Business context and reporting period
Alexandria Real Estate Equities, Inc. is a REIT focused on owning, operating, developing, and redeveloping life-science real estate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. At quarter-end, the company had 177 properties totaling approximately 16.6 million rentable square feet; operating properties were 93.0% leased.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $145.5 million | $138.1 million | $431.9 million | $409.0 million |
| Net income | $18.3 million | $33.0 million | $76.7 million | $99.9 million |
| Net income attributable to common stockholders | $10.6 million | $24.7 million | $46.6 million | $75.0 million |
| Diluted EPS | $0.17 | $0.40 | $0.75 | $1.29 |
| Net operating income (NOI) | $100.8 million | $97.2 million | $304.0 million | $291.0 million |
- For the first nine months, cash from operating activities was $227.5 million, up from $180.0 million; investing activities used $408.4 million and financing activities provided $196.2 million. Cash and cash equivalents ended the period at $94.9 million.
- Total assets were $7.0 billion and total equity was $3.5 billion. Consolidated debt was $3.03 billion, with a weighted-average interest rate of 3.93% and average remaining term of 4.9 years. Approximately 85% of debt was fixed-rate or hedged; 15% was unhedged variable-rate debt.
- Liquidity was approximately $1.2 billion, including $1.1 billion available under the $1.5 billion unsecured credit line. Net debt to adjusted EBITDA was 7.6x, versus 6.8x a year earlier; net debt to gross assets was 38%, versus 36%. Fixed-charge coverage was 2.5x, versus 2.7x.
- The company reported a 69% operating margin in its highlights. Adjusted EBITDA margin was 66% for Q3 and 67% for the nine-month period, compared with 68% and 69%, respectively, in 2011.
Material changes versus the prior comparable periods
Revenue grew 5% in Q3 and 6% for the nine-month period, principally reflecting properties acquired or delivered from development and redevelopment. NOI increased 4% in both periods, but same-property GAAP NOI declined 0.9% in Q3 and 0.8% for nine months; same-property cash NOI increased 4.3% and 2.6%, respectively. Common-stockholder earnings and EPS fell, with Q3 results including a $9.8 million impairment charge on four properties held for sale. Higher depreciation and amortization also weighed on income. Nine-month other income rose by $10.5 million, including a $5.8 million realized gain on an equity investment.
Portfolio occupancy declined to 93.0% from 94.6% a year earlier, while operating square footage increased. Rental rates on Q3 renewed or re-leased space were 2.9% lower on a cash basis but 7.6% higher on a GAAP basis; the nine-month changes were down 1.9% cash and up 5.9% GAAP.
Outlook, risks, contingencies, and unusual items
- 2012 guidance: diluted EPS of $1.16–$1.26; diluted FFO of $4.32–$4.36; and adjusted diluted FFO of $4.37–$4.41. Assumptions include 3%–4% cash same-property NOI growth and slightly negative to positive GAAP same-property NOI growth.
- Q4 projections: continuing-operations NOI of $107.5–$109.5 million; net income attributable to common stockholders of $26.9–$30.9 million; and diluted FFO per share of $1.15–$1.17. These are management estimates dependent on leasing, project delivery, capital-market conditions, and other assumptions.
- Management expected $151–$156 million in 2012 asset and land sales, including pending transactions; some projected dispositions were not completed at the filing date. The company also expected to begin vertical construction of the 419,806-square-foot New York West Tower in Q4.
- Development and redevelopment activity entails execution, leasing, cost, and timing risks. The company reported $359.4 million of remaining construction costs under contract and approximately $55.5 million of investment commitments. Project completion will also shift some capitalized costs to expense.
- Interest-rate exposure, refinancing and covenant compliance, tenant defaults or non-renewals, economic and life-science industry conditions, foreign currency, and changes to LIBOR are identified risks. A 1% rate increase was estimated to reduce future earnings by $3.5 million after hedges.
- Other notable items: $2.2 million of nine-month debt-extinguishment losses and a $6.0 million preferred-stock redemption charge. On October 29, 2012, water damage affected the underground parking area at a New York property; initial assessment found no structural damage, repair costs were not yet estimated, and insurance claims had been submitted.
- The company stated its disclosure controls were effective and reported no material change in internal control over financial reporting during Q3.
Important facts for investors to verify
- Whether projected asset sales close on expected terms and timing, and whether additional impairment or gains result.
- Leasing, occupancy, and same-property NOI trends, including cash-versus-GAAP rent changes and tenant concessions.
- Development and redevelopment budgets, completion and stabilization dates, pre-leasing, and expected yields.
- Debt maturities, available revolver capacity, leverage and coverage ratios, and exposure under interest-rate swaps and LIBOR-linked borrowing.
- Final repair costs and insurance recoveries related to the October New York water damage.
- Progress against full-year EPS, FFO, and capital-source/use projections; these are forward-looking estimates, not guarantees.