Alexandria Real Estate Equities, Inc 8-K/A, filed Oct 13, 2006
Alexandria Real Estate Equities, Inc. (ARE)
About this 8-K/A
Alexandria Real Estate Equities, Inc filed this 8-K/A on October 13, 2006, reporting on events of July 28, 2006.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 28, 2006
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
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385 East Colorado Boulevard, Suite 299
Pasadena, California 91101
(Address of principal executive offices including zip code)
(626) 578-0777
(Registrant's telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
EXPLANATORY NOTE
This Form 8-K/A amends the Current Report on Form 8-K of Alexandria Real Estate Equities, Inc. (the "Company"), filed on July 28, 2006. The sole purpose of this Form 8-K/A is to provide the financial statements as required by Item 9.01(a) and the pro forma financial information required by Item 9.01(b), which financial statements and information were not included in the original Form 8-K filings.
The Form 8-K related to the acquisition, on July 26, 2006, by an affiliate of the Company from an affiliate of the Massachusetts Institute of Technology ("MIT"), of a 90% equity interest in 10.4 acres commonly known as Technology Square at MIT in Cambridge, Massachusetts.
ITEM 9.01 Financial Statements and Exhibits
(a) Financial Statements of Property Acquired
The Report of Independent Auditors and the Statement of Revenue and Certain Expenses of the Property Acquired for the Six Months Ended June 30, 2006 (Unaudited) and the Year Ended December 31, 2005 (Audited) and the Notes thereto are attached hereto as Exhibit 99.1 and incorporated by reference herein.
(b) Pro Forma Financial Information
The Unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company as of June 30, 2006 and the Unaudited Pro Forma Condensed Consolidated Income Statements of the Company for the six months ended June 30, 2006 and the year ended December 31, 2005, and the adjustments thereto are attached hereto as Exhibit 99.2 and incorporated by reference herein.
(c) Exhibits
23.1 Consent of Ernst & Young LLP
99.1 Financial Statements of Property Acquired
99.2 Pro Forma Financial Information
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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ALEXANDRIA REAL ESTATE EQUITIES, INC. |
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October 13, 2006 |
By: /s/ DEAN A. SHIGENAGA |
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Dean A. Shigenaga |
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Chief Financial Officer |
EXHIBIT INDEX
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Exhibit Title |
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-34223, Form S-8 No. 333-60075, Form S-3 No. 333-133496, Amendment No. 1 to Form S-3 No. 333-56449 and Form S-3 No. 333-81985) of Alexandria Real Estate Equities, Inc. of our report dated September 9, 2006 with respect to the statement of revenue and certain expenses of ARE-Tech Square for the year ended December 31, 2005, included in the Form 8-K/A of Alexandria Real Estate Equities, Inc. dated October 13, 2006.
/s/ Ernst & Young LLP
Los Angeles, California
October 13, 2006
Exhibit 99.1
Report of Independent Auditors
To the Board of Directors
Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses (the Statement) of ARE - Tech Square (the "Property") for the year ended December 31, 2005. This statement of revenue and certain expenses is the responsibility of management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statement. An audit also includes assessing the basis of accounting used and significant estimates made by management, as well as evaluating the overall presentation of the Statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. Certain revenue and expenses (described in Note 1) that would not be comparable to those resulting from the proposed future operations of the Property are excluded and the statement is not intended to be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as described in Note 1, of the Property for the year ended December 31, 2005, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
September 9, 2006
ARE - Tech Square
Statement of Revenue and Certain
Expenses
(In thousands)
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(Unaudited) |
Year Ended December 31, 2005 |
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Revenue: |
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Rental |
$ 18,292 |
$ 34,473 |
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Tenant recoveries |
4,328 |
6,923 |
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Other income |
1,341 |
2,365 |
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Total revenue |
23,961 |
43,761 |
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Certain Expenses: |
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Utilities |
1,844 |
3,406 |
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Repairs and maintenance |
1,923 |
3,270 |
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Insurance |
211 |
421 |
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Taxes and license |
3,193 |
6,303 |
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Parking expense |
401 |
697 |
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Ground lease |
1,000 |
2,000 |
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Interest |
5,917 |
11,835 |
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Total certain expenses |
14,489 |
27,932 |
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Excess of revenue over certain expenses |
$ 9,472 |
$ 15,829 |
See accompanying notes.
