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Alexandria Real Estate Equities, Inc. All Rights Reserved. © 2018




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Alexandria Real Estate Equities, Inc. All Rights Reserved. © 2018
i




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(1)    See “Definitions and Reconciliations” in our Supplemental Information for additional information. As of June 30, 2018, annual rental revenue from only investment-grade tenants within our overall tenant base and within our top 20 tenants was 46% and 72%, respectively.


 
 
 
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Table of Contents
June 30, 2018
 
 

 
This document includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Please see page 8 of this Earnings Press Release and Supplemental Information for further information.
 
This document is not an offer to sell or a solicitation to buy securities of Alexandria Real Estate Equities, Inc. Any offers to sell or solicitations to buy our securities shall be made only by means of a prospectus approved for that purpose. Unless otherwise indicated, the “Company,” “Alexandria,” “ARE,” “we,” “us,” and “our” refer to Alexandria Real Estate Equities, Inc. and its consolidated subsidiaries.

 
Alexandria Real Estate Equities, Inc. All Rights Reserved. © 2018
iii

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Alexandria Real Estate Equities, Inc.
Reports
Second Quarter Ended June 30, 2018, Financial and Operating Results
Strong Internal and External Growth,
Operational Excellence and Growing Dividends



PASADENA, Calif. – July 30, 2018 – Alexandria Real Estate Equities, Inc. (NYSE:ARE)
announced financial and operating results for the second quarter ended June 30, 2018.

Key highlights

Increased common stock dividend

Common stock dividend for 2Q18 of $0.93 per common share, up 7 cents, or 8.1%, over 2Q17; continuation of our strategy to share growth in cash flows from operating activities with our stockholders while also retaining a significant portion for reinvestment.

Strong internal growth

Total revenues:
$325.0 million, up 19.0%, for 2Q18, compared to $273.1 million for 2Q17
$645.2 million, up 18.6%, for 1H18, compared to $543.9 million for 1H17
Net operating income (cash basis) of $818.7 million for 2Q18 annualized, up $60.4 million, or 8.0%, compared to 1Q18 annualized, and up $125.5 million, or 18.1%, compared to 4Q17 annualized
Same property net operating income growth:
4.1% and 6.3% (cash basis) for 2Q18, compared to 2Q17
4.1% and 10.3% (cash basis) for 1H18, compared to 1H17
Continued solid leasing activity and strong rental rate growth, in light of modest contractual lease expirations at the beginning of 2018 and a highly leased value-creation pipeline:
 
 
2Q18
 
1H18
Total leasing activity – RSF
 
985,996

 
2,467,160

Lease renewals and re-leasing of space:
 
 
 
 
Rental rate increases
 
24.0%

 
21.5%

Rental rate increases (cash basis)
 
12.8%

 
13.8%

RSF (included in total leasing activity above)
 
727,265

 
961,813

 
 
 
 
 

 
Key leases executed during 2Q18 (included in total leasing activity above):
Property
 
Submarket
 
RSF
 
Tenant
215 First Street
 
Cambridge
 
152,157

(1) 
Sarepta Therapeutics, Inc.
960 Industrial Road
 
Greater Stanford
 
110,000

(2) 
Joby Aero, Inc.
1201 Eastlake Avenue East
 
Lake Union
 
106,106

(3) 
Fred Hutchinson Cancer Research Center
Alexandria Center® at One Kendall Square
 
Cambridge
 
69,512

(4) 
Ipsen Bioscience, Inc.
950 Wind River Lane
 
Gaithersburg
 
50,000

 
AstraZeneca PLC
 
(1)
Includes 121,476 RSF renewed/re-leased at rental rate increases of 53% and 36% (cash basis) and expansion of 30,681 RSF. 88,459 RSF represents early renewal of a lease expiration in January 2021.
(2)
Represents short-term lease for 110,000 RSF. The property also includes an additional 423,000 RSF undergoing entitlements for future development in one or two phases.
(3)
Re-leasing of space with a lease expiration in May 2019 at a rental rate increase of 35%.
(4)
Re-leasing of space with a lease expiration in June 2019 at rental rate increases of 16% and 49% (cash).

Strong external growth; disciplined allocation of capital to visible, multiyear, highly leased
value-creation pipeline

Highly leased value-creation pipeline with deliveries targeted for 2018 and 2019:
 
 
 
 
Property
Leased %
 
Unlevered Yields
Target Delivery
 
 
Initial Stabilized
 
Initial Stabilized (Cash)
2018
 
501,325
 RSF
 
75%
 
7.5%
 
7.0%
2019
 
2,110,831
 RSF
 
86%
 
7.3%
 
6.7%
 
 
2,612,156
 RSF
 
84%
 
7.3%
 
6.8%
 
 
 
 
 
 
 
 
 
Includes 2Q18 commencement of vertical construction of a ground-up development project aggregating 205,000 RSF, 12% leased and 12% negotiating, at 1818 Fairview Avenue East in our Lake Union submarket.
New Class A development and redevelopment properties recently placed into service
1.6 million RSF placed into service during the last 12 months with average yields of 7.6% and 7.1% (cash).

Recent and future growth in net operating income (cash basis) driven by recently delivered projects:

Significant near-term contractual growth in annual cash rents of $44 million related to initial free rent granted on development and redevelopment projects recently placed into service (and no longer included in our value-creation pipeline) that are currently generating rental revenue.


