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ARE > SEC Filings for ARE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for ALEXANDRIA REAL ESTATE EQUITIES INC


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Certain information and statements included in this quarterly report on Form 10-Q, including, without limitation, statements containing the words "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates," or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, the following:

† Negative worldwide economic, financial, and banking conditions, and the recent slowdown of the United States economy;

† Worldwide economic recession, lack of confidence, and/or high structural unemployment;

†          Potential defaults on national debt by certain countries;

†          Potential and further downgrades of the credit ratings of the
federal, state, and foreign governments, or their perceived creditworthiness;

†          Concerns regarding the European debt crisis and market perception
concerning the instability of the euro;

†          Failure of the United States government to agree on a debt ceiling or
deficit reduction plan;

†          Potential and further downgrades of the credit ratings of major
financial institutions, or their perceived creditworthiness;

†          Financial, banking, and credit market conditions;

†          The seizure or illiquidity of credit markets;

†          Failure to meet market expectations for our financial performance;

†          Our inability to obtain capital (debt, construction financing, and/or
equity) or refinance debt maturities;

†          Our inability to comply with financial covenants in our debt
agreements;

†          Inflation or deflation;

†          Prolonged period of stagnant growth;

†          Increased interest rates and operating costs;

†          Adverse economic or real estate developments in our markets;

†          Our failure to successfully complete and lease our existing space

held for redevelopment and new properties acquired for that purpose and any properties undergoing development;

† Significant decreases in our active development, active redevelopment, or preconstruction activities, resulting in significant increases in our interest, operating, and payroll expenses;

†          Our failure to successfully operate or lease acquired properties;

†          The financial condition of our insurance carriers;

†          General and local economic conditions;

†          Government changes to the healthcare system and its negative impact
on our client tenants;

†          Adverse developments concerning the life science industry and/or our
life science client tenants;

†          The nature and extent of future competition;

†          Lower rental rates, and/or higher vacancy rates;

†          Failure to renew or replace expiring leases;

†          Defaults on or non-renewal of leases by client tenants;

†          Availability of and our ability to attract and retain qualified
personnel;

†          Our failure to comply with laws or changes in law;

†          Compliance with environmental laws;

†          Our failure to maintain our status as a real estate investment trust
("REIT");

†          Changes in laws, regulations, and financial accounting standards;

†          Certain ownership interests outside the United States that may

subject us to different or greater risks than those associated with our domestic operations;

†          Fluctuations in foreign currency exchange rates;

†          Security breaches through cyber-attacks or cyber-intrusions that
could disrupt our information technology networks and related systems; and

†          Changes in the method of determining LIBOR rates which may adversely
affect the fair value of our financial instruments and our earnings.


Table of Contents

This list of risks and uncertainties is not exhaustive. Additional information regarding risk factors that may affect us is included under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the fiscal year ended December 31, 2011. Readers of this quarterly report on Form 10-Q should also read our Securities and Exchange Commission ("SEC") and other publicly filed documents for further discussion regarding such factors.

As used in this quarterly report on Form 10-Q, references to the "Company," "we," "our," and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The following discussion should be read in conjunction with the condensed consolidated financial statements and the accompanying notes appearing elsewhere in this quarterly report on Form 10-Q. References to "GAAP" used herein refer to United States generally accepted accounting principles.

Overview

We are a Maryland corporation formed in October 1994 that has elected to be taxed as a REIT for federal income tax purposes. We are the largest owner, preeminent REIT, and leading life science real estate company focused principally on science-driven cluster development through the ownership, operation, management, selective acquisition, development, and redevelopment of properties containing life science laboratory space. We are the leading provider of high-quality environmentally sustainable real estate, technical infrastructure, and services to the broad and diverse life science industry. Client tenants include leading multinational pharmaceutical companies, academic and medical institutions, public and private biotechnology entities, United States ("U.S.") government research agencies, medical device companies, industrial biotech companies, venture capital firms, and life science product and service companies. Our primary business objective is to maximize stakeholder value by providing our stakeholders with the greatest possible total return based on a multifaceted platform of internal and external growth. Our operating platform is based on the principle of "clustering," with assets and operations located adjacent to life science entities, driving growth and technological advances within each cluster.

As of September 30, 2012, we had 177 properties aggregating approximately 16.6 million rentable square feet, composed of approximately 14.4 million rentable square feet of operating properties, approximately 1.5 million rentable square feet undergoing active development, and approximately 0.7 million rentable square feet undergoing active redevelopment. Our operating properties were approximately 93.0% leased as of September 30, 2012. Our primary sources of revenues are rental income and tenant recoveries from leases of our properties. The comparability of financial data from period to period is affected by the timing of our property acquisition, development, and redevelopment activities.

