ALEXANDRIA REAL ESTATE EQUITIES, INC. quarterly report, Q2 FY2012

Alexandria Real Estate Equities, Inc. — Q2 2012 Form 10-Q

Reporting period: Three and six months ended June 30, 2012. The unaudited filing covers a REIT focused on owning, developing, redeveloping, and operating life-science real estate. Unless noted, financial amounts below are in millions of dollars.

Financial performance and position

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Total revenue	$154.1	$143.3	$298.8	$283.0
Income from continuing operations	$25.4	$34.0	$56.2	$66.3
Net income attributable to common stockholders	$17.6	$26.0	$36.0	$50.4
Diluted EPS	$0.29	$0.44	$0.58	$0.89
Net operating income (NOI; non-GAAP)	$109.6	$102.7	$211.0	$201.4

Q2 revenue rose 8%, but continuing-operations income fell 25% and common-stockholder EPS declined from $0.44 to $0.29. For the six-month period, revenue rose 6%, while continuing-operations income declined 15% and EPS declined from $0.89 to $0.58.
Q2 NOI increased 7%; six-month NOI increased 5%. Reported Q2 operating margin was 71%.
Q2 other income was $9.4 million, versus $0.9 million, primarily reflecting a $5.8 million realized gain on an equity investment, along with increased fees and interest income. The gain was a non-recurring contributor to reported results.
Q2 depreciation and amortization rose 30% to $52.3 million, mainly reflecting recently completed developments, redevelopments, acquired properties, and write-downs associated with planned redevelopments. Rental operating expenses increased 10%; general and administrative expenses increased 14%.
Same-property results were weak: Q2 same-property NOI declined slightly on a GAAP basis, while cash-basis same-property NOI increased 1.6%. For the first half, same-property NOI was nearly flat on a GAAP basis and increased 1.9% on a cash basis.
For the six months, operating cash flow was $142.6 million, up from $110.2 million; management said operating cash flow before changes in operating assets and liabilities was $140.7 million, down slightly from $142.0 million. Investing used $291.8 million, including $258.6 million of property additions. Financing provided $148.6 million. Cash and cash equivalents ended at $80.9 million, excluding $41.9 million of restricted cash.
Total debt was approximately $3.0 billion at June 30, 2012, with a weighted-average interest rate of 4.01% and remaining term of 5.1 years. About 88% was fixed-rate or hedged; 12% was unhedged variable-rate debt. Net debt to adjusted EBITDA was 7.1x, and net debt to gross assets was 38%.
Liquidity was approximately $1.2 billion, comprising about $1.1 billion available under the $1.5 billion credit line and $80.9 million of unrestricted cash. Total assets were $6.84 billion; stockholders’ equity was $3.40 billion.

Business activity and material changes

At quarter-end, the company reported 182 properties and approximately 16.9 million rentable square feet. Operating properties were 92.9% leased; operating plus redevelopment properties were 86.9% occupied. No single tenant represented more than 7% of annualized base rent, and 48% of annualized base rent came from investment-grade tenants.
In Q2, the company executed 44 leases covering approximately 959,000 square feet. On renewed or re-leased space, rental rates decreased 0.8% on a cash basis but increased 5.8% on a GAAP basis; excluding one large lease, they increased 1.1% and 6.7%, respectively.
Capital structure actions included issuing $550 million of 4.60% senior notes due 2022, amending and extending the credit line while reducing its LIBOR margin from 2.40% to 1.20%, and repaying a $250 million bank term loan. The company also retired its $84.8 million 3.70% convertible notes.
The company issued $124.9 million net of 6.45% Series E preferred stock and redeemed $129.6 million of 8.375% Series C preferred stock. The redemption generated a $6.0 million charge to common-stockholder income. An at-the-market common-stock program was established for up to $250 million; $39.9 million net was raised in June, leaving approximately $209.5 million available.
Development and redevelopment spending was significant: construction spending totaled $269.0 million in the first half. A 170,618-square-foot San Francisco Bay development was 100% pre-leased and supported by a $55 million construction loan. A Greater Boston joint-venture project was 37% pre-leased.

Guidance, outlook, and risks

For full-year 2012, management projected diluted EPS of $1.36–$1.46 and diluted FFO per share of $4.32–$4.36; adjusted diluted FFO per share was projected at $4.37–$4.41. These are management estimates, not guarantees. Adjusted FFO excludes specified items, including the realized investment gain and debt and preferred-stock charges.
Projected same-property NOI growth was 3%–5% on a cash basis and 0%–2% on a GAAP basis. Management forecast Q4 2012 NOI of $110.5–$112.5 million, compared with $103.8 million for Q2 before the $5.8 million investment gain.
Management expects development completions and leasing to support future rent and cash-flow growth, but noted that completion and stabilization timing, leasing, and project yields are uncertain. As projects are completed, interest and other costs now capitalized may instead be expensed.
The company’s stated risks include economic and credit-market weakness, difficulty obtaining or refinancing capital, covenant compliance, interest-rate exposure, tenant defaults or non-renewals, vacancies or lower rents, development and redevelopment execution, life-science industry conditions, foreign currency movements, and maintaining REIT status. It expects to reclassify approximately $17.7 million of accumulated swap losses into interest expense over the next 12 months.
Contractual obligations included approximately $371.5 million of remaining construction costs under contract, expected over one to three years, and $59.6 million of investment funding commitments over six years. The filing states that cash, operating cash flow, and available credit are expected to cover near-term needs, subject to market and operating assumptions.
Disclosure controls and procedures were assessed as effective as of June 30, 2012; the filing reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

Whether leasing, occupancy, rental-rate trends, and same-property NOI support the projected 2012 growth, particularly given the divergence between cash and GAAP measures.
How much of earnings and FFO reflects the $5.8 million investment gain and other unusual items, including debt-extinguishment and preferred-stock redemption charges.
Development and redevelopment completion dates, pre-leasing, costs to complete, stabilization yields, and the expected conversion of capitalized costs to expenses.
Debt maturities, extension-option assumptions, covenant headroom, credit-line availability, and exposure to variable rates and swap-related interest expense.
Whether projected asset sales and capital sources are realized, and whether dividends and development spending remain supported by recurring operating cash flow.

FFO, adjusted FFO, NOI, and leverage ratios are non-GAAP measures; the filing cautions that definitions may differ from those used by other REITs and that these measures should not replace GAAP results or cash flows.