 
 
 
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Second Quarter Ended June 30, 2018, Financial and Operating Results (continued)
June 30, 2018
 
 

Completed strategic acquisitions

Acquisitions completed:
In 2Q18 and July 2018, we acquired 14 properties and four land parcels for an aggregate purchase price of $662.9 million in key submarkets. These acquisitions consisted of:
Two properties and four land parcels supporting the future development of new Class A buildings aggregating 1,010,000 RSF;
389,452 RSF of value-add operating properties with future redevelopment opportunities, including $203.0 million for a fee simple interest in an office building aggregating 349,947 RSF located in New York City, which is currently occupied by Pfizer Inc.; and
828,014 RSF of 99% occupied operating properties, including significant below-market leases.

Operating results
 
2Q18
 
2Q17
 
1H18
 
1H17
Net income attributable to Alexandria’s common stockholders – diluted:
In millions
$
52.0

 
$
31.6

 
$
185.0

 
$
57.3

Per share
$
0.51

 
$
0.35

 
$
1.83

 
$
0.64

 
 
 
 
 
 
 
 
Funds from operations attributable to Alexandria’s common stockholders – diluted, as adjusted:
In millions
$
167.9

 
$
136.2

 
$
330.4

 
$
266.7

Per share
$
1.64

 
$
1.50

 
$
3.27

 
$
2.98

See “Items Included in Net Income Attributable to Alexandria’s Common Stockholders” below for additional information.
Items included in net income attributable to Alexandria’s common stockholders:
(In millions, except per share amounts)
Amount
 
Per Share – Diluted
 
Amount
 
Per Share – Diluted
2Q18
 
2Q17
 
2Q18
 
2Q17
 
1H18
 
1H17
 
1H18
 
1H17
Realized gain on non-real estate investment
$

 
$

 
$

 
$

 
$
8.3

 
$

 
$
0.08

 
$

Unrealized gains on non-real estate investments(1)
5.1

 

 
0.05

 

 
77.3

 

 
0.76

 

Gain on sales of real estate

 
0.1

 

 

 

 
0.4

 

 

Impairment of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
(6.3
)
 
(0.2
)
 
(0.06
)
 

 
(6.3
)
 
(0.2
)
 
(0.06
)
 

Non-real estate investments

 
(4.5
)
 

 
(0.05
)
 

 
(4.5
)
 

 
(0.05
)
Loss on early extinguishment of debt

 

 

 

 

 
(0.7
)
 

 
(0.01
)
Preferred stock redemption charge

 

 

 

 

 
(11.3
)
 

 
(0.12
)
Total
$
(1.2
)
 
$
(4.6
)
 
$
(0.01
)
 
$
(0.05
)
 
$
79.3

 
$
(16.3
)
 
$
0.78

 
$
(0.18
)
Weighted-average shares of common stock outstanding for calculation of earnings per share – diluted
 
102.2

 
90.7

 
 
 
 
 
101.2

 
89.5


(1) See “Investments” on page 46 of our Supplemental Information for additional information.


 
Core operating metrics as of or for the quarter ended June 30, 2018

High-quality revenues and cash flows and operational excellence

Percentage of annual rental revenue in effect from:
Investment-grade or large cap tenants: 55%
Class A properties in AAA locations: 78%
Occupancy of operating properties in North America: 97.1%
Operating margin: 72%
Adjusted EBITDA margin: 69%
Weighted-average remaining lease term:
Total tenants: 8.6 years
Top 20 tenants: 12.8 years
See “Strong Internal Growth” on the previous page for information on our total revenues, same property net operating income growth, leasing activity, and rental rate growth.

Balance sheet management

Key metrics

$18.8 billion of total market capitalization as of June 30, 2018
$2.9 billion of liquidity as of June 30, 2018
 
 
2Q18
 
 
 
 
Quarter
 
Trailing 12
 
4Q18
 
Annualized
 
Months
 
Goal
Net debt to Adjusted EBITDA
 
5.8x
 
6.2x
 
Less than 5.5x
Fixed-charge coverage ratio
 
4.3x
 
4.3x
 
Greater than 4.0x
Unhedged variable-rate debt as a percentage of total debt
 
5%
 
N/A
 
Less than 5%
Current and future value-creation pipeline as a percentage of gross investments in real estate in North America
 
10%
 
N/A
 
8% to 12%

Key capital events

In June 2018, we completed an offering of $900.0 million of unsecured senior notes for net proceeds of $891.4 million. The unsecured senior notes consisted of:
$450.0 million of 4.00% unsecured senior notes, due in 2024. The net proceeds will be used to fund certain eligible green development and redevelopment projects that have received or are expected to receive LEED® Gold or Platinum certification.
$450.0 million of 4.70% unsecured senior notes, due in 2030.
During 2Q18, we sold 2.5 million shares of common stock under our at-the-market common stock offering program (“ATM program”) for $124.46 per share and received net proceeds of $300.8 million. In July 2018, we sold 703,625 shares of common stock under our ATM common stock offering program for $127.91 per share and received net proceeds of $88.7 million. As of July 30, 2018, we had $17.7 million available for future sales under the ATM program. We expect to file a new ATM program in the next few quarters.
In April 2018, our unconsolidated real estate joint venture at Menlo Gateway in our Greater Stanford submarket closed a secured note payable with commitments available for borrowing of $157.3 million, for the development of Phase II of the project. The loan matures on May 1, 2035, and bears interest at a fixed rate of 4.53%.