2012 highlights

Core operating metrics

† Total revenues for the three months ended September 30, 2012, were $145.5 million, compared to total revenues for the three months ended September 30, 2011, of $138.1 million; total revenues for the nine months ended September 30, 2012, were $431.9 million, compared to total revenues for the nine months ended September 30, 2011, of $409.0 million;

† Net operating income ("NOI") for the three months ended September 30, 2012, was $100.8 million, compared to NOI for the three months ended September 30, 2011, of $97.2 million; NOI for the nine months ended September 30, 2012, was $304.0 million, compared to NOI for the nine months ended September 30, 2011, of $291.0 million;

†          Operating margins were at 69% for the three months ended September
30, 2012;

†          Cash and GAAP same property net operating income increased 4.3% and

decreased 0.9%, respectively, for the three months ended September 30, 2012;

† Cash and GAAP same property net operating income increased 2.6% and decreased 0.8%, respectively, for the nine months ended September 30, 2012;

†          48% of our annualized base rent was from investment-grade client
tenants;

†          During the three months ended September 30, 2012, we executed 47

leases for 732,000 rentable square feet, including 266,000 rentable square feet of development and redevelopment space. Rental rates decreased 2.9% and increased 7.6% on a cash and GAAP basis, respectively, on renewed/re-leased space;

† During the nine months ended September 30, 2012, we executed 146 leases for 2,603,000 rentable square feet, including 829,000 rentable square feet of development and redevelopment space. Rental rates decreased 1.9% and increased 5.9% on a cash and GAAP basis, respectively, on renewed/re-leased space; excluding one lease for 48,000 rentable square feet related to one client tenant in the Research Triangle Park market, and one lease for 71,000 rentable square feet related to one client tenant in the Suburban Washington, D.C., market, rental rates for renewed/re-leased space were, on average, 0.1% higher and 7.3% higher than rental rates for expiring leases on a cash and GAAP basis, respectively; and


Table of Contents

† The occupancy percentage for North America operating properties was 94.2%, and the occupancy percentage for North America operating and redevelopment properties was 90.0%; the occupancy percentage for all operating properties was 93.0%, including Asia properties, and the occupancy percentage for all operating and redevelopment properties was 88.3%, including Asia properties.

Value-added opportunities and external growth

† From November 2011 to September 2012, we completed the redevelopment of 10300 Campus Point Drive, located in the San Diego market, a 96% leased project with 279,138 rentable square feet, including the completion of 189,562 rentable square feet in September 2012

† In September 2012, we completed the development of 4755 Nexus Center Drive, located in the San Diego market, a 100% leased project with 45,255 rentable square feet;

† In June 2012, we completed the redevelopment of 3530/3550 John Hopkins Court, located in the San Diego market, a 100% leased project with 98,320 rentable square feet;

† In April 2012, we completed a development located in the Canada market, a 100% leased project with 26,426 rentable square feet;

† In April 2012, we commenced the unconsolidated joint venture development of 360 Longwood Avenue, located in the Greater Boston market, a 37% pre-leased project with 414,000 rentable square feet; and

† In January 2012, we commenced the development of 259 East Grand Avenue, located in the San Francisco Bay market, a 100% pre-leased building with 170,618 rentable square feet.

Significant balance sheet management milestones

† We have completed $75.1 million of asset sales year to date with an additional $34.0 million of land sales forecasted in fourth quarter 2012 for a total of $109.1 million; and an additional $84.5 million sales of income-producing assets in process;

† We established an "at the market" common stock offering program under which we may sell up to $250.0 million of our common stock; we raised $98.4 million in net proceeds from sales under this program for the nine months ended September 30, 2012, including $58.5 million in net proceeds from sales under this program for the three months ended September 30, 2012;

† In June 2012, we closed a secured construction loan with aggregate commitments of $55.0 million for a development project at 259 East Grand Avenue located in the San Francisco Bay market;

† In April 2012, we amended our $1.5 billion unsecured senior line of credit to reduce its interest rate and extend its maturity date to April 2017, assuming we exercise our sole right to extend the maturity date twice;

† In April 2012, we redeemed all $129.6 million of our outstanding 8.375% series C preferred stock;

† In March 2012, we completed a 6.45% series E preferred stock offering with net proceeds of $124.9 million;

† In February 2012, we completed our 4.60% unsecured senior notes offering with net proceeds of $544.6 million; net proceeds from the offering were used to repay certain outstanding variable rate bank debt;

† In February 2012, we repaid all $250.0 million of our 2012 unsecured senior bank term loan; and

† In January and April 2012, we retired all $84.8 million of our 3.70% unsecured senior convertible notes.

Events subsequent to quarter end

† In the fourth quarter of 2012, we expect to commence vertical construction of the ground-up development of 430 East 29th Street, the West Tower of the Alexandria Center™ for Life Science - New York City, a project with 419,806 rentable square feet located in the Greater NYC market.


