Alexandria Real Estate Equities, Inc 10-Q, filed Nov 9, 2005
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-Q
Alexandria Real Estate Equities, Inc filed this 10-Q on November 9, 2005, covering the quarter ended September 30, 2005.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 1-12993
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) (Zip Code)
(626) 578-0777
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of November 4, 2005, 22,488,883 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | Page No. |
| Item 1. FINANCIAL STATEMENTS (Unaudited): |
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Condensed Consolidated Balance Sheets - As of September 30, 2005 and December 31, 2004 |
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Condensed Consolidated Income Statements - For the Three and Nine Months Ended September 30, 2005 and 2004 |
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Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2005 and 2004 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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| Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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| Item 4. CONTROLS AND PROCEDURES |
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| PART II. OTHER INFORMATION |
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| Item 6. EXHIBITS |
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| Signatures |
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2005 2004
------------ ------------
(Unaudited)
Assets
Rental properties, net $ 1,695,956 $ 1,427,853
Properties under development 279,425 252,249
Cash and cash equivalents 4,551 3,158
Tenant security deposits and other restricted cash 19,434 17,669
Tenant receivables 3,265 2,542
Deferred rent 48,329 43,166
Investments 77,101 67,419
Other assets 68,738 58,228
------------ ------------
Total assets $ 2,196,799 $ 1,872,284
============ ============
Liabilities and Stockholders' Equity
Secured notes payable $ 666,698 $ 638,946
Unsecured line of credit and unsecured term loan 605,000 548,000
Accounts payable, accrued expenses and
tenant security deposits 65,454 48,581
Dividends payable 18,892 16,284
------------ ------------
Total liabilities 1,356,044 1,251,811
------------ ------------
Minority interest 20,132 --
Stockholders' equity:
Series B preferred stock 57,500 57,500
Series C preferred stock 129,638 129,638
Common stock 224 196
Additional paid-in capital 604,357 414,028
Retained earnings -- 5,267
Accumulated other comprehensive income 28,904 13,844
------------ ------------
Total stockholders' equity 820,623 620,473
------------ ------------
Total liabilities and stockholders' equity $ 2,196,799 $ 1,872,284
============ ============
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ -----------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenues
Rental $ 48,814 $ 35,867 $ 138,244 $ 104,040
Tenant recoveries 13,588 9,608 36,624 26,336
Other income 1,350 984 3,140 2,279
----------- ----------- ----------- -----------
63,752 46,459 178,008 132,655
Expenses
Rental operations 14,360 10,178 39,773 27,708
General and administrative 5,993 3,662 15,180 11,112
Interest 13,160 6,626 35,729 20,261
Depreciation and amortization 14,073 10,565 39,948 30,615
----------- ----------- ----------- -----------
47,586 31,031 130,630 89,696
Minority interest 234 -- 257 --
----------- ----------- ----------- -----------
Income from continuing operations 15,932 15,428 47,121 42,959
Income from discontinued operations, net 59 36 132 1,732
----------- ----------- ----------- -----------
Net income 15,991 15,464 47,253 44,691
Dividends on preferred stock 4,022 4,094 12,067 8,603
Preferred stock redemption charge -- -- -- 1,876
----------- ----------- ----------- -----------
Net income available to common stockholders $ 11,969 $ 11,370 $ 35,186 $ 34,212
=========== =========== =========== ===========
Earnings per share - basic:
Continuing operations (net of preferred stock
dividends and preferred stock redemption charge) $ 0.57 $ 0.59 $ 1.71 $ 1.68
Discontinued operations, net -- -- 0.01 0.09
----------- ----------- ----------- -----------
Earnings per share - basic $ 0.57 $ 0.59 $ 1.72 $ 1.77
=========== =========== =========== ===========
Earnings per share - diluted:
Continuing operations (net of preferred stock
dividends and preferred stock redemption charge) $ 0.56 $ 0.58 $ 1.68 $ 1.65
Discontinued operations, net -- -- 0.01 0.09
----------- ----------- ----------- -----------
Earnings per share - diluted $ 0.56 $ 0.58 $ 1.69 $ 1.74
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding:
Basic 21,091,183 19,352,670 20,504,633 19,281,678
=========== =========== =========== ===========
Diluted 21,486,731 19,668,360 20,857,755 19,614,092
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See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
----------- ----------
2005 2004
---------- ----------
Operating Activities
Net income $ 47,253 $ 44,691
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sales of property (36) (1,627)
Minority interest 257 --
Depreciation and amortization 39,965 30,643
Amortization of loan fees and costs 5,211 1,712
Amortization of premiums on secured notes payable (787) (94)
Stock compensation expense 4,635 1,895
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash (1,765) (3,822)
Tenant receivables (715) (382)
Deferred rent (8,660) (8,790)
Other assets (19,546) (12,260)
Accounts payable, accrued expenses and tenant
security deposits 22,546 4,544
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Net cash provided by operating activities 88,358 56,510
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Investing Activities
Purchase of rental properties (169,129) (103,354)
Proceeds from sale of rental property 1,182 5,454
Additions to rental properties (56,073) (48,246)
Additions to properties under development (60,519) (72,635)
Additions to investments, net (1,461) (3,983)
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Net cash used in investing activities (286,000) (222,764)
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Financing Activities
Proceeds from secured notes payable 33,580 38,000
Proceeds from exercise of stock options 3,424 6,241
Proceeds from issuance of common stock 185,562 --
Proceeds from issuance of preferred stock -- 124,009
Redemption of Series A preferred stock -- (38,588)
Principal borrowings from unsecured line of credit 57,000 87,000
Principal reductions of secured notes payable (27,080) (8,640)
Dividends paid on common stock (41,109) (34,830)
Dividends paid on preferred stock (12,067) (6,593)
Distributions to minority interest (275) --
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Net cash provided by financing activities 199,035 166,599
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Net increase in cash and cash equivalents 1,393 345
Cash and cash equivalents at beginning of period 3,158 4,985
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Cash and cash equivalents at end of period $ 4,551 $ 5,330
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See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Background
As used in this Form 10-Q, references to the "Company", "we", "our" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged principally in the ownership, operation, management, acquisition and selective redevelopment and development of properties containing office/laboratory space. We refer to these properties as "life science properties". Our life science properties are designed and improved for lease primarily to institutional (universities and not-for-profit institutions), pharmaceutical, biotechnology, life science product, service, biodefense, and translational medicine entities, as well as government agencies. As of September 30, 2005, our portfolio consisted of 129 properties (128 located in nine states and one property located in Canada) with approximately 8.4 million rentable square feet of office/laboratory space.
