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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 1-12993

ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
95-4502084
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification Number)
 385 East Colorado Boulevard, Suite 299, Pasadena, California 91101
(Address of principal executive offices) (Zip code)

(626) 578-0777
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
ARE
New York Stock Exchange
7.00% Series D Cumulative Convertible Preferred Stock
ARE/PD
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer 
Non-accelerated filer
 
Smaller reporting company 
 
 
 
Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No

As of July 15, 2019, 113,417,511 shares of common stock, par value $0.01 per share, were outstanding.



TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2019, and December 31, 2018
 
 
 
 
Consolidated Financial Statements for the Three and Six Months Ended June 30, 2019 and 2018:
 
 
 
 
 
Consolidated Statements of Income
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
Consolidated Statements of Changes in Stockholders’ Equity and Noncontrolling Interests
 
 
 
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i



GLOSSARY

The following abbreviations or acronyms that may be used in this document shall have the adjacent meanings set forth below:

ASU
Accounting Standards Update
ATM
At the Market
BPS
Basis Points
CIP
Construction in Progress
EPS
Earnings per Share
FASB
Financial Accounting Standards Board
FFO
Funds From Operations
GAAP
U.S. Generally Accepted Accounting Principles
HVAC
Heating, Ventilation, and Air Conditioning
JV
Joint Venture
LEED®
Leadership in Energy and Environmental Design
LIBOR
London Interbank Offered Rate
Nareit
National Association of Real Estate Investment Trusts
NAV
Net Asset Value
REIT
Real Estate Investment Trust
RSF
Rentable Square Feet/Foot
SEC
Securities and Exchange Commission
SF
Square Feet/Foot
SoMa
South of Market (submarket of the San Francisco market)
U.S.
United States
VIE
Variable Interest Entity



ii



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

Alexandria Real Estate Equities, Inc.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Investments in real estate
$
12,872,824

 
$
11,913,693

Investments in unconsolidated real estate joint ventures
334,162

 
237,507

Cash and cash equivalents
198,909

 
234,181

Restricted cash
39,316

 
37,949

Tenant receivables
9,228

 
9,798

Deferred rent
585,082

 
530,237

Deferred leasing costs
247,468

 
239,070

Investments
1,057,854

 
892,264

Other assets
694,627

 
370,257

Total assets
$
16,039,470

 
$
14,464,956

 
 
 
 
Liabilities, Noncontrolling Interests, and Equity
 
 
 
Secured notes payable
$
354,186

 
$
630,547

Unsecured senior notes payable
5,140,914

 
4,292,293

Unsecured senior line of credit
514,000

 
208,000

Unsecured senior bank term loan
347,105

 
347,415

Accounts payable, accrued expenses, and tenant security deposits
1,157,417

 
981,707

Dividends payable
114,379

 
110,280

Total liabilities
7,628,001

 
6,570,242

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Redeemable noncontrolling interests
10,994

 
10,786

 
 
 
 
Alexandria Real Estate Equities, Inc.’s stockholders’ equity:
 
 
 
7.00% Series D cumulative convertible preferred stock
57,461

 
64,336

Common stock
1,120

 
1,110

Additional paid-in capital
7,581,573

 
7,286,954

Accumulated other comprehensive loss
(11,134
)
 
(10,435
)
Alexandria Real Estate Equities, Inc.’s stockholders’ equity
7,629,020

 
7,341,965

Noncontrolling interests
771,455

 
541,963

Total equity
8,400,475

 
7,883,928

Total liabilities, noncontrolling interests, and equity
$
16,039,470

 
$
14,464,956



The accompanying notes are an integral part of these consolidated financial statements.

