Alexandria Real Estate Equities, Inc 10-K, filed Mar 16, 2006
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-K
Alexandria Real Estate Equities, Inc filed this 10-K on March 16, 2006, covering the fiscal year ended December 31, 2005.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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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Maryland |
95-4502084 |
385 East Colorado Boulevard
Suite 299
Pasadena, California 91101
(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (626) 578-0777
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Name of Each Exchange on Which Registered |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
The aggregate market value of the shares of Common Stock held by non-affiliates of registrant was approximately $1.5 billion based on the closing price for such shares on the New York Stock Exchange on June 30, 2005.
As of March 13, 2006, the registrant had outstanding 22,778,820 shares of Common Stock.
Documents Incorporated By Reference
Part III of this report incorporates certain information by reference from the registrant's definitive proxy statement to be filed within 120 days of the end of the fiscal year covered by this report in connection with the registrant's annual meeting of stockholders to be held on or about May 18, 2006.
INDEX TO FORM 10-K
ALEXANDRIA REAL ESTATE EQUITIES, INC.
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PART I |
Page |
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Item 1. |
Business |
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Item 2. |
Properties |
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Item 3. |
Legal Proceedings |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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PART II |
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Item 5. |
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6. |
Selected Financial Data |
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Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operation |
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Item 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. |
Financial Statements and Supplementary Data |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
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Item 9A. |
Controls and Procedures |
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Item 9B. |
Other Information |
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PART III |
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Item 10. |
Directors and Executive Officers of the Registrant |
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Item 11. |
Executive Compensation |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. |
Certain Relationships and Related Transactions |
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Item 14. |
Principal Accounting Fees and Services |
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Item 15. |
Exhibits, Financial Statement Schedule |
PART I
This document contains 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. You can identify some of the forward-looking statements by the use of forward-looking words such as "believes", "expects", "may", "will", "should", "seeks", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words. 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 such forward-looking statements, including, but not limited to, those described below in this report and under the headings "Item 1. Business-Business Risks" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations". We do not undertake 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.
As used in this Form 10-K, references to the "Company", "we", "our", and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
General
We are a Maryland corporation formed in October 1994 that has elected to be taxed as a real estate investment trust ("REIT") for federal income tax purposes. We are engaged principally in the ownership, operation, management, acquisition and selective redevelopment and development of high quality, strategically located properties containing office/laboratory space designed and improved for lease primarily to institutional (universities and not-for-profit institutions), pharmaceutical, biotechnology, life science product, service, biodefense and translational research entities, as well as government agencies (collectively, the "life science industry"). Our properties leased to tenants in the life science industry typically consist of buildings containing scientific research and development laboratories and other improvements that are generic to tenants operating in the life science industry. We refer to such properties as "life science properties". As of December 31, 2005, we owned 134 properties (131 properties located in nine states and three properties located in Canada) with approximately 8.8 million rentable square feet of office/laboratory space.
Business and Growth Strategy
We focus our property operations and investment activities principally in the following life science markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle, Washington;
- Suburban Washington D.C. (including Maryland and Virginia);
- Eastern Massachusetts;
- New Jersey/Suburban Philadelphia;
- the Southeast (including North Carolina and Georgia); and
- Canada.
Our tenant base is broad and diverse within the life science industry and reflects our focus on regional, national and international tenants with substantial financial and operational resources. For a more detailed description of our properties and tenants, see "Item 2. Properties." We have an experienced Board of Directors and are led by a senior management team with extensive experience in both the real estate and life science industries.
We seek to maximize growth in funds from operations ("FFO") and cash available for distribution to stockholders through the ownership, operation, management, acquisition and selective redevelopment and development of life science properties, as well as management of our balance sheet. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Funds from Operations" for a discussion of how we compute and view FFO, as well as a discussion of other measures of cash flow. In particular, we seek to increase FFO and cash available for distribution by:
- acquiring high quality life science properties at prices that enable us to realize attractive returns;
- redeveloping existing office, warehouse or vacant space or newly acquired properties into generic laboratory space that can be leased at higher rental rates in our target life science markets;
- selectively developing properties;
- retenanting and re-leasing space at higher rental rates and with minimal non-revenue enhancing tenant improvement costs;
- realizing contractual rental rate escalations, which are currently provided for in approximately 90% of our leases (on a square footage basis);
- implementing effective cost control measures, including negotiating pass-through provisions in tenant leases for operating expenses and certain capital expenditures; and
- managing the level of debt on our balance sheet and our exposure to floating rate debt.
Internal Growth. We seek to achieve internal growth from several sources. For example, we seek to:
- include rental rate escalation provisions in our leases;
- improve investment returns through leasing of vacant space and replacement of existing tenants with new tenants at higher rental rates;
- achieve higher rental rates from existing tenants as existing leases expire;
- redevelop existing and/or newly acquired space to higher rent, generic laboratory space; and
- implement effective cost control measures, including negotiating pass-through provisions in tenant leases for operating expenses and certain capital expenditures.
Our ability to negotiate contractual rent escalations in future leases and to achieve increases in rental rates will depend upon market conditions and the demand for life science properties at the time the leases are negotiated and the increases are proposed.
Acquisitions. We seek to identify and acquire high quality life science properties in our target life science markets. Critical evaluation of prospective property acquisitions is an essential component of our acquisition strategy. When evaluating acquisition opportunities, we assess a full range of matters relating to the properties, including:
- location of the property and our strategy in the relevant market;
- quality of existing and prospective tenants;
- condition and capacity of the building infrastructure;
- quality and generic characteristics of laboratory facilities;
- physical condition of the structure and common area improvements;
- opportunities available for leasing vacant space and for retenanting occupied space; and
- opportunities to redevelop existing space into higher rent generic laboratory space.
Redevelopment. We seek to enhance our growth by redeveloping existing office, warehouse or vacant space as generic laboratory space that can be leased at higher rates. As of December 31, 2005, we had 15 properties in our redevelopment program that contained a total of approximately 1,009,000 square feet. Of this total, approximately 548,000 square feet are under redevelopment and currently vacant, and the remaining 461,000 square feet are currently leased. In addition to properties under active redevelopment, as of December 31, 2005, our asset base contained imbedded opportunities for a future permanent change of use to office/laboratory space through redevelopment aggregating approximately 1.0 million square feet.
Development. We seek to acquire strategic land parcels in key life science markets to enhance our growth through ground-up development projects. Our development strategy is primarily to pursue selective projects where we expect to achieve investment returns that will equal or exceed our returns on acquisitions. We generally have undertaken ground-up development projects only if our investment in infrastructure will be substantially made for generic, rather than tenant specific, improvements. As of December 31, 2005, we had six parcels of land under development for approximately 510,000 rentable square feet of office/laboratory space. In addition, as of December 31, 2005, our asset base contained strategically located land with ground-up development opportunities for approximately 5.1 million developable square feet of office/laboratory space.
Financing and Working Capital. We believe that cash provided by operations, our unsecured line of credit and our unsecured term loan will be sufficient to fund our working capital requirements. We generally expect to finance future acquisitions and redevelopment and development projects through our unsecured line of credit and unsecured term loan and, then, to refinance some or all of that indebtedness periodically with additional equity or debt capital. We may also issue shares of our common stock, preferred stock or interests in our subsidiaries to fund future operations. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Unsecured Line of Credit and Unsecured Term Loan".
We seek to maintain a balance between the amounts of our fixed and variable rate debt with a view to moderating our exposure to interest rate risk. We also use financial instruments, such as interest rate swap agreements, to hedge a portion of our exposure to the variable interest rates associated with our unsecured line of credit and our unsecured term loan. Interest rate swap agreements involve an exchange of fixed and floating rate interest payments without the exchange of the underlying principal or "notional amount". Interest received under our current interest rate swap agreements is based on the one-month London interbank offered rate, or LIBOR. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Interest Rate Swaps" for a more complete discussion of our unsecured line of credit, unsecured term loan, interest rate swap agreements and other outstanding indebtedness.
Preferred Securities. We expect to continue to issue additional series of preferred stock that are senior to our common stock. At December 31, 2005, we had preferred stock with a liquidation preference of approximately $187.1 million. The preferred stock has general preference rights with respect to liquidation and quarterly distributions. In June 2004, we completed a public offering of 5,185,500 shares of our 8.375% Series C cumulative redeemable preferred stock with aggregate proceeds of approximately $124.0 million. In July 2004, we redeemed all 1,543,500 outstanding shares of our 9.50% Series A cumulative redeemable preferred stock at an aggregate redemption price of approximately $38.6 million. Future redemptions or repurchases of our preferred securities may occur after their respective call dates. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources- Other Resources and Liquidity Requirements".
Business Risks
We Are Largely Dependent on the Life Science Industry for Revenues from Lease Payments
In general, our strategy is to invest primarily in properties used by tenants in the life science industry. Our business could be adversely affected if the life science industry experiences an economic downturn. Because of our industry focus, events within the life science industry may have a more pronounced effect on our ability to make distributions to our stockholders than if we had more diversified investments. Also, some of our properties may be better suited for a particular life science industry tenant and could require modification before we are able to re-lease vacant space to another life science industry tenant. Generally, our properties may not be suitable for lease to traditional office tenants without significant expenditures on renovations.
Our ability to negotiate contractual rent escalations in future leases and to achieve increases in rental rates will depend upon market conditions and the demand for life science properties at the time the leases are negotiated and the increases are proposed.
Our Tenants May Not Be Able to Pay Us if They Are Unsuccessful in Discovering, Developing, Making or Selling Their Products and Technologies
Our life science industry tenants are subject to a number of risks, including the following, any one or more of which may adversely affect their ability to make rental payments to us.
- Some of our tenants require significant funding to develop and commercialize their products and technologies, which funding must be obtained from private investors, the public markets, companies in the life science industry or federal, state and local governments. Such funding may become unavailable or difficult to obtain, which in turn may adversely affect a tenant's ability to pay us rent.
- Even with sufficient funding, some of our tenants may not be able to discover or identify potential drug targets in humans, or potential drugs for use in humans, or to create tools or technologies which are commercially useful in the discovery or identification of potential drug targets or drugs.
- Some of our tenants developing potential drugs may find that their drugs are not effective, or may even be harmful, when tested in humans.
- Some of our tenants may not be able to manufacture their drugs economically, even if such drugs are proven through human clinical trials to be safe and effective in humans.
- Drugs that are developed and manufactured by some of our tenants require regulatory approval prior to being made, marketed, sold and used. The regulatory approval process to manufacture and market drugs is costly, typically takes several years, requires the expenditure of substantial resources and is often unpredictable. A tenant may fail or experience significant delays in obtaining these approvals.
- Some of our tenants and their licensors require patent, copyright or trade secret protection to develop, make, market and sell their products and technologies. A tenant may be unable to commercialize its products or technologies if patents covering such products or technologies do not issue, or are successfully challenged, narrowed, invalidated or circumvented by third parties, or if a tenant fails to obtain licenses to the discoveries of third parties necessary to commercialize its products or technologies.
- A drug made by a tenant may not be well accepted by doctors and patients, or may be less effective or accepted than competitor's drugs, or may be subsequently recalled from the market, even if it is successfully developed, proven safe and effective in human clinical trials, manufactured and the requisite regulatory approvals are obtained.
We cannot assure you that our tenants will be able to develop, make, market or sell their products and technologies due to the risks inherent in the life science industry. Any tenant that is unable to avoid, or sufficiently mitigate, the risks described above, may have difficulty making rental payments to us.
We Could be Held Liable for Damages Resulting from Our Tenants' Use of Hazardous Materials
Many of our life science industry tenants engage in research and development activities that involve the controlled use of hazardous materials, chemicals and biological and radioactive compounds. In the event of contamination or injury from the use of these hazardous materials, we could be held liable for damages that result. This liability could exceed our resources and any recovery available through any applicable environmental remediation insurance coverage, and could adversely affect our ability to make distributions to our stockholders.
Together with our tenants, we must comply with federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. Failure to comply with, or changes in, these laws and regulations could adversely affect our business or our tenants' business and their ability to make rental payments to us.
The Inability of A Tenant to Pay Us Rent Could Adversely Affect Our Business
Our revenues are derived primarily from rental payments and reimbursement of operating expenses under our leases. If our tenants, especially significant tenants, fail to make rental payments under their leases, our financial condition, cash flow and our ability to make distributions to our stockholders could be adversely affected.
As of December 31, 2005, we had 283 leases with a total of 237 tenants, and 73 of our 134 properties were single-tenant properties. Our three largest tenants accounted for approximately 11.6% of our aggregate annualized base rent, or approximately 4.4%, 4.1% and 3.1%, respectively. "Annualized base rent" means the annualized fixed base rental amount in effect as of December 31, 2005, using rental revenues calculated on a straight-line basis in accordance with United States generally accepted accounting principles ("GAAP"). Annualized base rent does not include reimbursements for real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants in the case of triple net leases.
The bankruptcy or insolvency of a major tenant may also adversely affect the income produced by a property. If any of our tenants becomes a debtor in a case under the U.S. Bankruptcy Code, we cannot evict that tenant solely because of its bankruptcy. The bankruptcy court may authorize the tenant to reject and terminate its lease with us. Our claim against such a tenant for unpaid future rent would be subject to a statutory limitation that might be substantially less than the remaining rent actually owed to us under the tenant's lease. Any shortfall in rent payments could adversely affect our cash flow and our ability to make distributions to our stockholders.
Our U.S. Government Tenants May Not Receive Annual Budget Appropriations, Which Could Adversely Affect Their Ability to Pay Us
U.S. government tenants may be subject to annual budget appropriations. If one of our U.S. government tenants fails to receive its annual budget appropriation, it might not be able to make its lease payments to us. In addition, defaults under leases with federal government tenants are governed by federal statute and not by state eviction or rent deficiency laws. All of our leases with U.S. government tenants provide that the government tenant may terminate the lease under certain circumstances. As of December 31, 2005, leases with U.S. government tenants at our properties accounted for approximately 3.8% of our aggregate annualized base rent.
Loss of a Tenant Could Have a Negative Impact on Our Business
A tenant may not renew its lease upon the expiration of the initial term. In addition, we may not be able to locate a qualified replacement tenant upon expiration or termination of a lease. Consequently, we could lose the cash flow from the affected property, which could negatively impact our business. We may have to divert cash flow generated by other properties to meet our mortgage payments, if any, or to pay other expenses related to owning the affected property. As of December 31, 2005, leases at our properties representing approximately 10.5% and 8.9% of the total square footage of our properties were scheduled to expire in 2006 and 2007, respectively.
Poor Economic Conditions in Our Markets Could Adversely Affect Our Business
Our properties are located only in the following markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle, Washington;
- Suburban Washington D.C. (including Maryland and Virginia);
- Eastern Massachusetts;
- New Jersey/Suburban Philadelphia;
- the Southeast (including North Carolina and Georgia); and
- Canada.
As a result of our geographic concentration, we depend upon the local economic conditions in these markets, including local real estate conditions. We are, therefore, subject to increased exposure (positive or negative) to economic and other competitive factors specific to markets in confined geographic areas. Our operations may also be affected if too many competing properties are built in any of these markets. An economic downturn in any of these markets could adversely affect our operations and our ability to make distributions to stockholders. We cannot assure you that these markets will continue to grow or will remain favorable to the life science industry.
We May Have Difficulty Managing Our Growth
We expect to continue to grow by acquiring, redeveloping and selectively developing additional properties. To manage our growth effectively, we must successfully integrate new properties into our existing operations. We may not succeed with the integration. In addition, we may not effectively manage new properties, and new properties may not perform as expected. Our business could be adversely affected if we are unsuccessful in managing our growth.
Our Debt Service Obligations May Have Adverse Consequences on Our Business Operations
We use debt to finance our operations, including acquisitions of properties. Our use of debt may have adverse consequences, including the following:
- Our cash flow from operations may not be sufficient to meet required payments of principal and interest.
- We may be forced to dispose of one or more of our properties, possibly on disadvantageous terms, to make payments on our debt.
- We may default on our debt obligations, and the lenders or mortgagees may foreclose on our properties that secure those loans.
- A foreclosure on one of our properties could create taxable income without any accompanying cash proceeds to pay the tax.
- A default under a mortgage loan that has cross default provisions may cause us to automatically default on another loan.
- We may not be able to refinance or extend our existing debt.