As of September 30, 2005, approximately 84% of our leases (on a square footage basis) were triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases thereto. In addition, as of September 30, 2005, approximately 6% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Additionally, as of September 30, 2005, approximately 89% of our leases (on a square footage basis) provided for the recapture of certain capital expenditures and approximately 90% of our leases (on a square footage basis) contained effective annual rent escalations that are either fixed or indexed based on the consumer price index or another index.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Basis of Presentation and Significant Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated.
The Company holds interests, together with certain third parties, in a limited partnership and in a limited liability company which we consolidate in our financial statements. Such interests are subject to provisions of FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities", FASB Emerging Issues Task Force Issue No. 96-16, "Investor's Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", and AICPA Statement of Position 78-9, "Accounting for Investments in Real Estate Ventures". Based on the provisions set forth in these rules, we consolidate the limited partnership and limited liability company because we exercise significant control over major decisions by these entities, such as approval of budgets, selection of property managers, asset management, investment activity and changes in financing.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
International Operations
The functional currency for our subsidiaries operating in the United States is the U.S. dollar. During the first quarter of 2005, we completed our first international acquisition of one operating property through a wholly-owned Canadian subsidiary. The functional currency for our foreign subsidiary operating in Canada is the local currency, the Canadian dollar. The assets and liabilities of our foreign subsidiary are translated into U.S. dollars at the exchange rate in effect as of the financial statement date. Income statement accounts of our foreign subsidiary are translated using the average exchange rate for the period presented. Gains resulting from the translation are included in accumulated other comprehensive income as a separate component of stockholders' equity.
Gains or losses are recognized in the income statement when a transaction with a third party, denominated in a currency other than the entity's functional currency, is settled and the functional currency cash flows realized are more or less than the exchange rate in effect when the transaction was initiated.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
September 30, December 31,
2005 2004
------------ ------------
Unrealized gain on marketable securities $ 24,156 $ 15,934
Unrealized gain (loss) on interest rate
swap agreements 3,622 (2,090)
Unrealized foreign currency translation gain 1,126 --
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$ 28,904 $ 13,844
============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------- ---------- ---------- ----------
2005 2004 2005 2004
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Net income $ 15,991 $ 15,464 $ 47,253 $ 44,691
Unrealized gain on
marketable securities 2,646 11,135 8,222 11,240
Unrealized gain (loss) on interest
rate swap agreements 4,620 (3,079) 5,712 1,932
Unrealized foreign currency
translation gain 1,011 -- 1,126 --
---------- ---------- ---------- ----------
Comprehensive income $ 24,268 $ 23,520 $ 62,313 $ 57,863
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Stock-Based Compensation Expense
For 2002 and all prior years, we have elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for our employee and non-employee director stock options, stock grants and stock appreciation rights. Effective January 1, 2003, we adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003. We have not granted any stock options since 2002. Under APB 25, because the exercise price of the options we granted equals the market price of the underlying stock on the date of grant, no compensation expense had been recognized. Although we have elected to follow APB 25 for previously granted options, pro forma information regarding net income and net income per share is required by SFAS 123. This information has been determined as if we had accounted for stock options under the fair value method under SFAS 123.
For purposes of the following pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods (in thousands, except per share information):
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ ------------
2005 2004 2005 2004
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Net income available to common
stockholders, as reported $ 11,969 $ 11,370 $ 35,186 $ 34,212
Fair value of stock-based compensation cost (22) (181) (152) (558)
----------- ----------- ----------- ------------
Pro forma net income available to common
stockholders $ 11,947 $ 11,189 $ 35,034 $ 33,654
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Income per common share:
Basic - as reported $ 0.57 $ 0.59 $ 1.72 $ 1.77
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Basic - pro forma $ 0.57 $ 0.58 $ 1.71 $ 1.75
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Diluted - as reported $ 0.56 $ 0.58 $ 1.69 $ 1.74
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Diluted - pro forma $ 0.56 $ 0.57 $ 1.68 $ 1.72
=========== =========== =========== ============
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share- Based Payment" ("SFAS 123R") requires measurement of all employee stock-based compensation awards using a fair value method and the recording of such expense in the financial statements. SFAS 123R eliminates the accounting for such awards using the intrinsic method pursuant to APB 25. In April 2005, the Securities and Exchange Commission amended the compliance date for SFAS 123R to no later than the beginning of the registrant's first fiscal year beginning after June 15, 2005. Accordingly, we plan to adopt SFAS 123R on January 1, 2006. We intend to use the modified-prospective transition method whereby compensation expense will be recognized relating to the remaining unvested portion of outstanding stock options at the time of adoption, and the expense will be recognized over the remaining service period. We do not expect the adoption of SFAS 123R to have a material impact on our financial statements since all awards accounted for pursuant to APB 25 will be fully vested by December 31, 2005.