 
 
 
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Second Quarter Ended June 30, 2018, Financial and Operating Results (continued)
June 30, 2018
 
 

Corporate responsibility and industry leadership

Nareit CARE Gold Award Winner
2018 recipient of the Nareit Gold Investor CARE (Communications and Reporting Excellence) Award in the Large Cap Equity REIT category as the best-in-class REIT that delivers transparency, quality, and efficient communications and reporting to the investment community, which is our third Nareit Gold Investor CARE Award (2015, 2016, and 2018).
50% of annual rental revenue is expected from LEED-certified projects upon completion of 10 in-process projects. In April 2018, 100 Binney Street in our Cambridge submarket received LEED Gold® certification, demonstrating our commitment to sustainability.
In May 2018, Joel S. Marcus, executive chairman and founder, served as a keynote speaker at the Research Triangle Regional Partnership’s 2018 State of the Region. The event highlighted how the region can facilitate economic growth and infrastructural improvements to prepare for more diversified expansion in the future.
In June 2018, Joel S. Marcus was appointed to the Emily Krzyzewski Center board of directors. The Center serves as a college access hub propelling academically focused, low-income K-12 students and graduates toward success in college.
In June 2018, Circulate San Diego awarded 9880 Campus Point Drive in our University Town Center submarket the Circulate Mobility Certification, formerly known as the MOVE Alliance Certification. The certification is awarded for transit-oriented, smart growth projects in the San Diego region.
In June 2018, we released our inaugural 2017 Corporate Responsibility Report that highlights our continual efforts to make a positive, meaningful and purposeful impact on the health, safety and well-being of our tenants, stockholders and employees, as well as on the communities in which we live and work.

Subsequent events

During 2Q18, we entered into a contract to sell a land parcel located in Northern Virginia and recognized an impairment of $6.3 million to lower the carrying amount to the estimated fair value less selling costs. We completed the sale, at a price of $6.0 million, in July 2018 with no gain or loss.
In July 2018, we repaid $150.0 million of the outstanding balance of one secured construction loan. In connection with the partial repayment of the secured construction loan, we recognized a loss on early extinguishment of debt of $299 thousand related to the write-off of unamortized loan fees.


 
 
 
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Sustainability
June 30, 2018
 
 

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(1)
Upon completion of 10 LEED certification projects in process.
(2)
Upon completion of three WELL certification projects in process.
(3)
Upon completion of eight Fitwel certification projects in process.


 
 
Acquisitions
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June 30, 2018
(Dollars in thousands)
 
 


Property
 
Submarket/Market
 
Date of Purchase
 
Number of Properties
 
Operating
Occupancy
 
Square Footage
 
Unlevered Yields
 
Purchase Price
 
 
 
 
Operating
 
Operating with Future Redevelopment
 
Future
Development
 
Initial Stabilized
 
Initial Stabilized (Cash)
 
 
 
 
 
 
 
 
Future Development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
701 Dexter Avenue North
 
Lake Union/Seattle
 
7/20/18
 
1
 
N/A
 

 

 
217,000

 
(1
)
 
 
(1
)
 
 
$
33,500

 
Other
 
Various
 
Various
 
 
N/A
 

 

 
493,000

 
(1
)
 
 
(1
)
 
 
 
58,205

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating with Value-Creation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
219 East 42nd Street
 
Manhattan/New York City
 
7/10/18
 
1
 
100%
 

 
349,947

(2) 

 
6.8
%
(2) 
 
6.7
%
(2) 
 
 
203,000

 
100 Tech Drive
 
Route 128/Greater Boston
 
4/13/18
 
1
 
100%
 
200,431

 

 
300,000

 
8.7
%
 
 
7.3
%
 
 
 
87,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maryland Life Science Portfolio
 
Rockville/Gaithersburg/Maryland
 
5/8/18
 
8
 
100%
 
376,106

 
39,505

 

 
9.1
%
 
 
7.0
%
(3) 
 
 
146,500

 
2301 5th Avenue
 
Lake Union/Seattle
 
6/1/18
 
1
 
97%
 
197,136

 

 

 
8.3
%
 
 
5.1
%
(3) 
 
 
95,000

 
Other
 
Various
 
Various
 
2
 
100%
 
54,341

 

 

 
N/A

 
 
N/A

 
 
 
39,400

(4) 
 
 
 
 
 
 
14
 
 
 
828,014

 
389,452

 
1,010,000

 
 
 
 
 
 
 
 
662,855

 
1Q18 acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
339,400

 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,002,255

 
2018 guidance midpoint
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
1,010,000

 

(1)
We expect to provide total estimated costs and related yields of development and redevelopment projects in the future.
(2)
We acquired a fee simple interest in this office building, which is currently occupied by Pfizer Inc. with a remaining lease term of six years. Upon expiration of the lease, we have the opportunity to increase cash flows through the conversion of office space into office/laboratory space through redevelopment. Under the Midtown East Rezoning, this property is currently entitled with an as-of-right density for an additional 230,000 developable square feet. Unlevered initial stabilized yields represent initial returns during the Pfizer, Inc. occupancy prior to any future redevelopment activities. We expect to provide total estimated costs and related yields of the development or redevelopment in the future.
(3)
These properties provide an opportunity to increase cash flows through the re-leasing of in-place leases currently 16% and 25% below market at the Maryland Life Science Portfolio and 2301 5th Avenue, respectively.
(4)
Includes, among others, the final installment related to our November 2016 acquisition of 1455 and 1515 Third Street of $18.9 million which was paid during the three months ended June 30, 2018.


 
 
 
 
Acquisitions (continued)
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June 30, 2018
 
 
 


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Guidance
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June 30, 2018
(Dollars in millions, except per share amounts)
 
 
 

The following updated guidance is based on our current view of existing market conditions and assumptions for the year ending December 31, 2018. There can be no assurance that actual amounts will be materially higher or lower than these expectations. See our discussion of “forward-looking statements” on page 8 of this Earnings Press Release for additional information.
 
