Alexandria Real Estate Equities, Inc 10-Q, filed Nov 14, 2000
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-Q
Alexandria Real Estate Equities, Inc filed this 10-Q on November 14, 2000, covering the quarter ended September 30, 2000.
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, 2000 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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135 North Los Robles Avenue, Suite 250
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, 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 [ ],
As of November 10, 2000, 15,536,856 shares of common stock, par value $.01 per share, were outstanding.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets of Alexandria Real Estate Equities, Inc. and Subsidiaries as of September 30, 2000 and December 31, 1999 |
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Condensed Consolidated Income Statements of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three and nine months ended September 30, 2000 and 1999. |
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Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the nine months ended September 30, 2000 and 1999 |
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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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| PART II. Other Information |
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| Item 1. legal Proceedings |
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| Item 2: Changes in Securities and Use of Proceeds |
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| Item 3: Defaults Upon Senior Securities |
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| Item 4: Submission of Matters to a Vote of Security Holders |
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| Item 5: Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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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
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 30, December 31,
2000 1999
------------ ------------
Assets
Rental properties, net $670,107 $554,706
Property under development 23,662 44,121
Cash and cash equivalents 775 3,446
Tenant security deposits and other restricted cash 6,055 4,681
Secured note receivable 6,000 6,000
Tenant receivables 3,735 3,432
Deferred rent 13,303 9,014
Other assets 42,297 17,718
------------ ------------
Total assets $765,934 $643,118
============ ============
Liabilities and stockholders' equity
Secured notes payable $171,613 $158,512
Unsecured line of credit 240,000 192,000
Accounts payable, accrued expenses and tenant
security deposits 22,782 23,349
Dividends payable 7,447 6,674
------------ ------------
Total liabilities 441,842 380,535
Stockholders' equity:
Series A preferred stock 38,588 38,588
Common stock 155 137
Additional paid-in capital 278,646 225,180
Deferred compensation (598) (1,494)
Retained earnings - -
Accumulated other comprehensive income 7,301 172
------------ ------------
Total stockholders' equity 324,092 262,583
------------ ------------
Total liabilities and stockholders' equity $765,934 $643,118
============ ============
See 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,
----------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues:
Rental $21,581 $17,654 $59,893 $50,152
Tenant recoveries 5,663 4,354 15,121 11,736
Interest and other income 1,231 387 2,333 1,140
----------- ----------- ----------- -----------
28,475 22,395 77,347 63,028
Expenses:
Rental operations 6,027 4,772 15,828 13,891
General and administrative 2,391 1,922 6,588 4,915
Interest 7,066 4,835 18,585 14,648
Depreciation and amortization 6,460 5,017 17,737 12,610
----------- ----------- ----------- -----------
21,944 16,546 58,738 46,064
----------- ----------- ----------- -----------
Net income 6,531 5,849 18,609 16,964
Dividends on preferred stock 916 916 2,748 1,120
----------- ----------- ----------- -----------
Net income available to
common stockholders $5,615 $4,933 $15,861 $15,844
=========== =========== =========== ===========
Net income per common share:
-Basic $0.39 $0.36 $1.12 $1.18
=========== =========== =========== ===========
-Diluted $0.38 $0.36 $1.10 $1.16
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Weighted average shares of
common stock outstanding:
-Basic 14,518,005 13,723,327 14,130,016 13,453,444
=========== =========== =========== ===========
-Diluted 14,782,077 13,877,678 14,354,664 13,601,998
=========== =========== =========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30,
----------------------
2000 1999
---------- ----------
Net cash provided by operating activities $21,874 $30,173
---------- ----------
Investing Activities
Purchase of rental properties (46,503) (60,821)
Additions to rental properties (31,169) (9,867)
Property development costs (23,439) (14,100)
Additions to investments (10,051) (2,567)
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Net cash used in investing activities (111,162) (87,355)
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Financing Activities
Proceeds from secured notes payable 6,074 2,625
Net proceeds from issuance of preferred stock - 36,888
Net proceeds from issuances of common stock 52,130 29,830
Repurchase of common stock - (3,459)
Proceeds from exercise of stock options 3,969 774
Net borrowings on unsecured line of credit 48,000 11,000
Principal reductions of secured notes payable (2,764) (2,800)
Dividends paid on common stock (18,044) (16,371)
Dividends paid on preferred stock (2,748) (356)
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Net cash provided by financing activities 86,617 58,131
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Net increase (decrease) in cash and cash equivalents (2,671) 949
Cash and cash equivalents at beginning of period 3,446 1,554
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Cash and cash equivalents at end of period $775 $2,503
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See 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
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, conversion, retrofit, expansion and selective development and redevelopment of properties containing a combination of office and laboratory space. We refer to these properties as "Life Science Facilities." Our Life Science Facilities are designed and improved for lease primarily to pharmaceutical, biotechnology, diagnostic, device, contract research and personal care products companies, scientific research institutions, related government agencies and technology enterprises. As of September 30, 2000, our portfolio consisted of 74 properties in nine states with approximately 4.8 million rentable square feet.