2. Rental Properties, Net
Rental properties, net consist of the following (in thousands):
September 30, December 31,
2005 2004
------------ ------------
Land $ 283,895 $ 217,201
Buildings and building improvements 1,473,297 1,246,888
Other improvements 147,570 139,823
------------ ------------
1,904,762 1,603,912
Less accumulated depreciation (208,806) (176,059)
------------ ------------
$ 1,695,956 $ 1,427,853
============ ============
3. Investments
We hold equity investments in certain publicly-traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" in accordance with Statement of Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and are recorded at fair value. Investments in privately held entities are generally accounted for under the cost method because we do not influence any operating and financial policies of the entities in which we invest. Certain investments are accounted for under the equity method in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18") and Emerging Issues Task Force Topic D-46, "Accounting for Limited Partnerships" ("EITF Topic D-46"). For all our investments, if a decline in the fair value of an investment below its carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings. The factors that we consider in making these assessments include, but are not limited to, market prices, market conditions, prospects for favorable or unfavorable clinical trial results, new product initiatives and new collaborative agreements.
The following table summarizes our available-for-sale securities (in thousands):
September 30, December 31,
2005 2004
------------ ------------
Adjusted cost of available-for-sale securities $ 5,805 $ 3,190
Gross unrealized gains 24,663 16,110
Gross unrealized losses (507) (176)
------------ ------------
Fair value of available-for-sale securities $ 29,961 $ 19,124
============ ============
We believe that the gross unrealized losses shown above are temporary and accordingly we have not recognized an other-than-temporary impairment related to available-for-sale securities as of September 30, 2005 and December 31, 2004.
Our investments in privately held entities as of September 30, 2005 and December 31, 2004 totaled $47,140,000 and $48,295,000, respectively. Of these totals, $45,886,000 and $47,433,000 are accounted for under the cost method. The remainder ($1,254,000 and $862,000 as of September 30, 2005 and December 31, 2004, respectively) are accounted for under the equity method in accordance with APB 18 and EITF Topic D-46. As of September 30, 2005, there were no unrealized losses in our investments in privately held entities.
4. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $500 million. The unsecured line of credit expires December 2007 and may be extended at our sole option for an additional one-year period. As of September 30, 2005, we had borrowings of $355 million outstanding on the unsecured line of credit with a weighted average interest rate of 5.21%. As of September 30, 2005, we have an unsecured term loan with outstanding borrowings of $250 million with a weighted average interest rate of 5.11%. The unsecured term loan expires in December 2009.
Borrowings under our unsecured line of credit and unsecured term loan bear interest at a London Interbank Offered Rate ("LIBOR")-based rate. For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants. In addition, the terms of the unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Under the unsecured line of credit and unsecured term loan, we have an option to increase our maximum available commitment by an additional $100 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2005 (dollars in thousands):
Effective at
Notional September 30, Interest Termination Fair
Transaction Dates Effective Dates Amounts 2005 Pay Rates Dates Values
- ------------------ --------------- ------------ ------------- -------- ---------------- --------
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 $ 55
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 52
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 187
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 187
December 2003 December 31, 2004 50,000 50,000 3.000% December 30, 2005 124
December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 177
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (480)
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 445
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 445
April 2004 April 29, 2005 50,000 50,000 3.140% April 28, 2006 311
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 162
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (161)
June 2004 June 30, 2005 50,000 50,000 4.343% June 30, 2007 82
December 2004 December 31, 2004 50,000 50,000 3.590% January 2, 2008 939
December 2004 January 3, 2006 50,000 -- 3.927% July 1, 2008 695
May 2005 December 30, 2005 25,000 -- 4.120% November 30, 2006 87
May 2005 June 30, 2006 50,000 -- 4.270% June 29, 2007 143
May 2005 November 30, 2006 25,000 -- 4.330% November 30, 2007 52
May 2005 June 29, 2007 50,000 -- 4.400% June 30, 2008 66
May 2005 November 30, 2007 25,000 -- 4.460% November 28, 2008 21
May 2005 June 30, 2008 50,000 -- 4.509% June 30, 2009 34
May 2005 November 28, 2008 25,000 -- 4.615% November 30, 2009 (1)
Total Interest Rate Swap Agreements in Effect ------------- --------
at September 30, 2005 $ 350,000 $ 3,622
============= ========
5. Minority Interest
Minority interest represents the interests in a limited partnership and in a limited liability company held by certain third parties, which own two properties and are included in our consolidated financial statements. We recognize the minority interest in these entities in which we have a controlling interest. Minority interest is adjusted for additional contributions, distributions to minority holders and the minority holders' proportionate share of the net earnings or losses of each respective entity. As of September 30, 2005 the aggregate minority interest balance related to these entities was approximately $20.1 million and is classified as minority interest in the accompanying condensed consolidated balance sheet.
6. Stockholders' Equity
In March 2005, we sold 1,437,500 shares of our common stock in an underwritten offering (including the shares issued upon exercise of the underwriter's over-allotment option). The shares were issued at a price of $62.51 per share, resulting in aggregate proceeds of approximately $89.1 million (after deducting underwriting discounts and other offering costs).
In September 2005, we sold 1,200,000 shares of our common stock in an underwritten offering. The shares were issued at a price of $81.00 per share, resulting in net proceeds of approximately $96.4 million (after deducting underwriting discounts and other offering costs).
In September 2005, we declared a cash dividend on our common stock aggregating $15,289,000 ($0.68 per share) for the calendar quarter ended September 30, 2005. In September 2005, we also declared cash dividends on our 9.10% Series B Cumulative Redeemable Preferred Stock ("Series B preferred stock") and 8.375% Series C Cumulative Redeemable Preferred Stock ("Series C preferred stock") aggregating $1,308,000 ($0.56875 per share) and $2,714,000 ($0.5234375 per share), respectively, for the period July 15, 2005 through October 14, 2005. The dividends on our common stock, Series B preferred stock and Series C preferred stock were paid on October 14, 2005.