 
Guidance
 
 
 
Guidance
Summary of Key Changes in Guidance
 
As of 7/30/18
 
As of 4/30/18
 
Summary of Key Changes in Guidance
 
As of 7/30/18
 
As of 4/30/18
EPS, FFO per share, and FFO per share, as adjusted
 
See updates below(1)
 
Key sources and uses of capital
 
(2)
 
N/A
Occupancy percentage in North America as of December 31, 2018
 
97.1% to 97.7%
 
96.9% to 97.5%
 
Rental rate increases
 
17.0% to 20.0%
 
13.0% to 16.0%
 
 
 
 
 
Rental rate increases (cash basis)
 
9.5% to 12.5%
 
7.5% to 10.5%
Projected Earnings per Share and Funds From Operations per Share Attributable to Alexandria’s Common Stockholders – Diluted
 
 
 
As of 7/30/18
 
As of 4/30/18
 
Earnings per share
 
$2.87 to $2.93
 
$2.88 to $2.98
 
Depreciation and amortization
 
 
4.50
 
 
 
4.45
 
 
Allocation to unvested restricted stock awards
 
 
(0.05)
 
 
 
(0.05)
 
 
Funds from operations per share
 
$7.32 to $7.38
 
$7.28 to $7.38
 
Realized gain on non-real estate investment in 1Q18
 
 
(0.08)
 
 
 
(0.08)
 
 
Unrealized gains on non-real estate investments(3)
 
 
(0.76)
 
 
 
(0.70)
 
 
Impairment of real estate – land parcels(4)
 
 
0.06
 
 
 
 
 
Allocation to unvested restricted stock awards/other
 
 
0.03
 
 
 
0.02
 
 
Funds from operations per share, as adjusted
 
$6.57 to $6.63
 
$6.52 to $6.62
 
Midpoint
 
$6.60
 
$6.57
 
Key Assumptions
 
Low
 
High
 
Occupancy percentage in North America as of December 31, 2018
 
97.1%

 
97.7%

 
 
 
 
 
 
 
Lease renewals and re-leasing of space:
 
 
 
 
 
Rental rate increases
 
17.0%

 
20.0%

 
Rental rate increases (cash basis)
 
9.5%

 
12.5%

 
Same property performance:
 
 
 
 
 
Net operating income increase
 
2.5%

 
4.5%

 
Net operating income increase (cash basis)
 
9.0%

 
11.0%

 
 
 
 
 
 
 
Straight-line rent revenue
 
$
92

 
$
102

(7)
General and administrative expenses
 
$
85

 
$
90

 
Capitalization of interest
 
$
55

 
$
65

 
Interest expense
 
$
155

 
$
165

 
 
 
 
 
 
 
 
 
 
Guidance
as of 7/30/18
 
Key Credit Metrics
 
 
Net debt to Adjusted EBITDA – 4Q18 annualized
 
Less than 5.5x
 
Net debt and preferred stock to Adjusted EBITDA – 4Q18 annualized
 
Less than 5.5x
 
Fixed-charge coverage ratio – 4Q18 annualized
 
Greater than 4.0x
 
Unhedged variable-rate debt as a percentage of total debt as of December 31, 2018
 
Less than 5%
 
Value-creation pipeline as a percentage of gross real estate as of December 31, 2018
 
8% to 12%
 
Key Sources and Uses of Capital
 
Range
 
Midpoint
 
Certain Completed Items Through 7/30/18
Sources of capital:
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities after dividends
 
$
140

 
$
180

 
$
160

 
 
 
Incremental debt
 
540

 
500

 
 
520

 
 
 
Real estate dispositions, partial interest sales, and common equity
 
1,330

 
1,530

 
 
1,430

 
$
1,200

(5) 
Total sources of capital
 
$
2,010

 
$
2,210

 
$
2,110

 
 
 
Uses of capital:
 
 
 
 
 
 
 
 
 
 
Construction
 
$
1,050

 
$
1,150

 
 
$
1,100

 
 
 
Acquisitions
 
960

 
1,060

 
 
1,010

 
(6)
Total uses of capital
 
$
2,010

 
$
2,210

 
$
2,110

 
 
 
Incremental debt (included above):
 
 
 
 
 
 
 
 
 
 
Issuance of unsecured senior notes payable
 
$
900

 
$
900

 
 
$
900

 
$
900

 
Repayments of secured notes payable
 
(160
)
 
(165
)
 
 
(163
)
 
$
(150
)
 
Repayment of unsecured senior bank term loan
 
(200
)
 
(200
)
 
 
(200
)
 
 
 
$1.65 billion unsecured senior line of credit/other
 

 
(35
)
 
 
(17
)
 
 
 
Incremental debt
 
$
540

 
$
500

 
$
520

 
 