ARE - Tech Square
Notes to Statement of Revenue and Certain Expenses
1. Organization and Summary of Significant Accounting Policies
Organization
Alexandria Real Estate Equities, Inc. through an affiliate completed its purchase from an affiliate of the Massachusetts Institute of Technology ("MIT") of a 90% equity interest in the leasehold interest in 10.4 acres commonly known as Technology Square at MIT ("the Property") in Cambridge, Massachusetts. MIT retains a 10% interest in the project. Alexandria and MIT purchased the Property for $600 million and assumed existing financing on the project of approximately $225 million with an interest rate of 5.26%. The Property consists of a seven building campus (including a 1,593 space parking garage and a 49 space surface parking lot) containing approximately 1.2 million square feet. During 2005 and 2006, various spaces in the Property were undergoing a permanent change in use to office/laboratory space through redevelopment. Certain spaces are also anticipated to undergo conversion through redevelopment in the future. In addition, various spaces were delivered to tenants under operating leases as redevelopment activities were completed in both 2005 and 2006. As of December 31, 2005 and June 30, 2006, the occupancy of the Property was approximately 73% and 82%, respectively. The accompanying statement of revenue and certain expenses includes the operations of the Property. The square footage and occupancy information contained in this paragraph is unaudited.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission.
The Property is not a legal entity and the accompanying statement is not representative of the actual operations for the period presented, as certain revenue and expenses that may not be comparable to the revenue and expenses we expect to incur in the future operations of the Property have been excluded. Excluded items consist of interest income, straight-line rents, depreciation and amortization, management fees, capitalized operating and interest costs associated with a portion of the property under redevelopment, and general and administrative costs not directly comparable to the future operations of the Property.
An audited statement is being presented for the most recent fiscal year available instead of the three most recent years based on the following factors: (i) the Property was acquired from an unaffiliated party and (ii) based on the investigation of the Property by Alexandria Real Estate Equities, Inc., management is not aware of any material factors relating to the Property that would cause this financial information not to be necessarily indicative of future operating results.
In the decision to acquire the Property, Alexandria Real Estate Equities, Inc. considered the competition from other commercial property owners, the location, the leases, the rental rates and the occupancy level of the Property.
Alexandria Real Estate Equities, Inc. has reviewed the expenses of the Property, including property taxes, insurance, repairs and maintenance ground lease and interest.
Revenue Recognition
The leases of the Property are accounted for as operating leases. Revenue is recognized based on the contractual provisions of the leases. Recoveries from the tenants are recognized as revenue in the period the applicable costs are incurred.
Risks and Uncertainties
The preparation of financial statements, in conformity with U.S. generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
2. Future Minimum Lease Payments
The future minimum lease payments to be received under noncancelable operating leases as of December 31, 2005 are as follows (in thousands):
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2006 |
$ 37,627 |
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2007 |
39,829 |
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2008 |
39,330 |
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2009 |
39,748 |
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2010 |
37,823 |
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Thereafter |
142,763 |
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Total |
$ 337,120 |
The above future minimum lease payments do not include specified payments for tenant reimbursements of operating expenses.
3. Ground Lease
The Property is subject to a ground lease with an affiliate of MIT through December 31, 2064. The ground lease agreement requires adjustments to rental expense every five years based upon the relevant Consumer Price Index subject to a maximum increase of 3% per year.
4. Secured Note Payable
The Property secures a note payable which had a balance of approximately $225 million at December 31, 2005 and bears fixed interest at 5.26%. The note requires monthly payments of principal and interest and matures on April 1, 2014. The scheduled principal repayments on the secured note payable as of December 31, 2005 were as follows (in thousands):
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2006 |
$ 1 |
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2007 |
1 |
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2008 |
1 |
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2009 |
2,093 |
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2010 |
3,279 |
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Thereafter |
219,623 |
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Total |
$ 224,998 |
5. Related Party Transactions
The Property is subject to leases with an affiliate of MIT. These leases account for approximately $7,924,000 of rental revenue for the year ended December 31, 2005.
6. Unaudited Interim Statement
The statement of certain revenues and certain expenses for the period January 1, 2006 to June 30, 2006 is unaudited. In the opinion of management, all significant adjustments necessary for a fair presentation of the statement for the interim period have been included. The results of operations for the interim period are not necessarily indicative of the results to be expected for a full year of operations of the Property.
Exhibit 99.2
Alexandria Real Estate Equities, Inc.
Unaudited Pro Forma Condensed Consolidated Financial Statements
The following unaudited pro forma condensed consolidated balance sheet of Alexandria Real Estate Equities, Inc. as of June 30, 2006 is presented as if the property described in Item 2 of this Form 8-K (the "Form 8-K Property") had been acquired on June 30, 2006 and as if the issuance of 2.5 million shares of common stock, as described in the Form 8-K dated September 25, 2006, occurred on June 30, 2006. The following unaudited pro forma condensed consolidated statement of income of Alexandria Real Estate Equities, Inc. for the six months ended June 30, 2006 and for the year ended December 31, 2005 are presented as if the Form 8-K Properties had been acquired on January 1, 2005 and as if the issuance of 2.5 million shares of common stock, as described in the Form 8-K dated September 25, 2006, occurred on January 1, 2005.