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 that are necessary to fairly present the interim financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 1999.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Alexandria and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation.
2. New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 133 (SFAS 133) "Accounting for Derivative Instruments and Hedging Activities." This statement, which is required to be adopted for annual periods beginning after June 15, 2000, establishes standards for recognition and measurement of derivatives and hedging activities. We are currently assessing the financial statement impact of SFAS 133.
3. Rental Properties
Rental properties consist of the following (in thousands):
September 30, December 31,
2000 1999
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Land $98,926 $81,446
Buildings and improvements 564,798 475,507
Tenant and other improvements 58,088 33,249
----------- -----------
721,812 590,202
Less accumulated depreciation (51,705) (35,496)
----------- -----------
$670,107 $554,706
=========== ===========
During the three months ended September 30, 2000, we acquired seven properties containing approximately 237,000 rentable square feet from unrelated third parties for an aggregate purchase price (including closing and transaction costs) of approximately $34.0 million.
4. Unsecured Line of Credit
We have an unsecured line of credit that provides for borrowings of up to $325 million. Borrowings under the line of credit bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio, and a fixed charge coverage ratio. In addition, the terms of the line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. Borrowings under the line of credit are limited to an amount based on a pool of unencumbered assets. Accordingly, as we acquire additional unencumbered properties, borrowings available under the line of credit will increase, but may not exceed $325 million. As of September 30, 2000, borrowings under the line of credit were limited to approximately $311 million, and the borrowings outstanding on the line of credit carried a weighted average interest rate of 8.34%.
The line of credit expires February 2003 and provides for an extension (provided there is no default) of an additional one-year period, upon notice by the company and consent of the participating banks.
5. Stockholders' Equity
On September 25, 2000, we declared a cash dividend on our common stock aggregating $6,680,000 ($ 0.43 per share) for the calendar quarter ended September 30, 2000. We paid the dividend on October 16, 2000. On September 25, 2000, we also declared a cash dividend on our Series A preferred stock aggregating $916,000 ($ 0.59375 per share) for the period from July 16, 2000 through October 15, 2000. We paid the dividend on October 16, 2000. The portion relating to the period prior to September 30, 2000 ($765,000) has been included in dividends payable in the accompanying balance sheet.
6. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net income available to common
stockholders $5,615 $4,933 $15,861 $15,844
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Weighted average shares of
common stock outstanding - basic 14,518,005 13,723,327 14,130,016 13,453,444
Add: dilutive effect of
stock options and stock grants 264,072 154,351 224,648 148,554
----------- ----------- ----------- -----------
Weighted average shares of
common stock outstanding - diluted 14,782,077 13,877,678 14,354,664 13,601,998
=========== =========== =========== ===========
Net income per common share:
- Basic $0.39 $0.36 $1.12 $1.18
=========== =========== =========== ===========
- Diluted $0.38 $0.36 $1.10 $1.16
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7. Subsequent Event
On October 4, 2000, we obtained a loan for $24,700,000, secured by first deeds of trust on two Life Science Facilities located in Maryland. The loan bears interest at a rate of 8.33% per annum and is payable in monthly installments based on a 30-year amortization schedule. The loan is due in November 2010. The proceeds from the loan were used to pay down a portion of the outstanding balance on our unsecured line of credit.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve known and unknown risks and uncertainties. Given these uncertainties, prospective and current investors are cautioned not to place undue reliance on such forward-looking statements. Our actual results, business plans or industry results may be materially different from any future results or business plans expressed or implied by such forward-looking statements as a result of many factors, including, but not limited to, those described 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, 1999. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained in this or any other document. Readers of this Form 10-Q should also read our Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors. As used in this Form 10-Q, "we," "our," "ours" 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, conversion, retrofit, expansion and selective development and redevelopment of high quality, strategically located Life Science Facilities in our target markets.
Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. Of the 74 properties we owned as of September 30, 2000, four were acquired in 1994, eight in 1996, nine in 1997, 29 in 1998, six in 1999 and 11 in 2000. In addition, we completed the development of two properties in 1999 (together with the six properties acquired in 1999, the "1999 Properties") and five properties in 2000 (together with the 11 properties acquired in 2000, the "2000 Properties"). As a result of our acquisition and development activities, the financial data presented in this report shows significant increases in total revenue and expenses for the 2000 period compared to the 1999 period.
Results of Operations
Comparison of Three Months Ended September 30, 2000 ("Third Quarter 2000") to Three Months Ended September 30, 1999 ("Third Quarter 1999")
Rental revenue increased by $3.9 million, or 22%, to $21.6 million for Third Quarter 2000 compared to $17.7 million for Third Quarter 1999. The increase resulted primarily from rental revenue from the 1999 Properties acquired or developed after July 1, 1999 and the 2000 Properties. Rental revenue from the properties operating before July 1, 1999 (the "Third Quarter Same Properties") increased by $420,000, or 2.8%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $1.3 million, or 30%, to $5.7 million for Third Quarter 2000 compared to $4.4 million for Third Quarter 1999. The increase resulted partially from tenant recoveries from the 1999 Properties acquired or developed after July 1, 1999 and the 2000 Properties. Tenant recoveries for the Third Quarter Same Properties increased by $793,000, or 20%, primarily due to increases in certain recoverable operating expenses and capitalized costs at certain properties.
Interest and other income increased by $844,000, or 218%, to $1.2 million for Third Quarter 2000 compared to $387,000 for Third Quarter 1999, resulting primarily from $256,000 in service fees from two of our properties and $320,000 of investment income.
Rental operating expenses increased by $1.2 million, or 26%, to $6.0 million for Third Quarter 2000 compared to $4.8 million for Third Quarter 1999. The increase resulted partially from rental operating expenses from the 1999 Properties acquired or developed after July 1, 1999 and the 2000 Properties. Operating expenses for the Third Quarter Same Properties increased by $654,000, or 14.8%, primarily due to an increase in recoverable tenant related expenses partially offset by the fact that third party management fees are no longer incurred at certain properties.
The following is a comparison of property operating data computed under accounting principles generally accepted in the United States ("GAAP Basis") and under accounting principles generally accepted in the United States, adjusted to exclude the effect of straight line rent adjustments required by GAAP ("Cash Basis") for the Third Quarter Same Properties (dollars in thousands):
For the Three Months
Ended September 30,
-----------------------
2000 1999 Change
----------- ----------- ---------
GAAP BASIS:
Revenue $20,776 $19,336 7.4%
Rental operating expenses 5,073 4,419 14.8%
----------- ----------- ---------
Net operating income $15,703 $14,917 5.3%
=========== =========== =========
CASH BASIS (1):
Revenue $20,570 $18,616 10.5%
Rental operating expenses 5,073 4,419 14.8%
----------- ----------- ---------
Net operating income $15,497 $14,197 9.2%
=========== =========== =========
_________
- Revenue and operating expenses are computed in accordance with GAAP, except that revenue excludes the effect of straight line rent adjustments.
General and administrative expenses increased by $469,000, or 24%, to $2.4 million for Third Quarter 2000 compared to $1.9 million for Third Quarter 1999. The increase was primarily due to the continued increase in the scope of our operations.