 
(1)
Midpoint of FFO per share, as adjusted guidance increased by $0.03 from $6.57 to $6.60 primarily due to the incremental acquisitions as noted in footnote 2, and the continued strength of our core and the related increases in projected occupancy and rental rate growth on leasing activity.
(2)
Updates to key sources and uses of capital guidance for 2018 include: (a) $290 million increase in the midpoint of acquisitions range from $720 million to $1.0 billion, (b) $220 million increase in the midpoint of real estate dispositions, partial interest sales, and common equity range from $1.2 billion to $1.4 billion, (c) $300 million increase in issuance of unsecured senior notes payable reflecting the June 2018 issuance of our $900 million unsecured senior notes, and (d) $150 million increase in repayments of secured notes payable reflecting the July 2018 partial repayment of our secured construction loan.
(3)
Per share amounts of unrealized gains on non-real estate investments may be different for the full year ending December 31, 2018, depending on the weighted-average shares outstanding for the year ending December 31, 2018. Excludes future unrealized gains or losses that could be recognized in earnings from changes in fair value of equity investments after June 30, 2018. See page 46 of our Supplemental Information for additional information.
(4)
Impairment of real estate aggregating $6.3 million recognized during the three months ended June 30, 2018, related to one land parcel located in Northern Virginia that was subsequently sold in July 2018 with no gain or loss.
(5)
We have completed transactions aggregating $1.2 billion through July 2018. This includes completed and projected settlement of our forward equity sales agreements and completed sales under our ATM program. In January 2018, we executed forward equity sales agreements for 6.9 million shares of our common stock. In March 2018, we settled 843,600 shares from the forward equity sales agreements and received proceeds of $100.2 million, net of underwriting discounts and adjustments provided in the forward equity sales agreements. We expect to receive proceeds of $709.9 million upon settlement of the remaining outstanding forward equity sales agreements, to be further adjusted as provided in the sales agreements, in 2018. During the three months ended June 30, 2018, we sold 2.5 million shares of common stock under our ATM program at $124.46 per share, with net proceeds of $300.8 million. In July 2018, we sold 703,625 shares of common stock under our ATM common stock offering program for $127.91 per share and received net proceeds of $88.7 million.
(6)
See “Acquisitions” on page 5 of this Earnings Press Release for additional information.
(7)
Approximately 50% of straight-line rent revenue represents initial free rent on recently delivered and expected 2018 deliveries of new Class A properties from our development and redevelopment pipeline.


 
 
 
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Earnings Call Information and About the Company
June 30, 2018
 
 


We will host a conference call on Tuesday, July 31, 2018, at 3:00 p.m. Eastern Time (“ET”)/noon Pacific Time (“PT”), which is open to the general public to discuss our financial and operating results for the second quarter ended June 30, 2018. To participate in this conference call, dial (877) 270-2148 or (412) 902-6510 shortly before 3:00 p.m. ET/noon PT and ask the operator to join the Alexandria Real Estate Equities, Inc. call. The audio webcast can be accessed at www.are.com in the “For Investors” section. A replay of the call will be available for a limited time from 5:00 p.m. ET/2:00 p.m. PT on Tuesday, July 31, 2018. The replay number is (877) 344-7529 or (412) 317-0088, and the confirmation code is 10118275.

Additionally, a copy of this Earnings Press Release and Supplemental Information for the second quarter ended June 30, 2018, is available in the “For Investors” section of our website at www.are.com or by following this link: http://www.are.com/fs/2018q2.pdf.

For any questions, please contact Joel S. Marcus, executive chairman and founder; Stephen A. Richardson, co-chief executive officer; Peter M. Moglia, co-chief executive officer and co-chief investment officer; Dean A. Shigenaga, co-president and chief financial officer; or Sara M. Kabakoff, assistant vice president – corporate communications, at (626) 578-0777.

About the Company

Alexandria Real Estate Equities, Inc. (NYSE:ARE), an S&P 500® company, is an urban office real estate investment trust (“REIT”) uniquely focused on collaborative life science and technology campuses in AAA innovation cluster locations, with a total market capitalization of $18.8 billion and an asset base in North America of 32.0 million SF as of June 30, 2018. The asset base in North America includes 21.5 million RSF of operating properties and 3.5 million RSF of development and redevelopment of new Class A properties currently undergoing construction and pre-construction activities with target delivery dates ranging from 2018 through 2020. Additionally, the asset base in North America includes 7.0 million SF of intermediate-term and future development projects. Founded in 1994, Alexandria pioneered this niche and has since established a significant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria has a longstanding and proven track record of developing Class A properties clustered in urban life science and technology campuses that provide its innovative tenants with highly dynamic and collaborative environments that enhance their ability to successfully recruit and retain world-class talent and inspire productivity, efficiency, creativity, and success. Alexandria also provides strategic capital to transformative life science and technology companies through its venture capital arm. We believe our unique business model and diligent underwriting ensure a high-quality and diverse tenant base that results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.

***********

This document includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements regarding our 2018 earnings per share attributable to Alexandria’s common stockholders – diluted, 2018 funds from operations per share attributable to Alexandria’s common stockholders – diluted, net operating income, and our projected sources and uses of capital. You can identify the forward-looking statements by their use of forward-looking words, such as “forecast,” “guidance,” “projects,” “estimates,” “anticipates,” “goals,” “believes,” “expects,” “intends,” “may,” “plans,” “seeks,” “should,” or “will,” or the negative of those words or similar words. These forward-looking statements are based on our current expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts, as well as a number of assumptions concerning future events. There can be no assurance that actual results will not be materially higher or lower than these expectations. These statements are subject to risks, uncertainties, assumptions, and other important factors that could cause actual results to differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, without limitation, our failure to obtain capital (debt, construction financing, and/or equity) or refinance debt maturities, increased interest rates and operating costs, adverse economic or real estate developments in our markets, our failure to successfully place into service and lease any properties undergoing development or redevelopment and our existing space held for future development or redevelopment (including new properties acquired for that purpose), our failure to successfully operate or lease acquired properties, decreased rental rates, increased vacancy rates or failure to renew or replace expiring leases, defaults on or non-renewal of leases by tenants, adverse general and local economic conditions, an unfavorable capital market environment, decreased leasing activity or lease renewals, and other risks and uncertainties detailed in our filings with the Securities and Exchange Commission (“SEC”). Accordingly, you are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements are made as of the date of this Earnings Press Release, and unless otherwise stated, we assume no obligation to update this information and expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. For more discussion relating to risks and uncertainties that could cause actual results to differ materially from those anticipated in our forward-looking statements, and risks to our business in general, please refer to our SEC filings, including our most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q.

