estate JVs
(70,880) (61,933) (30,960)
Our share of depreciation and amortization from
unconsolidated real estate JVs 13,734 11,413 6,366
Gain on sales of real estate (126,570) (1) (154,089) (474)
Impairment of real estate - rental properties 25,485 40,501 12,334
Assumed conversion of 7.00% Series D cumulative
convertible preferred stock - - 3,204
Allocation to unvested restricted stock awards (6,315) (7,018) (5,904)
Funds from operations attributable to
1,203,486 1,274,347 877,416
Unrealized gains on non-real estate investments (43,632) (374,033) (161,489)
Significant realized gains on non-real estate
investments (110,119) - -
Impairment of real estate 27,190 15,221 -
Impairment of non-real estate investments - 24,482 17,124
Loss on early extinguishment of debt 67,253 60,668 47,570
Loss on early termination of interest rate hedge
agreements - - 1,702
Termination fee - (86,179) -
Acceleration of stock compensation expense due to
executive officer resignation - 4,499 -
Preferred stock redemption charge - - 2,580
Removal of assumed conversion of 7.00% Series D
cumulative convertible preferred stock - - (3,204)
Allocation to unvested restricted stock awards 710 4,790 1,307
Funds from operations attributable to
$ 1,144,888 $ 923,795 $ 783,006 (1)Includes$101.1 million related to the sale of our entire 49.0% interest in the unconsolidated real estate joint venture at Menlo Gateway. (2)Calculated in accordance with standards established by the Nareit Board of Governors. 138
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Year Ended December 31,
(Per share) 2021 2020 2019
Net income per share attributable to
$ 6.01 $ 3.12 Depreciation and amortization of real estate assets 5.07 5.01 4.60 Gain on sales of real estate (0.86) (1.22) - Impairment of real estate - rental properties 0.17 0.32 0.11 Allocation to unvested restricted stock awards (0.04) (0.05) (0.06) Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted 8.16 10.07 7.77 Unrealized gains on non-real estate investments (0.30) (2.96) (1.44) Significant realized gains on non-real estate investments (0.75) - - Impairment of real estate 0.18 0.12 - Impairment of non-real estate investments - 0.19 0.15 Loss on early extinguishment of debt 0.46 0.48 0.42 Loss on early termination of interest rate hedge agreements - - 0.02 Termination fee - (0.68) - Acceleration of stock compensation expense due to executive officer resignation - 0.04 - Preferred stock redemption charge - - 0.02 Allocation to unvested restricted stock awards 0.01 0.04 0.02 Funds from operations per share attributable toAlexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted$ 7.76
Weighted-average shares of common stock outstanding(1) for calculations of: EPS - diluted
147,460 126,490 112,524
Funds from operations - diluted, per share 147,460 126,490 112,966
Funds from operations - diluted, as adjusted, per share 147,460
126,490 112,524
(1)Refer to the definition of "Weighted-average shares of common stock outstanding - diluted" within this section of this Item 7 in this annual report on Form 10-K for additional information.
139
--------------------------------------------------------------------------------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, impairments of
real estate, and significant termination fees. Adjusted EBITDA also excludes
unrealized gains or losses and significant realized gains or losses 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 total 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 investing and financing decisions related to our real estate and non-real
estate investments, our 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, significant impairments
and realized gains or losses on non-real estate investments, and significant
termination fees allows investors to evaluate performance from period to period
on a consistent basis without having to account for differences recognized
because of investing and financing decisions related to our real estate and
non-real estate investments or other corporate activities that may not be
representative of the operating performance of our properties.
In addition, 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 (loss) 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.
In order to calculate the Adjusted EBITDA margin, we divide Adjusted EBITDA by
total revenue as presented in our consolidated statements of operations. We
believe this supplemental performance measure provides investors with additional
useful information regarding the profitability of our operating activities.