7. Non-Cash Transactions
During the nine months ended September 30, 2005, we assumed six secured notes payable in connection with the acquisitions of six properties, in six separate transactions, located in the San Francisco Bay, Suburban Washington D.C., Eastern Massachusetts and Seattle markets. During the nine months ended September 30, 2004, we assumed three secured note payables in connection with the acquisitions of three properties, in three separate transactions, located in the Suburban Washington D.C., the Southeast and Eastern Massachusetts markets. The following table summarizes these transactions (in thousands):
Nine Months Ended
September 30,
----------------------------
2005 2004
------------ ------------
Aggregate purchase price $ 44,959 $ 36,320
Secured notes payable assumed 25,466 21,774
------------ ------------
Cash paid for properties $ 19,493 $ 14,546
============ ============
For the nine months ended September 30, 2005 and 2004, we incurred $3,562,000 and $1,895,000, respectively, in non-cash stock compensation expense.
8. Earnings Per Share
The following table shows the computation of earnings per share, and dividends declared per common share (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ ------------
2005 2004 2005 2004
----------- ----------- ----------- ------------
Net income available to common stockholders $ 11,969 $ 11,370 $ 35,186 $ 34,212
=========== =========== =========== ============
Weighted average shares of common stock
outstanding - basic 21,091,183 19,352,670 20,504,633 19,281,678
Add: dilutive effect of stock options and
stock grants 395,548 315,690 353,122 332,414
----------- ----------- ----------- ------------
Weighted average shares of common stock
outstanding - diluted 21,486,731 19,668,360 20,857,755 19,614,092
=========== =========== =========== ============
Earnings per share - basic $ 0.57 $ 0.59 $ 1.72 $ 1.77
=========== =========== =========== ============
Earnings per share - diluted $ 0.56 $ 0.58 $ 1.69 $ 1.74
=========== =========== =========== ============
Dividends declared per common share $ 0.68 $ 0.64 $ 2.02 $ 1.86
=========== =========== =========== ============
9. Discontinued Operations
In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), we classify a property as "held for sale" when all of the following criteria for a plan of sale have been met: (1) management, having the authority to approve the action, commits to a plan to sell the property; (2) the property is available for immediate sale in its present condition, subject only to the terms that are usual and customary; (3) an active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated; (4) the sale of the property is probable and is expected to be completed within one year; (5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When the property is classified as "held for sale", its operations are classified as discontinued operations in our consolidated statements of income. When a property is designated as "held for sale", amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. A loss is recognized for any initial adjustment of the asset's carrying amount to fair value less costs to sell in the period the asset qualifies as "held for sale". Depreciation of assets is discontinued commencing on the date they are designated as "held for sale".
The following is a summary of discontinued operations (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Revenue $ 27 $ 51 $ 127 $ 167
Operating expenses 4 6 14 34
------------ ------------ ------------ ------------
Revenue less operating expenses 23 45 113 133
Depreciation -- 9 17 28
Income before gain on ------------ ------------ ------------ ------------
sale of property 23 36 96 105
Gain on sale of property 36 -- 36 1,627
------------ ------------ ------------ ------------
Income from discontinued operations, net $ 59 $ 36 $ 132 $ 1,732
============ ============ ============ ============
September 30, December 31,
2005 2004
------------ ------------
Properties held for sale, net $ -- $ 1,016
Other assets -- 142
------------ ------------
Total assets $ -- $ 1,158
============ ============
Total liabilities -- 50
------------ ------------
Net assets of discontinued operations $ -- $ 1,108
============ ============
Income from discontinued operations, net includes the results of operations of one property we sold during the third quarter of 2005, and one property we sold during the first quarter of 2004. During the third quarter of 2005, we sold one property located in the Southeast market that had been designated as "held for sale" during the second quarter of 2005. The total sale price for the property was approximately $1.3 million. In connection with this sale, we recorded a gain on sale of property of approximately $36,000. During the first quarter of 2004, we sold one property located in the Suburban Washington D.C. market that had been designated as "held for sale" during the fourth quarter of 2003. The total sale price for the property was approximately $5.7 million. In connection with the sale, we recorded a gain on sale of property of approximately $1.6 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
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 operation, 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, those described below in this report and under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2004. We do not take any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events or otherwise. Readers of this Form 10-Q should also read our other filings with the Securities and Exchange Commission for further discussion regarding such factors.
As used in this 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 financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition and selective redevelopment and development of high quality, strategically located properties containing office/laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science properties".
As of September 30, 2005, our portfolio consisted of 129 properties containing approximately 8.4 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 95% leased, excluding those properties in our redevelopment program. Our primary sources of revenue are rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our property acquisition, development and redevelopment activities.
As of September 30, 2005, approximately 84% of our leases (on a square footage basis) were triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases thereto. In addition, as of September 30, 2005, approximately 6% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Additionally, as of September 30, 2005, approximately 89% of our leases (on a square footage basis) provided for the recapture of certain capital expenditures and approximately 90% of our leases (on a square footage basis) contained effective annual rent escalations that are either fixed or indexed based on the consumer price index or another index.
Results of Operations
Comparison of Three Months Ended September 30, 2005 ("Third Quarter 2005") to Three Months Ended September 30, 2004 ("Third Quarter 2004")
Rental revenues increased by $12.9 million, or 36%, to $48.8 million for Third Quarter 2005 compared to $35.9 million for Third Quarter 2004. The increase resulted primarily from rental revenues from properties acquired, placed in service or redeveloped after July 1, 2004.
Tenant recoveries increased by $4.0 million, or 41%, to $13.6 million for Third Quarter 2005 compared to $9.6 million for Third Quarter 2004. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after July 1, 2004.
Other income increased by $366,000, or 37%, to $1.4 million for Third Quarter 2005 compared to $984,000 for Third Quarter 2004. The increase resulted primarily from increases in storage income and construction management fee income.
