Alexandria Real Estate Equities, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results. The company is a REIT focused on life-science laboratory real estate; it reported 171 properties with approximately 14.9 million rentable square feet.
Financial and operating performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $143.4m | $120.3m | $425.8m | $351.6m |
| Net operating income (NOI) | $100.8m | $87.2m | $302.2m | $257.3m |
| Income from continuing operations | $33.9m | $30.0m | $100.3m | $45.0m |
| Net income attributable to common stockholders | $24.7m | $22.2m | $75.0m | $22.5m |
| Basic and diluted EPS | $0.40 | $0.45 | $1.29 | $0.49 |
| Operating cash flow | Not presented by quarter | $185.8m | $162.5m |
- Q3 revenue rose 19%; nine-month revenue rose 21%. Growth primarily reflected acquisitions and properties delivered from development, rather than same-property rental growth.
- Same-property NOI was $71.8m in Q3, essentially flat year over year; nine-month same-property NOI was $212.1m, up 0.2%. Total NOI increased 16% in Q3 and 17% for the nine months, driven mainly by non-same properties.
- Nine-month common-stockholder EPS increased from $0.49 to $1.29, in part because the prior-year period included a $42.8m debt-extinguishment loss versus $6.5m in 2011. Q3 EPS declined despite higher net income, alongside a larger weighted-average share count.
- Operating-property occupancy was 94.6%, versus 94.0% at September 30, 2010; occupancy including redevelopment properties was 89.3%, unchanged year over year. New and renewal lease rates averaged 2.5% above expiring rents on a GAAP basis, with average concessions/free rent of 1.7 months.
- At September 30, total assets were $6.46bn and total liabilities $3.02bn. Cash and equivalents were $73.1m; restricted cash was $27.9m. Debt comprised $760.9m secured notes, $814.0m on the unsecured line, $1.0bn unsecured term loans, and $84.5m convertible notes—approximately $2.66bn in total.
- For the nine months, investing cash outflow was $601.3m, including $302.6m of property additions and $305.0m of property purchases. Financing provided $397.3m; cash decreased $18.2m to $73.1m.
Material changes, outlook, and risks
- Growth in the portfolio included the approximately $293m acquisition of 409 and 499 Illinois Street in San Francisco, and additional acquisitions and completed projects. The May follow-on stock offering raised net proceeds of $451.5m.
- The company repurchased approximately $217.1m principal amount of 3.70% convertible notes for $221.4m cash during the nine months. It also increased its unsecured line commitment from $1.15bn to $1.5bn and increased its 2016 term loan to $750m, using proceeds in part to repay the 2012 term loan.
- Management stated its objectives include reducing leverage over several years, reducing unsecured convertible debt, managing maturities, and maintaining liquidity. It generally intends not to begin new above-ground development without significant pre-leasing. No formal earnings or EPS guidance is provided.
- Management estimated capital needs of $253.965m for Q4 2011 and $865.273m for 2012, including construction, dividends, and debt repayments. Estimated construction and related capital spending was $119m for Q4 2011 and $373m for 2012. The funding plan included estimated operating cash flow, asset sales, available credit, and a targeted $400m–$500m new unsecured term loan; bond issuance was dependent on market conditions. These are estimates, not assurances.
- The $250m 2012 unsecured term loan matures in October 2012; approximately $84.8m principal of convertible notes is also due in 2012. A $76m secured loan maturity was extended into 2012, with a further 3–5 year extension under discussion. October 2011 transactions included repaying two secured loans totaling $32.7m and selling a held-for-sale property for approximately $2.9m.
- About 51% of debt was unhedged variable-rate debt. Management estimated a 1% increase in rates would reduce annual future earnings by approximately $7.3m after hedges. Derivative fair-value liabilities were $36.7m; approximately $20.4m was expected to be reclassified to interest expense over the next 12 months.
- Unusual items included a $1.0m impairment charge on a vacant Boston-area property classified as held for sale, and $6.5m of debt-extinguishment losses. Broader risks include refinancing and covenant compliance, interest-rate and credit-market conditions, development completion and leasing, tenant defaults or vacancies, economic weakness, and foreign-currency exposure. The company reported compliance with debt covenants at September 30, 2011.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the planned $400m–$500m term loan and other funding sources are completed in time to address 2012 maturities and construction commitments.
- Actual asset-sale proceeds, development spending, project completion timing, and leasing/occupancy of redevelopment and development space.
- Debt balances, available revolver capacity, covenant headroom, and exposure to variable interest rates as financing plans progress.
- Whether same-property NOI and lease renewals sustain growth, and how concessions and tenant credit affect cash rent collections.
- How much reported earnings improvement reflects recurring operations versus prior-year debt-extinguishment losses and other nonrecurring items.