140
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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 calculates the Adjusted EBITDA margin for the three
months and years ended December 31, 2021 and 2020 (dollars in thousands):
Three Months Ended December 31, Year Ended December 31,
2021 2020 2021 2020
Net income $ 99,796 $ 457,133 $ 654,282 $ 827,171
Interest expense 34,862 37,538 142,165 171,609
Income taxes 4,156 2,053 12,054 7,230
Depreciation and amortization 239,254 177,750 821,061 698,104
Stock compensation expense 14,253 11,394 48,669 43,502
Loss on early extinguishment of
debt - 7,898 67,253 60,668
Gain on sales of real estate (124,226) (1) (152,503) (126,570) (154,089)
Significant realized gains on
non-real estate investments - - (110,119) (2) -
Unrealized losses (gains) on
non-real estate investments 139,716 (233,538) (43,632) (374,033)
Impairment of real estate - 25,177 52,675 55,722
Impairment of non-real estate
investments - - - 24,482
Termination fee - - - (86,179)
Adjusted EBITDA $ 407,811 $ 332,902 $ 1,517,838 $ 1,274,187
Total revenues $ 576,923 $ 463,720 $ 2,114,150 $ 1,885,637
Adjusted EBITDA margin 71% 72% 72% 68%
(1)Includes $101.1 million related to the sale of our entire 49.0% interest in
the unconsolidated real estate joint venture at Menlo Gateway.
(2)Refer to the "Investments" section within this Item 7 in this annual report
on Form 10-K for additional information.
141
--------------------------------------------------------------------------------Annual rental revenue
Annual rental revenue represents the annualized fixed base rental obligations, calculated in accordance with GAAP, for leases 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, 2021 , approximately 91% 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. Capitalization rates
Capitalization rates are calculated based upon net operating income and net operating income (cash basis) annualized for the quarter preceding the date on which the property is sold, or near term prospective net operating income.
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, agtech, and technology campuses inAAA 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, agtech, or tech office space. We generally will not commence new development projects for aboveground construction of new Class A office/laboratory, agtech, and tech office 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. Development, redevelopment, and pre-construction spending also includes the following costs: (i) certain tenant improvements and renovations that will be reimbursed, (ii) amounts to bring certain acquired properties up to market standard and/or other costs identified during the acquisition process (generally within two years of acquisition), and (iii) permanent conversion of space for highly flexible, move-in-ready office/laboratory space to foster the growth of promising early- and growth-stage life science companies. 142 --------------------------------------------------------------------------------
Revenue-enhancing and repositioning capital expenditures represent spending to reposition or significantly change the use of a property, including through improvement in the asset quality from Class B to Class A.
Non-revenue-enhancing capital expenditures represent costs required to maintain the current revenues of a stabilized property, including the associated costs for renewed and re-leased space.
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 and years endedDecember 31, 2021 and 2020 (dollars in thousands): Three Months Ended December 31, Year Ended December 31, 2021 2020 2021 2020 Adjusted EBITDA$ 407,811 $ 332,902 $ 1,517,838 $ 1,274,187 Interest expense $ 34,862 $
37,538
44,078 37,589 170,641 125,618
Amortization of loan fees (2,911) (2,905) (11,441) (10,494)
Amortization of debt premiums 502 869 2,041 3,555
Cash interest and fixed charges $ 76,531 $
73,091
Fixed-charge coverage ratio:
- period annualized 5.3x 4.6x 5.0x 4.4x
- trailing 12 months 5.0x 4.4x 5.0x 4.4x
Gross assets
Gross assets is calculated as total assets plus accumulated depreciation (in
thousands):
December 31,
2021 2020
Total assets $ 30,219,373 $ 22,827,878 Accumulated depreciation 3,771,241 3,182,438 Gross assets
$ 33,990,614 $ 26,010,316
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.
143
--------------------------------------------------------------------------------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, 2021 , as reported by Bloomberg Professional Services. Credit ratings from Moody's Investors Service andS&P Global Ratings reflect credit ratings of the tenant's parent entity, and there can be no assurance that a tenant's parent entity will satisfy the tenant's lease obligation upon such tenant's default. We monitor the credit quality and related material changes of our tenants. Material changes that cause a tenant's market capitalization to decrease below$10 billion , which are not immediately reflected in the twelve-month average, may result in their exclusion from this measure.