- The terms of any refinancing or extension may not be as favorable as the terms of our existing debt.
- We may be subject to a significant increase in the variable interest rates on our unsecured line of credit or unsecured term loan, which could adversely impact our operations.
As of December 31, 2005, we had outstanding mortgage indebtedness of approximately $667 million, secured by 67 properties and three land development parcels, and outstanding debt under our unsecured line of credit and unsecured term loan of $740 million.
Our Unsecured Line of Credit and Unsecured Term Loan Restrict Our Ability to Engage in Some Business Activities
Our unsecured line of credit and unsecured term loan facilities contain customary negative covenants and other financial and operating covenants that, among other things:
- restrict our ability to incur additional indebtedness;
- restrict our ability to make certain investments;
- restrict our ability to merge with another company;
- restrict our ability to make distributions to stockholders;
- require us to maintain financial coverage ratios; and
- require us to maintain a pool of unencumbered assets approved by the lenders.
These restrictions could cause us to default on our unsecured line of credit and unsecured term loan or negatively affect our operations and our ability to make distributions to our stockholders.
We May Not Be Able to Obtain Additional Capital to Further Our Business Objectives
Our ability to acquire, redevelop or develop properties depends upon our ability to obtain capital. Periodically, the real estate industry experiences reduced supplies of favorably-priced equity or debt capital, which decreases the level of new investment activity by publicly-traded real estate companies. A prolonged period in which we cannot effectively access the public equity or debt markets may result in heavier reliance on alternative financing sources to undertake new investments. An inability to obtain equity or debt capital on acceptable terms could delay or prevent us from acquiring, structuring and completing desirable investments, which could adversely affect our business. Also, the issuance of additional shares of capital stock or interests in subsidiaries to fund future operations could dilute the ownership of then existing stockholders.
We have filed a "shelf" registration statement on Form S-3, under which we may offer from time to time and at our discretion, common stock, preferred stock, warrants and debt securities in amounts, at prices and on terms to be determined at the time of offering. As of December 31, 2005 we had approximately $305 million of available capacity for future issuances of securities under the shelf registration statement.
If Interest Rates Rise, Our Debt Service Costs Will Increase
Borrowings outstanding under our unsecured line of credit, unsecured term loan and certain other borrowings bear interest at a variable rate, and we may incur additional variable rate debt in the future. Increases in market interest rates would increase our interest expense under these debt instruments and would increase the costs of refinancing existing indebtedness or obtaining new debt. Accordingly, these increases could adversely affect our financial position and our ability to make distributions to stockholders.
We May Not Be Able to Acquire Properties or Operate Them Successfully
Our success depends in large part upon our ability to acquire additional properties on satisfactory terms and to operate them successfully. If we are unable to do so, our business could be adversely affected. In addition, the acquisition of life science properties generally involves a higher per square foot price than the acquisition of traditional suburban office properties.
The acquisition, ownership and operation of real estate is subject to many risks that may adversely affect our business and our ability to make payments to stockholders, including the risks that:
- Our properties may not perform as we expect.
- We may not be able to acquire a desired property because of competition from other real estate investors with significant capital.
- We may lease space at rates below our expectations.
- We may not be able to obtain financing on acceptable terms.
- We may overpay for new acquisitions.
- We may underestimate the cost of improvements required to bring an acquired property up to standards established for the market position intended for that property.
If we encounter any of these risks, our business and our ability to make payments to stockholders could be adversely affected.
We May Not Be Able to Complete Redevelopment and Development Projects Effectively
Our redevelopment and development activities subject us to many risks, including those associated with:
- delays in construction;
- budget overruns;
- lack of availability and/or increasing costs of materials;
- financing availability;
- volatility in interest rates;
- labor availability;
- timing of the commencement of rental payments;
- delays or denials of entitlements or permits; and
- other property development uncertainties.
In addition, redevelopment and development activities, regardless of whether they are ultimately successful, typically require a substantial portion of management's time and attention. This may distract management from focusing on other operational activities. If we are unable to complete redevelopment and development projects successfully, our business may be adversely affected.
If Our Revenues Are Less Than Our Expenses, We May Have to Borrow Additional Funds and We May Not Be Able to Make Distributions to Our Stockholders
If our properties do not generate revenues sufficient to meet our operating expenses, including debt service and other capital expenditures, we may have to borrow additional amounts to cover fixed costs and cash flow needs. This could adversely affect our ability to make distributions to our stockholders. Factors that could adversely affect the revenues from, and the values of, our properties include:
- national and local economic conditions;
- competition from other life science properties;
- changes in the life science industry;
- real estate conditions in our target markets;
- our ability to collect rent payments;
- availability of financing;
- changes in interest rate levels;
- vacancies at our properties and our ability to re-lease space;
- changes in tax or other regulatory laws;
- costs of compliance with government regulation;
- lack of liquidity of real estate investments; and
- increases in operating costs.
In addition, if a lease at a property is not a triple net lease, we will have greater expenses associated with that property and greater exposure to increases in such expenses. Significant expenditures, such as mortgage payments, real estate taxes, insurance and maintenance costs, generally are fixed and do not decrease when revenues at the related property decrease.
Improvements to Life Science Properties Are Significantly More Costly Than Traditional Office Space
Our properties contain generic infrastructure improvements that are significantly more costly than other property types. Although we have historically been able to recover the additional investment in generic infrastructure improvements through higher rental rates, there is the risk that we will not be able to continue to do so in the future. Typical improvements include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- increased floor to ceiling heights;
- heavy-duty HVAC systems;
- enhanced environmental control technology;
- significantly upgraded electrical, gas and plumbing infrastructure; and
- laboratory benches.
We May Not Be Able to Sell Our Properties Quickly to Raise Money
Investments in real estate are relatively illiquid. Accordingly, we may not be able to sell our properties when we desire or at acceptable prices in response to changes in economic or other conditions. In addition, the Internal Revenue Code limits our ability to sell properties held for fewer than four years. These limitations on our ability to sell our properties may adversely affect our cash flows and our ability to make distributions to stockholders.
We Face Substantial Competition in Our Target Markets
The significant competition for business in our target markets could have an adverse effect on our operations. We compete for investment opportunities with:
- insurance companies;
- pension and investment funds;
- partnerships;
- developers;
- investment companies;
- other REITs; and
- owner/occupants.
Many of these entities have substantially greater financial resources than we do and may be able to pay more than us or accept more risk than we are willing to accept. These entities may be less sensitive to risks with respect to the creditworthiness of a tenant or the geographic concentration of their investments. Competition may also reduce the number of suitable investment opportunities available to us or may increase the bargaining power of property owners seeking to sell.
Our Properties May Have Defects That Are Unknown to Us
Although we review the physical condition of our properties before they are acquired, and on a periodic basis after acquisition, any of our properties may have characteristics or deficiencies unknown to us that could adversely affect the property's value or revenue potential.
If We Fail to Qualify as a REIT, We Would Be Taxed at Corporate Rates and Would Not Be Able to Take Certain Deductions When Computing Our Taxable Income
If, in any taxable year, we fail to qualify as a REIT:
- We would be subject to federal income tax on our taxable income at regular corporate rates.
- We would not be allowed a deduction for distributions to stockholders in computing taxable income.
- Unless we were entitled to relief under the Internal Revenue Code of 1986, as amended, we would also be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification.
- We would no longer be required by the Internal Revenue Code to make any distributions to our stockholders.
As a result of any additional tax liability, we might need to borrow funds or liquidate certain investments in order to pay the applicable tax. Accordingly, funds available for investment or distribution to our stockholders would be reduced for each of the years involved.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and financial results, and the determination of various factual matters and circumstances not entirely within our control. There are only limited judicial or administrative interpretations of these provisions. Although we believe that we have operated, commencing with our taxable year ended December 31, 1996, in a manner so as to qualify as a REIT, we cannot assure you that we are or will remain so qualified.
In addition, although we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT, new legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is adverse to our stockholders.
There Are Limits on the Ownership of Our Capital Stock Under Which A Stockholder May Lose Beneficial Ownership of Its Shares
The Internal Revenue Code provides that, in order for us to maintain our qualification as a REIT, not more than 50% of the value of our outstanding capital stock may be owned, directly or constructively, by five or fewer individuals or entities.
In addition, our charter prohibits, with certain limited exceptions, direct or constructive ownership of shares of our capital stock representing more than 9.8% of the combined total value of the outstanding shares of our capital stock by any person (the "Ownership Limit"). Our Board of Directors may exempt a stockholder from the Ownership Limit if, prior to the exemption, our Board of Directors receives all information it deems necessary to determine or ensure our status as a REIT.
The constructive ownership rules are complex and may cause shares of our common stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. A transfer of shares to a person who, as a result of the transfer, violates the Ownership Limit, may be void or may be deemed to be made to a trust, for the benefit of one or more qualified charitable organizations designated by us. In that case, the intended transferee will have only a right to share, to the extent of the transferee's original purchase price for such shares, in proceeds from the trust's sale of those shares.
In Addition to the Ownership Limit, Certain Provisions of Our Charter and Bylaws and Our Stockholder Rights Plan May Delay or Prevent Transactions That May Be Deemed to Be Desirable to Our Stockholders
As authorized by Maryland law, our charter allows our Board of Directors to cause us to issue additional authorized but unissued shares of our common stock or preferred stock and to classify or reclassify unissued shares of common or preferred stock without any stockholder approval. Our Board of Directors could establish a series of preferred stock that could delay, defer or prevent a transaction that might involve a premium price for our common stock or for other reasons be desired by our common stockholders or that have a dividend preference which may adversely affect our ability to pay dividends on our common stock.
Our charter permits the removal of a director only upon a two-thirds vote of the votes entitled to be cast generally in the election of directors and our bylaws require advance notice of a stockholder's intention to nominate directors or to present business for consideration by stockholders at an annual meeting of our stockholders. Our charter and bylaws also contain other provisions that may delay, defer or prevent a transaction or change in control that involves a premium price for our common stock or that for other reasons may be desired by our stockholders.
Under our Stockholder Rights Plan, if a stockholder acquires beneficial ownership of 15% or more of our common stock, other stockholders would become entitled to purchase our common stock at half the market price, which would likely result in substantial dilution to the 15% or greater stockholder. This may also have the effect of delaying or preventing a change in control or other transaction that might involve a premium price for our common stock or for other reasons desired by our common stockholders.
Our Insurance May Not Adequately Cover All Potential Losses
If we experience a loss at any of our properties that is not covered by insurance or that exceeds our insurance policy limits, we could lose the capital invested in the affected property and, possibly, future revenues from that property. In addition, we could continue to be obligated on any mortgage indebtedness or other obligations related to the affected properties. We carry comprehensive liability, fire, extended coverage and rental loss insurance with respect to our properties. We have obtained earthquake insurance for all of our properties because many of them are located in the vicinity of active earthquake faults. We also carry environmental remediation insurance and have title insurance policies on all of our properties. We obtain our title insurance policies when we acquire the property, with each policy covering an amount equal to the initial purchase price of each property. Accordingly, any of our title insurance policies may be in an amount less than the current value of the related property.
We believe that our insurance policy specifications, insured limits and deductibles are consistent with or superior to those customarily carried for similar properties. Our tenants are also required to maintain comprehensive insurance, including liability and casualty insurance, that is customarily obtained for similar properties. There are, however, certain types of losses that we and our tenants do not generally insure against because they are uninsurable or because it is not economical to insure against them. In the current market, there have recently been substantial increases in the premium cost of property and liability insurance. The availability of coverage against certain types of losses, such as from terrorism or toxic mold, has become more limited and, when available, is at a significantly higher premium cost. We cannot predict whether insurance coverage against terrorism or toxic mold will remain available for our properties because insurance companies may no longer offer coverage against such losses or, if offered, such coverage may become prohibitively expensive. Many, but not all, of our properties are low-rise buildings. Toxic mold has not presented any material problems at any of our properties.
We Could Incur Significant Costs Complying With Environmental Laws
Federal, state and local environmental laws and regulations may require us, as a current or prior owner or operator of real estate, to investigate and clean up hazardous or toxic substances or petroleum products released at or from any of our properties. The cost of investigating and cleaning up contamination could be substantial and could exceed the amount of any environmental remediation insurance coverage available to us. In addition, the presence of contamination, or the failure to properly clean it up, may adversely affect our ability to lease or sell an affected property, or to borrow funds using that property as collateral.
Under environmental laws and regulations, we may have to pay governmental entities or third parties for property damage and for investigation and clean-up costs incurred by those parties relating to contaminated properties regardless of whether we knew of or caused the contamination. Even if more than one party may have been responsible for the contamination, we may be held responsible for all of the clean-up costs. In addition, third parties may sue us for damages and costs resulting from environmental contamination or jointly responsible parties may contest their responsibility or be financially unable to pay their share of such costs.
Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials. These laws may impose fines and penalties on us for the release of asbestos-containing materials and may allow third parties to seek recovery from us for personal injury from exposure to asbestos fibers. We have detected asbestos-containing materials at some of our properties, but we do not expect that it will result in material environmental costs or liabilities to us.
Environmental laws and regulations also require the removal or upgrading of certain underground storage tanks and regulate:
- the discharge of storm water, wastewater and any water pollutants;
- the emission of air pollutants;
- the generation, management and disposal of hazardous or toxic chemicals, substances or wastes; and
- workplace health and safety.
Many of our tenants routinely handle hazardous substances and wastes as part of their operations at our properties. Environmental laws and regulations subject our tenants, and potentially us, to liability resulting from these activities. Environmental liabilities could also affect a tenant's ability to make rental payments to us. We require our tenants to comply with these environmental laws and regulations and to indemnify us for any related liabilities.
Independent environmental consultants have conducted Phase I or similar environmental assessments at all of our properties. We intend to use consultants to conduct similar environmental assessments on our future acquisitions. This type of assessment generally includes a site inspection, interviews and a public records review, but no subsurface sampling. These assessments and certain additional investigations of our properties have not to date revealed any environmental liability that we believe would have a material adverse effect on our business or results of operations.
The additional investigations have included, as appropriate:
- asbestos surveys;
- radon surveys;
- lead surveys;
- mold surveys;
- additional public records review;
- subsurface sampling; and
- other testing.
Nevertheless, it is possible that the assessments on our properties have not revealed, or that assessments on future acquisitions, will not reveal all environmental liabilities. Consequently, there may be material environmental liabilities of which we are unaware that may result in substantial costs to us or our tenants and that could have a material adverse effect on our business.
We May Incur Significant Costs Complying With the Americans With Disabilities Act and Similar Laws
Under the Americans With Disabilities Act, places of public accommodation and/or commercial facilities are required to meet federal requirements related to access and use by disabled persons. We may be required to make substantial capital expenditures at our properties to comply with this law. In addition, our noncompliance could result in the imposition of fines or an award of damages to private litigants.
A number of additional federal, state and local laws and regulations exist regarding access by disabled persons. These regulations may require modifications to our properties or may affect future renovations. This may limit the overall returns on our investments.
We believe that our properties are substantially in compliance with the present requirements of the Americans With Disabilities Act and similar laws.
We May Incur Significant Costs If We Fail to Comply With Laws or If Laws Change
Our properties are subject to many federal, state and local regulatory requirements and to state and local fire and life-safety requirements. If we do not comply with all of these requirements, we may have to pay fines to governmental authorities or damage awards to private litigants. We believe that our properties are currently in compliance with all of these regulatory requirements. We do not know whether these requirements will change or whether new requirements will be imposed. Changes in these regulatory requirements could require us to make significant unanticipated expenditures. These expenditures could have an adverse effect on us and our ability to make distributions to stockholders.
The Loss of Services of Any of Our Senior Executive Officers Could Adversely Affect Us
We depend upon the services of relatively few executive officers. The loss of services of any one of them may adversely affect our business, financial condition and prospects. We use the extensive personal and business relationships that members of our management have developed over time with owners of life science properties and with major life science industry tenants. We cannot assure you that our senior executive officers will remain employed with us.
We May Change Our Business Policies Without Stockholder Approval
Our Board of Directors determines all of our material business policies, with management's input, including those related to our:
- status as a REIT;
- incurrence of debt and debt management activities;
- acquisition and selective development activities;
- stockholder distributions; and
- other policies, as appropriate.
