Business context and reporting period
Alexandria Real Estate Equities, Inc. is a REIT focused on life-science real estate. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. At quarter-end, the company reported 164 properties totaling approximately 12.9 million rentable square feet. Operating properties were 94.0% leased, excluding ground-up development and redevelopment space; including redevelopment space, occupancy was 89.3%.
Financial results and key metrics
Amounts below are in millions, except per-share data, occupancy, and where indicated.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $121.6 | $115.8 | $355.1 | $368.4 |
| Net income | $30.5 | $26.4 | $47.0 | $111.7 |
| Net income attributable to common stockholders | $22.2 | $18.2 | $22.5 | $83.3 |
| Diluted EPS | $0.45 | $0.47 | $0.49 | $2.26 |
| FFO attributable to common stockholders, diluted | $53.9 | $50.6 | $121.3 | $180.4 |
For the nine months, rental revenue was $268.8 million and tenant recoveries were $82.8 million. Rental operations expense was $95.7 million, general and administrative expense $25.8 million, interest expense $52.5 million, and depreciation and amortization $92.1 million. The filing does not present a single operating-margin figure.
Net cash provided by operating activities was $162.0 million for the nine months, compared with $171.2 million in 2009. Investing activities used $342.6 million and financing activities provided $220.8 million. Cash and cash equivalents were $110.8 million at September 30, versus $70.6 million at December 31, 2009; restricted cash was $35.3 million.
Total assets were $5.75 billion and total equity was $2.89 billion at quarter-end. Secured notes were $841.3 million, unsecured line and term-loan borrowings totaled $1.304 billion, and convertible notes had a carrying amount of $374.1 million. These debt balances total approximately $2.52 billion, down from approximately $2.75 billion at year-end 2009. The $1.9 billion unsecured facilities had $1.304 billion outstanding. The company reported compliance with its debt covenants. Its hedge agreements had a $628.5 million notional amount and a $54.1 million fair-value liability.
Material changes versus prior comparable periods
- Third-quarter revenue increased 5% year over year; common-stockholder net income increased, while diluted EPS was $0.45 versus $0.47, with the share count substantially higher following equity issuance and note exchange.
- Nine-month revenue declined 4%, but 2009 included $18.5 million of additional rent from a lease modification. Excluding that item, 2010 rental revenue increased 3%.
- Nine-month common-stockholder net income and FFO declined materially. 2010 included $42.8 million of losses on early debt extinguishment; 2009 included an $11.3 million debt-extinguishment gain. The 2009 comparison also included $7.2 million of other income and higher discontinued-operations income.
- Interest expense declined 16% for the nine months, reflecting lower debt and borrowing rates. The company completed a $342.3 million net common-stock offering and exchanged or repurchased substantially all of its 8.00% convertible notes, issuing 5.62 million shares in the exchange.
- Under newly adopted VIE accounting, the company deconsolidated a real estate entity and reported a $35.9 million equity-method investment at September 30.
Outlook, management commentary, risks, and unusual items
Management described core operations as steady and gave no quantified earnings or FFO guidance. It expects operating cash flow to support recurring needs and REIT distributions, while longer-term needs—including development, redevelopment, acquisitions, and debt repayment—may be funded through operating cash flow, asset sales, debt, joint ventures, or additional equity. Management intends to reduce debt as a proportion of capital over time, complete existing projects, and be selective about new development; future ground-up projects are expected to require significant preleasing.
At September 30, construction in progress was $1.36 billion. Estimated remaining costs were $46.2 million for active redevelopment and $61.5 million for active ground-up development. Separately, contractual construction costs were approximately $118.5 million, and investment funding commitments were approximately $49.2 million. The company expects to extend or refinance debt as appropriate; it extended its $1.15 billion credit line maturity to October 2011 and anticipated a further amendment or extension in late 2010 or early 2011. The $750 million term loan was due in October 2012, assuming an available extension.
Subsequent events: in October, the company acquired a San Diego life-science campus for approximately $128 million, funded with line-of-credit borrowings; it was leased through December 2011. In November, it sold Mission Bay land parcels for approximately $278 million, recording an approximately $60 million gain, and used proceeds to repay line-of-credit borrowings. The sales reduced Mission Bay preconstruction area by approximately 2.0 million square feet.
Key risks include refinancing and credit-market access, interest-rate changes, covenant headroom, leasing and tenant credit/default risk, development costs and completion or lease-up, and exposure to the life-science sector. The filing states a 1% interest-rate increase would reduce annual future earnings by approximately $2.1 million after hedging. Approximately 29% of debt was unhedged variable-rate debt; the company expected approximately $23.0 million of hedge losses to be reclassified to interest expense over the next 12 months. Management cautioned that a prolonged downturn or rising capital costs could affect covenant compliance. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile nine-month earnings and FFO to recurring property performance, particularly the debt-extinguishment loss and prior-period one-time income and lease items.
- Confirm the final terms and completion of the planned credit-line amendment or extension, and monitor the 2011 credit-line and 2012 term-loan maturities and covenant capacity.
- Track leasing, occupancy, tenant credit, and execution of the active development and redevelopment pipeline against disclosed costs and schedules.
- Assess the effect of the Mission Bay land sale, the reported gain, and the subsequent San Diego acquisition on debt, liquidity, and future recurring income.
- Evaluate equity dilution from the 2010 offering and convertible-note exchange, alongside the company’s dividend obligations and capital needs.