Investments in real estate - value-creation square footage currently in rental properties
The square footage presented in the table below includes RSF of buildings in operation as ofDecember 31, 2021 , primarily representing lease expirations at recently acquired properties that also have inherent future development or redevelopment opportunities, for which we have the intent to demolish or redevelop the existing property upon expiration of the existing in-place leases and commencement of future construction: RSF of lease expirations going into development and redevelopment Property/Submarket Dev/Redev 2022 2023 Thereafter Total Near-term projects: 40 Sylvan Road/Route 128 Redev - 312,845 - 312,845 651 Gateway Boulevard/South San Francisco Redev 197,787 - 102,223 (1)
300,010
3825 Fabian Way/Greater Stanford Redev 250,000 - -
250,000
3450 Hillview Avenue/Greater Stanford Redev 42,340 - -
42,340
11255 and 11355 North Torrey Pines Road /Torrey Pines Dev 139,135 - -
139,135
10931 and 10933 North Torrey Pines Road /Torrey Pines Dev 92,450 - - 92,450 3301 Monte Villa Parkway Redev 51,255 - - 51,255 41 Moore Drive/Research Triangle Redev 62,490 - - 62,490 835,457 312,845 102,223 1,250,525 Intermediate-term projects: 3460 Hillview Avenue/Greater Stanford Redev - - 34,611
34,611
9444 Waples Street/Sorrento Mesa Dev 30,855 - 57,525 (1) 88,380
30,855 - 92,136 122,991
Future projects:
550 Arsenal Street/Cambridge/Inner Suburbs Dev - - 260,867 260,867
380 and 420 E Street /Seaport Innovation District Dev - - 195,506 195,506 Other/Greater Boston Redev - - 167,549 (1) 167,549 1122 El Camino Real/South San Francisco Dev - - 223,232
223,232
3875 Fabian Way/Greater Stanford Redev - - 228,000
228,000
960 Industrial Road/Greater Stanford Dev - - 110,000
110,000
2475 Hanover Street/Greater Stanford Redev - - 83,980
83,980
219 East 42nd Street/New York City Dev - - 349,947
349,947
10975 and 10995 Torreyana Road/Torrey Pines Dev - - 84,829
84,829
4161 Campus Point Court/University Town Center Dev - 159,884 -
159,884
10260 Campus Point Drive/University Town Center Dev - 109,164 -
109,164
Sequence District by Alexandria/Sorrento Mesa Dev/Redev - - 689,938
689,938
4025, 4031, and 4045 Sorrento Valley Dev 42,594 - -
42,594
Boulevard/Sorrento Valley 601 Dexter Avenue North/Lake Union Dev - - 18,680 18,680 830 4th Avenue South/SoDo Dev - - 42,380 42,380 Other/Seattle Dev - 84,782 17,655 (1) 102,437 Other TBD 70,700 - 72,405 (1) 143,105 113,294 353,830 2,544,968 3,012,092 979,606 666,675 2,739,327 4,385,608
(1)Includes vacant square footage as of
144
--------------------------------------------------------------------------------Joint venture financial information
We present components of balance sheet and operating results information related to our real estate 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 our real estate 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 our real estate 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. 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 presented and prepared in accordance with GAAP.
Mega campus
Mega campuses are cluster campuses that consist of approximately 1 million or more RSF, including operating, active development/redevelopment, and land RSF less operating RSF expected to be demolished. The following table reconciles our operating RSF as ofDecember 31, 2021 : Operating RSF Mega campus 24,599,149 Non-mega campus 14,236,643 Total 38,835,792 Mega campus RSF as a percentage of total operating property RSF
63 %
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 and preferred stock to Adjusted EBITDA
Net debt and preferred stock to Adjusted EBITDA is a non-GAAP financial measure
that we believe is useful to investors as a supplemental measure of evaluating
our balance sheet leverage. Net debt and preferred stock is equal to the sum of
total consolidated debt less cash, cash equivalents, and restricted cash, plus
preferred stock outstanding as of the end of the period. Refer to the definition
of "Adjusted EBITDA and Adjusted EBITDA margin" under Item 7 in this annual
report on Form 10-K for further information on the calculation of Adjusted
EBITDA.