Rental operating expenses increased by $4.2 million, or 41%, to $14.4 million for Third Quarter 2005 compared to $10.2 million for Third Quarter 2004. The increase resulted primarily from increases in rental operating expenses (primarily property taxes and utilities) from properties acquired, placed in service or redeveloped after July 1, 2004. The majority of the increase in rental operating expenses is recoverable from our tenants through tenant recoveries.
General and administrative expenses increased by $2.3 million, or 64%, to $6.0 million for Third Quarter 2005 compared to $3.7 million for Third Quarter 2004 primarily due to costs associated with the growth in both the depth and breadth of our operations in multiple markets from 103 properties with approximately 6.5 million rentable square feet at September 30, 2004 to 129 properties with approximately 8.4 million rentable square feet at September 30, 2005.
Interest expense increased by $6.5 million, or 99%, to $13.2 million for Third Quarter 2005 compared to $6.6 million for Third Quarter 2004. The increase resulted from increases in indebtedness on our unsecured line of credit, unsecured term loan and secured notes payable, and increases in the floating interest rates on our unsecured line of credit, unsecured term loan and other floating rate debt. These borrowings were utilized to finance the acquisition of properties in 2004 and 2005, and the development and redevelopment of properties. The weighted average effective interest rate on our unsecured line of credit and unsecured term loan (not including the effect of interest rate swap agreements) increased from 3.04% as of September 30, 2004 to 5.17% as of September 30, 2005. We have entered into certain swap agreements to hedge a portion of our exposure to variable interest rates with our unsecured line of credit and unsecured term loan (see "Liquidity and Capital Resources - Unsecured line of credit and unsecured term loan").
Depreciation and amortization increased by $3.5 million, or 33%, to $14.1 million for Third Quarter 2005 compared to $10.6 million for Third Quarter 2004. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after July 1, 2004.
Income from discontinued operations, net was $59,000 for Third Quarter 2005. It reflects the results of operations of one property in the Southeast market that was sold during Third Quarter 2005.
Comparison of Nine Months Ended September 30, 2005 ("Nine Months 2005") to Nine Months Ended September 30, 2004 ("Nine Months 2004")
Rental revenues increased by $34.2 million, or 33%, to $138.2 million for Nine Months 2005 compared to $104.0 million for Nine Months 2004. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after January 1, 2004.
Tenant recoveries increased by $10.3 million, or 39%, to $36.6 million for Nine Months 2005 compared to $26.3 million for Nine Months 2004. The increase resulted primarily from properties acquired, placed in service or redeveloped after January 1, 2004.
Other income increased by $861,000, or 38%, to $3.1 million for Nine Months 2005 compared to $2.3 million for Nine Months 2004. The increase resulted primarily from increases in storage income and construction management fee income.
Rental operating expenses increased by $12.1 million, or 44%, to $39.8 million for Nine Months 2005 compared to $27.7 million for Nine Months 2004. The increase resulted primarily from increases in rental operating expenses (primarily property taxes and utilities) from properties acquired, placed in service or redeveloped after January 1, 2004. The majority of the increase in rental operating expenses is recoverable from our tenants through tenant recoveries.
General and administrative expenses increased by $4.1 million, or 37%, to $15.2 million for Nine Months 2005 compared to $11.1 million for Nine Months 2004 primarily due to costs associated with the growth in both the depth and breadth of our operations in multiple markets from 103 properties with approximately 6.5 million rentable square feet at September 30, 2004 to 129 properties with approximately 8.4 million rentable square feet at September 30, 2005.
Interest expense increased by $15.5 million, or 76%, to $35.7 million for Nine Months 2005 compared to $20.3 million for Nine Months 2004. The increase resulted from increases in indebtedness on our unsecured line of credit, unsecured term loan and secured notes payable, and increases in the floating interest rates on our unsecured line of credit, unsecured term loan and other floating rate debt. These borrowings were utilized to finance the acquisition of properties in 2004 and 2005, and the development and redevelopment of properties. The weighted average effective interest rate on our unsecured line of credit and unsecured term loan (not including the effect of interest rate swap agreements) increased from 3.04% as of September 30, 2004 to 5.17% as of September 30, 2005. We have entered into certain swap agreements to hedge a portion of our exposure to variable interest rates with our unsecured line of credit and unsecured term loan (see "Liquidity and Capital Resources - Unsecured line of credit and unsecured term loan").
Depreciation and amortization increased by $9.3 million, or 30%, to $39.9 million for Nine Months 2005 compared to $30.6 million for Nine Months 2004. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after January 1, 2004.
Income from discontinued operations, net was $132,000 and $1.7 million for Nine Months 2005 and Nine Months 2004, respectively. It reflects the results of operations of one property in the Southeast market that we sold during Nine Months 2005, and one property in the Suburban Washington D.C. market that we sold in the first quarter of 2004. In connection with the sales of these properties, we recorded a gain of approximately $36,000 and $1.6 million during Nine Months 2005 and Nine Months 2004, respectively.
Liquidity and Capital Resources
Cash flows
Net cash provided by operating activities for Nine Months 2005 increased by $31.8 million to $88.4 million compared to $56.5 million for Nine Months 2004. The increase resulted primarily from increases in cash flows from our portfolio of operating properties, and increases in accounts payable, accrued expenses and tenant security deposits.
Net cash used in investing activities for Nine Months 2005 increased by $63.2 million to $286.0 million compared to $222.8 million for Nine Months 2004. This increase was primarily due to a higher level of property acquisitions in Nine Months 2005 compared to Nine Months 2004.
Net cash provided by financing activities for Nine Months 2005 increased by $32.4 million to $199.0 million compared to $166.6 million for Nine Months 2004. This increase was primarily due to an increase in proceeds from the issuance of common stock, partially offset by a decrease in principal borrowings from our unsecured line of credit.
