Business context and reporting period
Alexandria Real Estate Equities, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2011. The REIT owns, operates, redevelops, and develops life-science laboratory properties. At quarter-end, it reported 168 properties totaling 13.7 million rentable square feet; operating properties were 94% occupied.
Financial performance and key metrics
Unless otherwise noted, amounts are in millions of dollars. Comparisons are with the three months ended March 31, 2010.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $140.3 | $116.5 | +20% |
| Income from continuing operations | $32.7 | $28.2 | +16% |
| Net income | $32.6 | $28.8 | +13% |
| Net income attributable to common stockholders | $24.4 | $20.5 | +19% |
| Diluted EPS | $0.44 | $0.47 | Down $0.03 |
| Net cash from operating activities | $45.8 | $51.3 | Down $5.5 |
| Net cash used in investing activities | $(88.5) | $(80.8) | Greater use of $7.7 |
| Net cash from financing activities | $29.7 | $29.9 | Nearly unchanged |
Rental revenue rose 20%, primarily from properties acquired or delivered after Q1 2010. Same-property revenue increased 1%, while same-property net operating income (NOI), a non-GAAP measure, rose 0.3% to $72.0 million. Total NOI increased 17% to $99.2 million. The filing does not present a conventional operating-margin measure. FFO attributable to common stockholders, a non-GAAP REIT measure, was $60.6 million, compared with $54.0 million on a diluted, assumed-conversion basis.
Interest expense was $17.8 million, up 2%; depreciation and amortization increased 24% to $36.7 million. The company recorded a $2.5 million loss on early extinguishment of debt from repurchasing $96.1 million principal amount of 3.70% convertible notes for $98.6 million. Common dividends declared were $0.45 per share, versus $0.35 a year earlier.
Financial position, debt, and liquidity
At March 31, 2011, total assets were $5.98 billion and total liabilities were $2.98 billion. Debt carrying amounts comprised $787.9 million of secured notes, $1.679 billion of unsecured credit-facility borrowings and term loans, and $202.5 million of convertible notes. Cash and cash equivalents were $78.2 million; restricted cash was $30.5 million. The filing reports $821 million available under the $1.5 billion unsecured line of credit.
During the quarter, the company amended its unsecured credit facility, increasing total commitments to $2.25 billion and extending the line’s maturity to January 2015, subject to extension options. It also closed a $250 million unsecured term loan due February 2014, with an extension option. The weighted average rate on the existing unsecured line and $750 million term loan, including swaps, was approximately 3.4%. About 54% of debt was fixed-rate or hedged; the remaining 46% was unhedged variable-rate debt. The company reported compliance with debt covenants: leverage ratio 37% against a 60% limit, unsecured leverage 40% against 60%, fixed-charge coverage 2.2 against a 1.5 minimum, unsecured debt yield 13.5%, and secured debt ratio 11% against a 40% limit.
Operating cash flow declined mainly due to timing of payments in accounts payable and accrued liabilities. The company spent $76.3 million on property additions and repurchased convertible notes; cash decreased by $13.0 million during the quarter.
Material changes, outlook, and risks
- Leasing: 44 leases covered approximately 552,000 square feet. New and renewal rents averaged 1.6% above expiring rents on a GAAP basis, with average concessions of about one month.
- Development: As of quarter-end, estimated costs to complete active redevelopment and development were approximately $118 million and $82 million, respectively. Management estimated $277 million of remaining-2011 capital expenditures for listed projects and other items; this excluded the April acquisition of 499 Illinois Street.
- Acquisitions: In April 2011, the company acquired 409 and 499 Illinois Street in San Francisco for approximately $293 million. One tower was 97% leased through November 2023; the other was vacant and in shell condition. Management also anticipated approximately $100 million of additional acquisitions in 2011.
- Funding and strategy: Management intends to reduce leverage over time, preserve substantial unused line capacity, continue selective acquisitions and project spending, and may refinance some or all remaining 3.70% convertible notes and part of the $750 million term loan. Expected remaining-2011 uses also included $98 million of debt principal, $101 million of interest, $21 million of preferred dividends, and approximately $75 million of common dividends, assuming the $0.45 quarterly rate and share count remain constant.
- Risks: Management cited capital-market access, refinancing and covenant compliance, interest-rate exposure, construction costs and completion, leasing and occupancy, tenant credit and renewals, economic and life-sciences industry conditions, and foreign currency exposure. A 1% rise in variable borrowing rates was estimated to reduce annual future earnings by approximately $7.1 million after hedges. No impairment charges were recorded in Q1.
Important facts for investors to verify
- Whether lease-up and completion of redevelopment and development projects meet management’s plans and cost estimates.
- Funding and expected returns for the $293 million Illinois Street acquisition and anticipated additional acquisitions.
- Convertible-note repurchases, debt refinancing needs, covenant headroom, and availability under the credit line.
- Whether operating cash flow can support dividends and substantial planned capital spending.
- Tenant retention and rollover exposure: 1.6 million square feet of leases were scheduled to expire in 2011, though about 586,000 square feet had been leased as of or after March 31 and about 392,000 square feet was targeted for redevelopment.