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Alexandria: Earnings Margin to Remain at an Elevated Level

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Cost rising modestly

Alexandria Real Estate Equities (ARE) reported total operating expenses of $496.8 million in fiscal 2014, up by 16.4% over 2013. This came on the back of a 5% rise in total costs in 2013. Property rental expenses comprised 44.1% of the total costs, followed by depreciation and amortization expenses at 45.1% and G&A (general and administrative) expenses at 10.8%.

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Property operating expenses

Property rental expenses increased by 15.9% to $219.2 million in 2014 over the previous year. The rise in property rental expenses was related to higher rental operating expenses from non-same properties, due to properties acquired, developed, and redeveloped during the year. The increase in occupancy, higher utility charges, and rising repair and maintenance expenses also led to the rise in rental expenses.

The rise in G&A (general and administrative) expenses by 10.3% to $53.5 million in 2014 was due to property acquisitions and dispositions in the year. Expanding operations in multiple markets also led to the higher G&A expenses.

Depreciation and amortization expenses increased by 18.5% to $224.1 million in 2014 over 2013. The rise in depreciation expenses was mainly due to the increase in operating properties in 2013 and 2014.

Earnings margin

Alexandria (ARE) recorded an EBITDA (earnings before interest, tax, depreciation, and amortization) margin of 62.5% in 2014, compared with 62.6% in 2013. This was the lowest EBITDA margin recorded by the company in the last five years. The company’s EBITDA margin peaked at 65.8% in 2010. Despite the decline in its EBITDA margin in 2014, the company has consistently reported higher margins over the last five years. The company’s EBITDA margin has been higher due to stable expenses and rising revenues. The company is likely to maintain the higher EBITDA margin in the years ahead, buoyed by higher occupancy, rising rental rates, better asset quality, and higher demand from science and technology companies.

The EBITDA margin recorded by the company is much higher than the industry average of 52.3%. In its peer group, Kilroy Realty (KRC) reported the highest EBITDA margin, with 62.7% in 2014, followed by SL Green Realty (SLG) with 60.2% and Boston Properties (BXP) with 59.7%. The SPDR Dow Jones REIT ETF (RWR) invests ~1.1% of its portfolio in Alexandria. In the next article, we’ll discuss Alexandria’s funds from operations and net operating income.

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