The pro forma condensed consolidated financial statements are not necessarily indicative of what the actual financial position or results of operations would have been had we completed the transactions on the dates as described above, nor do they purport to represent our future financial position or our future results of operations.
Alexandria Real Estate Equities, Inc.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
June 30, 2006
(dollars in thousands)
M/U>
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Pro Forma |
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Historical |
Adjustments(A) |
Pro Forma |
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Assets |
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Rental properties, net |
$ 1,967,859 |
$ 619,679 |
$2,587,538 |
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Properties under development and development land |
342,229 |
- |
342,229 |
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Cash and cash equivalents |
3,647 |
- |
3,647 |
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Tenant security deposits and other restricted cash |
24,307 |
- |
24,307 |
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Tenant receivables |
3,656 |
- |
3,656 |
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Deferred rent |
58,342 |
- |
58,342 |
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Investments |
77,719 |
- |
77,719 |
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Other assets |
98,880 |
4,698 |
103,578 |
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Total assets |
$ 2,576,639 |
$ 624,377 |
$3,201,016 |
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Liabilities and stockholders' equity |
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Secured notes payable |
$ 768,103 |
$ 223,432 |
$ 991,535 |
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Unsecured line of credit and unsecured term loan |
537,000 |
105,579 |
642,579 |
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Accounts payable, accrued expenses and tenant security deposits |
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Dividends payable |
22,297 |
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22,297 |
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Total liabilities |
1,419,226 |
354,954 |
1,774,180 |
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Minority interest |
20,176 |
36,898 |
57,074 |
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Stockholders' equity: |
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Series B preferred stock |
57,500 |
- |
57,500 |
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Series C preferred stock |
129,638 |
- |
129,638 |
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Common stock |
264 |
25 |
289 |
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Additional paid-in capital |
909,739 |
232,500 |
1,142,239 |
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Accumulated other comprehensive income |
40,096 |
- |
40,096 |
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Total stockholders' equity |
1,137,237 |
232,525 |
1,369,762 |
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Total liabilities and stockholders' equity |
$ 2,576,639 |
$ 624,377 |
$3,201,016 |
See accompanying notes.
Alexandria Real Estate Equities, Inc.
Unaudited Pro Forma Condensed Consolidated Income Statement
Six Months Ended June 30, 2006
(dollars in thousands, except per share amounts)
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Pro Forma |
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Historical |
Adjustments (B) |
Pro Forma |
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Revenues: |
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Rental |
$ 107,285 |
$ 21,123 |
$ 128,408 |
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Tenant recoveries |
27,312 |
4,328 |
31,640 |
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Other income |
4,478 |
1,341 |
5,819 |
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Total revenues |
139,075 |
26,792 |
165,867 |
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Expenses: |
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Rental operations |
29,773 |
8,558 |
38,331 |
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General and administrative |
12,721 |
- |
12,721 |
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Interest |
31,182 |
7,279 |
38,461 |
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Depreciation and amortization |
31,443 |
7,559 |
39,002 |
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Total expenses |
105,119 |
23,395 |
128,514 |
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Minority interest |
740 |
661 |
1,401 |
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Income from continuing operations |
33,216 |
2,735 |
35,951 |
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Income from discontinued operations, net |
701 |
- |
701 |
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Net income |
33,917 |
2,735 |
36,652 |
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Dividends on preferred stock |
8,045 |
- |
8,045 |
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Net income available to common stockholders |
$ 25,872 |
$ 2,735 |
$ 28,607 |
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Earnings per share - basic |
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Continuing operations (net of preferred stock dividends) |
$ 1.12 |
$ 1.11 |
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Discontinued operations, net |
0.03 |
0.03 |
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Earnings per share - basic |
$ 1.15 |
$ 1.14 |
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Earnings per share - diluted |
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Continuing operations (net of preferred stock dividends) |
$ 1.09 |
$ 1.09 |
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Discontinued operations, net |
0.03 |
0.03 |
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Earnings per share - diluted |
$ 1.12 |
$ 1.12 |
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Weighted average of common stock outstanding |
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Basic |
22,590,811 |
25,090,811 (B) |
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Diluted |
23,010,992 |
25,510,992 (B) |
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See accompanying notes.
Alexandria Real Estate Equities, Inc.