145
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The following table reconciles debt to net debt and preferred stock and computes
the ratio to Adjusted EBITDA as of December 31, 2021 and 2020 (dollars in
thousands):
December 31,
2021 2020
Secured notes payable $ 205,198 $ 230,925
Unsecured senior notes payable 8,316,678 7,232,370
Unsecured senior line of credit and commercial paper 269,990
99,991
Unamortized deferred financing costs 65,476 56,312 Cash and cash equivalents (361,348) (568,532) Restricted cash (53,879) (29,173) Preferred stock - - Net debt and preferred stock$ 8,442,115 $ 7,021,893 Adjusted EBITDA: - quarter annualized$ 1,631,244 $ 1,331,608 - trailing 12 months$ 1,517,838 $ 1,274,187 Net debt and preferred stock to Adjusted EBITDA: - quarter annualized 5.2 x 5.3 x - trailing 12 months 5.6 x 5.5 x
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, 2021 , 2020, and 2019 (dollars in thousands): Year Ended December 31, 2021 2020 2019 Net income$ 654,282 $ 827,171 $ 404,047 Equity in earnings of unconsolidated real estate joint ventures (12,255) (8,148) (10,136) General and administrative expenses 151,461 133,341 108,823 Interest expense 142,165 171,609 173,675 Depreciation and amortization 821,061 698,104 544,612 Impairment of real estate 52,675 48,078 12,334 Loss on early extinguishment of debt 67,253 60,668 47,570 Gain on sales of real estate (126,570) (154,089) (474) Investment income (259,477) (421,321) (194,647) Net operating income 1,490,595 1,355,413 1,085,804 Straight-line rent revenue (115,145) (96,676) (104,235) Amortization of acquired below-market leases (54,780) (57,244) (29,813) Net operating income (cash basis)$ 1,320,670
Net operating income (from above)$ 1,490,595 $ 1,355,413 $ 1,085,804 Total revenues$ 2,114,150 $ 1,885,637 $ 1,531,296 Operating margin 71% 72% 71% 146
-------------------------------------------------------------------------------- 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 of 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 gain 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 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.
147
--------------------------------------------------------------------------------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, termination fees, if any, are excluded from the results of same properties. Refer to the "Same properties" subsection in the "Results of operations" section within 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. We classify rental revenues and tenant recoveries generated through the leasing of real estate assets within revenue in income from rentals in our consolidated statements of operations. We provide investors with a separate presentation of rental revenues and tenant recoveries in the "Comparison of results for the year endedDecember 31, 2021 to the year endedDecember 31, 2020 " subsection of the "Results of operations" section within this Item 7 because we believe it promotes investors' understanding of 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.
The following table reconciles income from rentals to tenant recoveries for the
years ended
Year Ended December 31,
2021 2020 2019
Income from rentals $ 2,108,249 $ 1,878,208 $ 1,516,864
Rental revenues (1,618,592) (1,471,840) (1,165,788)
Tenant recoveries $ 489,657 $ 406,368 $ 351,076
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.
148
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The following table summarizes unencumbered net operating income as a percentage
of total net operating income for the years ended December 31, 2021 , 2020, and
2019 (dollars in thousands):
Year Ended
2021 2020 2019
Unencumbered net operating income $ 1,444,307 $ 1,295,520 $ 1,024,619
Encumbered net operating income 46,288 59,893 61,185
Total net operating income $ 1,490,595 $ 1,355,413 $ 1,085,804
Unencumbered net operating income as a
percentage of total net operating income 97% 96% 94%
Weighted-average shares of common stock outstanding - diluted
From time to time, we enter into capital market transactions, including forward
equity sales agreements ("Forward 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 of
December 31, 2021 , we had no Forward Agreements outstanding. Refer to Note 15 -
"Stockholders' equity" to our consolidated financial statements under Item 15 in
this annual report on Form 10-K for additional information.
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 ended December 31, 2021 , 2020,
and 2019, are calculated as follows (in thousands):
Year Ended
2021 2020 2019
Weighted-average shares of common stock
outstanding:
Basic shares for EPS 146,921 126,106 112,204
Outstanding forward equity sales agreements 539 384 320
Series D Convertible Preferred Stock - - -
Diluted shares for EPS 147,460 126,490 112,524
Basic shares for EPS 146,921 126,106 112,204
Outstanding forward equity sales agreements 539 384 320
Series D Convertible Preferred Stock - - 442
Diluted shares for FFO 147,460 126,490 112,966
Basic shares for EPS 146,921 126,106 112,204
Outstanding forward equity sales agreements 539 384 320
Series D Convertible Preferred Stock - - -
Diluted shares for FFO, as adjusted 147,460 126,490 112,524
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