Alexandria®, Lighthouse Design® logo, Building the Future of Life-Changing Innovation™, LaunchLabs®, Alexandria Center®, Alexandria Technology Square®, and Alexandria Summit® are trademarks of Alexandria Real Estate Equities, Inc. All other company names, trademarks, and logos referenced herein are the property of their respective owners.




 
 
Consolidated Statements of Income
q218logo2.jpg
June 30, 2018
(In thousands, except per share amounts)
 
 

 
 
Three Months Ended
 
Six Months Ended
 
 
6/30/18

3/31/18
 
12/31/17
 
9/30/17
 
6/30/17
 
6/30/18
 
6/30/17
Revenues:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Rental
 
$
250,635

 
$
244,485

 
$
228,025

 
$
216,021

 
$
211,942

 
$
495,120

 
$
419,135

Tenant recoveries
 
72,159

 
73,170

 
70,270

 
67,058

 
60,470

 
145,329

 
121,816

Other income
 
2,240

 
2,484

 
496

 
2,291

 
647

 
4,724

 
2,985

Total revenues
 
325,034

 
320,139

 
298,791

 
285,370

 
273,059

 
645,173


543,936

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental operations
 
91,908

 
91,771

 
88,073

 
83,469

 
76,980

 
183,679

 
154,067

General and administrative
 
22,939

 
22,421

 
18,910

 
17,636

 
19,234

 
45,360

 
38,463

Interest
 
38,097

 
36,915

 
36,082

 
31,031

 
31,748

 
75,012

 
61,532

Depreciation and amortization
 
118,852

 
114,219

 
107,714

 
107,788

 
104,098

 
233,071

 
201,281

Impairment of real estate
 
6,311

 

 

 

 
203

 
6,311

 
203

Loss on early extinguishment of debt
 

 

 
2,781

 

 

 

 
670

Total expenses
 
278,107

 
265,326

 
253,560

 
239,924

 
232,263

 
543,433

 
456,216

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated real estate joint ventures
 
1,090

 
1,144

 
376

 
14,100

 
589

 
2,234

 
950

Investment income(1)
 
12,530

 
85,561

 

 

 

 
98,091

 

Gain on sales of real estate – rental properties
 

 

 

 

 

 

 
270

Gain on sales of real estate – land parcels
 

 

 

 

 
111

 

 
111

Net income
 
60,547

 
141,518

 
45,607

 
59,546

 
41,496

 
202,065

 
89,051

Net income attributable to noncontrolling interests
 
(5,817
)
 
(5,888
)
 
(6,219
)
 
(5,773
)
 
(7,275
)
 
(11,705
)
 
(13,119
)
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders
 
54,730

 
135,630

 
39,388

 
53,773

 
34,221

 
190,360

 
75,932

Dividends on preferred stock
 
(1,302
)
 
(1,302
)
 
(1,302
)
 
(1,302
)
 
(1,278
)
 
(2,604
)
 
(5,062
)
Preferred stock redemption charge
 

 

 

 

 

 

 
(11,279
)
Net income attributable to unvested restricted stock awards
 
(1,412
)
 
(1,941
)
 
(1,255
)
 
(1,198
)
 
(1,313
)
 
(2,765
)
 
(2,300
)
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders
 
$
52,016

 
$
132,387

 
$
36,831

 
$
51,273

 
$
31,630

 
$
184,991

 
$
57,291

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.51

 
$
1.33

 
$
0.39

 
$
0.55

 
$
0.35

 
$
1.83

 
$
0.64

Diluted
 
$
0.51

 
$
1.32

 
$
0.38

 
$
0.55

 
$
0.35

 
$
1.83

 
$
0.64

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
101,881

 
99,855

 
95,138

 
92,598

 
90,215

 
100,878

 
89,186

Diluted
 
102,236

 
100,125

 
95,914

 
93,296

 
90,745

 
101,191

 
89,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share of common stock
 
$
0.93

 
$
0.90

 
$
0.90

 
$
0.86

 
$
0.86

 
$
1.83

 
$
1.69


(1)
See “Investments” on page 46 of our Supplemental Information for additional information.


 
 
Consolidated Balance Sheets
q218logo2.jpg
June 30, 2018
(In thousands)
 
 

 
 
6/30/18
 
3/31/18
 
12/31/17
 
9/30/17
 
6/30/17
Assets
 
 
 
 

 
 

 
 

 
 

Investments in real estate
 
$
11,190,771

 
$
10,671,227

 
$
10,298,019

 
$
10,046,521

 
$
9,819,413

Investments in unconsolidated real estate joint ventures
 
192,972

 
169,865

 
110,618

 
33,692

 
58,083

Cash and cash equivalents
 
287,029

 
221,645

 
254,381

 
118,562

 
124,877

Restricted cash
 
34,812

 
37,337

 
22,805

 
27,713

 
20,002

Tenant receivables
 
8,704

 
11,258

 
10,262

 
9,899

 
8,393

Deferred rent
 
490,428

 
467,112

 
434,731

 
402,353

 
383,062

Deferred leasing costs
 
232,964

 
226,803

 
221,430

 
208,265

 
201,908

Investments
 
790,753

 
724,310

 
523,254

 
485,262

 
424,920

Other assets
 
333,757

 
291,639

 
228,453

 
213,056

 
205,009

Total assets
 
$
13,562,190

 
$
12,821,196

 
$
12,103,953

 
$
11,545,323

 
$
11,245,667

 
 
 
 
 
 
 
 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
 
 
 
 
 
 
 