Our Board of Directors may amend or revise these policies at any time without a vote of our stockholders. A change in these policies could adversely affect our business and our ability to make distributions to our stockholders.
We Could Become Highly Leveraged and Our Debt Service Obligations Could Increase
Our organizational documents do not limit the amount of debt that we may incur. Therefore, we could become highly leveraged. This would result in an increase in our debt service obligations that could adversely affect our cash flow and our ability to make distributions to our stockholders.
We have adopted a policy of incurring debt only if, upon such incurrence, our debt to total market capitalization ratio would not exceed 60.0%. Our total market capitalization is the market value of our capital stock, including interests exchangeable for shares of capital stock, plus total debt. Our Board of Directors could, however, change or eliminate this policy at any time. Higher leverage could also increase the risk of default on our debt obligations.
Our Distributions to Stockholders May Decline at Any Time
We may not continue our current level of distributions to stockholders. Our Board of Directors will determine future distributions based on a number of factors, including:
- our amount of cash available for distribution;
- our financial condition;
- any decision by our Board of Directors to reinvest funds rather than to distribute such funds;
- our capital expenditures;
- the annual distribution requirements under the REIT provisions of the Internal Revenue Code; and
- other factors our Board of Directors deems relevant.
Possible Future Sales of Shares of Our Common Stock Could Adversely Affect Its Market Price
We cannot predict the effect, if any, of future sales of shares of our common stock on the market price of our common stock from time to time. Sales of substantial amounts of capital stock (including common stock issued upon the exercise of stock options), or the perception that such sales may occur, could adversely affect prevailing market prices for our common stock.
We have reserved for issuance to our officers, directors and employees pursuant to our Amended and Restated 1997 Stock Award and Incentive Plan that number of shares of our common stock that equals 12% of the total number of shares outstanding at any time, provided that in no event may the number of shares of our common stock available for issuance under the plan exceed 3,000,000 shares at any time.
As of December 31, 2005, options to purchase 492,016 shares of our common stock were outstanding, all of which were exercisable. We have filed a registration statement with respect to the issuance of shares of our common stock pursuant to grants under our equity incentive plan. In addition, any shares issued under our equity incentive plan will be available for sale in the public market from time to time without restriction by persons who are not our "affiliates" (as defined in Rule 144 adopted under the Securities Act of 1933). Affiliates will be able to sell shares of our common stock pursuant to exemptions from registration requirements or upon registration.
External Factors May Adversely Impact the Valuation of Investments
We hold equity investments in certain publicly-traded companies and privately held entities primarily involved in the life science industry. The valuation of these investments is affected by many external factors beyond our control, including, but not limited to, market prices, market conditions, prospects for favorable or unfavorable clinical trial results, new product initiatives and new collaborative agreements. Unfavorable developments with respect to any of these factors may have an adverse impact on the valuation of our investments.
We Are Subject to Risks from Potential Fluctuations in Exchange Rates Between the U.S. Dollar and Foreign Currencies
As of December 31, 2005, we had three properties located in Canada. We are pursuing, and intend to continue to pursue, additional growth opportunities in Canada and other international markets. Investments in countries where the U.S. dollar is not the national currency are subject to international currency risk from the potential fluctuations in exchange rates between the U.S. dollar and the local currency. A significant decrease in the value of the Canadian dollar or other foreign currencies where we have a significant investment could materially affect our results of operations. We may attempt to mitigate such effects by borrowing in the local foreign currency in which we invest. Any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT.
Available Information
We will provide, upon request and free of charge, paper copies of our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments to the foregoing reports, as soon as is reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. These materials, along with our corporate governance guidelines, business integrity policy and board committee charters, are also available through our corporate website at http://www.labspace.com. The public may also download these materials from the Securities and Exchange Commission's website at http://www.sec.gov. Any amendments to, and waivers of, our Business Integrity Policy will be posted on our corporate website.
Employees
As of December 31, 2005, we had 93 full-time employees. We believe that we have good relations with our employees. We have adopted a Business Integrity Policy that applies to all of our employees. Its receipt and review by each employee is documented and verified annually.
General.
As of December 31, 2005, we owned 134 properties comprising of approximately 8.8 million rentable square feet of office/laboratory space. Excluding properties under redevelopment, our properties were approximately 93.2% leased as of December 31, 2005. Our properties, some of which consist of multiple buildings, range in size up to 284,000 square feet, are built to accommodate single or multiple tenants and are generally one or two story concrete tilt-up, block and/or steel frame structures. The exteriors typically resemble traditional suburban office properties, but the interior infrastructures are designed to accommodate the needs of life science industry tenants. These improvements typically are generic to life science industry tenants rather than being specific to a particular tenant. As a result, we believe that the improvements have long-term value and utility and are usable by a wide range of life science industry tenants. Generic infrastructure improvements to our life science properties typically include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- increased floor to ceiling heights;
- heavy-duty HVAC systems;
- enhanced environmental control technology;
- significantly upgraded electrical, gas and plumbing infrastructure; and
- laboratory benches.
We own a fee simple interest in each of our properties, except for the following twelve properties that account for approximately 10% of the total rentable square footage of our properties:
- three properties in the San Francisco Bay area (Harbor Bay Parkway #2, Harbor Bay Parkway #3 and Harbor Bay Parkway #4), in which we own a commercial condominium interest, together with an undivided interest in the common areas of the project of which the property is a part;
- the properties at Garcia Avenue & Bayshore Parkway, Hanover Street, Alexander Road, Charlestown Navy Yard, Virginia Manor Road, Porter Drive, and Medical Center Drive #1, in which we own ground leasehold interests; and,
- two properties located in the San Francisco Bay and Eastern Massachusetts markets, in which we have a controlling interest through a partially owned limited partnership and a limited liability company, respectively. The non-controlling interest held by certain third parties is reflected as minority interest in our consolidated financial statements. See further discussion in our consolidated financial statements and notes thereto in "Item 15. Exhibits, Financial Statement Schedule".
As of December 31, 2005, we had 283 leases with a total of 237 tenants, and 73 of our 134 properties were single-tenant properties. Leases in our multi-tenant buildings typically have terms of three to seven years, while the single-tenant building leases typically have initial terms of 10 to 20 years. As of December 31, 2005:
- approximately 85% 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 to base rent, and, in addition to our triple net leases, 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 a consumer price index or other index; and
- approximately 89% of our leases (on a square footage basis) provided for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing), which we believe would typically be borne by the landlord in traditional office leases.
Our leases also typically give us the right to review and approve tenant alterations to the property. Generally, tenant-installed improvements to the properties remain our property after termination of the lease at our election. However, we are permitted under the terms of most of our leases to require that the tenant, at its expense, remove the improvements and restore the premises to their original condition.
As of December 31, 2005, we managed all of our properties.
Location of Properties
The locations of our properties are diversified among a number of life science markets. The following table sets forth, as of December 31, 2005, the total rentable square footage, annualized base rent and encumbrances of our properties in each of our existing markets (dollars in thousands).
% of
Total Total
Number Rentable Rentable % of
of Square Square Annualized Annualized
Markets Properties Footage Footage Base Rent (1) Base Rent Encumbrances (2)
- --------------- --------- ----------- ---------- -------------- ----------- ---------------
California - Pasadena 1 31,343 0.3% $793 0.4% $ --
California - San Diego 26 1,246,717 14.1% 27,509 13.8% 209,279
California - San Francisco Bay 18 1,302,280 14.8% 37,222 18.6% 40,867
Eastern Massachusetts 25 1,450,665 16.4% 37,290 18.7% 90,843
New Jersey/Suburban Philadelphia 8 501,223 5.7% 8,229 4.1% --
Southeast (3) 9 492,646 5.6% 8,059 4.0% 19,970
Suburban Washington D.C. 33 2,663,010 30.2% 50,430 25.3% 185,705
Washington - Seattle 11 840,123 9.5% 23,995 12.0% 66,025
International - Canada 3 296,362 3.4% 6,223 3.1% 6,387
--------- ----------- ---------- -------------- ----------- ---------------
Total 134 8,824,369 100.0% $199,750 100.0% $619,076 (4)
========= =========== ========== ============== =========== ===============
_____________
(1) Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2005 (using rental revenue computed on a straight-line basis in accordance with GAAP).
(2) Certain properties are pledged as security under our secured debt as of December 31, 2005. See Schedule III - Consolidated Financial Statement Schedule of Rental Properties and Accumulated Depreciation in "Item 15. Exhibits, Financial Statement Schedule" for additional information on our properties, including encumbered properties.
(3) North Carolina and Georgia.
(4) Excludes $47.6 million of encumbrances related to three land parcels located in the San Francisco Bay and Seattle markets.
In addition, as of December 31, 2005, our asset base contained strategically located ground-up development opportunities for approximately 5.1 million developable square feet of office/laboratory space.
Tenants
Our life science properties are leased principally to a diverse group of tenants, with no tenant being responsible for more than 4.4% of our annualized base rent. The following table sets forth information regarding leases with our 20 largest tenants based upon annualized base rent as of December 31, 2005.
20 Largest Tenants
Remaining Percentage
Lease Approximate Percentage Percentage Annualized of Aggregate
Number Term Aggregate of Aggregate Annualized of Aggregate Net Effective Annualized
of in Rentable Leased Base Rent (in Annualized Rent (in Net Effective
Tenant Leases Years Square Feet Square Feet thousands) (1) Base Rent thousands) (2) Rent
- ---------------------------------------- -------- ------------ ------------ -------------- ------------ -------------- -------------
ZymoGenetics, Inc. 2 13.4 203,369 2.6% 8,747 4.4% $8,742 4.8%
Human Genome Sciences, Inc. 4 1.1 260,258 3.4% 8,237 4.1% 8,078 4.4%
Theravance, Inc. 2 6.3 170,244 2.2% 6,136 3.1% 5,885 3.2%
GlaxoSmithKline 3 13.4 (3) 142,642 1.8% 5,871 2.9% 5,838 3.2%
Oscient Pharmaceuticals Corporat 2 2.8 (4) 149,916 1.9% 5,413 2.7% 5,083 2.8%
Quest Diagnostics Incorporated 1 11.0 248,186 3.2% 4,341 2.2% 4,340 2.4%
Infinity Pharmaceuticals, Inc. 2 7.0 67,167 0.9% 4,302 2.2% 4,043 2.2%
Telik, Inc. 1 8.4 91,644 1.2% 3,711 1.9% 3,607 2.0%
Fred Hutchinson Cancer Research 3 8.0 (5) 116,606 1.5% 3,589 1.8% 3,231 1.8%
Digene Corporation 1 10.8 143,585 1.9% 3,480 1.7% 3,047 1.7%
ArQule, Inc. 1 9.4 128,325 1.7% 3,398 1.7% 3,398 1.9%
Gene Logic Inc. 4 3.9 (6) 149,168 1.9% 3,352 1.7% 2,822 1.5%
Amgen, Inc. 1 2.2 116,284 1.5% 3,295 1.7% 3,295 1.8%
Merck & Co., Inc. 3 2.9 (7) 166,007 2.1% 3,250 1.6% 3,001 1.6%
Senomyx, Inc. 1 1.0 86,962 1.1% 3,090 1.6% 2,956 1.6%
Sunesis Pharmaceuticals, Inc. 1 7.5 53,980 0.7% 2,813 1.4% 2,231 1.2%
Neurochem Inc. 1 14.9 162,362 2.1% 2,677 1.3% 2,677 1.5%
Amylin Pharmaceuticals, Inc. 2 9.1 86,764 1.1% 2,672 1.3% 2,402 1.3%
Johnson & Johnson 1 6.7 59,000 0.8% 2,671 1.3% 2,500 1.4%
Bio Veris Corporation 2 4.1 (8) 117,241 1.5% 2,615 1.3% 2,469 1.3%
------- -------- ------------ ------------ -------------- ------------ -------------- -------------
Total/Weighted Average (9): 38 7.3 2,719,710 35.1% 83,660 41.9% $79,645 43.6%
======= ======== ============ ============ ============== ============ ============== =============
________________
(1) Annualized base rent means the annualized fixed base rental amount in effect as of December 31, 2005 (using rental revenue computed on a straight-line basis in accordance with GAAP).
(2) Annualized net effective rent is the annualized base rent in effect as of December 31, 2005 (using rental revenue computed on a straight-line basis in accordance with GAAP), less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortization of tenant improvements and leasing commissions.
(3) Amount shown is a weighted average of multiple leases with this tenant for 128,759 rentable square feet and 13,883 rentable square feet with remaining lease terms of 14.3 years and 5.8 years, respectively.
(4) Amount shown is a weighted average of multiple leases with this tenant for 68,460 rentable square feet and 81,456 rentable square feet with remaining lease terms of 5.2 years and 0.9 years, respectively.
(5) Amount shown is a weighted average of multiple leases with this tenant for 100,295 rentable square feet, 11,162 rentable square feet and 5,149 rentable square feet with remaining lease terms of 8.9 years, 2.9 years and 1.4 years, respectively.
(6) Amount shown is a weighted average of multiple leases with this tenant for 26,127 rentable square feet, 57,410 rentable square feet, 16,406 rentable square feet and 49,225 rentable square feet with remaining lease terms of 5.2 years, 5.1 years, 4.1 years and 1.9 years, respectively.
(7) Amount shown is a weighted average of multiple leases with this tenant for 89,923 rentable square feet and 76,084 rentable square feet with remaining lease terms of 4.8 years and 0.8 years, respectively.
(8) Amount shown is a weighted average of multiple leases with this tenant for 83,541 rentable square feet and 33,700 rentable square feet with remaining lease terms of 4.5 years and 3.1 years, respectively.
(9) Weighted average based on percentage of aggregate leased square feet.
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance and which, in the aggregate, are not expected to have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
We did not submit any matters to a vote of our security holders in the fourth quarter of the fiscal year ended December 31, 2005.
PART II
Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "ARE". On March 13, 2006, the last reported sales price per share of our common stock was $92.57, and there were approximately 272 holders of record of our common stock (excluding beneficial owners whose shares are held in the name of CEDE & Co.). The following table sets forth the quarterly high and low sales prices per share of our common stock as reported on the NYSE and the distributions paid by us with respect to each such period.
Per Share Period High Low Distribution - ------ ------ ------ ------------ 2005 Fourth Quarter........................ $85.00 $76.02 $0.70 Third Quarter......................... $85.85 $73.02 $0.68 Second Quarter........................ $75.42 $62.09 $0.68 First Quarter......................... $74.50 $63.15 $0.66 2004 Fourth Quarter........................ $75.24 $65.51 $0.66 Third Quarter......................... $66.67 $56.50 $0.64 Second Quarter........................ $64.76 $50.88 $0.62 First Quarter......................... $65.20 $57.30 $0.60
Future distributions on our common stock will be determined by and at the discretion of our Board of Directors and will be dependent upon a number of factors, including actual cash available for distribution, our financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code and such other factors as our Board of Directors deems relevant. To maintain our qualification as a REIT, we must make annual distributions to stockholders of at least 90% of our taxable income for the current taxable year, determined without regard to deductions for dividends paid and excluding any net capital gains. Under certain circumstances, we may be required to make distributions in excess of cash flow available for distributions to meet these distribution requirements. In such a case, we may borrow funds or may raise funds through the issuance of additional debt or equity capital. We cannot assure you that we will make any future distributions.
The tax treatment of distributions on common stock paid in 2005 is as follows: (1) 71.8% ordinary dividend, (2) 24.1% return of capital, (3) 3.9% capital gain at 15%, and (4) 0.2% Section 1250 capital gain at 25%. The tax treatment of distributions paid in 2004 is as follows: (1) 76.8% ordinary dividend, (2) 19.8% return of capital, (3) 2.4% capital gain at 15%, and (4) 1.0% Section 1250 capital gain at 25%.
See "Item 12. Security Ownership of Certain Beneficial Owners and Management" for information on securities authorized for issuance under equity compensation plans.
Item 6. Selected Financial Data
The following table should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. See "Item 15. Exhibits, Financial Statement Schedule".