Unaudited Pro Forma Condensed Consolidated Income Statement
Year Ended December 31, 2005
(dollars in thousands, except per share amounts)
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Pro Forma |
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Historical |
Adjustments (B) |
Pro Forma |
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Revenues: |
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Rental |
$ 189,312 |
$ 40,135 |
$ 229,447 |
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Tenant recoveries |
49,974 |
6,923 |
56,897 |
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Other income |
4,798 |
2,365 |
7,163 |
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Total revenues |
244,084 |
49,423 |
293,507 |
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Expenses: |
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Rental operations |
54,540 |
15,922 |
70,462 |
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General and administrative |
21,094 |
- |
21,094 |
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Interest |
49,116 |
13,070 |
62,186 |
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Depreciation and amortization |
55,399 |
15,117 |
70,516 |
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Total expenses |
180,149 |
44,109 |
224,258 |
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Minority interest |
634 |
1,025 |
1,659 |
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Income from continuing operations |
63,301 |
4,289 |
67,590 |
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Income from discontinued operations, net |
132 |
- |
132 |
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Net income |
63,433 |
4,289 |
67,722 |
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Dividends on preferred stock |
16,090 |
- |
16,090 |
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Net income available to common stockholders |
$ 47,343 |
$ 4,289 |
$ 51,632 |
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Earnings per share - basic |
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Continuing operations (net of preferred stock dividends) |
$ 2.25 |
$ 2.19 |
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Discontinued operations, net |
0.01 |
0.01 |
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Earnings per share - basic |
$ 2.26 |
$ 2.20 |
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Earnings per share - diluted |
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Continuing operations (net of preferred stock dividends) |
$ 2.21 |
$ 2.16 |
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Discontinued operations, net |
0.01 |
0.01 |
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Earnings per share - diluted |
$ 2.22 |
$ 2.17 |
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Weighted average of common stock outstanding |
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Basic |
20,948,915 |
23,448,915 (B) |
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Diluted |
21,316,886 |
23,816,886 (B) |
See accompanying notes.
Alexandria Real Estate Equities, Inc.
Adjustments to the Unaudited Pro Forma Condensed
Consolidated Financial Statements
Rental Properties
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations", ("FAS 141") we perform the following procedures when making an allocation of the purchase price of real estate: (1) estimate the value of the real estate as of the acquisition date on an "as if vacant basis"; (2) allocate the "as if vacant" value among land, land improvements, buildings, building improvements, tenant improvements and equipment; (3) calculate the value of the intangibles as the difference between the "as if vacant" value and the purchase price; and (4) allocate the intangible value to above, below and at market leases, origination costs associated with in-place leases, tenant relationships and other intangible assets. The purchase price has been allocated on a preliminary basis to the respective assets acquired and the liabilities assumed. We expect to finalize our purchase price accounting no later than twelve months from the date of acquisition.
The values allocated to land improvements, building improvements, tenant improvements and equipment are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, 40 years for buildings and building improvements, the shorter of the respective lease term or estimated life for tenant improvements and the estimated useful life for equipment. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of at-market leases and origination costs are classified as leasing costs, included in other assets in the accompanying unaudited pro forma condensed consolidated balance sheet and amortized over the remaining life of the lease.
Certain Expenses
In accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost" ("SFAS 34") and Statement of Financial Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects" ("SFAS 67"), we capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a project. Pursuant to SFAS 34 and SFAS 67, capitalization of construction and development costs is required while activities are ongoing to prepare an asset for its intended use. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written off. Should development activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred.
1. Adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet
The pro forma adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2006 are as follows:
(A) The pro forma adjustments reflect the acquisition of the Form 8-K Property as if it was acquired on June 30, 2006 and include adjustments to reflect the acquisition of the Form 8-K Property. The purchase price of $600 million was funded through the assumption of approximately $225 million of existing debt, minority interest contribution from the Massachusetts Institute of Technology, borrowings of approximately $106 million under our unsecured line of credit and the issuance of 2.5 million shares of common stock with net proceeds totaling $232.5 million. The pro forma adjustments include adjustments to reflect the acquisition as funded through existing debt, minority interest contribution, borrowings under our unsecured credit facility and issuance of common stock, and purchase price allocation to tangible and intangible assets and liabilities in accordance with FAS 141.
2. Adjustments to the Unaudited Pro Forma Condensed Consolidated Income Statements
The pro forma adjustments to the Unaudited Pro Forma Condensed Consolidated Income Statements for the six months ended June 30, 2006 and for the year ended December 31, 2005 are as follows:
(B) The pro forma adjustments reflect the acquisition of the form 8-K Property as if it was acquired on January 1, 2005 and include adjustments to reflect (a) the historical operations of the Property, (b) rental income recorded on a straight line basis (c) the amortization of the value of above and below market leases over the life of the respective lease as an increase to rental income, (d) additional interest expense on borrowings related to our unsecured line of credit at historical interest rates and interest expense associated with the assumption of existing secured debt, (e) capitalization of direct construction and development costs and interest related to construction activities in accordance with SFAS 34 and SFAS 67, (f) depreciation expense on the building based on an estimated useful life of 40 years, amortization expense on tenant improvements, leasing costs over the remaining life of the lease and FAS 141 amortization expense related to tenant and leasing costs, (g) management fees and (h) minority interest in income.