Alexandria Real Estate Equities, Inc. ( ARE)

Q3 2011 Earnings Call

October 26, 2011 3:00 PM ET

Executives

Rhonda Chiger – IR

Joel Marcus – Chairman, President and CEO

Steve Richardson – EVP, Regional Market Director, San Francisco

Dean Shigenaga – CFO, SVP and Treasurer

Amanda Cashin – Assistant VP, Life Sciences

Analysts

Jonatnhan Habermann – Goldman Sachs

Anthony Paolone – JPMorgan

Michael Jason Bilerman – Citi

Philip Martin – Morningstar

John Stewart – Green Street Advisors

Dave Rodgers – RBC Capital Markets

Gabe (ph) – UBS

Ross Nussbaum – UBS

Presentation

Operator

Please stand by. Good day, everyone, and welcome to the Alexandria Real Estate Equities, Incorporated Third Quarter 2011 Results Conference Call. Today’s call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Rhonda Chiger. Please go ahead, ma’am.

Rhonda Chiger

Thank you. Good afternoon and welcome. This conference call contains forward-looking statements within the meaning of the federal securities laws. The company’s actual results may differ materially from these projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company’s annual report on Form 10-K and its other periodic reports filed with the Securities and Exchange Commission.

And now, I would like to turn the call over to Joel Marcus. Please go ahead.

Joel Marcus

Thanks, Rhonda, and welcome, everybody, to the third quarter earnings call. With me today are Dean Shigenaga, Steve Richardson, who is just elected by the board the Chief Operating Officer, Krupal Raval and Amanda Cashin.

As you know, the current macroenvironment is highly volatile, it is mixed across the country, and our assumption is that it is not going get noticeably better in 2012. Let me start with guidance since there’s been a lot of focus on that. Dean will address guidance in detail. He’ll discuss the current range, the detailed assumptions behind that with our stress test analysis. He’ll also focus on the fourth quarter ‘11 NOI and FFO run rates and the fourth quarter ‘12 NOI and FFO run rates.

We’ll update guidance again on Investor Day. And in retrospect I think in the future, we’ll provide a wider initial guidance range for future years and narrow as we go through the quarters and assess our performance as we go. I think that will be a lot easier for all of you.

Our 2012 growth rate could well be in the mid-single digit range. The environment is obviously different but many of the metrics that are evident today show interesting similarities to the post-Internet crash years of 2002 through 2004. Substantial effort is under way to move legacy suburban assets in the key adjacency urban assets and you’ll see the results of that in the coming quarters.

We do have continuing solid demand from our ARE’s urban adjacency locations, notwithstanding substantial negative headlines, San Diego, Cambridge and New York City as examples.

Let me talk about maybe good, bad, ugly and the misunderstood. On the good side, the achievement this past quarter of our investment grade rating has substantially de-risked the company’s balance sheet. We transformed from 2008 as an unrated niche REIT to today as an investment grade niche REIT with a broad set of capital sources with the best-in-class adjacency assets. Those enabled us to attract high quality tenants which really are transformational, have large addressable markets, have solid growth prospects and are category leaders with competitive barriers and attractive business models.

We’re making very good progress in leasing space, vacant re-lease, re-development and hopefully development as we go forward with reasonable economics given the current macro environment. We’re maintaining on an annual basis solid core operating metrics within a range of reasonableness, again, given the current environment.

We’ve made and we’ve seen dramatic positive progress made on the lease up of the assets and the re-development pipeline and the two new assets coming into the re-development pipeline, 400 Tech Square. We may be almost fully leased there shortly. And also, Steve will report a little bit about our 1551 Eastlake, the former Gates Foundation headquarters building making great progress there. On the – that was the good. The bad, while we’re generating operating metrics which vary quarter to quarter and we have a very strong leasing volume this quarter, almost a million square feet, our GAAP NOI was slightly negative for the first time in the company’s history, but luckily cash NOI has been healthy.

GAAP rental rate decreased for the third quarter, as you saw was primarily due to a step down were we signed original leases on significant renewals on those which were signed I remember actually some of the negotiations 10 years ago at the top of the Internet bubble, one in San Francisco bay and one in Cambridge.

On the ugly or the misunderstood, I think it’s pretty clear the driver’s underlying our life science thesis remain intact despite headline to the contrary. The biopharma industry has undergone really thorough transformational change, and the prospects per significant size as well as growing biopharma companies requiring quality space and the best adjacency locations had been actually increased not decreased due to their transformed business models.

And their need to move more critical functions from isolated so be it style of campuses to the heart of the innovation standards and our business model, our best in class assets and our locations really provide the sweet spot for us in this transformational process. We will continue to concentrate on these key adjacency urban locations.

Pharm-aid is very profitable, has over almost $200 billion in cash on the balance sheet as of the end of the quarter, and total biopharma R&D remains very healthy at well north of $60 billion. We believe that the business case remains intact that the U.S. is and will remain the heart and center of entrepreneurial and novel discovery innovation in medical and scientific research. But companies will continue as evidenced virtually every day. They continue to cut costs to better their top and bottom line results and clearly pricing and reimbursement is a key pressure point.

Just a couple of recent cuts noticed that there’s been a continuing trend to offshore process R&D, not discovery R&D. Clinical trial work is broadening into quite a number of countries and things like data management and other kind of office kind of efforts can be offshored and it’s up to I think the people in this country to provide a high quality and effective and efficient workforce. But clearly, innovative discovery and R&D is headquartered and situated here in the U.S.

The industry transformation is well on its way. The modernization of the business models is evident. Innovation is the key to continuing success and it’s clear both North America and in European biopharma companies have the attributes to continue to do – continue their global leadership with pretty solid growth. The NIH has been a huge headline of late, about $30.9 billion for this past year. 2012 is unknown. The House has a bill that it could increase more than $1 billion. The Senate has a bill that it could be down $190 million but not bad considering the environment we’re in and there’s no real opposition, the strong NIH budget in government. It just is a function of getting caught up with the really big items in defense entitlements, et cetera and just overall spending.

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