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Projected results

Based on our current view of existing market conditions and certain current assumptions, we expect that our earnings per share attributable to Alexandria Real Estate Equities, Inc.'s common stockholders - diluted and funds from operations ("FFO") per share attributable to Alexandria Real Estate Equities, Inc.'s common stockholders - diluted for the year ended December 31, 2012, will be as set forth in the table below. The table below provides a reconciliation of FFO per share attributable to Alexandria Real Estate Equities, Inc.'s common stockholders - diluted, as adjusted, a non-GAAP measure, to earnings per share, the most directly comparable GAAP measure.

                                                                  Year Ended
Guidance for the Year Ended December 31, 2012                 December 31, 2012
Earnings per share attributable to Alexandria Real Estate       $1.16 - $1.26
Equities, Inc.'s common stockholders - diluted
Depreciation and amortization                                   $3.00 - $3.06
Gain on sales of property                                          $(0.06)
Impairment of real estate                                           $0.16
FFO per share attributable to Alexandria Real Estate            $4.32 - $4.36
Equities, Inc.'s common stockholders - diluted
Write-off of unamortized loan fees upon early retirement of         $0.01
the 2012 Unsecured Senior Bank Term Loan
Write-off of unamortized loan fees upon modification of             $0.03
unsecured senior line of credit
Preferred stock redemption charge                                   $0.10
Realized gain on equity investment primarily related to one
non-tenant life science entity                                     $(0.09)
FFO per share attributable to Alexandria Real Estate
Equities, Inc.'s common stockholders - diluted, as adjusted     $4.37 - $4.41

Key net operating income projection assumptions:
Same property net operating income growth - cash basis             3% to 4%
                                                                   Slightly
Same property net operating income growth - GAAP basis        negative/positive
Rental rate steps on lease renewals and re-leasing of space        Slightly
- cash basis                                                  negative/positive
Rental rate steps on lease renewals and re-leasing of space
- GAAP basis                                                       Up to 5%
Straight-line rents                                            $6.5 million/qtr
Amortization of above and below market leases                  $0.8 million/qtr
Realized gain on equity investment primarily related to one      $5.8 million
non-tenant life science entity


Table of Contents

Net operating income, net income, and FFO for the three months ended December 31, 2012

As of September 30, 2012, we had approximately $304.6 million and $277.5 million of construction in progress related to our five North American development and eight North American redevelopment projects, respectively. The completion of these projects, along with recently delivered projects, certain future projects, and contributions from same properties, is expected to contribute significant increases in rental income, net operating income, and cash flows. Net operating income from continuing operations is projected to increase from $100.8 million for the three months ended September 30, 2012, to a range from $107.5 million to $109.5 million for the three months ended December 31, 2012 (after considering approximately $3.0 million in required reclassifications for discontinued operations.) Operating performance assumptions related to the completion of our North America development and redevelopment projects, including the timing of initial occupancy, stabilization dates, and Initial Stabilized Yields, are included on page 51. Certain key assumptions regarding our projections, including the impact of various development and redevelopment projects, are included in the tables below.

The completion of our development and redevelopment projects will result in increased interest expense and other direct project costs, because these project costs will no longer qualify for capitalization and these costs will be expensed as incurred. Our projections for general and administrative expenses, capitalization of interest, and interest expense, net, are included in the tables on the preceding page and below. Our projections of net operating income are subject to a number of variables and uncertainties, including those discussed under the "Forward-looking Statements" section of Part I, the "Risk Factors" section of Item 1A, and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section under Item 7, of our annual report on Form 10-K for the year ended December 31, 2011. To the extent our full year earnings guidance is updated during the year, we will provide additional disclosure supporting reasons for any significant changes to such guidance. Further, we believe net operating income is a key performance indicator and is useful to investors as a performance measure because, when compared across periods, net operating income reflects the impact on operations from trends in occupancy rates, rental rates, and operating costs, providing perspective not immediately apparent from income from continuing operations.

Three Months Ended December 31, 2012 (in millions,          Reported on October
except per share amounts)                                        26, 2012
Net operating income:
Continuing operations                                         $107.5 - $109.5
Incremental dispositions classified in discontinued                $3.0
operations
Total net operating income                                    $110.5 - $112.5
General and administrative                                     $11.0 - $12.0
Capitalization of interest                                     $13.6 - $14.6
Interest                                                       $18.0 - $20.0
Depreciation and amortization                                  $42.6 - $47.7
Preferred stock dividends                                          $6.5
Other                                                           $1.0 - $1.4
Net income attributable to Alexandria Real Estate              $26.9 - $30.9
Equities, Inc.'s common stockholders
FFO                                                            $72.0 - $73.0
FFO per share - diluted                                        $1.15 - $1.17