Interest expense increased by $2.3 million, or 46%, to $7.1 million for Third Quarter 2000 compared to $4.8 million for Third Quarter 1999. The increase resulted from (a) indebtedness incurred to acquire the 1999 Properties acquired after July 1, 1999 and the 2000 Properties, (b) indebtedness incurred to finance the development of properties and (c) an increase in the floating interest rate on our line of credit. The weighted average effective interest rate on our borrowings (not including the effect of swap agreements) increased from 6.91% as of September 30, 1999 to 8.34% as of September 30, 2000. We have entered into certain swap agreements to hedge our borrowings at variable interest rates (see "Liquidity and Capital Resources - Unsecured Line of Credit").
Depreciation and amortization increased by $1.5 million, or 29%, to $6.5 million for Third Quarter 2000 compared to $5.0 million for Third Quarter 1999. The increase resulted primarily from depreciation associated with the 1999 Properties acquired after July 1, 1999 and the 2000 Properties.
As a result of the foregoing, net income was $6.5 million for Third Quarter 2000 compared to $5.8 million for Third Quarter 1999.
Comparison of Nine Months Ended September 30, 2000 ("Nine Months 2000") to Nine Months Ended September 30, 1999 ("Nine Months 1999")
Rental revenue increased by approximately $9.7 million, or 19%, to $59.9 million for Nine Months 2000 compared to $50.2 million for Nine Months 1999. The increase resulted primarily from rental revenue from the 1999 Properties and the 2000 Properties. Rental revenue from the Properties acquired before January 1, 1999 (the "Nine Months Same Properties") increased by $1.2 million, or 2.8%, due to increases in rental rates and occupancy.
Tenant recoveries increased by approximately $3.4 million, or 29%, to $15.1 million for Nine Months 2000 compared to $11.7 million for Nine Months 1999. The increase resulted primarily from tenant recoveries from the 1999 Properties and the 2000 Properties. Tenant recoveries from the Nine Months Same Properties increased by $1.7 million, or 17.0%, primarily due to increases in certain recoverable operating expenses and capitalized costs at certain properties.
Interest and other income increased by $1.2 million, or 105%, to $2.3 million for Nine Months 2000 compared to $1.1 million for Nine Months 1999, resulting primarily from investment income of $499,000 and $366,000 in service fees from two of our properties.
Rental operating expenses increased by approximately $1.9 million, or 14%, to $15.8 million for Nine Months 2000 compared to $13.9 million for Nine Months 1999. The increase resulted primarily from the 1999 Properties and the 2000 Properties. Operating expenses for the Nine Months Same Properties increased by $500,000, or 4.2%, primarily due to an increase in recoverable tenant related expenses partially offset by the fact that third party management fees are no longer incurred at certain properties.
The following is a comparison of property operating data computed on a GAAP Basis and on a Cash Basis for the Nine Months Same Properties (dollars in thousands):
For the Nine Months
Ended September 30,
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2000 1999 Change
----------- ----------- ---------
GAAP BASIS:
Revenue $55,802 $52,634 6.0%
Rental operating expenses 12,512 12,012 4.2%
----------- ----------- ---------
Net operating income $43,290 $40,622 6.6%
=========== =========== =========
CASH BASIS (1):
Revenue $54,730 $50,897 7.5%
Rental operating expenses 12,512 12,012 4.2%
----------- ----------- ---------
Net operating income $42,218 $38,885 8.6%
=========== =========== =========
_________
(1) Revenue and operating expenses are computed in accordance with GAAP, except that revenue excludes the effect of straight line rent adjustments
General and administrative expenses increased by approximately $1.7 million, or 34%, to $6.6 million for Nine Months 2000 compared to $4.9 million for Nine Months 1999. The increase was primarily due to the continued increase in the scope of our operations.
