Alexandria Real Estate Equities, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. The company is a REIT focused on life-science laboratory real estate. Unless stated otherwise, dollar amounts below are in millions.
Business context and operating portfolio
- At quarter-end, the portfolio included 174 properties and approximately 15.5 million rentable square feet, including 13.6 million square feet in operating properties.
- Operating properties were 94.2% leased, unchanged from March 31, 2011; operating and redevelopment properties together were 87.9% occupied, versus 88.6% a year earlier.
- Approximately 95% of leases were triple net. The largest tenant represented 6.4% of annualized base rent; the top 20 tenants represented 44.7%.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Total revenue | $145.0 | $139.9; up 4% |
| Income from continuing operations | $30.9 | $32.5; down 5% |
| Net income | $32.8 | $32.6 |
| Common-stockholder net income | $18.4; $0.30 per diluted share | $24.4; $0.44 per diluted share |
| Net operating income (NOI, non-GAAP) | $101.6; 70% operating margin as reported by management | $98.9; up 3% |
| Same-property NOI | $81.5 | $82.1; down 1% |
| Cash from operating activities | $49.7 | $44.5 |
| Cash used in investing activities | $(124.2) | $(86.3) |
| Cash from financing activities | $71.4 | $29.7 |
| Cash and cash equivalents at quarter-end | $77.4 | $78.5 at December 31, 2011 |
Rental revenue rose 1% and tenant recoveries rose 5%. Reported common earnings included a $6.0 million preferred-stock redemption charge; Q1 2012 also included a $1.9 million land-sale gain. Depreciation and amortization increased 19% to $43.4 million. The company reported FFO of $59.7 million, down from $60.6 million, and AFFO of $62.5 million, up from $58.8 million; both are non-GAAP measures and may not be comparable with other REITs.
Debt, liquidity, and capital
- Total debt was approximately $2.79 billion at March 31, 2012, compared with approximately $2.78 billion at December 31, 2011. The quarter-end balance included $721.7 million secured notes, $549.5 million unsecured senior notes, $167.0 million on the revolving credit line, $1.35 billion in bank term loans, and $1.2 million in convertible notes.
- Management reported 95% of debt as fixed-rate or hedged and 5% as unhedged floating-rate debt. Weighted-average interest rate was 4.28%; weighted-average remaining term was 5.3 years.
- Cash plus available capacity under the $1.5 billion credit line was approximately $1.4 billion; about $1.3 billion was available to borrow at quarter-end. Net debt to trailing Adjusted EBITDA was 7.1x and net debt to gross assets was 36% (non-GAAP measures).
- In February, the company issued $550 million of 4.60% senior notes due 2022, using proceeds to repay a $250 million term loan and reduce revolving borrowings. In March it issued $124.9 million net proceeds of 6.45% Series E preferred stock. Series C preferred stock, carrying a higher 8.375% rate, was redeemed on April 13, 2012.
- Capital investment was substantial: construction spending was $130.3 million for the quarter, and additions to properties were $120.6 million in investing cash flows. Dividends paid were $37.5 million.
Material changes and management outlook
- Portfolio growth and delivered/acquired properties supported revenue and NOI growth, while same-property NOI declined 1%. Leasing activity included 63 leases covering approximately 912,000 square feet. Renewed or re-leased rents were 3.3% higher on a GAAP basis but 2.8% lower on a cash basis; excluding one lease, they were up 7.6% and 1.1%, respectively.
- Management projected Q4 2012 quarterly NOI of $111–$113 million. Full-year 2012 assumptions included same-property NOI growth of 3%–5% on a cash basis and 0%–2% on a GAAP basis, net interest expense of $73–$79 million, and G&A expense growth of 12%–14% versus 2011.
- Management forecast 2012 dispositions totaling $112 million, including $31 million from the Longwood Medical Area land transaction and $16 million of properties already held for sale. Projected development, redevelopment, and construction uses were $612 million for 2012. These plans depend on leasing, project delivery, asset sales, and capital-market conditions.
- In April, the revolving credit facility was amended: its maturity was extended to April 2017, subject to extension options; the LIBOR margin fell from 2.40% to 1.20%; and an accordion option permits up to $500 million of additional capacity. The amendment resulted in an approximately $1.6 million debt-extinguishment charge.
Risks, contingencies, and unusual items
- Key risks include changes in financing availability and interest rates, covenant compliance, refinancing needs, development cost or schedule overruns, leasing and occupancy weakness, tenant defaults or non-renewals, and adverse conditions affecting life-science tenants or property markets.
- The company had $249.5 million of remaining construction costs under contract and approximately $57.9 million of investment commitments over six years. Ground-lease obligations totaled $683.4 million.
- Interest-rate swaps had a $31.3 million liability at quarter-end. The company expected approximately $19.8 million to be reclassified from accumulated other comprehensive loss to interest expense during the next 12 months. A 1 percentage-point increase in rates was estimated to reduce annual future earnings by approximately $1.4 million after swaps.
- The Longwood land interest was transferred into an unconsolidated joint venture; the company recognized a $1.9 million gain and received a $22.3 million distribution. The project was 37% pre-leased, with construction expected to begin in Q2 2012.
- Management stated that debt covenants were met and disclosure controls were effective as of March 31, 2012. The filing cautions that interim results may not indicate full-year performance.
Important facts for investors to verify
- Whether leasing, occupancy, and cash rent trends support the projected NOI growth, particularly as leases expire and concessions are granted.
- Development and redevelopment completion dates, leasing levels, remaining capital costs, and the extent to which project spending is funded without additional debt or equity.
- Execution of the $112 million disposition plan and other projected capital sources, and the effects of the April credit amendments on borrowing costs and liquidity.
- Debt maturities, covenant headroom, swap exposures, and the ability to sustain common and preferred dividends while funding investment needs.
- Concentration and credit quality of life-science tenants, and the potential impact of tenant-sector conditions on renewals, collections, and property values.