1



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Income from rentals
$
371,618

 
$
322,794

 
$
726,367

 
$
640,449

Other income
2,238


2,240


6,331


4,724

Total revenues
373,856

 
325,034

 
732,698

 
645,173

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operations
105,689

 
91,908

 
207,190

 
183,679

General and administrative
26,434

 
22,939

 
51,111

 
45,360

Interest
42,879

 
38,097

 
81,979

 
75,012

Depreciation and amortization
134,437

 
118,852

 
268,524

 
233,071

Impairment of real estate

 
6,311

 

 
6,311

Loss on early extinguishment of debt

 

 
7,361

 

Total expenses
309,439

 
278,107

 
616,165

 
543,433

 
 
 
 
 
 
 
 
Equity in earnings of unconsolidated real estate joint ventures
1,262

 
1,090

 
2,408

 
2,234

Investment income
21,500

 
12,530

 
105,056

 
98,091

Net income
87,179

 
60,547

 
223,997

 
202,065

Net income attributable to noncontrolling interests
(8,412
)

(5,817
)

(16,071
)

(11,705
)
Net income attributable to Alexandria Real Estate Equities, Inc.’s stockholders
78,767

 
54,730

 
207,926

 
190,360

Dividends on preferred stock
(1,005
)
 
(1,302
)
 
(2,031
)
 
(2,604
)
Preferred stock redemption charge

 

 
(2,580
)
 

Net income attributable to unvested restricted stock awards
(1,432
)
 
(1,412
)
 
(3,134
)
 
(2,765
)
Net income attributable to Alexandria Real Estate Equities, Inc.’s common stockholders
$
76,330

 
$
52,016

 
$
200,181

 
$
184,991

 
 
 
 
 
 
 
 
Net income per share attributable to Alexandria Real Estate Equities, Inc.’s common stockholders:
 
 
 
 
 
 
 
Basic
$
0.68

 
$
0.51

 
$
1.80

 
$
1.83

Diluted
$
0.68

 
$
0.51

 
$
1.80

 
$
1.83

 
 
 
 
 
 
 
 


The accompanying notes are an integral part of these consolidated financial statements.

2



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
87,179

 
$
60,547

 
$
223,997

 
$
202,065

Other comprehensive loss
 
 
 
 
 
 
 
Unrealized (losses) gains on interest rate hedge agreements:
 
 
 
 
 
 
 
Unrealized interest rate hedge (losses) gains arising during the period
(1,126
)
 
661

 
(1,684
)
 
2,643

Reclassification adjustment for amortization of interest income included in net income
114

 
(1,131
)
 
(1,815
)
 
(1,809
)
Unrealized (losses) gains on interest rate hedge agreements, net
(1,012
)
 
(470
)
 
(3,499
)
 
834

 
 
 
 
 
 
 
 
Unrealized gains (losses) on foreign currency translation:
 
 
 
 
 
 
 
Unrealized foreign currency translation gains (losses) arising during the period
590

 
(3,243
)
 
2,800

 
(3,572
)
Unrealized gains (losses) on foreign currency translation, net
590

 
(3,243
)
 
2,800

 
(3,572
)
 
 
 
 
 
 
 
 
Total other comprehensive loss
(422
)
 
(3,713
)
 
(699
)
 
(2,738
)
Comprehensive income
86,757

 
56,834

 
223,298

 
199,327

Less: comprehensive income attributable to noncontrolling interests
(8,412
)
 
(5,817
)
 
(16,071
)
 
(11,705
)
Comprehensive income attributable to Alexandria Real Estate Equities, Inc.’s stockholders
$
78,345

 
$
51,017

 
$
207,227

 
$
187,622


The accompanying notes are an integral part of these consolidated financial statements.


3




Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
7.00% Series D
Cumulative
Convertible
Preferred
Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of March 31, 2019
 
$
57,461

 
111,180,659

 
$
1,112

 
$
7,518,716

 
$

 
$
(10,712
)
 
$
777,448

 
$
8,344,025

 
$
10,889

Net income
 

 

 

 

 
78,767

 

 
8,194

 
86,961

 
218

Total other comprehensive loss
 

 

 

 

 

 
(422
)
 

 
(422
)
 

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(14,674
)
 
(14,674
)
 
(207
)
Contributions from and sales of noncontrolling interests
 

 

 

 

 

 

 
487

 
487

 
94

Issuance of common stock
 

 
602,484

 
6

 
85,388

 

 

 

 
85,394

 