Year Ended December 31,
---------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Operating Data:
Total revenue ............................................................. $ $244,084 $ $183,081 $ $160,354 $ $142,067 $ $120,658
Total expenses ............................................................ 180,149 124,645 111,995 103,936 93,217
Minority interest ......................................................... 634 - - - -
----------- ----------- ----------- ----------- -----------
Income from continuing operations.......................................... 63,301 58,436 48,359 38,131 27,441
Income from discontinued operations, net.................................. 132 1,759 11,284 1,901 2,836
----------- ----------- ----------- ----------- -----------
Net income................................................................. 63,433 60,195 59,643 40,032 30,277
Dividends on preferred stock............................................... 16,090 12,595 8,898 8,579 3,666
Preferred stock redemption charge.......................................... - 1,876 - - -
----------- ----------- ----------- ----------- -----------
Net income available to common stockholders................................ $ 47,343 $ 45,724 $ 50,745 $ 31,453 $ 26,611
=========== =========== =========== =========== ===========
Earnings per share - basic:
Continuing operations (net of preferred stock dividends
and preferred stock redemption charge) .......................... $ 2.25 $ 2.28 $ 2.08 $ 1.68 $ 1.49
Discontinued operations, net........................................ 0.01 0.09 0.59 0.11 0.18
----------- ----------- ----------- ----------- -----------
Earnings per share - basic.......................................... $ 2.26 $ 2.37 $ 2.67 $ 1.79 $ 1.67
=========== =========== =========== =========== ===========
Earnings per share - diluted:
Continuing operations (net of preferred stock dividends
and preferred stock redemption charge) .......................... $ 2.21 $ 2.24 $ 2.05 $ 1.65 $ 1.47
Discontinued operations, net........................................ 0.01 0.09 0.59 0.11 0.17
----------- ----------- ----------- ----------- -----------
Earnings per share - diluted........................................ $ 2.22 $ 2.33 $ 2.64 $ 1.76 $ 1.64
=========== =========== =========== =========== ===========
Weighted average shares of common stock outstanding
Basic .............................................................. 20,948,915 19,315,364 18,993,856 17,594,228 15,953,459
=========== =========== =========== =========== ===========
Diluted ............................................................ 21,316,886 19,658,759 19,247,790 17,859,787 16,208,178
=========== =========== =========== =========== ===========
Cash dividends declared per share of common stock.......................... $ 2.72 $ 2.52 $ 2.20 $ 2.00 $ 1.84
=========== =========== =========== =========== ===========
Year Ended December 31,
---------------------------------------------------------------
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Balance Sheet Data (at year end):
Rental properties, net .................................................... $ 1,788,818 $ 1,427,853 $ 982,297 $ 976,422 $ 796,626
Total assets .............................................................. $ 2,362,450 $ 1,872,284 $ 1,272,577 $ 1,159,243 $ 962,146
Secured notes payable, unsecured line of credit and unsecured term loan ... $ 1,406,666 $ 1,186,946 $ 709,007 $ 614,878 $ 573,161
Total liabilities ......................................................... $ 1,512,535 $ 1,251,811 $ 765,442 $ 673,390 $ 629,508
Minority interest ......................................................... $ 20,115 $ - $ - $ - $ -
Stockholders' equity ...................................................... $ 829,800 $ 620,473 $ 507,135 $ 485,853 $ 332,638
Reconciliation of Net Income Available to Common Stockholders to
Funds from Operations Available to Common Stockholders:
Net income available to common stockholders (1)............................ $ 47,343 $ 45,724 $ 50,745 $ 31,453 $ 26,611
Add:
Depreciation and amortization (2).......................................... 55,416 42,523 38,901 34,071 30,578
Impairment of investments.................................................. - - - 2,545 -
Minority interest.......................................................... 634 - - - -
Subtract:
Gain/loss on sales of property (3)......................................... (36) (1,627) (8,286) - -
FFO allocable to minority interest......................................... (668) - - - -
----------- ----------- ----------- ----------- -----------
Funds from operations available to common stockholders (4) ................ $ 102,689 $ 86,620 $ 81,360 $ 68,069 $ 57,189
=========== =========== =========== =========== ===========
Other Data:
Cash flows from operating activities ...................................... $ 120,678 65,316 74,311 67,050 60,340
Cash flows from investing activities ...................................... $ (432,900) (448,252) (139,274) (227,840) (192,179)
Cash flows from financing activities ...................................... $ 312,975 381,109 66,158 162,204 131,439
Number of properties owned at year end .................................... 134 113 91 91 85
Rentable square feet of properties owned at year end....................... 8,824,369 7,448,570 5,728,470 5,799,562 5,372,485
Occupancy of properties owned at year end ................................. 88% 87% 88% 89% 89%
Occupancy of properties owned at year end, excluding properties under
redevelopment........................................................... 93% 95% 94% 96% 99%
(1) During the second quarter of 2004, we elected to redeem the 9.50% Series A cumulative redeemable preferred stock ("Series A preferred stock"). Accordingly, in compliance with Emerging Issues Task Force Topic D-42, we recorded a charge of $1,876,000, or $0.10 per common share (diluted) in the second quarter of 2004 for costs related to the redemption of the Series A preferred stock.
(2) Includes depreciation and amortization on assets "held for sale" reflected as discontinued operations (for the periods prior to when such assets were designated as "held for sale").
(3) Gain/loss on sales of property relates to the disposition of a property in the Southeast market during the third quarter of 2005, the disposition of a property in the Suburban Washington D.C. market during the first quarter of 2004, the disposition of a property in the Suburban Washington D.C. market during the fourth quarter of 2003, the disposition of a property in the Eastern Massachusetts market during the third quarter of 2003, and the disposition of a property in the San Francisco Bay market during the first quarter of 2003. Gain/loss on sales of property is included in the income statement in income from discontinued operations, net.
(4) 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 difference 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. For a more detailed discussion of FFO, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Funds From Operations".
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The terms "Company", "we", "our" and "us" as used in this Form 10-K refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The following discussion should be read in conjunction with our consolidated financial statements and notes in "Item 15. Exhibits, Financial Statement Schedule".
Overview
The following factors, among others, could cause actual results and future events to differ from those set forth or contemplated in the forward-looking statements:
- Changes in general economic conditions or in the real estate and life science industries;
- Risks and uncertainties related to how successful our tenants are in discovering, developing, making or selling their products and technologies;
- Potential liability for damages resulting from our tenant's use of hazardous materials;
- Adverse changes in the annual budget appropriations received by our government tenants;
- Economic conditions in our markets could adversely affect our business;
- Risks associated with doing business internationally, including currency fluctuations and unfamiliarity with new markets;
- Loss of a tenant could have a negative impact on our business;
- We may have difficulty managing our growth;
- Our debt service obligations may have adverse consequences on our business operations;
- Our unsecured line of credit and unsecured term loan restrict our ability to engage in some business activities;
- Ability to obtain additional capital to further our business objectives;
- Difficulties in identifying properties for acquisition or operating them successfully;
- Risks associated with completing developments and redevelopments;
- Our failure to qualify and maintain our status as a real estate investment trust under the Internal Revenue Code of 1986;
- Losses in excess of our insurance coverage;
- Environmental uncertainties;
- Failure to comply with laws, including the Americans with Disabilities Act and similar laws; and
- Ability to retain our senior executives.
Our success also depends upon economic trends and various market conditions. We caution you not to place undue reliance on forward-looking statements, which reflect our analysis only and speak as of the date of this report or, if different, as of the dates indicated in the statements. We assume no obligation to update or supplement forward-looking statements.
We are a publicly-traded real estate investment trust focused principally on the ownership, operation, management, acquisition and selective redevelopment and development of properties containing office/laboratory space. Such 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 research entities, as well as government agencies.
In 2005, we:
- Added 19 properties with an aggregate of approximately 1,197,000 rentable square feet.
- Added four land parcels aggregating 1,438,000 square feet.
- Completed the development of three properties with an aggregate of approximately 195,000 rentable square feet.
- Commenced ground-up development of three properties aggregating 339,000 square feet.
- Increased capacity of our unsecured credit facilities to $1 billion with an option to increase capacity by an additional $200 million.
- Sold one property with approximately 16,500 rentable square feet.
- Completed two public offerings for a total of 2,685,500 shares of our common stock in two separate underwritten offerings resulting in net proceeds of approximately $189.4 million.
As of December 31, 2005, we had 134 properties containing approximately 8.8 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 93% leased, excluding those properties in our redevelopment program.
Our primary sources of revenue are rental income and tenant recoveries from leases of our properties. The comparability of financial data from period to period is affected by the timing of our property acquisition, development and redevelopment activities. Of the 134 properties as of December 31, 2005, four were acquired in 1994, nine in 1996, nine in 1997, 27 in 1998, six in 1999, 11 in 2000, five in 2001, four in 2002, four in 2003, 22 in 2004 and 19 in 2005. In addition, we completed the development of one property in 1999, five properties in 2000 (together with the 11 properties acquired in 2000), two properties in 2001 (together with the five properties acquired in 2001), two properties in 2002 (together with the four properties acquired in 2002), one property in 2004 (together with the 22 properties acquired in 2004, the "2004 Properties") and three properties in 2005 (together with the 19 properties acquired in 2005, the "2005 Properties"). As a result of these acquisition and development activities, as well as our ongoing leasing and redevelopment activities, there have been significant increases in total revenues and expenses, including significant increases in total revenues and expenses for 2005 as compared to 2004, and for 2004 as compared to 2003.
As of December 31, 2005, approximately 85% 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 December 31, 2005, approximately 6% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Additionally, as of December 31, 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.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles ("GAAP"). Our significant accounting policies are described in the notes to our consolidated financial statements in "Item 15. Exhibits, Financial Statement Schedule". The preparation of these financial statements in conformity with GAAP requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base these estimates, judgments and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
REIT Compliance
We have elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code. Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code to our operations and financial results, and the determination of various factual matters and circumstances not entirely within our control. We believe that our current organization and method of operation comply with the rules and regulations promulgated under the Internal Revenue Code to enable us to qualify, and continue to qualify, as a REIT. However, it is possible that we have been organized or have operated in a manner that would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify.
If we fail to qualify as a REIT in any taxable year, then we will be required to pay federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. If we lose our REIT status, then our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved and we would no longer be required to make distributions to our stockholders.
Rental Properties, Properties Under Development and Land Held For Development
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations", we perform the following procedures when making an allocation of the purchase price of real estate: (1) estimate the value of the real estate as of the acquisition date on an "as if vacant" basis; (2) allocate the "as if vacant" value among land, land improvements, buildings, building improvements, tenant improvements and equipment; (3) calculate the value of the intangibles as the difference between the "as if vacant" value and the purchase price; and (4) allocate the intangible value to above, below and at market leases, origination costs associated with in-place leases, tenant relationships and other intangible assets.
The values allocated to land improvements, buildings, building improvements, tenant improvements and equipment are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, 40 years for buildings and building improvements, the respective lease term for tenant improvements and the estimated useful life for equipment. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of at-market leases and origination costs are classified as leasing costs, included in other assets on our balance sheets and amortized over the remaining life of the lease.
Rental properties, properties under development and land held for development are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future undiscounted cash flows is less than the carrying amount of the property. Upon determination that an impairment has occurred, a write-down is recorded to reduce the carrying amount of the property to its estimated fair value.
Capitalization of Costs
In accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost" ("SFAS 34") and Statement of Financial Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects" ("SFAS 67"), we capitalize direct construction, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development, redevelopment or construction of a project. Pursuant to SFAS 34 and SFAS 67, capitalization of construction, development and redevelopment costs is required while activities are ongoing to prepare an asset for its intended use. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written off. Should development, redevelopment or construction activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred.
We also capitalize costs directly related and essential to our leasing activities. These costs are amortized on a straight-line basis over the terms of the related leases. Costs that were previously capitalized and which related to unsuccessful leasing opportunities are written off.
Accounting for 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 Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and are recorded at fair value. Fair value has been determined as the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The classification of investments under SFAS 115 is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of investments sold is determined by the specific identification method, with net realized gains included in other income.
Investments in privately held entities are generally accounted for under the cost method because we do not influence any operating or 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" and Emerging Issues Task Force Topic D-46, "Accounting for Limited Partnership Investments". Under the equity method of accounting, we record our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.
For all of 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, financial condition, prospects for favorable or unfavorable clinical trial results, new product initiatives and/or sales, and new collaborative agreements.
Interest Rate Swap Agreements
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 rate 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.
We reflect our interest rate swap agreements on the balance sheet at their estimated fair values with an offsetting adjustment reflected as unrealized gains/losses in accumulated other comprehensive income in stockholders' equity. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value, and such value may never be realized.
All of our interest rate swap agreements meet the criteria to be deemed "highly effective" under the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") in reducing our exposure to variable interest rates. In accordance with SFAS 133, we formally document all relationships between interest rate swap agreements and hedged items, including the method for evaluating effectiveness and the risk strategy. Accordingly, we have categorized these instruments as cash flow hedges. We make an assessment at the inception of each interest rate swap agreement and on an on-going basis to determine whether these instruments are highly effective in offsetting changes in cash flows associated with the hedged items. While we intend to continue to meet the conditions for such hedge accounting, if hedges did not qualify as "highly effective", the changes in the fair values of the derivatives used as hedges would be reflected in earnings.
We do not believe we are exposed to a significant amount of credit risk in our interest rate swap agreements as our counterparties are established, well-capitalized financial institutions.
Recognition of Rental Income and Tenant Recoveries
Rental income from leases with scheduled rent increases, free rent, incentives and other rent adjustments is recognized on a straight-line basis over the respective lease terms. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent in the accompanying consolidated balance sheets. Amounts received currently, but recognized as income in future years, are included as unearned rent in accounts payable, accrued expenses and tenant security deposits in the accompanying consolidated balance sheets. We commence recognition of rental income at the date the tenant takes possession of or controls the physical use of the property.
Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred.
We maintain an allowance for estimated losses that may result from the inability of our tenants to make payments required under the terms of the lease. If a tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and unrealized deferred rent.
Discontinued Operations
We follow the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" in determining whether a property qualifies as an asset "held for sale" and should be classified as "discontinued operations". A property is classified 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 all of these criteria have been met, the property is classified as "held for sale" and 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".
Results of Operations
Comparison of the Year Ended December 31, 2005 to the Year Ended December 31, 2004
Rental revenues increased by $45.6 million, or 32%, to $189.3 million for 2005 compared to $143.7 million for 2004. The increase resulted primarily from the 2004 Properties being owned for a full year and the addition of the 2005 Properties.
Tenant recoveries increased by $14.1 million, or 39%, to $50.0 million for 2005 compared to $35.8 million for 2004. The increase resulted primarily from the 2004 Properties being owned for a full year and the addition of the 2005 Properties.
Other income increased by $1.3 million, or 35%, to $4.8 million for 2005 compared to $3.5 million for 2004, primarily due to an increase in miscellaneous sources of income.
Rental operating expenses increased by $16.1 million, or 42%, to $54.5 million for 2005 compared to $38.4 million for 2004. The increase resulted primarily from increases in rental operating expenses (primarily property taxes and utilities) from properties acquired, placed in service or redeveloped in 2005. The majority of the increase in rental operating expenses is recoverable from our tenants through tenant recoveries.
General and administrative expenses increased by $6.0 million, or 40%, to $21.1 million for 2005 compared to $15.1 million for 2004, primarily due to the growth in both the depth and breadth of our operations in multiple markets, including internationally, from 113 properties with approximately 7.4 million rentable square feet as of December 31, 2004 to 134 properties with approximately 8.8 million rentable square feet as of December 31, 2005 and the costs associated with continued compliance with Section 404 of the Sarbanes-Oxley Act. As a percentage of total revenues, general and administrative expenses for 2005 remained relatively consistent with 2004.
Interest expense increased by $20.4 million, or 71%, to $49.1 million for 2005 compared to $28.7 million for 2004. The increase resulted primarily 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 the 2004 and 2005 Properties, 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 3.72% as of December 31, 2004 to 5.68% as of December 31, 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 - Interest Rate Swaps").
Depreciation and amortization increased by $12.9 million, or 30%, to $55.4 million for 2005 compared to $42.5 million for 2004. The increase resulted primarily from depreciation associated with the 2004 Properties being owned for a full year and the addition of the 2005 Properties.
Income from discontinued operations of $132,000 for 2005 reflects the results of operations of one property that was designated as "held for sale" as of June 30, 2005. In connection with the sale of this property in the third quarter of 2005, we recorded a gain of approximately $36,000. Income from discontinued operations of $1.8 million for 2004 primarily reflects the results of operations of one property that was designated as "held for sale" as of December 31, 2003. In connection with the sale of this property in the first quarter of 2004, we recorded a gain of approximately $1.6 million.