Interest expense increased by approximately $4.0 million, or 27%, to $18.6 million for Nine Months 2000 compared to $14.6 million for Nine Months 1999. The increase resulted from (a) indebtedness incurred to acquire the 1999 Properties and the 2000 Properties, (b) indebtedness incurred to finance the development of properties and (c) an increase in the floating interest rate on our line of credit. The weighted average effective interest rate on our borrowings (not including the effect of swap agreements) increased from 6.91% as of September 30, 1999 to 8.34% as of September 30, 2000. We have entered into certain swap agreements to hedge our borrowings at variable interest rates (see "Liquidity and Capital Resources - Unsecured Line of Credit").
Depreciation and amortization increased by approximately $5.1 million, or 41%, to $17.7 million for Nine Months 2000 compared to $12.6 million for Nine Months 1999. The increase resulted primarily from depreciation associated with the 1999 Properties and the 2000 Properties.
As a result of the foregoing, net income was $18.6 million for Nine Months 2000 compared to $17.0 million for Nine Months 1999.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for Nine Months 2000 decreased by $8.3 million, to $21.9 million compared to $30.2 million for Nine months 1999. The decrease resulted primarily from increases in other assets resulting from loan costs incurred in connection with the renewal of our unsecured line of credit in February 2000 and deferred rent associated with new leases.
Net cash used in investing activities increased by $23.8 million, to $111.2 million for Nine Months 2000 compared to $87.4 million for Nine Months 1999. The increase was primarily due to a higher level of property development and redevelopment costs incurred and increased investment activity.
Net cash provided by financing activities increased by $28.5 million, to $86.6 million for Nine Months 2000 compared to $58.1 million for Nine Months 1999. Cash provided by financing activities for Nine Months 2000 consisted of net proceeds from our unsecured line of credit, secured debt, issuances of common stock and exercise of stock options, partially offset by principal reductions of our secured debt and distributions to stockholders. Cash provided by financing activities for Nine Months 1999 consisted of net proceeds from our unsecured line of credit, issuance and repurchase of our common stock, issuance of preferred stock, exercise of stock options and secured debt, partially offset by principal reductions of our secured debt and distributions to stockholders.
Commitments
As of September 30, 2000, we were committed under the terms of certain leases to complete the construction of buildings and related improvements at a remaining aggregate cost of $23.8 million.
As of September 30, 2000, we were also committed to fund approximately $48.4 million for the construction of tenant improvements under the terms of various leases and for certain investments in limited partnerships.
Restricted Cash
Restricted cash as of September 30, 2000 consists of the following (in thousands):
Amount
---------
Funds held in trust as additional security required under
the terms of certain secured notes payable $4,479
Security deposit funds based on the terms of certain
lease agreements 1,576
---------
$6,055
=========
Secured Debt
Secured debt as of September 30, 2000 consists of the following (dollars in thousands):
Balance at Stated
September 30, Interest
Collateral 2000 Rate Maturity Date
- --------------------------------------- ------------ ------------ --------------
One Innovation Drive,
Worcester, MA (1) $11,390 8.75% January 2006
100/800/801 Capitola Drive,
Durham, NC 12,356 8.68% December 2006
20/22 Firstfield Road, Gaithersburg, MD
and 1300 Quince Orchard Road,
Gaithersburg, MD 10,020 8.25% August 2007
620 Memorial Drive,
Cambridge, MA (2) 19,597 9.125% October 2007
14225 Newbrook Drive, Chantilly, VA
and 3000/3018 Western Avenue,
Seattle, WA 35,739 7.22% May 2008
377 Plantation Street, Worcester, MA
and 6166 Nancy Ridge Road,
San Diego, CA 18,829 8.71% December 2009
1431 Harbor Bay Parkway,
Alameda, CA 6,018 7.165% January 2014
3535/3565 General Atomics Court,
San Diego, CA 16,645 9.00% December 2014
1102/1124 Columbia Street,
Seattle, WA 19,682 7.75% May 2016
381 Plantation Street,
(development project)
Worcester, MA 2,625 9.00% October 2000
1201 Clopper Road,
Gaithersburg, MD 18,712 LIBOR + 1.75% October 2001
------------
$171,613
============
(1) The balance shown includes an unamortized premium of $640,000. The effective rate of the loan is 7.25%.