Issuance pursuant to stock plan
 

 
327,699

 
3

 
17,244

 

 

 

 
17,247

 

Taxes paid related to net settlement of equity awards
 

 
(125,274
)
 
(1
)
 
(3,996
)
 

 

 

 
(3,997
)
 

Dividends declared on common stock ($1.00 per share)
 

 

 

 

 
(113,541
)
 

 

 
(113,541
)
 

Dividends declared on preferred stock ($0.4375 per share)
 

 

 

 

 
(1,005
)
 

 

 
(1,005
)
 

Reclassification of distributions in excess of earnings
 

 

 

 
(35,779
)
 
35,779

 

 

 

 

Balance as of June 30, 2019
 
$
57,461

 
111,985,568

 
$
1,120

 
$
7,581,573

 
$

 
$
(11,134
)
 
$
771,455

 
$
8,400,475

 
$
10,994



The accompanying notes are an integral part of these consolidated financial statements.

4







Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
7.00% Series D
Cumulative
Convertible
Preferred Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of March 31, 2018
 
$
74,386

 
100,696,361

 
$
1,007

 
$
6,117,976

 
$

 
$
1,228

 
$
528,538

 
$
6,723,135

 
$
10,212

Net income
 

 

 

 

 
54,730

 

 
5,606

 
60,336

 
211

Total other comprehensive loss
 

 

 

 

 

 
(3,713
)
 

 
(3,713
)
 

Redemption of noncontrolling interests
 

 

 

 

 

 

 

 

 
(100
)
Distributions to noncontrolling interests
 

 

 

 

 

 

 
(12,309
)
 
(12,309
)
 
(212
)
Contributions from noncontrolling interests
 

 

 

 
257

 

 

 
6,978

 
7,235

 
750

Issuance of common stock
 

 
2,456,037

 
25

 
300,813

 

 

 

 
300,838

 

Issuance pursuant to stock plan
 

 
193,719

 
1

 
12,644

 

 

 

 
12,645

 

Dividends declared on common stock ($0.93 per share)
 

 

 

 

 
(97,591
)
 

 

 
(97,591
)
 

Dividends declared on preferred stock ($0.4375 per share)
 

 

 

 

 
(1,302
)
 

 

 
(1,302
)
 

Reclassification of distributions in excess of earnings
 

 

 

 
(44,163
)
 
44,163

 

 

 

 

Balance as of June 30, 2018
 
$
74,386

 
103,346,117

 
$
1,033

 
$
6,387,527

 
$

 
$
(2,485
)
 
$
528,813

 
$
6,989,274

 
$
10,861



The accompanying notes are an integral part of these consolidated financial statements.


5




Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
7.00% Series D
Cumulative
Convertible
Preferred
Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2018
 
$
64,336

 
111,011,816

 
$
1,110

 
$
7,286,954

 
$

 
$
(10,435
)
 
$
541,963

 
$
7,883,928

 
$
10,786

Net income
 

 

 

 

 
207,926

 

 
15,636

 
223,562

 
435

Total other comprehensive loss
 

 

 

 

 

 
(699
)
 

 
(699
)
 

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(24,175
)
 
(24,175
)
 
(415
)
Contributions from and sales of noncontrolling interests
 

 

 

 
202,246

 

 

 
238,031

 
440,277

 
188

Issuance of common stock
 

 
602,484

 
6

 
85,388

 

 

 

 
85,394

 

Issuance pursuant to stock plan
 

 
523,691

 
5

 
34,180

 

 

 

 
34,185

 

Taxes paid related to net settlement of equity awards
 

 
(152,423
)
 
(1
)
 
(4,085
)
 

 

 

 
(4,086
)
 

Repurchases of 7.00% Series D preferred stock
 
(6,875
)
 

 

 
215

 
(2,580
)
 

 

 
(9,240
)
 

Dividends declared on common stock ($1.97 per share)
 

 

 

 

 
(223,115
)
 

 

 
(223,115
)
 

Dividends declared on preferred stock ($0.875 per share)
 

 

 

 

 
(2,031
)
 

 

 
(2,031
)
 

Cumulative effect of adjustment upon adoption of new lease accounting standard on January 1, 2019
 

 

 

 

 
(3,525
)
 

 

 
(3,525
)
 

Reclassification of distributions in excess of earnings
 

 

 

 
(23,325
)
 
23,325

 

 

 

 

Balance as of June 30, 2019
 
$
57,461

 
111,985,568

 
$
1,120

 
$
7,581,573

 
$

 
$
(11,134
)
 
$
771,455

 
$
8,400,475

 
$
10,994




The accompanying notes are an integral part of these consolidated financial statements.