Comparison of the Year Ended December 31, 2004 to the Year Ended December 31, 2003
Rental revenues increased by $17.5 million, or 14%, to $143.7 million for 2004 compared to $126.2 million for 2003. The increase resulted primarily from the 2003 Properties being owned for a full year and the addition of the 2004 Properties.
Tenant recoveries increased by $3.8 million, or 12%, to $35.8 million for 2004 compared to $32.0 million for 2003. The increase resulted primarily from the 2003 Properties being owned for a full year and the addition of the 2004 Properties.
Other income increased by $1.5 million, or 71%, to $3.5 million for 2004 compared to $2.1 million for 2003, primarily due to an increase in net realized gains on investments and from an increase in miscellaneous sources of income.
Rental operating expenses increased by $5.6 million, or 17%, to $38.4 million for 2004 compared to $32.8 million for 2003. The increase resulted primarily from the 2003 Properties being owned for a full year and the addition of the 2004 Properties.
General and administrative expenses increased by $894,000, or 6%, to $15.1 million for 2004 compared to $14.2 million for 2003, mainly due to compliance with Section 404 of the Sarbanes-Oxley Act, Operation Outreach and general increases in administrative costs. Our Operation Outreach program provides financial assistance to families of activated and deployed soldiers that face considerable financial challenges and have significant financial needs. As a percentage of total revenues, general and administrative expenses for 2004 remained relatively consistent with 2003.
Interest expense increased by $2.3 million, or 9%, to $28.7 million for 2004 compared to $26.4 million for 2003. The increase resulted primarily from increases in indebtedness on our unsecured line of credit, unsecured term loan and secured notes payable, and to increases in the floating interest rates on our unsecured line of credit and unsecured term loan. These borrowings were utilized to finance the acquisition of the 2003 and 2004 Properties, and the development and redevelopment of properties. The weighted average effective interest rate on these borrowings (not including the effect of interest rate swap agreements) increased from 2.64% as of December 31, 2003 to 3.72% as of December 31, 2004. 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 - Interest Rate Swaps").
Depreciation and amortization increased by $3.9 million, or 10%, to $42.5 million for 2004 compared to $38.6 million for 2003. The increase resulted primarily from depreciation associated with the 2003 Properties being owned for a full year and the addition of the 2004 Properties.
Income from discontinued operations of $1.8 million for 2004 primarily reflects the results of operations of one property that was designated as "held for sale" as of December 31, 2003. In connection with this sale, we recorded a gain of approximately $1.6 million during 2004. Income from discontinued operations of $11.3 million for 2003 primarily reflects the results of operations of three properties that were designated as "held for sale" as of December 31, 2002. In connection with the sale of these properties, we recorded a net gain of approximately $8.3 million during 2003.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for 2005 increased by $55.4 million to $120.7 million compared to $65.3 million for 2004. The increase resulted primarily from increases in cash flows from our operating properties, and increases in accounts payable, accrued expenses and tenant security deposits.
Net cash used in investing activities for 2005 decreased by $15.4 million to $432.9 million compared to $448.3 million for 2004. This decrease was primarily due to decreases in additions to properties under development and land held for development, and property acquisitions, partially offset by an increase in additions to rental properties.
Net cash provided by financing activities for 2005 decreased by $68.1 million to $313.0 million compared to $381.1 million for 2004. This decrease was primarily due to decreases in the proceeds from secured notes payable and from issuances of preferred stock, an increase in the principal reductions of secured notes payable, and increases in dividends paid on common stock and preferred stock. This was partially offset by the net proceeds from issuances of common stock, a decrease in repayments of our unsecured line of credit and unsecured term loan and the decrease in redemption of preferred stock.
Off-Balance Sheet Arrangements
As of December 31, 2005, we had no off-balance sheet arrangements.
Contractual Obligations and Commitments
Contractual obligations as of December 31, 2005, consisted of the following (in thousands):
Payments by Period
-----------------------------------------------
Total 2006 2007-2008 2009-2010 Thereafter
- --------------------------------------------------------------------------------------------
Secured notes payable (1) $ 662,147 $ 44,552 $ 206,813 $ 130,637 $ 280,145
Unsecured line of credit and
unsecured term loan 740,000 -- 240,000 500,000 --
Ground lease obligations 62,774 1,730 3,538 3,664 53,842
Other obligations 6,248 887 1,816 1,819 1,726
------------ ----------- ------------ ---------- ------------
Total $ 1,471,169 $ 47,169 $ 452,167 $ 636,120 $ 335,713
============ =========== ============ ========== ============
(1) Excludes unamortized premiums of $4.5 million as of December 31, 2005.
Secured notes payable as of December 31, 2005 included 34 notes secured by 67 properties and three land development parcels.
In November 2005, we amended our unsecured line of credit and our unsecured term loan (see "Unsecured Line of Credit and Unsecured Term Loan " below). The unsecured line of credit matures in December 2007 and may be extended at our sole option for an additional one-year period. The unsecured term loan matures in December 2009.
Ground lease obligations as of December 31, 2005 included leases for seven of our properties and one land development parcel. These lease obligations have remaining lease terms of 27 to 50 years, exclusive of extension options.
In addition to the above, we were committed as of December 31, 2005 under the terms of contracts to complete the construction of properties under development at a remaining aggregate cost of $46.4 million.
As of December 31, 2005, we were also committed to fund approximately $20.1 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $13.3 million for certain investments.
Tenant Security Deposits and Other Restricted Cash
Tenant security deposits and other restricted cash consisted of the following (in thousands):
December 31,
----------------------
2005 2004
---------- ----------
Funds held in trust under the terms of
certain secured notes payable $ 13,838 $ 11,241
Security deposit funds based on the terms
of certain lease agreements 2,047 2,045
Other funds held in escrow 5,128 4,383
---------- ----------
$ 21,013 $ 17,669
========== ==========
Secured Notes Payable
Secured notes payable consisted of the following (in thousands):
December 31,
---------------------
2005 2004
---------- ----------
Secured notes payable, interest rates varying from 4.32% to 8.75%, $ 662,147 $ 635,432
(weighted average effective interest rate of 6.31% and 5.67%
at December 31, 2005 and 2004, respectively), maturity
dates ranging from January 2006 to June 2016
Unamortized premiums 4,519 3,514
----------- ----------
Total secured notes payable $ 666,666 $ 638,946
======================
Our secured notes payable generally require monthly payments of principal and interest. The total book values of properties securing debt were $848,286,000 and $776,342,000 at December 31, 2005 and 2004, respectively. At December 31, 2005, our secured notes payable were comprised of $595.9 million and $70.8 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 notes payable and the weighted average interest rates as of December 31, 2005 (in thousands):
Weighted
Average
Year Amount Interest Rate(1)
----------------------- ----------- -------------
2006 $ 44,552 6.32%
2007 83,623 6.26%
2008 123,190 6.16%
2009 42,084 6.52%
2010 88,553 6.48%
Thereafter 280,145 6.24%
-----------
Subtotal 662,147
Unamortized premiums 4,519
-----------
Total secured notes
payable $ 666,666
===========
(1) The weighted average interest rate is calculated based on the outstanding debt as of January 1st of each year.
Unsecured Line of Credit and Unsecured Term Loan
In November 2005, we entered into an amendment to our amended and restated credit agreement to increase the maximum permitted borrowings under our unsecured credit facilities from $750 million to $1 billion consisting of a $500 million unsecured revolving credit facility and a $500 million unsecured term loan. We may in the future elect to increase commitments under the unsecured credit facilities by up to an additional $200 million.
Borrowings under our unsecured line of credit, as amended, 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 a LIBOR period of one, two, three or six months. The unsecured line of credit matures in December 2007 and may be extended at our sole option for an additional one-year period. As of December 31, 2005, we had borrowings of $240 million outstanding on the unsecured line of credit with a weighted average interest rate of 5.69%.
Our unsecured term loan bears 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 for a period of one, two, three or six months. The unsecured term loan matures in December 2009. As of December 31, 2005, we had borrowings of $500 million outstanding on the unsecured term loan with a weighted average interest rate of 5.67%.
Our unsecured line of credit and unsecured term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a leverage ratio and a fixed charge coverage ratio. 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. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum combined amount of $1 billion. Under these provisions as of December 31, 2005, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $863 million.
Interest Rate Swaps
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 rate 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 December 31, 2005 (dollars in thousands):
Notional Effective at Interest Termination Fair
Transaction Dates Effective Dates Amounts December 31, 2005 Pay Rates Dates Values
- ------------------ ---------------- --------- ------------------- --------- ---------------- ---------
December 2002 January 2, 2003 $25,000 $ 25,000 3.285% June 30, 2006 $ 167
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 167
December 2003 December 30, 2005 50,000 50,000 4.150% December 29, 2006 280
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (313)
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 434
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 434
April 2004 April 29, 2005 50,000 50,000 3.140% April 28, 2006 230
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 274
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (63)
June 2004 June 30, 2005 50,000 50,000 4.343% June 30, 2007 284
December 2004 December 31, 2004 50,000 50,000 3.590% January 2, 2008 1,129
December 2004 January 3, 2006 50,000 -- 3.927% July 1, 2008 950
May 2005 December 30, 2005 25,000 25,000 4.120% November 30, 2006 136
May 2005 June 30, 2006 50,000 -- 4.270% June 29, 2007 250
May 2005 November 30, 2006 25,000 -- 4.330% November 30, 2007 103
May 2005 June 29, 2007 50,000 -- 4.400% June 30, 2008 162
May 2005 November 30, 2007 25,000 -- 4.460% November 28, 2008 61
May 2005 June 30, 2008 50,000 -- 4.509% June 30, 2009 112
May 2005 November 28, 2008 25,000 -- 4.615% November 30, 2009 41
December 2005 December 29, 2006 50,000 -- 4.730% November 30, 2009 17
December 2005 December 29, 2006 50,000 -- 4.740% November 30, 2009 4
December 2005 January 2, 2008 50,000 -- 4.768% December 31, 2010 8
------------------- ---------
Total Interest Rate Swap Agreements in $ 325,000 $ 4,867
Effect at December 31, 2005 =================== =========
We do not believe we are exposed to a significant amount of credit risk in our interest rate swap agreements as our 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 December 31, 2005, our interest rate swap agreements were classified in other assets at their fair values aggregating approximately $4.9 million, with the offsetting adjustment reflected as unrealized gains in accumulated other comprehensive income in stockholders' equity. As of December 31, 2004, our interest rate swap agreements were classified in accounts payable, accrued expenses and tenant security deposits at their fair values aggregating approximately $2.1 million, with the offsetting adjustment reflected as unrealized losses in accumulated other comprehensive income in stockholders' equity. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made. During the next twelve months, we expect to reclassify $3.3 million from accumulated other comprehensive income to interest income.
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 1,248,000 shares of our common stock in an underwritten offering (including shares issued upon exercise of the underwriter's over-allotment option). The shares were issued at a price of $81.00 per share, resulting in net proceeds of approximately $100.3 million (after deducting underwriting discounts and other offering costs).
As of December 31, 2005, we had approximately $305 million of available capacity for future issuances of debt, equity and other securities under a shelf registration statement filed with the Securities and Exchange Commission. These securities may be issued from time to time and at our discretion based on our needs and market conditions.
In November 2005, we entered into an amendment to our existing amended and restated credit agreement. The maximum permitted borrowings under the credit facilities was increased from $750 million to $1 billion consisting of a $500 million unsecured revolving credit facility and a $500 million unsecured term loan. We may in the future elect to increase commitments under the unsecured credit facilities by up to an additional $200 million.
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 the unsecured line of credit and unsecured term loan, and the issuance of additional debt and/or equity securities.
Exposure to Environmental Liabilities
In connection with the acquisition of all of our properties, we have obtained Phase I environmental assessments to ascertain the existence of any environmental liabilities or other issues. The Phase I environmental assessments of our properties have not revealed any environmental liabilities that we believe would have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any material environmental liabilities that have occurred since the Phase I environmental assessments were completed. In addition, we carry a policy of pollution legal liability insurance covering exposure to certain environmental losses at all of our properties
Capital Expenditures, Tenant Improvements and Leasing Costs
The following table shows total and weighted average per square foot property-related capital expenditures, tenant improvements and leasing costs (all of which are added to the basis of the properties) related to our life science properties (excluding capital expenditures and tenant improvements that are recoverable from tenants, revenue-enhancing or related to properties that have undergone redevelopment) for the years ended December 31, 2005, 2004, 2003, 2002 and 2001, attributable to leases that commenced at our properties after our acquisition:
Total/
Weighted
Average 2005 2004 2003 2002 2001
----------- ----------- ---------- ---------- ---------- ----------
Capital expenditures (1):
Major capital expenditures $ 6,807,000 $ 972,000 $2,628,000 (2)$1,632,000 (3)$ 959,000 $ 616,000
Recurring capital expenditures $ 5,460,000 $ 1,278,000 $1,243,000 $ 853,000 $1,472,000 (4)$ 614,000
Weighted average square feet
in portfolio 30,591,968 8,128,690 6,123,807 5,708,635 5,499,660 5,131,176
Per weighted average square
foot in portfolio
Major capital expenditures $ 0.22 $ 0.12 $ 0.43 (2)$ 0.29 (3)$ 0.17 $ 0.12
Recurring capital expenditures $ 0.18 $ 0.16 $ 0.20 $ 0.15 $ 0.27 (4)$ 0.12
Tenant improvements and leasing
costs:
Retenanted space (5)
Tenant improvements and
leasing costs $ 4,891,000 $ 324,000 $ 713,000 $2,890,000 $ 498,000 $ 466,000
Retenanted square feet 991,992 130,887 142,814 248,488 318,642 151,161 (5)
Per square foot leased of
retenanted space $ 4.93 $ 2.48 $ 4.99 $ 11.63 $ 1.56 $ 3.08
Renewal space
Tenant improvements and
leasing costs $ 2,797,000 $ 778,000 $ 937,000 $ 105,000 $ 526,000 $ 451,000
Renewal square feet 2,184,863 666,058 558,874 271,236 255,978 432,717
Per square foot leased of
renewal space $ 1.28 $ 1.17 $ 1.68 $ 0.39 $ 2.05 $ 1.04
(1) Property-related capital expenditures include all major capital and recurring capital expenditures except capital expenditures that are recoverable from tenants, revenue-enhancing capital expenditures, or costs related to the redevelopment of a property. Major capital expenditures consisted of roof replacements and HVAC systems that are typically identified and considered at the time a property is acquired. Major capital expenditures for 2003 also included one-time costs related to the implementation of our national branding and signage program. Recurring capital expenditures exclude major capital expenditures.
(2) Major capital expenditures for 2004 included a one-time HVAC system upgrade at one property totaling $1,551,000 or $0.25 per square foot.
(3) Major capital expenditures for 2003 included $1,072,000 or $0.19 per square foot in one-time costs related to the implementation of our national branding and signage program.
(4) Recurring capital expenditures for 2002 included $552,000 or $0.10 per square foot related to a fully leased property in San Diego, California that underwent substantial renovation in 2002.
(5) Excludes space that has undergone redevelopment before retenanting.
Capital expenditures fluctuate in any given period due to the nature, extent and timing of improvements required and the extent to which they are recoverable from our tenants. Approximately 89% of our leases 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 maintain an active preventative maintenance program at each of our properties to minimize capital expenditures required.
Tenant improvements and leasing costs also fluctuate in any given year depending upon factors such as the timing and extent of vacancies, property age, location and characteristics, the type of lease (renewal tenant or retenanted space), the involvement of external leasing agents and overall competitive market conditions.
Inflation
As of December 31, 2005, approximately 85% 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 December 31, 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
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 difference 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 to funds from operations available to common stockholders for the years ended December 31, (in thousands):
Year Ended December 31,
-----------------------
2005 2004
----------- ----------
Net income available to common stockholders (1) $47,343 $45,724
Add:
Depreciation and amortization (2) 55,416 42,523
Minority interest 634 -
Less:
Gain on sales of property (3) (36) (1,627)
FFO allocable to minority interest (668) -
----------- ----------
Funds from operations available to common
stockholders $102,689 $86,620
=========== ==========
(1) During the second quarter of 2004, we elected to redeem the 9.50% Series A cumulative redeemable preferred stock. Accordingly, in compliance with Emerging Issues Task Force Topic D-42, we recorded a charge of $1,876,000, or $0.10 per common share (diluted) in the second quarter of 2004 for costs related to the redemption of the Series A preferred stock.