Secured notes payable
 
$
776,260

 
$
775,689

 
$
771,061

 
$
1,153,890

 
$
1,127,348

Unsecured senior notes payable
 
4,289,521

 
3,396,912

 
3,395,804

 
2,801,290

 
2,800,398

Unsecured senior line of credit
 

 
490,000

 
50,000

 
314,000

 
300,000

Unsecured senior bank term loans
 
548,324

 
548,197

 
547,942

 
547,860

 
547,639

Accounts payable, accrued expenses, and tenant security deposits
 
849,274

 
783,986

 
763,832

 
740,070

 
734,189

Dividends payable
 
98,676

 
93,065

 
92,145

 
83,402

 
81,602

Total liabilities
 
6,562,055

 
6,087,849

 
5,620,784

 
5,640,512

 
5,591,176

 
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
10,861

 
10,212

 
11,509

 
11,418

 
11,410

 
 
 
 
 
 
 
 
 
 
 
Alexandria Real Estate Equities, Inc.’s stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
7.00% Series D cumulative convertible preferred stock
 
74,386

 
74,386

 
74,386

 
74,386

 
74,386

Common stock
 
1,033

 
1,007

 
998

 
943

 
921

Additional paid-in capital
 
6,387,527

 
6,117,976

 
5,824,258

 
5,287,777

 
5,059,180

Accumulated other comprehensive (loss) income
 
(2,485
)
 
1,228

 
50,024

 
43,864

 
22,677

Alexandria Real Estate Equities, Inc.’s stockholders’ equity
 
6,460,461

 
6,194,597

 
5,949,666

 
5,406,970

 
5,157,164

Noncontrolling interests
 
528,813

 
528,538

 
521,994

 
486,423

 
485,917

Total equity
 
6,989,274

 
6,723,135

 
6,471,660

 
5,893,393

 
5,643,081

Total liabilities, noncontrolling interests, and equity
 
$
13,562,190

 
$
12,821,196

 
$
12,103,953

 
$
11,545,323

 
$
11,245,667





 
 
Funds From Operations and Funds From Operations per Share
q218logo2.jpg
June 30, 2018
(In thousands)
 
 

The following table presents a reconciliation of net income attributable to Alexandria’s common stockholders, the most directly comparable financial measure presented in accordance with generally accepted accounting principles (“GAAP”), including our share of amounts from consolidated and unconsolidated real estate joint ventures, to funds from operations attributable to Alexandria’s common stockholders – diluted, and funds from operations attributable to Alexandria’s common stockholders – diluted, as adjusted, for the periods below:
 
 
Three Months Ended
 
Six Months Ended
 
 
6/30/18
 
3/31/18
 
12/31/17
 
9/30/17
 
6/30/17
 
6/30/18
 
6/30/17
Net income attributable to Alexandria’s common stockholders
 
$
52,016

 
$
132,387

 
$
36,831

 
$
51,273

 
$
31,630

 
$
184,991

 
$
57,291

Depreciation and amortization
 
118,852

 
114,219

 
107,714

 
107,788

 
104,098

 
233,071

 
201,281

Noncontrolling share of depreciation and amortization from consolidated real estate JVs
 
(3,914
)
 
(3,867
)
 
(3,777
)
 
(3,608
)
 
(3,735
)
 
(7,781
)
 
(7,377
)
Our share of depreciation and amortization from unconsolidated real estate JVs
 
807

 
644

 
432

 
383

 
324

 
1,451

 
736

Gain on sales of real estate – rental properties
 

 

 

 

 

 

 
(270
)
Our share of gain on sales of real estate from unconsolidated real estate JVs
 

 

 

 
(14,106
)
 

 

 

Gain on sales of real estate – land parcels
 

 

 

 

 
(111
)
 

 
(111
)
Impairment of real estate – rental properties
 

 

 

 

 
203

 

 
203

Allocation to unvested restricted stock awards
 
(1,042
)
 
(1,548
)
 
(734
)
 
(957
)
 
(685
)
 
(3,212
)
 
(1,245
)
Dilutive effect of assumed conversion of 7.00% Series D cumulative convertible preferred stock(1)
 

 
1,302

 

 

 

 
2,604

 

Funds from operations attributable to Alexandria’s common stockholders – diluted(2)
 
166,719

 
243,137

 
140,466

 
140,773

 
131,724

 
411,124

 
250,508

Unrealized gains on non-real estate investments(1)
 
(5,067
)
 
(72,229
)
 

 

 

 
(77,296
)
 

Realized gain on non-real estate investment
 

 
(8,252
)
 

 

 

 
(8,252
)
 

Removal of dilutive effect of assumed conversion of 7.00% Series D cumulative convertible preferred stock included in funds from operations above(1)
 

 
(1,302
)
 

 

 

 
(2,604
)
 

Impairment of land parcels and non-real estate investments
 
6,311

(3) 

 
3,805

 

 
4,491

 
6,311

(3) 
4,491

Loss on early extinguishment of debt
 

 

 
2,781

 

 

 

 
670

Preferred stock redemption charge
 

 

 

 

 

 

 
11,279

Allocation to unvested restricted stock awards
 
(18
)
 
1,125

 
(94
)
 

 
(58
)
 
1,140

 
(209
)
Funds from operations attributable to Alexandria’s common stockholders – diluted, as adjusted
 