Table of Contents

Leasing

For the three months ended September 30, 2012, we executed a total of 47 leases for approximately 732,000 rentable square feet at 34 different properties (excluding month-to-month leases). Of this total, approximately 352,000 rentable square feet related to new or renewal leases of previously leased space (renewed/re-leased space), and approximately 380,000 rentable square feet related to developed, redeveloped, or previously vacant space. Of the 380,000 rentable square feet, approximately 266,000 rentable square feet related to our development or redevelopment programs, and the remaining approximately 114,000 rentable square feet related to previously vacant space. Rental rates for this renewed/re-leased space were, on average, approximately 2.9% lower on a cash basis and approximately 7.6% higher on a GAAP basis than rental rates for the respective expiring leases. Additionally, we granted tenant concessions, including free rent averaging approximately 1.8 months, with respect to the 732,000 rentable square feet leased during the three months ended September 30, 2012. Approximately 75% of the number of leases executed during the three months ended September 30, 2012, did not include concessions for free rent. Weighted average lease term for the three months ended September 30, 2012, was 6.8 years.

For the nine months ended September 30, 2012, we executed a total of 146 leases for approximately 2,603,000 rentable square feet at 77 different properties (excluding month-to-month leases). Of this total, approximately 1,161,000 rentable square feet related to new or renewal leases of previously leased space (renewed/re-leased space), and approximately 1,442,000 rentable square feet related to developed, redeveloped, or previously vacant space. Of the 1,442,000 rentable square feet, approximately 829,000 rentable square feet related to our development or redevelopment programs, and the remaining approximately 613,000 rentable square feet related to previously vacant space. Rental rates for this renewed/re-leased space were, on average, approximately 1.9% lower on a cash basis and approximately 5.9% higher on a GAAP basis than rental rates for the respective expiring leases. Excluding one lease for 48,000 rentable square feet related to one client tenant in the Research Triangle Park market and one lease for 71,000 rentable square feet related to one client tenant in the Suburban Washington, D.C., market, rental rates for renewed/re-leased space were, on average, 0.1% higher and 7.3% higher than rental rates for expiring leases on a cash and GAAP basis, respectively. Additionally, we granted tenant concessions, including free rent averaging approximately 1.7 months, with respect to the 2,603,000 rentable square feet leased during the nine months ended September 30, 2012. Approximately 71% of the number of leases executed during the nine months ended September 30, 2012, did not include concessions for free rent. Weighted average lease term for the nine months ended September 30, 2012, was 7.1 years.

As of September 30, 2012, approximately 94% of our leases (on a rentable square footage basis) were triple net leases, requiring client tenants to pay substantially all real estate taxes, insurance, utilities, common area expenses, and other operating expenses (including increases thereto) in addition to base rent. Additionally, approximately 96% of our leases (on a rentable square footage basis) contained effective annual rent escalations that were either fixed or indexed based on a consumer price index or another index, and approximately 91% of our leases (on a rentable square footage basis) provided for the recapture of certain capital expenditures.


Table of Contents

Summary of Lease Expirations



The following table summarizes information with respect to the lease expirations
at our properties as of September 30, 2012:



                                                                            Annualized
                                                                           Base Rent of
  Year of                                                 Percentage of      Expiring
   Lease        Number of Leases     RSF of Expiring     Aggregate Total   Leases (per
 Expiration         Expiring              Leases               RSF             RSF)
    2012              21  (1)         490,382  (1)            3.5 %           $25.84
    2013              88              953,531                 6.9 %           $28.31
    2014              86            1,237,589                 8.9 %           $30.23
    2015              67            1,259,426                 9.1 %           $31.81
    2016              52            1,432,820                10.3 %           $30.33
    2017              59            1,506,498                10.9 %           $30.38
    2018              19            1,143,754                 8.3 %           $39.62
    2019              16              595,324                 4.3 %           $34.18
    2020              15              731,680                 5.3 %           $40.36
    2021              19              697,828                 5.0 %           $38.70
 Thereafter           32            2,151,820                15.5 %           $39.15




                                                                                                        Annualized
                                            2012 RSF of Expiring Leases                                Base Rent of
                                 Negotiating/    Targeted for          Remaining                      Expiring Leases            Market Rent
      Market          Leased     Anticipating    Redevelopment      Expiring Leases     Total            (per RSF)               per RSF (2)
Greater Boston                                                                                                                              25.00 -
                       13,091           3,169                -               40,207      56,467      $           31.58    $                  $59.00
San Francisco Bay                                                                                                                           20.00 -
                            -               -           32,074 (3)           21,176      53,250                  63.16    $                  $47.00
San Diego                                                                                                                                   16.00 -
                       23,218               -          243,550  (4)           3,000     269,768                  21.94    $                  $36.00
Greater NYC                 -               -                -                    -           -                      -               N/A
. . .
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