(2) Includes depreciation and amortization on assets "held for sale" reflected as discontinued operations (for the periods prior to when such assets were designated as "held for sale").
(3) Gain on sales of property relates to the disposition of one property in the Southeast market during the third quarter of 2005 and the disposition of one property in the Suburban Washington D.C. market during the first quarter of 2004. Gain on sales of property is included in the income statement in income from discontinued operations, net.
Property and Lease Information
The following table is a summary of our properties as of December 31, 2005 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Markets Properties Feet Rent Percentages
- ------------------------------------- ---------- ----------- --------- -----------
California - Pasadena 1 31,343 $793 100.0%
California - San Diego 23 1,070,477 27,509 92.2%
California - San Francisco Bay 15 1,043,737 30,583 96.5%
Eastern Massachusetts 22 1,263,077 34,603 93.6%
New Jersey/Suburban Philadelphia 7 458,623 7,900 98.5%
Southeast 8 432,127 7,460 85.9%(1)
Suburban Washington D.C. 31 2,439,146 46,936 93.0%(2)
Washington - Seattle 9 780,211 23,081 87.8%
International - Canada 3 296,362 6,223 100.0%
---------- ----------- --------- -----------
Total Operating Properties 119 7,815,103 $185,088 93.2%(2)
========== =========== ========= ===========
Properties Under Redevelopment 15 1,009,266 $14,662 45.7%
---------- ----------- --------- -----------
Total Properties 134 8,824,369 $199,750 87.7%(2)
---------- ----------- --------- -----------
(1) Substantially all of the vacant space is office or warehouse space.
(2) Excluding one lease for approximately 103,000 square feet that terminated in the fourth quarter of 2005, occupancy percentages for Suburban Washington D.C., total operating properties and total properties would have been 97.2%, 94.5% and 88.9%, respectively.
The following table summarizes information with respect to the lease expirations at our properties as of December 31, 2005:
Square Annualized Base Year of Number of Footage of Percentage of Rent of Expiring Lease Expiring Expiring Aggregate Leased Leases (per Expiration Leases Leases Square Feet square foot) - ---------- ----------- ---------- -------------- --------------- 2006 79 (1) 924,223 11.9% $24.98 2007 39 786,824 10.2% $26.30 2008 27 630,784 8.1% $26.24 2009 26 492,926 6.4% $21.77 2010 33 740,788 9.6% $22.40 Thereafter 79 4,165,798 53.8% $26.91
(1) Includes month-to-month leases for approximately 56,000 square feet.
Item 7A. 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 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, December 31, 2005 and 2004, we estimate that a 1% increase in interest rates on our variable 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 by approximately $2.1 million and $2.0 million, respectively. We further estimate that a 1% decrease in interest rates on our variable debt, including our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect on December 31, 2005 and 2004, would increase annual future earnings by approximately $2.1 million and $2.0 million, respectively. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair values by approximately $36.8 million and $27.2 million at December 31, 2005 and 2004, respectively. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair values by approximately $38.4 million and $28.4 million at December 31, 2005 and 2004, respectively.
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 December 31, 2005 and 2004 . 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 December 31, 2005 and 2004 would decrease their fair values by approximately $8.2 million and $6.7 million, respectively.
We have exposure to foreign currency exchange rate market risk related to our wholly-owned subsidiaries operating in Canada. The functional currency of our foreign subsidiaries operating in Canada is the local currency, the Canadian dollar. Gains or losses resulting from the translation of our foreign subsidiaries' balance sheets and income statements 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.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included as a separate section in this Annual Report on Form 10-K. See "Item 15. Exhibits, Financial Statement Schedule".
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended December 31, 2005 that could materially affect, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2005, 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. These controls and procedures have been designed to ensure that information required for disclosure is recorded, processed, summarized and reported within the requisite time periods. Based on our evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2005.
Management's Annual Report on Internal Control Over Financial Reporting
The management of Alexandria Real Estate Equities, Inc. and subsidiaries (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorizations of the Company's management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements. Management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making its assessment, management has utilized the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in "Internal Control - Integrated Framework". Management concluded that based on its assessment, the Company's internal control over financial reporting was effective as of December 31, 2005. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report on the next page.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited management's assessment, included in the accompanying Annual Management's Report on Internal Control Over Financial Reporting, that Alexandria Real Estate Equities, Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated March 9, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 9, 2006
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated herein by reference from our definitive proxy statement for our 2006 annual meeting of stockholders to be filed pursuant to Regulation 14A within 120 days after the end of our fiscal year (the "2006 Proxy Statement") under the caption "Board of Directors, Executive Officers and Senior Management".
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference from our 2006 Proxy Statement under the caption "Board of Directors, Executive Officers and Senior Management - Executive Compensation".
The following table sets forth information on the Company's equity compensation plan as of December 31, 2005:
Equity Compensation Plan Information
|
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
|
Weighted-average exercise price of outstanding options, warrants and rights (b) |
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|
Equity Compensation Plan Approved by Stockholders - 1997 Incentive Plan |
|
492,016 |
|
$34.92 |
|
413,501 |
The other information required by this Item is incorporated herein by reference from our 2006 Proxy Statement under the caption "Security Ownership of Management and Principal Stockholders".
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference from our 2006 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference from our 2006 Proxy Statement under the caption "Fees Billed by Independent Registered Public Accountants".
PART IV
Item 15. Exhibits, Financial Statement Schedule
(a)(1) and (2) Financial Statements and Schedule
The financial statements and schedule required by this Item are included as a separate section of this Annual Report on Form 10-K, beginning on page F-1.
(a)(3) See Exhibits and Index to Exhibits below.
|
|
Page |
|
Report of Independent Registered Public Accounting Firm |
|
|
Audited Consolidated Financial Statements: |
|
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended |
|
|
Notes to Consolidated Financial Statements |
|
|
Schedule III - Consolidated Financial Statement Schedule of Rental Properties and Accumulated Depreciation |
(b) Exhibits and Index to Exhibits
|
Exhibit Number |
Exhibit Title |
|
3.1 * |
Articles of Amendment and Restatement of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 14, 1997 |
|
3.2 * |
Certificate of Correction of Alexandria, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on August 14, 1997 |
|
3.3 |
Bylaws of Alexandria (as amended February 27, 2006) |
|
3.4 * |
Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle 8 of Title 3 of the Maryland General Corporation Law, filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000 |
|
3.5 * |
Articles Supplementary, dated January 28, 2002, relating to the 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17, 2002 |
|
4.1 * |
Rights Agreement, dated as of February 10, 2000, between the Company and American Stock Transfer & Trust Company, as Rights Agent, including the forms of Articles Supplementary setting forth the terms of the Series A Junior Participating Preferred Stock, par value $.01 per share, Rights Certificate and the Summary of Rights to Purchase Preferred Stock attached as exhibits to the Rights Agreement. Pursuant to the Rights Agreement, printed Rights Certificates will not be mailed until after the Distribution Date (as defined in the Rights Agreement), filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on February 10, 2000 |
|
4.2 * |
Specimen certificate representing shares of Common Stock, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545) |
|
4.3 * |
Specimen certificate representing shares of 9.10% Series B Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on February 17, 2002 |
|
4.4 * |
Specimen certificate representing shares of 8.375% Series C Cumulative Redeemable Preferred Stock, filed as an exhibit to Alexandria's current report on Form 8-A filed with the Commission on June 28, 2004 |
|
10.1 * (1) |
Amended and Restated 1997 Stock Award and Incentive Plan of Alexandria, dated December 29, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2002 |
|
10.2 * (1) |
Form of Non-Employee Director Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545) |
|
10.3 * (1) |
Form of Incentive Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545) |
|
10.4 * (1) |
Form of Nonqualified Stock Option Agreement for use in connection with options issued pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's Registration Statement on Form S-11 (No. 333-23545) |
|
10.5 * (1) |
Form of Employee Restricted Stock Agreement for use in connection with shares of restricted stock issued to employees pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999 |
|
10.6 * (1) |
Form of Independent Contractor Restricted Stock Agreement for use in connection with shares of restricted stock issued to independent contractors pursuant to the Amended and Restated 1997 Stock Award and Incentive Plan, filed as an exhibit to Alexandria's quarterly report on Form 10-Q filed with the Commission on November 15, 1999 |
|
10.7 * (1) |
Alexandria's 2000 Deferred Compensation Plans, effective December 1, 2000, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 29, 2002 |
|
10.8* |
Amended and Restated Credit Agreement as of December 22, 2004, among Alexandria Real Estate, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, and the other borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Bank of America, N.A. as Administrative Agent, Citicorp North America, Inc. and Commerzbank AG New York and Grand Cayman Branches, as Co-Syndication Agents, Societe Generale and Eurohypo AG, New York Branch, as Co-Documentation Agents, Banc of America Securities LLC and Citigroup Global Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners, filed as an exhibit to Alexandria's annual report on Form 10-K filed with the Commission on March 16, 2005. |
|
10.9 |
Second Amendment to Amended and Restated Credit Agreement as of November 16, 2005, among Alexandria Real Estate, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, and the other subsidiaries party hereto as the borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Citicorp North America, Inc. and Commerzbank AG New York and Grand Cayman Branches, as Co-Syndication Agents, Societe Generale and Eurohypo AG, New York Branch, as Co-Documentation Agents, Banc of America Securities LLC and Citigroup Global Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners |
|
10.10 (1) |
Executive Employment Agreement between Alexandria Real Estate Equities, Inc. and James H. Richardson, dated January 9, 2006 |
|
10.11 (1) |
Executive Employment Agreement between Alexandria Real Estate Equities, Inc. and Joel S. Marcus, dated March 13, 2006 |
|
10.12 (1) |
Summary of Director Compensation Arrangements |
|
12.1 |
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends |
|
14.1* |
Alexandria Real Estate Equities, Inc. Business Integrity Policy and Procedures for Reporting Non-Compliance (code of ethics pursuant to Item 406 Regulation S-K) |
|
21.1 |
List of Subsidiaries of Alexandria |
|
23.1 |
Consent of Ernst & Young LLP |
|
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 |
Certifications 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 |
___________________
(*) Incorporated by reference. (1) Management contract or compensatory arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
ALEXANDRIA REAL ESTATE EQUITIES, INC. |
||
|
Dated March 16, 2006 |
|
By: /s/ JOEL S. MARCUS |
|
KNOW ALL THOSE BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jerry M. Sudarsky and Joel S. Marcus, and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, if any, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents of their substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Signature |
Title |
Date |
|
/s/ JERRY M. SUDARSKY |
Chairman of the Board of Directors |
March 15, 2006 |
|
/s/ JOEL S. MARCUS |
Chief Executive Officer (Principal Executive Officer) and Director |
March 16, 2006 |
|
/s/ JAMES H. RICHARDSON |
President and Director |
March 15, 2006 |
|
/s/ DEAN A. SHIGENAGA |
Chief Financial Officer (Principal Financial and Accounting Officer) |
March 16, 2006 |
|
/s/ RICHARD B. JENNINGS |
Director |
March 9, 2006 |
|
/s/ RICHARD H. KLEIN |
Director |
March 15, 2006 |
|
/s/ MARTIN A. SIMONETTI |
Director |
March 15, 2006 |
|
/s/ ALAN G. WALTON |
Director |
March 15, 2006 |
|
/s/ RICHMOND A. WOLF |
Director |
March 16, 2006 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria Real Estate Equities, Inc. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Alexandria Real Estate Equities, Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 9, 2006, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Los Angeles, California
March 9, 2006
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31,
----------------------
2005 2004
---------- ----------
Assets
Rental properties, net $1,788,818 $1,427,853
Properties under development and land held for development 329,338 252,249
Cash and cash equivalents 3,911 3,158
Tenant security deposits and other restricted cash 21,013 17,669
Tenant receivables 4,764 2,542
Deferred rent 54,573 43,166
Investments 82,010 67,419
Other assets 78,023 58,228
---------- ----------
Total assets $2,362,450 $1,872,284
========== ==========
Liabilities and Stockholders' Equity
Secured notes payable $ 666,666 $ 638,946
Unsecured line of credit and unsecured term loan 740,000 548,000
Accounts payable, accrued expenses and tenant security deposits 86,391 48,581
Dividends payable 19,478 16,284
---------- ----------
Total liabilities 1,512,535 1,251,811
Commitments and contingencies
Minority interest 20,115 -
Stockholders' equity:
9.10% Series B cumulative redeemable preferred stock,
$0.01 par value per share, 2,300,000 shares authorized;
2,300,000 shares issued and outstanding at
December 31, 2005 and 2004; $25.00 liquidation value per share 57,500 57,500
8.375% Series C cumulative redeemable preferred stock
$0.01 par value per share, 5,750,000 shares authorized;
5,185,500 shares issued and outstanding at
December 31, 2005 and 2004; $25.00 liquidation value per share 129,638 129,638
Common stock, $0.01 par value per share, 100,000,000
shares authorized; 22,441,294 and 19,594,418 shares
issued and outstanding at December 31, 2005
and 2004, respectively 224 196
Additional paid-in capital 607,405 414,028
Retained earnings - 5,267
Accumulated other comprehensive income 35,033 13,844
---------- ----------
Total stockholders' equity 829,800 620,473
---------- ----------
Total liabilities and stockholders' equity $2,362,450 $1,872,284
========== ==========
See the accompanying Notes to Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------
2005 2004 2003
----------- ----------- -----------
Revenues
Rental $ 189,312 $ 143,700 $ 126,236
Tenant recoveries 49,974 35,840 32,050
Other income 4,798 3,541 2,068
----------- ----------- -----------
244,084 183,081 160,354
Expenses
Rental operations 54,540 38,394 32,770
General and administrative 21,094 15,105 14,211
Interest 49,116 28,670 26,416
Depreciation and amortization 55,399 42,476 38,598
----------- ----------- -----------
180,149 124,645 111,995
Minority interest 634 - -
----------- ----------- -----------
Income from continuing operations 63,301 58,436 48,359
Income from discontinued operations, net 132 1,759 11,284
----------- ----------- -----------
Net income 63,433 60,195 59,643
Dividends on preferred stock 16,090 12,595 8,898
Preferred stock redemption charge - 1,876 -
----------- ----------- -----------
Net income available to common stockholders $ 47,343 $ 45,724 $ 50,745
=========== =========== ===========
Earnings per share - basic:
Continuing operations (net of preferred
stock dividends and preferred stock
redemption charge) $ 2.25 $ 2.28 $ 2.08
Discontinued operations, net 0.01 0.09 0.59
----------- ----------- -----------
Earnings per share - basic $ 2.26 $ 2.37 $ 2.67
=========== =========== ===========
Earnings per share - diluted:
Continuing operations (net of preferred
stock dividends and preferred stock
redemption charge) $ 2.21 $ 2.24 $ 2.05
Discontinued operations, net 0.01 0.09 0.59
----------- ----------- -----------
Earnings per share - diluted $ 2.22 $ 2.33 $ 2.64
=========== =========== ===========
Weighted average shares of common stock outstanding:
Basic 20,948,915 19,315,364 18,993,856
=========== =========== ===========
Diluted 21,316,886 19,658,759 19,247,790
=========== =========== ===========
See the accompanying Notes to Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Accumulated
Series A Series B Series C Number of Additional Other
Preferred Preferred Preferred Common Common Paid-In Retained Comprehensive
Stock Stock Stock Shares Stock Capital Earnings Income (Loss) Total
---------- ---------- ---------- ----------- ------- --------- ----------- ------------ ----------
Balance at December 31, 2002 $ 38,588 57,500 - 18,973,957 $ 190 $ 398,399 $ - $ (8,824) $ 485,853
Net income - - - - - - 59,643 - 59,643
Unrealized gain on marketable securities - - - - - - - 610 610
Unrealized gain on swap agreements - - - - - - - 2,739 2,739
----------
Comprehensive income - - - - - - - - 62,992
Issuances pursuant to Stock Plan (options and awards) - - - 290,066 3 9,295 - - 9,298
Dividends declared on preferred stock - - - - - - (8,898) - (8,898)
Dividends declared on common stock - - - - - - (42,110) - (42,110)
---------- ---------- ---------- ----------- ------- --------- ----------- ------------ ----------
Balance at December 31, 2003 38,588 57,500 - 19,264,023 193 407,694 8,635 (5,475) 507,135
Net income - - - - - - 60,195 - 60,195
Unrealized gain on marketable securities - - - - - - - 15,110 15,110
Unrealized gain on swap agreements - - - - - - - 4,209 4,209
----------
Comprehensive income - - - - - - - - 79,514
Issuance of Series C preferred stock, net of offering costs - - 129,638 - - (5,629) - - 124,009