$
167,945

 
$
162,479

 
$
146,958

 
$
140,773

 
$
136,157

 
$
330,423

 
$
266,739


(1)
On January 1, 2018, we adopted an ASU that requires changes in the fair value of our non-real estate investments to be recognized in net income. During the three months ended March 31, 2018, we recognized unrealized gains of $72.2 million. These unrealized gains are included in net income and funds from operations as defined by Nareit (“Nareit FFO”). For net income per share purposes, our Series D preferred stock was not assumed to be converted for the three months ended March 31, 2018, as its assumed conversion was anti-dilutive. However, for Nareit FFO per share, we assumed the conversion of the Series D preferred stock because its effect was dilutive on a per share basis.
We compute funds from operations, as adjusted, excluding unrealized gains or losses on non-real estate investments. As a result, the assumed conversion of our Series D preferred stock was reversed from our Nareit FFO calculation, as its impact was anti-dilutive on a per share basis for our funds from operations, as adjusted.
See “Investments” on page 46 of our Supplemental Information for additional information. See definitions for “Funds from operations and funds from operations, as adjusted, attributable to Alexandria’s common stockholders” and “Weighted-Average Shares of Common Stock Outstanding – Diluted” on pages 53 and 57, respectively, of our Supplemental Information for additional information.
(2)
Calculated in accordance with standards established by the Advisory Board of Governors of the National Association of Real Estate Investment Trusts (the “Nareit Board of Governors”) in its April 2002 White Paper and related implementation guidance.
(3)
Impairment of real estate recognized during the three months ended June 30, 2018, related to one land parcel located in Northern Virginia that was subsequently sold in July 2018 with no gain or loss.


 
 
Funds From Operations and Funds From Operations per Share (continued)
q218logo2.jpg
June 30, 2018
(In thousands, except per share amounts)
 
 


The following table presents a reconciliation of net income per share attributable to Alexandria’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 per share attributable to Alexandria’s common stockholders – diluted, and funds from operations per share attributable to Alexandria’s common stockholders – diluted, as adjusted, for the periods below. Per share amounts may not add due to rounding.
 
 
Three Months Ended
 
Six Months Ended
 
 
6/30/18
 
3/31/18
 
12/31/17
 
9/30/17
 
6/30/17
 
6/30/18
 
6/30/17
Net income per share attributable to Alexandria’s common stockholders
 
$
0.51

 
$
1.32

 
$
0.38

 
$
0.55

 
$
0.35

 
$
1.83

 
$
0.64

Depreciation and amortization 
 
1.13

 
1.08

 
1.08

 
1.11

 
1.10

 
2.23

 
2.16

Our share of gain on sales of real estate from unconsolidated real estate JVs
 

 

 

 
(0.15
)
 

 

 

Allocation to unvested restricted stock awards
 
(0.01
)
 

 

 

 

 
(0.03
)
 

Dilutive effect of assumed conversion of 7.00% Series D cumulative convertible preferred stock(1)
 

 
0.01

 

 

 

 

 

Funds from operations per share attributable to Alexandria’s common stockholders – diluted(2)
 
1.63

 
2.41

 
1.46

 
1.51

 
1.45

 
4.03


2.80

Unrealized gains on non-real estate investments(1)
 
(0.05
)
 
(0.70
)
 

 

 

 
(0.76
)
 

Realized gain on non-real estate investment
 

 
(0.08
)
 

 

 

 
(0.08
)
 

Removal of dilutive effect of assumed conversion of 7.00% Series D cumulative convertible preferred stock included in funds from operations above(1)
 

 
(0.01
)
 

 

 

 

 

Impairment of land parcels and non-real estate investments
 
0.06

(3) 

 
0.04

 

 
0.05

 
0.06

(3) 
0.05

Loss on early extinguishment of debt
 

 

 
0.03

 

 

 

 
0.01

Preferred stock redemption charge
 

 

 

 

 

 

 
0.12

Allocation to unvested restricted stock awards
 

 

 

 

 

 
0.02

 

Funds from operations per share attributable to Alexandria’s common stockholders – diluted, as adjusted
 
$
1.64

 
$
1.62

 
$
1.53

 
$
1.51

 
$
1.50

 
$
3.27

 
$
2.98

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average shares of common stock outstanding(1) for calculations of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share – diluted and funds from operations – diluted, as adjusted, per share
 
102,236

 
100,125

 
95,914

 
93,296

 
90,745

 
101,191

 
89,479

Funds from operations – diluted, per share
 
102,236

 
100,866

 
95,914

 
93,296

 
90,745

 
101,933

 
89,479


(1)
See footnote 1 on prior page for additional information.
(2)
Calculated in accordance with standards established by the Nareit Board of Governors in its April 2002 White Paper and related implementation guidance.
(3)
See footnote 3 on prior page for additional information.












SUPPLEMENTAL
INFORMATION









 
 
 
q218logo2.jpg
Company Profile
June 30, 2018
 
 

Alexandria Real Estate Equities, Inc. (NYSE:ARE), an S&P 500® company, is an urban office REIT uniquely focused on collaborative life science and technology campuses in AAA innovation cluster locations, with a total market capitalization of $18.8 billion and an asset base in North America of 32.0 million SF as of June 30, 2018. The asset base in North America includes 21.5 million RSF of operating properties and 3.5 million RSF of development and redevelopment of new Class A properties currently undergoing construction and pre-construction activities with target delivery dates ranging from 2018 through 2020. Additionally, the asset base in North America includes 7.0 million SF of intermediate-term and future development projects. Founded in 1994, Alexandria pioneered this niche and has since established a significant market presence in key locations, including Greater Boston, San Francisco, New York City, San Diego, Seattle, Maryland, and Research Triangle Park. Alexandria has a longstanding and proven track record of developing Class A properties clustered in urban life science and technology campuses that provide our 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. Alexandria also provides strategic capital to transformative life science and technology companies through our venture capital arm. We believe our unique business model and diligent underwriting ensure a high-quality and diverse tenant base that results in higher occupancy levels, longer lease terms, higher rental income, higher returns, and greater long-term asset value. For additional information on Alexandria, please visit www.are.com.