6






Alexandria Real Estate Equities, Inc.
Consolidated Statement of Changes in Stockholders’ Equity and Noncontrolling Interests
(Dollars in thousands)
(Unaudited)

 
 
Alexandria Real Estate Equities, Inc.’s Stockholders’ Equity
 
 
 
 
 
 
 
 
7.00% Series D
Cumulative
Convertible
Preferred Stock
 
Number of
Common
Shares
 
Common
Stock
 
Additional
Paid-In Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income
 
Noncontrolling
Interests
 
Total
Equity
 
Redeemable
Noncontrolling
Interests
Balance as of December 31, 2017
 
$
74,386

 
99,783,686

 
$
998

 
$
5,824,258

 
$

 
$
50,024

 
$
521,994

 
$
6,471,660

 
$
11,509

Net income
 

 

 

 

 
190,360

 

 
11,280

 
201,640

 
425

Total other comprehensive loss
 

 

 

 

 

 
(2,738
)
 

 
(2,738
)
 

Reclassification of cumulative net unrealized gains on non-real estate investments upon adoption of new financial instruments standard on January 1, 2018
 

 

 

 

 
140,521

 
(49,771
)
 

 
90,750

 

Redemption of noncontrolling interests
 

 

 

 

 

 

 

 

 
(1,397
)
Distributions to noncontrolling interests
 

 

 

 

 

 

 
(18,018
)
 
(18,018
)
 
(426
)
Contributions from noncontrolling interests
 

 

 

 
257

 

 

 
13,557

 
13,814

 
750

Issuance of common stock
 

 
3,299,637

 
33

 
400,174

 

 

 

 
400,207

 

Issuance pursuant to stock plan
 

 
262,794

 
2

 
24,132

 

 

 

 
24,134

 

Dividends declared on common stock ($1.83 per share)
 

 

 

 

 
(189,571
)
 

 

 
(189,571
)
 

Dividends declared on preferred stock ($0.875 per share)
 

 

 

 

 
(2,604
)
 

 

 
(2,604
)
 

Reclassification of distributions in excess of earnings
 

 

 

 
138,706

 
(138,706
)
 

 

 

 

Balance as of June 30, 2018
 
$
74,386

 
103,346,117

 
$
1,033

 
$
6,387,527

 
$

 
$
(2,485
)
 
$
528,813

 
$
6,989,274

 
$
10,861



The accompanying notes are an integral part of these consolidated financial statements.

7



Alexandria Real Estate Equities, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 
Six Months Ended June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net income
$
223,997

 
$
202,065

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
268,524

 
233,071

Impairment of real estate

 
6,311

Loss on early extinguishment of debt
7,361

 

Equity in earnings of unconsolidated real estate joint ventures
(2,408
)
 
(2,234
)
Distributions of earnings from unconsolidated real estate joint ventures
1,679

 
287

Amortization of loan fees
4,613

 
5,136

Amortization of debt premiums
(1,583
)
 
(1,181
)
Amortization of acquired below-market leases
(15,202
)
 
(11,368
)
Deferred rent
(52,441
)
 
(55,890
)
Stock compensation expense
22,466

 
15,223

Investment income
(105,056
)
 
(98,091
)
Changes in operating assets and liabilities:
 
 
 
Tenant receivables
573

 
1,552

Deferred leasing costs
(23,471
)
 
(29,705
)
Other assets
560

 
(15,055
)
Accounts payable, accrued expenses, and tenant security deposits
(21,272
)
 
8,120

Net cash provided by operating activities