Contractual obligations and commitments
Contractual obligations as of September 30, 2005, consist of the following (dollars in thousands):
Payments by Period
------------------------------------------
Total 2005 2006-2007 2008-2009 Thereafter
------------- -------- --------- --------- ----------
Contractual Obligations
Secured notes payable (1) $ 662,137 $ 1,916 $ 250,964 $ 155,801 $ 253,456
Unsecured line of credit and
unsecured term loan 605,000 -- 355,000 250,000 --
Ground lease obligations 63,992 451 3,683 3,801 56,057
Other obligations 5,971 233 1,699 1,616 2,423
------------- -------- --------- --------- ----------
Total $ 1,337,100 $ 2,600 $ 611,346 $ 411,218 $ 311,936
============= ======== ========= ========= ==========
- Excludes unamortized premiums of $4.6 million as of September 30, 2005.
Secured notes payable as of September 30, 2005 includes 33 notes secured by 60 properties and eight land development parcels.
The unsecured line of credit expires December 2007 and may be extended at our sole option for an additional one-year period. The unsecured term loan expires December 2009.
Ground lease obligations as of September 30, 2005 include leases for seven of our properties and one land development parcel. These lease obligations have remaining lease terms of 28 to 50 years, exclusive of extension options.
In addition to the above, we were committed as of September 30, 2005 under the terms of contracts to complete the construction of properties under development at a remaining aggregate cost of approximately $54.8 million.
As of September 30, 2005, we were also committed to fund approximately $27.0 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $13.5 million for certain investments.
Tenant security deposits and other restricted cash
Tenant security deposits and other restricted cash consist of the following (in thousands):
September 30, December 31,
2005 2004
--------- ---------
Funds held in trust under the terms of certain secured notes payable $ 13,254 $ 11,241
Security deposit funds based on the terms of certain lease agreements 2,087 2,045
Other funds held in escrow 4,093 4,383
--------- ---------
$ 19,434 $ 17,669
========= =========
Secured notes payable
Secured notes payable consists of the following (dollars in thousands):
September 30, December 31,
2005 2004
------------ ------------
Secured notes payable, interest rates varying from 4.32% to 8.71%, $ 662,137 $ 635,432
(weighted average effective interest rate of 6.14% and 5.67%
at September 30, 2005 and December 31, 2004, respectively),
maturity dates ranging from January 2006 to June 2016
Unamortized premiums 4,561 3,514
------------ ------------
Total secured notes payable $ 666,698 $ 638,946
============ ============
Our secured notes payable generally require monthly payments of principal and interest. At September 30, 2005, our secured notes payable were comprised of $482.8 million and $183.9 million of fixed and variable rate debt, respectively, compared to $437.2 million and $201.7 million of fixed and variable rate debt, respectively, at December 31, 2004.
The following is a summary of the scheduled principal payments for our secured debt and the weighted average interest rates as of September 30, 2005 (in thousands):
Weighted
Average
Year Amount Interest Rate (1)
- ---------------------- ----------- -----------
2005 $ 1,916 6.15%
2006 188,565 6.15%
2007 62,399 6.36%
2008 115,629 6.28%
2009 40,172 6.82%
Thereafter 253,456 6.80%
-----------
Subtotal 662,137
Unamortized premiums 4,561
-----------
Total $ 666,698
===========
(1) The weighted average interest rate is calculated based on the outstanding debt as of October 1st 2005, and as of January 1st for each year thereafter.
Unsecured line of credit and unsecured term loan
We have an unsecured line of credit that provides for borrowings of up to $500 million. The unsecured line of credit expires December 2007 and may be extended at our sole option for an additional one-year period. As of September 30, 2005, we had borrowings of $355 million outstanding on the unsecured line of credit with a weighted average interest rate of 5.21%. As of September 30, 2005, we have an unsecured term loan with outstanding borrowings of $250 million with a weighted average interest rate of 5.11%. The unsecured term loan expires December 2009.
Borrowings under our unsecured line of credit and unsecured term loan bear interest at a LIBOR-based rate. For each LIBOR-based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants. In addition, the terms of the unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Under the unsecured line of credit and unsecured term loan, we have an option to increase our maximum available commitment by an additional $100 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2005 (dollars in thousands):
Effective at
Notional September 30, Interest Termination Fair
Transaction Dates Effective Dates Amounts 2005 Pay Rates Dates Values
- ------------------ --------------- ------------ ------------- -------- ---------------- --------
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 $ 55
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 52
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 187
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 187
December 2003 December 31, 2004 50,000 50,000 3.000% December 30, 2005 124
December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 177
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (480)
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 445
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 445
April 2004 April 29, 2005 50,000 50,000 3.140% April 28, 2006 311
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 162
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (161)
June 2004 June 30, 2005 50,000 50,000 4.343% June 30, 2007 82
December 2004 December 31, 2004 50,000 50,000 3.590% January 2, 2008 939
December 2004 January 3, 2006 50,000 -- 3.927% July 1, 2008 695
May 2005 December 30, 2005 25,000 -- 4.120% November 30, 2006 87
May 2005 June 30, 2006 50,000 -- 4.270% June 29, 2007 143
May 2005 November 30, 2006 25,000 -- 4.330% November 30, 2007 52
May 2005 June 29, 2007 50,000 -- 4.400% June 30, 2008 66
May 2005 November 30, 2007 25,000 -- 4.460% November 28, 2008 21
May 2005 June 30, 2008 50,000 -- 4.509% June 30, 2009 34
May 2005 November 28, 2008 25,000 -- 4.615% November 30, 2009 (1)
Total Interest Rate Swap Agreements in Effect ------------- --------
at September 30, 2005 $ 350,000 $ 3,622
============= ========
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as the counterparties are established, well-capitalized financial institutions. In addition, we have entered into master derivative agreements with each counterparty. These master derivative agreements (all of which are on the standard International Swaps & Derivatives Association, Inc. form) define certain terms between us and each counterparty to address and minimize certain risks associated with our swap agreements, including a default by a counterparty.