(2) The balance shown includes an unamortized premium of $1,898,000. The effective rate of the loan is 7.25%.
The following is a summary of the scheduled principal payments for our secured debt as of September 30, 2000 (in thousands):
Year Amount
-------------------------------------------
2000 $3,271
2001 22,458
2002 4,050
2003 4,380
2004 4,030
Thereafter 130,886
-----------
Subtotal 169,075
Unamortized Premium 2,538
-----------
$171,613
===========
Unsecured line of credit
We have an unsecured line of credit that provides for borrowings of up to $325 million. Borrowings under the line of credit bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit contains financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio, and a fixed charge coverage ratio. In addition, the terms of the line of credit restrict, among other things, certain investments, indebtedness, distributions and mergers. Borrowings under the line of credit are limited to an amount based on a pool of unencumbered assets. Accordingly, as we acquire additional unencumbered properties, borrowings available under the line of credit will increase, but may not exceed $325 million. As of September 30, 2000, borrowings under the line of credit were limited to approximately $311 million, and the borrowings outstanding on the line of credit carried a weighted average interest rate of 8.34%.
The line of credit expires February 2003 and provides for an extension (provided there is no default) of an additional one-year period, upon notice by the company and consent of the participating banks.
In October 1999, we entered into an interest rate swap agreement with FleetBoston Financial (the "Bank") to hedge our exposure to variable interest rates associated with our line of credit. Interest paid is calculated at a fixed interest rate of 6.5% through May 31, 2001 on a notional amount of $50 million, and interest received is calculated at one-month LIBOR. The net difference between the interest paid and the interest received under such agreements is reflected in our financial statements as an adjustment to interest expense.
In January 2000, we entered into an additional interest rate swap agreement with the Bank to further hedge our exposure to variable interest rates associated with our line of credit. Interest paid is calculated at a fixed interest rate of 6.5% from February 1, 2000 to March 31, 2000, 6.75% from April 1, 2000 to July 31, 2000, 7.00% from August 1, 2000 to December 29, 2000 and 7.25% from December 30, 2000 to December 31, 2001, in each case on a notional amount of $50 million, and interest received is calculated at one-month LIBOR.
In April 2000, we entered into a third swap agreement with Merrill Lynch Capital Services, Inc. Interest paid is calculated at a fixed interest rate of 6.995% through January 2, 2003 on a notional amount of $50 million and interest received is calculated at one- month LIBOR.
In July 2000, we entered into a fourth swap agreement with the Bank. Interest paid will be calculated at a fixed interest rate of 7.07% commencing May 31, 2001 through May 31, 2003 on a notional amount of $50 million and interest received will be calculated at one-month LIBOR.
With respect to our swap agreements, we are exposed to losses in the event the Bank or Merrill Lynch are unable to perform under the agreements, or in the event one month LIBOR is less than the agreed-upon fixed interest rates. The fair value of the swap agreements outstanding as of September 30, 2000 and changes in their fair value as a result of changes in market interest rates are not recognized in our financial statements.
Other Resources and Liquidity Requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using 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 make distributions necessary to enable us to continue qualifying as a real estate investment trust. We also believe that net cash provided by operations will be sufficient to fund our recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, for purposes such as property acquisitions, property development activities, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements, through long-term secured and unsecured indebtedness, including borrowings under our line of credit, and the issuance of additional debt and/or equity securities.
Inflation
Approximately 82% of our leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases therein. In addition, approximately 91% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI index. Accordingly, we do not believe that our earnings or cash flow are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in our variable rate borrowing cost, including borrowings under our unsecured line of credit.
Funds from Operations
We believe that funds from operations ("FFO") is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of our ability to incur and service debt, to make capital expenditures and to make distributions. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in its October 1999 White Paper (the "White Paper"), which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for our discretionary use because a portion of FFO is needed for capital replacement or expansion, debt service obligations, or other commitments and uncertainties. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our 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.