Redemption of Series A preferred stock (38,588) - - - - 1,876 (1,876) - (38,588)
Issuances pursuant to Stock Plan (options and awards) - - - 330,395 3 10,087 - - 10,090
Dividends declared on preferred stock - - - - - - (12,595) - (12,595)
Dividends declared on common stock - - - - - - (49,092) - (49,092)
---------- ---------- ---------- ----------- ------- --------- ----------- ------------ ----------
Balance at December 31, 2004 - 57,500 129,638 19,594,418 196 414,028 5,267 13,844 620,473
Net income - - - - - - 63,433 - 63,433
Unrealized gain on marketable securities - - - - - - - 12,439 12,439
Unrealized gain on swap agreements - - - - - - - 6,957 6,957
Foreign currency translation - - - - - - - 1,793 1,793
----------
Comprehensive income - - - - - - - - 84,622
Issuance of common stock, net of offering costs - - - 2,685,500 27 189,344 - - 189,371
Amortization of stock compensation expense - - - - - - - - 0
Issuances pursuant to Stock Plan (options and awards) - - - 161,376 1 10,929 - - 10,930
Dividends declared on preferred stock - - - - - - (16,090) - (16,090)
Dividends declared on common stock - - - - - (6,896) (52,610) - (59,506)
---------- ---------- ---------- ----------- ------- --------- ----------- ------------ ----------
Balance at December 31, 2005 $ - $ 57,500 $ 129,638 22,441,294 $ 224 $ 607,405 $ - $ 35,033 $ 829,800
========== ========== ========== =========== ======= ========= =========== ============ ==========
See the accompanying Notes to Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
Operating Activities
Net income $ 63,433 $ 60,195 $ 59,643
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in income related to investments (483) (208) (306)
Realized (gain)/loss on sales of investments (1,811) (2,228) (230)
(Gain)/loss on sales of property (36) (1,627) (8,286)
Minority interest 634 - -
Depreciation and amortization 55,416 42,523 38,901
Amortization of loan fees and costs 6,666 2,374 2,133
Amortization of premiums on secured notes payable (1,089) (161) (290)
Stock compensation expense 5,136 2,470 2,734
Changes in operating assets and liabilities:
Tenant security deposits and other restricted cash (3,344) (6,612) (3,037)
Tenant receivables (2,214) (573) 672
Deferred rent (14,904) (11,671) (6,826)
Other assets (26,586) (18,261) (10,828)
Accounts payable, accrued expenses and tenant security deposits 39,860 (905) 31
----------- ----------- -----------
Net cash provided by operating activities 120,678 65,316 74,311
Investing Activities
Purchase of rental properties (223,862) (251,091) (48,729)
Proceeds from sales of rental properties 1,182 5,454 42,376
Additions to rental properties (92,417) (70,248) (48,264)
Additions to properties under development and land held for development (117,945) (129,620) (78,327)
Additions to investments (10,367) (7,993) (8,818)
Proceeds from investments 10,509 5,246 2,488
----------- ----------- -----------
Net cash used in investing activities (432,900) (448,252) (139,274)
Financing Activities
Proceeds from secured notes payable 153,398 198,400 64,667
Proceeds from issuances of common stock 189,371 - -
Proceeds from issuance of preferred stock - 124,009 -
Redemption of Series A preferred stock - (38,588) -
Proceeds from exercise of stock options 4,291 7,094 5,941
Borrowings from unsecured line of credit and unsecured term loan 515,000 490,000 310,083
Repayments of unsecured line of credit (323,000) (331,000) (259,083)
Principal reductions of secured notes payable (153,015) (10,376) (6,125)
Dividends paid on common stock (56,312) (47,333) (40,427)
Dividends paid on preferred stock (16,090) (11,097) (8,898)
Distributions to minority interest (668) - -
----------- ----------- -----------
Net cash provided by financing activities 312,975 381,109 66,158
Net increase (decrease) in cash and cash equivalents 753 (1,827) 1,195
Cash and cash equivalents at beginning of year 3,158 4,985 3,790
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,911 $ 3,158 $ 4,985
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest, net of interest capitalized $ 39,292 $ 28,714 $ 28,143
=========== =========== ===========
See the accompanying Notes to Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Background
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 research entities, as well as government agencies. As of December 31, 2005, we had 134 properties (131 properties located in nine states and three properties located in Canada) with approximately 8.8 million rentable square feet of office/laboratory space, compared to 113 properties in nine states with approximately 7.4 million rentable square feet of office/laboratory space as of December 31, 2004.
As of December 31, 2005, approximately 85% 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 December 31, 2005, approximately 6% of our leases (on a square footage basis) required the tenants to pay a majority of operating expenses. Additionally, as of December 31, 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. The information provided in this paragraph is unaudited.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant 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 investment activity and changes in financing.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, tenant receivables, unsecured line of credit and unsecured term loan, and accounts payable, accrued expenses and tenant security deposits approximate fair value.
The fair value of our secured notes payable was estimated using discounted cash flows analyses based on borrowing rates we believe we could obtain with similar terms and maturities. As of December 31, 2005 and 2004, the fair values of our secured notes payable were approximately $682,835,000 and $652,100,000, respectively.
Operating Segments
We view our operations as principally one segment and the financial information disclosed herein represents all of the financial information related to our principal operating segment.
International Operations
The functional currency for our subsidiaries operating in the United States is the U.S. dollar. During 2005, we acquired three operating properties in Canada through wholly-owned Canadian subsidiaries. The functional currency for our foreign subsidiaries operating in Canada is the local currency, the Canadian dollar. The assets and liabilities of our foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect as of the financial statement date. Income statement accounts of our foreign subsidiaries 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.
The appropriate amounts of exchange gains or losses included in accumulated other comprehensive income are reflected in income when there is a sale or partial sale of the Company's investment in these operations or upon a complete or substantially complete liquidation of the investment.
Rental Properties, Properties Under Development and Land Held For Development
In accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations", we perform the following procedures when making an allocation of the purchase price of real estate: (1) estimate the value of the real estate as of the acquisition date on an "as if vacant" basis; (2) allocate the "as if vacant" value among land, land improvements, buildings, building improvements, tenant improvements and equipment; (3) calculate the value of the intangibles as the difference between the "as if vacant" value and the purchase price; and (4) allocate the intangible value to above, below and at market leases, origination costs associated with in-place leases, tenant relationships and other intangible assets.
The values allocated to land improvements, buildings, building improvements, tenant improvements and equipment are depreciated on a straight-line basis using an estimated life of 20 years for land improvements, 40 years for buildings and building improvements, the respective lease term for tenant improvements and the estimated useful life for equipment. The values of above and below market leases are amortized over the life of the related lease and recorded as either an increase (for below market leases) or a decrease (for above market leases) to rental income. The values of at-market leases and origination costs are classified as leasing costs, included in other assets in the accompanying consolidated balance sheets and amortized over the remaining life of the lease.
Rental properties, properties under development and land held for development are individually evaluated for impairment when conditions exist which may indicate that it is probable that the sum of expected future undiscounted cash flows is less than the carrying amount of the property. Upon determination that an impairment has occurred, a write-down is recorded to reduce the carrying amount of the property to its estimated fair value.
In accordance with Statement of Financial Accounting Standards No. 34, "Capitalization of Interest Cost" ("SFAS 34") and Statement of Financial Accounting Standards No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects" ("SFAS 67"), we capitalize direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a project. Pursuant to SFAS 34 and SFAS 67, capitalization of construction and development costs is required while activities are ongoing to prepare an asset for its intended use. Costs incurred after a project is substantially complete and ready for its intended use are expensed as incurred. Costs previously capitalized related to abandoned acquisition or development opportunities are written off. Should development activity cease, a portion of interest, property taxes, insurance and certain costs would no longer be eligible for capitalization, and would be expensed as incurred. Expenditures for repairs and maintenance are expensed as incurred.
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".
Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Tenant Security Deposits and Other Restricted Cash
Tenant security deposits and other restricted cash consisted of the following (in thousands):
December 31,
--------------------------
2005 2004
----------- -------------
Funds held in trust under the terms
of certain secured notes payable $ 13,838 $ 11,241
Security deposit funds based on the
terms of certain lease agreement 2,047 2,045
Other funds held in escrow 5,128 4,383
----------- -------------
$ 21,013 $ 17,669
=========== =============
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 Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and are recorded at fair value. Fair value has been determined as the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The classification of investments under SFAS 115 is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of investments sold is determined by the specific identification method, with realized gains and losses included in other income in the accompanying consolidated statements of income.
Investments in privately held entities are generally accounted for under the cost method because we do not influence any operating or 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 Partnership Investments" ("EITF Topic D-46"). Under the equity method we record our investment initially at cost and adjust the carrying amount of the investment to recognize our share of the earnings or losses of the investee subsequent to the date of our investment.
For all of 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.
Leasing Costs
Costs directly related and essential to our leasing activities are capitalized and amortized on a straight-line basis over the term of the related lease. Costs that were previously capitalized and which related to unsuccessful leasing opportunities are written off. Leasing costs, net of related amortization, totaled $32,924,000 and $29,747,000 as of December 31, 2005 and 2004, respectively, and are included in other assets in the accompanying consolidated balance sheets.
Loan Fees and Costs
Fees and costs incurred in obtaining long-term financing are amortized over the terms of the related loans and included in interest expense in the accompanying consolidated statements of income. Loan fees and costs, net of related amortization, totaled $14,789,000 and $14,075,000 as of December 31, 2005 and 2004, respectively, and are included in other assets in the accompanying consolidated balance sheets.
Interest Rate Swaps
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 rate 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.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" establishes accounting and reporting standards for derivative financial instruments such as our interest rate swap agreements. All of our interest rate swap agreements meet the criteria to be deemed "highly effective" under SFAS 133 in reducing our exposure to variable interest rates. In accordance with SFAS 133, we formally document all relationships between interest rate swap agreements and hedged items, including the method for evaluating effectiveness and the risk strategy. Accordingly, we have categorized these instruments as cash flow hedges. We make an assessment at the inception of each interest rate swap agreement and on an on-going basis to determine whether these instruments are highly effective in offsetting changes in cash flows associated with the hedged items. The ineffective portion of each interest rate swap agreement is immediately recognized in earnings. While we intend to continue to meet the conditions for such hedge accounting, if hedges did not qualify as "highly effective", the changes in the fair values of the derivatives used as hedges would be reflected in earnings.
Pursuant to SFAS 133, interest rate swaps are reflected at their estimated fair values in the accompanying consolidated balance sheets. We use a variety of methods and assumptions based on market conditions and risks existing at each balance sheet date to determine the fair values of our interest rate swap agreements. These methods of assessing fair value result in a general approximation of value.
We do not believe we are exposed to a significant amount of credit risk in our interest rate swap agreements as our counterparties are established, well-capitalized financial institutions.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consisted of the following (in thousands):
December 31,
-----------------------
2005 2004
----------- -----------
Unrealized gain on marketable
securities $ 28,373 $ 15,934
Unrealized gain (loss) on interest
rate swap agreements 4,867 (2,090)
Unrealized foreign currency
translation gain 1,793 --
----------- -----------
$ 35,033 $ 13,844
=========== ===========
Rental Income and Tenant Recoveries
Rental income from leases with scheduled rent increases, free rent, incentives and other rent adjustments are recognized on a straight-line basis over the respective lease terms. We include amounts currently recognized as income, and expected to be received in later years, in deferred rent in the accompanying consolidated balance sheets. Amounts received currently, but recognized as income in future years, are included as unearned rent in accounts payable, accrued expenses and tenant security deposits in the accompanying consolidated balance sheets. We commence recognition of rental income at the date the tenant takes possession of or controls the physical use of the property.
Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred.
We maintain an allowance for estimated losses that may result from the inability of our tenants to make required payments. If a tenant fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the amount of unpaid rent and unrealized deferred rent. As of December 31, 2005 and 2004, we had no allowance for doubtful accounts.
Interest Income
Interest income was $578,000, $181,000 and $108,000 in 2005, 2004 and 2003, respectively, and is included in other income in the accompanying consolidated statements of income.
Income Taxes
As a REIT, we are not subject to federal income taxation as long as we meet a number of organizational and operational requirements and make distributions greater than or equal to 100% of our taxable income to our stockholders. Since we believe we have met these requirements and our distributions exceeded taxable income, no federal income tax provision has been reflected in the accompanying consolidated financial statements for the years ended December 31, 2005, 2004 and 2003. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.
During 2005, 2004 and 2003, we declared dividends on our common stock of $2.72, $2.52 and $2.20 per share, respectively. During 2004 and 2003, we declared dividends on our Series A cumulative redeemable preferred stock of $1.72847 and $2.375 per share, respectively. During 2005, 2004 and 2003, we declared dividends on our Series B cumulative redeemable preferred stock of $2.275, $2.275 and $2.275, respectively. During 2005 and 2004, we declared dividends on our Series C cumulative redeemable preferred stock of $2.09375 and $0.61649 per share, respectively. See Note 11, Preferred Stock and Excess Stock.
The tax treatment of distributions on common stock paid in 2005 is as follows: (1) 71.8% ordinary dividend, (2) 24.1% return of capital, (3) 3.9% capital gain at 15%, and (4) 0.2% Section 1250 capital gain at 25%. The tax treatment of distributions paid in 2004 is as follows: (1) 76.8% ordinary dividend, (2) 19.8% return of capital, (3) 2.4% capital gain at 15%, and (4) 1.0% Section 1250 capital gain at 25%. The information provided in this paragraph is unaudited.
Earnings Per Share, Dividends Declared and Preferred Stock Redemption Cost
The following table shows the computation of earnings per share, and dividends declared per common share:
Year Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
(Dollars in thousands, except per share amounts)
Net income available to common
stockholders $ 47,343 $ 45,724 $ 50,745
============ ============= =============
Weighted average shares of common stock
outstanding - basic 20,948,915 19,315,364 18,993,856
Add: dilutive effect of stock options
and stock grants 367,971 343,395 253,934
------------ ------------- -------------
Weighted average shares of common stock
outstanding - diluted 21,316,886 19,658,759 19,247,790
============ ============= =============
Earnings per share - basic $ 2.26 $ 2.37 $ 2.67
============ ============= =============
Earnings per share - diluted $ 2.22 $ 2.33 $ 2.64
============ ============= =============
Dividends declared per common share $ 2.72 $ 2.52 $ 2.20
============ ============= =============
Emerging Issues Task Force Topic D-42, "The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock" ("EITF Topic D-42") provides, among other things, that any excess of (1) the fair value of the consideration transferred to the holders of preferred stock redeemed over (2) the carrying amount of the preferred stock, should be subtracted from net earnings to determine net income available to common stockholders in the calculation of earnings per share. The cost to issue our preferred stock was recorded as a reduction to additional paid-in capital in the years that the preferred stock was issued. Upon any redemption of our preferred stock, the respective offering costs, representing the excess of the fair value of the consideration transferred to the holders over the carrying amount of the preferred stock, will be recognized as a dividend to preferred stockholders. During 2004, we recorded a charge of approximately $1,876,000 to net income available to common stockholders for costs related to the redemption of our 9.5% Series A cumulative redeemable preferred stock. Dividends on preferred stock are deducted from net income to arrive at net income allocable to common stockholders.