As of September 30, 2005 and December 31, 2004, our interest rate swap agreements have been classified at their fair values in our consolidated balance sheets. The offsetting adjustments were reflected as unrealized gains/losses in accumulated other comprehensive income in the stockholders' equity section of our condensed consolidated balance sheets. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made.
Other resources and liquidity requirements
In March 2005, we sold 1,437,500 shares of our common stock in an underwritten offering (including the shares issued upon exercise of the underwriter's over-allotment option). The shares were issued at a price of $62.51 per share, resulting in aggregate proceeds of approximately $89.1 million (after deducting underwriting discounts and other offering costs).
In September 2005, we sold 1,200,000 shares of our common stock in an underwritten offering. The shares were issued at a price of $81.00 per share, resulting in net proceeds of approximately $96.4 million (after deducting underwriting discounts and other offering costs).
We expect to continue meeting our short-term liquidity and capital requirements generally through our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to enable us to make distributions necessary to continue qualifying as a REIT. We also believe that net cash provided by operating activities will be sufficient to fund recurring non- revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as for property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non- recurring capital improvements, through net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our unsecured line of credit and unsecured term loan, and the issuance of additional debt and/or equity securities.
Capital Expenditures and Leasing Costs
The following provides additional information with respect to capital expenditures and leasing costs incurred during the nine months ended September 30, 2005 (in thousands):
|
Property-related capital expenditures (1) |
$ 1,937 |
|
Leasing costs (2) |
$ 282 |
|
Property-related redevelopment costs |
$58,631 |
|
Property-related development costs |
$60,841 |
_______
- Property-related capital expenditures include all capital expenditures except capital expenditures that are recoverable from tenants, revenue-enhancing capital expenditures and costs related to the redevelopment of a property. Capital expenditures fluctuate in any given period due to the nature, extent or timing of improvements required and the extent to which they are recoverable from tenants. Approximately 89% of our leases (based on rentable square feet) provide for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing). In addition, we implement an active preventative maintenance program at each of our properties to minimize capital expenditures.
- Leasing costs consist of tenant improvements and leasing commissions related to leasing of acquired vacant space and second generation space.
Inflation
As of September 30, 2005, approximately 84% of our leases (on a square footage basis) were triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases thereto. In addition, as of September 30, 2005, approximately 6% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Approximately 90% of our leases (on a square footage basis) contained effective annual rent escalations that are either fixed (generally ranging from 3% to 3.5%) or indexed based on the consumer price index or another index. Accordingly, we do not believe that our earnings or cash flow from real estate operations are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
Generally accepted accounting principles ("GAAP") basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of Funds From Operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance for REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Liquidity and Capital Resources - Cash flows" above for information regarding these measures of cash flow.)
The following table presents a reconciliation of net income available to common stockholders, the most directly comparable GAAP financial measure to FFO, to funds from operations available to common stockholders for the three and nine months ended September 30, 2005 and 2004 (in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------- ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ------------
Net income available to common stockholders $11,969 $11,370 $35,186 $34,212
Add:
Depreciation and amortization (1) 14,073 10,574 39,965 30,643
Minority interest 234 -- 257 --
Subtract:
Gain on sales of property (2) (36) -- (36) (1,627)
FFO allocable to minority interest (271) -- (275) --
---------- ---------- ---------- ------------
Funds from operations available to
common stockholders $25,969 $21,944 $75,097 $63,228
========== ========== ========== ============
- Includes depreciation and amortization on assets sold or "held for sale" reflected as discontinued operations (for the periods prior to when such assets were sold or designated as "held for sale").
- Gain on sales of property relates to the disposition of one property in the Southeast market during the third quarter of 2005, and one property in the Suburban Washington D.C. market during the first quarter of 2004.
Property and Lease Information
The following table is a summary of our property portfolio as of September 30, 2005 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentages
----------- ----------- ---------- -----------
Markets
California - Pasadena 1 31,343 $ 807 98.9%
California - San Diego 22 1,052,304 28,858 92.8%
California - San Francisco Bay 15 1,043,737 30,904 97.6%
Eastern Massachusetts 21 1,208,686 33,644 93.0%
New Jersey/Suburban Philadelphia 7 458,623 7,827 98.5%
Southeast 7 383,891 6,636 83.8%(1)
Suburban Washington D.C. 31 2,405,311 49,495 97.8%
Washington - Seattle 11 821,543 23,560 87.3%
International - Canada 1 68,000 2,595 100.0%
----------- ----------- ---------- -----------
Total 116 7,473,438 $ 184,326 94.5%(2)
=========== =========== ========== ===========
________
- All, or substantially all, of the vacant space is office or warehouse space.
- Excludes 13 properties under full or partial redevelopment. The total rentable square feet associated with these properties was 914,817, of which 465,713 square feet were under redevelopment as of September 30, 2005. Including properties under full or partial redevelopment, occupancy as of September 30, 2005 was 89.5%.