The following tables present our FFO for the three and nine months ended September 30, 2000 and 1999 (in thousands):
For the Three Months
Ended September 30,
---------------------
2000 1999
---------- ----------
Net income $6,531 $5,849
Add:
Depreciation and amortization 6,460 5,017
Subtract:
Dividends on preferred stock (916) (916)
---------- ----------
FFO $12,075 $9,950
========== ==========
For the Nine Months
Ended September 30,
---------------------
2000 1999
---------- ----------
Net income $18,609 $16,964
Add:
Depreciation and amortization 17,737 12,610
Subtract:
Dividends on preferred stock (2,748) (1,120)
---------- ----------
FFO $33,598 $28,454
========== ==========
Property and Lease Information
The following table is a summary of our property portfolio as of September 30, 2000 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentage
----------- ----------- ----------- -----------
Region:
Suburban Washington D.C. 19 1,685,204 $26,242 97.9% (1)
California - San Diego 18 761,707 19,340 98.8%
California - San Francisco Bay 6 399,424 8,792 95.2% (1)
Southeast 5 308,898 5,054 100.0%
New Jersey/Suburban Philadelphia 5 268,418 4,234 98.6%
Eastern Massachusetts 6 384,589 10,336 99.5%
Washington - Seattle 3 327,754 9,354 100.0%
----------- ----------- ----------- -----------
Subtotal 62 4,135,994 83,352 98.3%
Redevelopment Properties 12 658,864 7,651 41.3%
----------- ----------- ----------- -----------
Total 74 4,794,858 $91,003 90.5%
=========== =========== =========== ===========
________
- All, or substantially all, of the vacant space is office or warehouse space.
The following table provides information with respect to the lease expirations at our properties as of September 30, 2000:
Square Percentage of Annualized Base
Year of Number of Footage of Aggregate Rent of Expiring
Lease Expiring Expiring Portfolio Lease Leases (per
Expiration Leases Leases Square Footage square foot)
- --------- ---------- ---------- -------------- ----------------
2000 (1) 22 168,397 3.9% $15.84
2001 34 507,436 11.7% $20.23
2002 25 467,259 10.8% $19.43
2003 23 461,980 10.6% $19.43
2004 19 400,894 9.2% $19.30
Thereafter 53 2,332,209 53.8% $22.42
_________
(1) Represents leases expiring between October 1, 2000 and December 31, 2000.
The following table is a summary of our lease activity for the three months ended September 30, 2000 computed on a GAAP Basis and on a Cash Basis:
Rental TI'S/Lease Average
Number Square Expiring New Rate Commissions Lease
of Leases Footage Rate Rate Increase Per Foot Term
--------- --------- --------- --------- --------- ------------ ---------
Lease Activity - Expired Leases
Lease Expirations
Cash Rent 30 98,729 $19.20 -- -- -- --
GAAP Rent 30 98,729 $19.02 -- -- -- --
Renewed / Released Space
Cash Rent 10 51,772 $21.52 $22.68 5.4% $4.81 1.9 Years
GAAP Rent 10 51,772 $21.44 $23.05 7.5% $4.81 1.9 Years
Month-to-Month Leases
Cash Rent 10 25,812 $11.32 $11.32 0.0% -- --
GAAP Rent 10 25,812 $11.00 $11.32 2.9% -- --
Total Leasing
Cash Rent 20 77,584 $18.13 $18.90 4.2% -- --
GAAP Rent 20 77,584 $17.97 $19.15 6.6% -- --
Vacant Space Leased
Cash Rent 7 141,262 -- $18.43 -- $19.38 6.2 Years
GAAP Rent 7 141,262 -- $18.90 -- $19.38 6.2 Years
All Lease Activity
Cash Rent 27 218,846 -- $18.60 -- -- --
GAAP Rent 27 218,846 -- $18.99 -- -- --
The following table is a summary of our lease activity for the nine months ended September 30, 2000 computed on a GAAP Basis and on a Cash Basis:
Rental TI'S/Lease Average
Number Square Expiring New Rate Commissions Lease
of Leases Footage Rate Rate Increase Per Foot Term
--------- --------- --------- --------- --------- ------------ ---------
Lease Activity - Expired Leases
Lease Expirations
Cash Rent 42 520,433 $22.07 -- -- -- --
GAAP Rent 42 520,433 $21.70 -- -- -- --
Renewed / Released Space
Cash Rent 33 446,659 $22.29 $24.32 9.1% $12.14 4.8 Years
GAAP Rent 33 446,659 $21.89 $25.35 15.8% $12.14 4.8 Years
Month-to-Month Leases
Cash Rent 10 27,312 $11.32 $11.44 1.1% -- --
GAAP Rent 10 27,312 $11.02 $11.44 3.8% -- --
Total Leasing
Cash Rent 43 473,971 $21.66 $23.58 8.9% -- --
GAAP Rent 43 473,971 $21.26 $24.55 15.5% -- --
Vacant Space Leased
Cash Rent 10 299,488 -- $21.85 -- $14.66 7.9 Years
