Business context and reporting period
Alexandria Real Estate Equities, Inc. is a REIT focused on life-science laboratory properties and related development. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. At quarter-end, the company reported 161 properties totaling approximately 12.7 million rentable square feet and 94.0% occupancy of operating properties, excluding space undergoing redevelopment.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $117.0m | $121.0m | $233.5m | $252.6m |
| Net income (loss) | ($12.2m) | $44.1m | $16.6m | $85.4m |
| Net income (loss) attributable to common stockholders | ($20.4m) | $32.3m | $0.2m | $65.1m |
| Basic earnings (loss) per share | ($0.45) | $0.83 | $0.00 | $1.82 |
| Operating cash flow | Not separately presented | Not separately presented | $121.3m | $112.0m |
| Capital additions to properties | Not separately presented | Not separately presented | $219.2m | $241.6m |
At June 30, 2010, total assets were $5.565bn, cash and cash equivalents $73.3m, restricted cash $37.7m, and total liabilities $3.008bn. Debt carrying amounts totaled approximately $2.684bn: $859.8m secured notes, $1.446bn unsecured line and term borrowings, and $378.6m convertible notes. Unsecured facilities had a weighted-average rate of approximately 3.27%, including hedges. The company reported compliance with its debt covenants.
Quarterly rental revenue was $89.5m and tenant recoveries $26.6m. Q2 expenses were $87.7m, including $18.8m interest and $30.3m depreciation and amortization. Six-month FFO attributable to common stockholders, a non-GAAP measure, was $59.7m versus $126.5m; Q2 FFO was $9.8m versus $65.2m. Common dividends declared were $0.35 per share for the quarter and $0.70 per share for the six months.
Material changes versus prior comparable periods
- Q2 common-stockholder results shifted to a $20.4m loss from $32.3m income, primarily reflecting a $41.5m loss on extinguishment of debt in the 8.00% convertible-note exchange. Q2 2009 included an $11.3m gain from repurchasing 3.70% notes.
- Six-month revenue declined 7.6%; however, 2009 rental revenue included $18.5m from a lease modification. Excluding that item, management said rental revenue increased $5.4m, or 3%, in 2010.
- Other income fell to $2.0m for the first half from $9.7m, as the 2009 period included a $7.2m receipt related to real estate acquired in 2007.
- Six-month interest expense declined to $36.3m from $41.6m, reflecting lower rates and reduced total indebtedness, partly offset by interest on the 8.00% notes.
- The June exchange retired approximately $232.7m principal of 8.00% notes for 5.62m common shares and approximately $41.9m cash. Common shares outstanding increased to 49.63m at June 30 from 43.85m at year-end 2009.
- Debt mix changed: secured notes declined from $937.0m at year-end to $859.8m, while unsecured line and term borrowings rose from $1.226bn to $1.446bn. Total liabilities decreased to $3.008bn from $3.051bn.
Outlook, commentary, risks and unusual items
Management described core operations as steady and emphasized completing existing redevelopment (approximately 552,000 square feet) and active ground-up development (approximately 865,000 square feet), while being prudent about adding projects. Estimated remaining costs were approximately $70 per square foot for redevelopment and $93 per square foot for active U.S. development. The company gave no specific earnings or revenue guidance.
Management intends to reduce debt as a share of capital over several years and expects to fund construction and debt repayment through operating cash flow, property sales, joint ventures, and new debt or equity as appropriate. The $1.15bn unsecured line matured in October 2010, with a company option to extend to October 2011; the $750m term loan matured in October 2011, with an option to extend to October 2012. The filing does not state that these extensions had been exercised. In July 2010, after quarter-end, the company repurchased another $7.1m principal of 8.00% notes for approximately $12.8m and expected a further extinguishment loss of about $1.3m.
Significant risks include refinancing and capital-market access, covenant compliance, interest-rate movements, construction costs and leasing of development projects, occupancy and tenant credit, and exposure to the life-science sector and foreign currencies. Approximately 67% of debt was fixed-rate or hedged; management estimated a 1% rate increase would reduce annual future earnings by about $4.2m after hedges. Approximately $23.1m of hedge losses was expected to be reclassified to interest expense over the next 12 months. Contracted construction and improvement costs were approximately $126.1m, in addition to approximately $51.8m of investment commitments over six years. The company reported no impairment charges in the periods presented. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Track whether the October 2010 credit-line maturity was extended or refinanced, and review subsequent debt maturities and covenant headroom.
- Assess the cash, dilution, and accounting effects of the convertible-note exchange and subsequent July repurchase; distinguish the $41.5m nonrecurring extinguishment loss from recurring operations.
- Monitor occupancy, lease expirations, tenant credit, and leasing progress for the active development and redevelopment pipeline, including project costs and pre-leasing.
- Reconcile reported revenue and earnings against the 2009 lease-modification and one-time receipt effects; review FFO alongside GAAP results and operating cash flow.
- Confirm liquidity available for dividends, construction commitments, and debt repayment, noting that restricted cash is not necessarily available for general purposes.