The following table provides information with respect to the lease expirations at our properties as of September 30, 2005:
Square Percentage of Annualized Base
Year of Number of Footage of Aggregate Rent of Expiring
Lease Expiring Expiring Portfolio Leased Leases (per
Expiration Leases Leases Square Feet square foot)
- ------------- ------------ -------------- ---------------- ----------------
2005 45 (1) 179,047 2.4% $24.51
2006 57 953,463 12.7% $24.89
2007 32 711,897 9.5% $27.06
2008 21 546,643 7.3% $26.69
2009 24 463,066 6.2% $21.56
Thereafter 106 4,656,859 61.9% $27.19
_________
- Includes 23 month-to-month leases for approximately 41,000 square feet.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on September 30, 2005, we estimate that a 1% increase in interest rates on our variable rate debt, including our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $4.4 million. We further estimate that a 1% decrease in interest rates on our variable rate debt, including our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect on September 30, 2005, would increase annual future earnings and cash flows by approximately $4.4 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $27.7 million at September 30, 2005. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $28.8 million at September 30, 2005.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on September 30, 2005. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
We have exposure to equity price market risk because of our equity investments in certain publicly-traded companies and privately held entities. We classify investments in publicly-traded companies as available-for-sale and, consequently, record them on our balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. Investments in privately held entities are generally accounted for under the cost method because we do not influence any of the operating or financial policies of the entities in which we invest. For all investments, we recognize other than temporary declines in value against earnings in the same period the decline in value was deemed to have occurred. There is no assurance that future declines in values will not have a material adverse impact on our future results of operations. By way of example, a 10% decrease in the fair value of our equity investments as of September 30, 2005 would decrease their fair value by approximately $7.7 million.
We have exposure to foreign currency exchange rate market risk related to our wholly-owned subsidiary operating in Canada. The functional currency of our foreign subsidiary operating in Canada is the local currency, the Canadian dollar. Gains or losses resulting from the translation of our foreign subsidiary's balance sheet and income statement are included in accumulated other comprehensive income as a separate component of stockholders' equity. Gains or losses will be reflected in our income statement when a transaction with a third party, denominated in a currency other than the entity's functional currency, is settled and the functional currency cash flows realized are more or less than the exchange rate in effect when the transaction was initiated.
There have been no material changes in our reported market risks since January 1, 2005. See further discussion of these risks in our Annual Report on Form 10-K for the year ended December 31, 2004.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We performed an evaluation, under the supervision of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on our evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective to ensure that information required for disclosure is recorded, processed, summarized and reported within the requisite time periods as of September 30, 2005.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 6. EXHIBITS
|
12.1 |
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. |
|
31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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, thereunto duly authorized, on November 9, 2005.
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ALEXANDRIA REAL ESTATE EQUITIES INC. |
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/s/ Joel S. Marcus Joel S. Marcus Chief Executive Officer (Principal Executive Officer) |
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/s/ Dean A. Shigenaga Dean A. Shigenaga Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 12.1
ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
Nine Months Year Ended December 31, (a)
Ended -----------------------------------------
9/30/05 2004 2003 2002 (b) 2001
----------- --------- --------- --------- ---------
Income from continuing operations
before minority interest.............. $47,378 $58,436 $48,359 $38,131 $27,441
Add: Interest expense................... 35,729 28,670 26,416 24,984 27,666
Subtract: Minority interest in income of
subsidiaries which have not incurred
fixed charges......................... (214) - - - -
----------- --------- --------- --------- ---------
Earnings available for fixed charges $82,893 $87,106 $74,775 $63,115 $55,107
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Combined fixed charges and preferred
stock dividends:
Interest incurred..................... $57,118 $46,733 $40,647 $39,865 $39,380
Preferred stock dividends............. 12,067 12,595 8,898 8,579 3,666
Preferred stock redemption charge..... - 1,876 - - -
----------- -------- --------- --------- ---------
Total combined fixed charges and
preferred stock dividends........... $69,185 $61,204 $49,545 $48,444 $43,046
----------- -------- --------- --------- ---------
Ratio of earnings to combined fixed charges
and preferred stock dividends(c)...... 1.20 1.42(d) 1.51 1.30 1.28
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- Amounts disclosed for prior periods have been reclassified to conform to the current year presentation related to discontinued operations.
- Pursuant to SFAS 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", in 2003 we reclassified the 2002 loss on early extinguishment of debt to continuing operations. In 2002, this loss was classified as an extraordinary item as previously required under SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt". Amounts shown for 2002 have been adjusted to reflect this reclassification.
- For purposes of calculating the consolidated ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of earnings from continuting operations before income taxes, fixed charges and minority interest in income of subsidiaries which have not incurred fixed charges. Fixed charges consist of interest incurred (including amortization of deferred financing costs and capitalized interest) and preferred stock dividends.
- Ratio of earnings to combined fixed charges and preferred stock dividends for the year ended December 31, 2004 includes the effect of the preferred stock redemption charge pursuant to Emerging Issues Task Force Topic D-42. Excluding the impact of this charge, the ratio of earnings to combined fixed charges and preferred stock dividends for the year ended December 31, 2004 is 1.47.
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT
TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel S. Marcus, Chief Executive Officer (Principal Executive Officer) of Alexandria Real Estate Equities, Inc., certify that:
- I have reviewed this quarterly report on Form 10-Q of Alexandria Real Estate Equities, Inc.;
- Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
- Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
- Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
- Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
- The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
- Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2005
/s/ Joel S. Marcus
Joel S. Marcus
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT
TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dean A. Shigenaga, Chief Financial Officer (Principal Financial and Accounting Officer) of Alexandria Real Estate Equities, Inc., certify that:
- I have reviewed this quarterly report on Form 10-Q of Alexandria Real Estate Equities, Inc.;
- Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
- Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
- Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
- Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
- Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
- The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's the board of directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
- Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2005
/s/ Dean A. Shigenaga
Dean A. Shigenaga
Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER
PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel S. Marcus, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Alexandria Real Estate Equities, Inc. for the quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Alexandria Real Estate Equities, Inc.
Date: November 9, 2005
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/s/ Joel S. Marcus |
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Joel S. Marcus |
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Chief Executive Officer |
I, Dean A. Shigenaga, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Alexandria Real Estate Equities, Inc. for the quarter ended June 30, 2005 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Alexandria Real Estate Equities, Inc.
Date: November 9, 2005
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/s/ Dean A. Shigenaga |
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Dean A. Shigenaga |
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Chief Financial Officer |