GAAP Rent 10 299,488 -- $23.84 -- $14.66 7.9 Years
All Lease Activity
Cash Rent 53 773,459 -- $22.91 -- -- --
GAAP Rent 53 773,459 -- $24.27 -- -- --
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 are exposed is interest rate risk, which is the result of 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 characteristics of our outstanding debt and limit the effects of interest rates 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 our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon 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, 2000, we estimate that a 1% increase in interest rates on our line of credit would decrease annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $900,000. We further estimate that a 1% decrease in interest rates on our line of credit would increase annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $900,000. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their fair value by approximately $7.7 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their fair value by approximately $8.9 million. A 1% increase or decrease in interest rates on our secured note receivable would not have a material impact on its fair value.
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, 2000. 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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, none of which, in the aggregate, are expected to have a material adverse effect on our financial condition, results of operations or cash flows, and substantially all of which are expected to be covered by liability insurance.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On September 8, 2000, we filed a Current Report on Form 8-K to report the acquisition of six Life Science Facilities.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
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 14, 2000.
| ALEXANDRIA REAL ESTATE EQUITIES, INC. |
| (Registrant) |
| By: | /s/ Joel. S. Marcus |
|
| |
| Joel S. Marcus | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| By: | /s/ Peter J. Nelson |
|
| |
| Peter J. Nelson | |
| Chief Financial Officer, Treasurer and Secretary | |
| (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)
For the
Nine Months
Ended
September 30,
2000 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- ---------
Earnings (Loss): ........................ $18,609 $22,053 $19,403 ($2,797) $2,175 $866
Add Back:
Interest Expense....................... 18,585 19,697 14,033 7,043 6,327 3,553
Write-off of Unamortized Loan Costs.... -- -- -- 2,295 -- --
Acquisition LLC Financing Costs........ -- -- -- 6,973 -- --
--------- --------- --------- --------- --------- ---------
Earnings Available for Fixed Charges. $37,194 $41,750 $33,436 $13,514 $8,502 $4,419
--------- --------- --------- --------- --------- ---------
Combined Fixed Charges:
Interest Incurred...................... $24,442 $23,792 $16,264 $7,139 $6,327 $3,553
Write-off of Unamortized Loan Costs(a). -- -- -- 2,295 -- --
Acquisition LLC Financing Costs(b)..... -- -- -- 6,973 -- --
Preferred Dividends.................... 2,748 2,036 -- 3,038 1,590 --
--------- --------- --------- --------- --------- ---------
Fixed Charges........................ $27,190 $25,828 $16,264 $19,445 $7,917 $3,553
--------- --------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends(c)........... 1.37 1.62 2.06 0.69 1.07 1.24
Excess of Fixed Charges Over Earnings.... $ -- $ -- $ -- $ -- $ -- $ --
-------------------
- This amount represents unamortized loan costs associated with debt retired in connection with the IPO.
- This amount represents the portion of the purchase price of the membership interests in ARE Acquisitions, LLC (the "Acquisition LLC") paid by the Company in excess of the cost incurred by the Acquisition LLC to acquire the three Life Science Facilities owned by it.
- For purposes of calculating the consolidated ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest incurred (including amortization of deferred financing costs and capitalized interest), write-off of unamortized loan costs, Acquisition LLC Financing Costs (see Note (b)), and preferred stock dividends.