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, the Company 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 has been recognized. Although we have elected to follow APB 25 for previously granted options, pro forma information regarding net income available to common stockholders and earnings per share is required by SFAS 123. This information has been determined as if we had accounted for our 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):
Year Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
Net income available to common
stockholders, as reported $ 47,343 $ 45,724 $ 50,745
Fair value of stock-based compensation cost (152) (733) (1,323)
------------ ------------- -------------
Pro forma net income available to common
stockholders $ 47,191 $ 44,991 $ 49,422
============ ============= =============
Earnings per share:
Basic - as reported $ 2.26 $ 2.37 $ 2.67
Basic - pro forma $ 2.25 $ 2.33 $ 2.60
Diluted - as reported $ $2.22 $ $2.33 $ 2.64
Diluted - pro forma $ $2.21 $ $2.29 $ 2.57
Impact of Recently Issued Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached a consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance on other-than-temporary impairment of marketable debt and equity securities accounted for under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115") and Statement of Financial Accounting Standards No. 124, "Accounting for Certain Investments Held by Not-for-Profit Organizations" ("SFAS 124"), and non-marketable equity securities accounted for under the cost method. EITF 03-1 provides a three-step model to determine (1) when an investment is considered impaired; (2) whether the impairment is other-than-temporary; and (3) the measurement of the impairment loss. The guidance also requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. In addition, EITF 03-1 provides that a company does not have to estimate the fair value of an investment accounted for under the cost method if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. In September 2004, the FASB issued FASB Staff Position ("FSP") No. EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", which delays the effective date of the recognition and measurement provisions of EITF 03-1 until certain implementation issues are addressed and a final FSP providing implementation guidance is issued. In November 2005, the FASB issued FSP 115-1 and FSP 124-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("FSP 115-1 and FSP 124-1") which replaces the guidance set forth in paragraphs 10-18 of EITF 03-1 with reference to existing guidance including SFAS 115, SEC Staff Accounting Bulletin No. 59, "Accounting for Noncurrent Marketable Equity Securities" and Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock". FSP 115-1 and FSP 124-1 is effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005. The Company adopted FSP 115-1 and FSP 124-1 in December 2005. The adoption of FSP 115-1 and FSP 124-1 did not have a material impact on our financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). 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. This eliminates the accounting for such awards using the intrinsic method pursuant to Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("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. Upon adoption of SFAS 123R, 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 under APB 25 were fully vested on December 31, 2005.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, "Exchanges of Nonmonetary Assets" ("SFAS 153"), which amends Accounting Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB 29"). SFAS 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair values of the assets exchanged. SFAS 153 is effective for nonmonetary asset exchanges beginning in our third quarter of 2005. The adoption of SFAS 153 did not have a material impact on our financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections" ("SFAS 154"), which replaces Accounting Principles Board Opinion No. 20, "Accounting Changes" and Statement of Financial Accounting Standards No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS 154 requires retrospective application to prior periods' financial statements of voluntary changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have an impact on our financial statements.
3. Rental Properties, Net, Properties Under Development and Land Held For Development
Rental properties, net consisted of the following (in thousands):
December 31,
---------------------------
2005 2004
------------ -------------
Land $ 296,841 $ 217,201
Buildings and improvements 1,559,385 1,246,888
Tenant and other improvements 153,482 139,823
------------ -------------
2,009,708 1,603,912
Less accumulated depreciation (220,890) (176,059)
------------ -------------
$ 1,788,818 $ 1,427,853
============ =============
As of December 31, 2005 and 2004, certain of our rental properties were encumbered by deeds of trust and assignments of rents and leases associated with the properties. See Note 5, Secured Notes Payable. The net book values of encumbered properties including land parcels as of December 31, 2005 and 2004 were $848,286,000 and $776,342,000, respectively.
We lease space under noncancelable leases with remaining terms of one to 18 years.
Included in rental properties, net as of December 31, 2005 and 2004 were 15 and 17 properties, respectively, in our redevelopment program. The allocated net book values of the portion of these properties undergoing redevelopment as of December 31, 2005 and 2004 were approximately $139,661,000 and $150,627,000, respectively. Depreciation ceases on the portion of a property undergoing redevelopment during the period of redevelopment.
In accordance with SFAS 34, we are required to capitalize interest on construction, development and redevelopment projects during the period an asset is undergoing activities to prepare it for its intended use. Capitalization of interest ceases after a project is substantially complete and ready for its intended use. In addition, should construction, development or redevelopment activity cease, interest would be expensed as incurred. Total interest capitalized for the years ended December 31, 2005, 2004 and 2003 was $27,490,000, $17,902,000 and $13,941,000, respectively. Total interest incurred for the years ended December 31, 2005, 2004 and 2003 was $77,695,000, $46,733,000 and $41,571,000, respectively.
Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, as of December 31, 2005 are as follows (in thousands):
Year Amount
- --------------------------------------- ------------
2006 $ 182,666
2007 164,884
2008 153,116
2009 139,673
2010 130,859
Thereafter 478,638
------------
$ 1,249,836
============
4. 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 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 or financial policies of the entities in which we invest. Certain investments are accounted for under the equity method in accordance with APB 18 and EITF Topic D-46. For all of 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. For additional discussion of our accounting policies with respect to investments, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies.
The following table summarizes our available-for-sale securities (in thousands):
December 31,
--------------------
2005 2004
--------- ---------
Adjusted cost of available-for-sale securities $ 4,740 $ 3,190
Gross unrealized gains 29,135 16,110
Gross unrealized losses (762) (176)
--------- ---------
Fair value of available-for-sale securities $ 33,113 $ 19,124
========= =========
Investments in available-for-sale securities with gross unrealized losses as of December 31, 2005 and 2004 have been in a continuous unrealized loss position for less than twelve months. We believe that these unrealized losses are temporary and accordingly we have not recognized an other-than-temporary impairment related to available-for-sale securities as of December 31, 2005 and 2004.
Our investments in privately held entities as of December 31, 2005 and 2004 totaled $48,897,000 and $48,295,000, respectively. Of these totals, $47,164,000 and $47,433,000 are accounted for under the cost method. The remainder ($1,733,000 and $862,000 for 2005 and 2004, respectively) are accounted for under the equity method in accordance with APB 18 and EITF Topic D-46. As of December 31, 2005 and 2004, there were no unrealized losses in our investments in privately held entities.
Net investment income of $2,294,000, $2,436,000 and $536,000 was recognized in 2005, 2004 and 2003, respectively, and is included in other income in the accompanying consolidated statements of income. Net investment income in 2005 consisted of equity in income of $483,000 related to investments in privately held entities accounted for under the equity method, gross realized gains of $2,433,000, and gross realized losses of $622,000. Net investment income in 2004 consisted of equity in income of $208,000 related to investments in privately held entities accounted for under the equity method, gross realized gains of $2,508,000, and gross realized losses of $280,000. Net investment income in 2003 consisted of equity in income of $306,000 related to investments in privately held entities accounted for under the equity method, gross realized gains of $532,000, and gross realized losses of $302,000.
5. Secured Notes Payable
Secured notes payable consisted of the following (in thousands):
December 31,
---------------------
2005 2004
---------- ----------
Secured notes payable, interest rates varying from 4.32% to 8.75%, $ 662,147 $ 635,432
(weighted average effective interest rate of 6.31% and 5.67%
at December 31, 2005 and 2004, respectively), maturity
dates ranging from January 2006 to June 2016
Unamortized premiums 4,519 3,514
----------- ----------
Total secured notes payable $ 666,666 $ 638,946
======================
Our secured notes payable generally require monthly payments of principal and interest. The total net book values of properties securing debt were $848,286,000 and $776,342,000 at December 31, 2005 and 2004, respectively. At December 31, 2005, our secured notes payable were comprised of $595.9 million and $70.8 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.
Future principal payments due on secured notes payable as of December 31, 2005, are as follows (in thousands):
Weighted
Average
Year Amount Interest Rate (1)
- ---------------------------------- ------------ -------------
2006 $ 44,552 6.32%
2007 83,623 6.26%
2008 123,190 6.16%
2009 42,084 6.52%
2010 88,553 6.48%
Thereafter 280,145 6.24%
------------
Subtotal 662,147
Unamortized premiums 4,519
Total secured notes payable ------------
$ 666,666
============
(1) The weighted average interest rate is calculated based on the outstanding debt as of January 1st of each year.
6. Unsecured Line of Credit and Unsecured Term Loan
In November 2005, we entered into an amendment to our amended and restated credit agreement to increase the maximum permitted borrowings under our unsecured credit facilities from $750 million to $1 billion consisting of a $500 million unsecured revolving credit facility and a $500 million unsecured term loan. We may in the future elect to increase commitments under the unsecured credit facilities by up to an additional $200 million.
Borrowings under our unsecured line of credit, as amended, 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 a LIBOR period of one, two, three or six months. The unsecured line of credit matures in December 2007 and may be extended at our sole option for an additional one-year period. As of December 31, 2005, we had borrowings of $240 million outstanding on the unsecured line of credit with a weighted average interest rate of 5.69%.
Our unsecured term loan bears 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 for a period of one, two, three or six months. The unsecured term loan matures in December 2009. As of December 31, 2005, we had borrowings of $500 million outstanding on the unsecured term loan with a weighted average interest rate of 5.67%.
Our unsecured line of credit and unsecured term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a leverage ratio and a fixed charge coverage ratio. 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. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum combined amount of $1 billion. Under these provisions as of December 31, 2005, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $863 million.
7. Interest Rate Swaps
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 rate 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.
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", as amended by Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" establishes accounting and reporting standards for derivative financial instruments such as our interest rate swap agreements. All of our interest rate swap agreements meet the criteria to be deemed "highly effective" under SFAS 133 in reducing our exposure to variable interest rates. In accordance with SFAS 133, we formally document all relationships between interest rate swap agreements and hedged items, including the method for evaluating effectiveness and the risk strategy. Accordingly, we have categorized these instruments as cash flow hedges. We make an assessment at the inception of each interest rate swap agreement and on an on-going basis to determine whether these instruments are highly effective in offsetting changes in cash flows associated with the hedged items. While we intend to continue to meet the conditions for such hedge accounting, if hedges did not qualify as "highly effective", the changes in the fair values of the derivatives used as hedges would be reflected in earnings.
As of December 31, 2005, our interest rate swap agreements were classified in other assets at their fair values aggregating approximately $4.9 million, with the offsetting adjustment reflected as unrealized gains in accumulated other comprehensive income in stockholders' equity. As of December 31, 2004, our interest rate swap agreements were classified in accounts payable, accrued expenses and tenant security deposits at their fair values aggregating approximately $2.1 million, with the offsetting adjustment reflected as unrealized losses in accumulated other comprehensive income in stockholders' equity. Balances in accumulated other comprehensive income are recognized in earnings as swap payments are made. During the next twelve months, we expect to reclassify $3.3 million from accumulated other comprehensive income to interest income.
The following table summarizes our interest rate swap agreements as of December 31, 2005 (dollars in thousands):
Notional Effective at Interest Termination Fair
Transaction Dates Effective Dates Amounts December 31, 2005 Pay Rates Dates Values
- ------------------ ---------------- --------- ------------------- --------- ---------------- ---------
December 2002 January 2, 2003 $25,000 $ 25,000 3.285% June 30, 2006 $ 167
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 167
December 2003 December 30, 2005 50,000 50,000 4.150% December 29, 2006 280
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (313)
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 434
March 2004 December 31, 2004 25,000 25,000 2.956% December 31, 2006 434
April 2004 April 29, 2005 50,000 50,000 3.140% April 28, 2006 230
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 274
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (63)
June 2004 June 30, 2005 50,000 50,000 4.343% June 30, 2007 284
December 2004 December 31, 2004 50,000 50,000 3.590% January 2, 2008 1,129
December 2004 January 3, 2006 50,000 -- 3.927% July 1, 2008 950
May 2005 December 30, 2005 25,000 25,000 4.120% November 30, 2006 136
May 2005 June 30, 2006 50,000 -- 4.270% June 29, 2007 250
May 2005 November 30, 2006 25,000 -- 4.330% November 30, 2007 103
May 2005 June 29, 2007 50,000 -- 4.400% June 30, 2008 162
May 2005 November 30, 2007 25,000 -- 4.460% November 28, 2008 61
May 2005 June 30, 2008 50,000 -- 4.509% June 30, 2009 112
May 2005 November 28, 2008 25,000 -- 4.615% November 30, 2009 41
December 2005 December 29, 2006 50,000 -- 4.730% November 30, 2009 17
December 2005 December 29, 2006 50,000 -- 4.740% November 30, 2009 4
December 2005 January 2, 2008 50,000 -- 4.768% December 31, 2010 8
------------------- ---------
Total Interest Rate Swap Agreements in $ 325,000 $ 4,867
Effect at December 31, 2005 =================== =========
8. Commitments and Contingencies
Employee Retirement Savings Plan
We have a retirement savings plan pursuant to Section 401(k) of the Internal Revenue Code whereby our employees may contribute a portion of their compensation to their respective retirement accounts, in an amount not to exceed the maximum allowed under the Internal Revenue Code. In addition to employee contributions, we have elected to provide discretionary profit sharing contributions (subject to statutory limitations), which amounted to $552,000, $515,000 and $461,000, respectively, for the years ended December 31, 2005, 2004 and 2003. Employees who participate in the plan are immediately vested in their contributions and in the contributions of the company.
Concentration of Credit Risk
We maintain our cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts in excess of FDIC insurance coverage. We believe that the risk is not significant.
We are dependent on rental income from relatively few tenants in the life science industry. The inability of any single tenant to make its lease payments could adversely affect our operations. As of December 31, 2005, we held 283 leases with a total of 237 tenants and 73 of our 134 properties were each leased to a single tenant. At December 31, 2005, our three largest tenants accounted for approximately 11.6% of our aggregate annualized base rent.
We generally do not require collateral or other security from our tenants, other than security deposits. In addition to security deposits held in cash, we held $35.1 million in irrevocable letters of credit available from certain tenants as security deposits for 86 leases as of December 31, 2005.
Commitments
As of December 31, 2005, we were committed under the terms of contracts to complete the construction of properties under development at a remaining aggregate cost of approximately $46.4 million.
As of December 31, 2005, we were also committed to fund approximately $20.1 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $13.3 million for certain investments.
As of December 31, 2005, we were committed under the terms of eight ground leases. These lease obligations totaling approximately $62.8 million have remaining lease terms of 27 to 50 years, exclusive of extension options. In addition, as of December 31, 2005, we were committed under the terms of certain operating leases for our headquarters and field offices. These lease obligations totaling approximately $6.2 million have remaining lease terms of two to seven years, exclusive of extension options.
9. 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 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. Distributions, profits and losses related to these entities are allocated in accordance with the respective operating agreements. As of December 31, 2005 the aggregate minority interest balance related to these entities was approximately $20.1 million and is classified as minority interest in the accompanying consolidated balance sheet.
10. Issuances of Common Stock
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 net proceeds of approximately $89.1 million (after deducting underwriting discounts and other offering costs).
In September 2005, we sold 1,248,000 shares of our common stock in an underwritten offering (including shares issued upon exercise of the underwriter's over-allotment option). The shares were issued at a price of $81.00 per share, resulting in net proceeds of approximately $100.3 million (after deducting underwriting discounts and other offering costs).
11. Preferred Stock and Excess Stock
Series A Cumulative Redeemable Preferred Stock
In July 2004, we redeemed all 1,543,500 outstanding shares of our 9.50% Series A cumulative redeemable preferred stock ("Series A preferred stock") at a redemption price of $25.00 per share plus $0.5409722 per share representing accumulated and unpaid dividends to the redemption date. In accordance with EITF Topic D-42, we recorded a charge of approximately $1,876,000 to net income available to common stockholders during the second quarter of 2004 for costs related to the redemption of the Series A preferred stock. We redeemed our Series A preferred stock with proceeds from the Series C preferred stock offering.
Series B Cumulative Redeemable Preferred Stock
In January 2002, we completed a public offering of 2,300,000 shares of our 9.10% Series B cumulative redeemable preferred stock ("Series B preferred stock") (including the shares issued upon exercise of the underwriters' over-allotment option). The shares were issued at a price of $25.00 per share, resulting in aggregate proceeds of approximately $55.1 million (after deducting underwriters' discounts and other offering costs). The dividends on our Series B preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.275 per share. Our Series B preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to January 22, 2007, except in order to preserve our status as a REIT. Investors in our Series B preferred stock generally have no voting rights. On or after January 22, 2007, we may, at our option, redeem our Series B preferred stock, in whole or in part, at any time with proceeds from the sale of equity securities at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
Series C Cumulative Redeemable Preferred Stock
In June 2004, we completed a public offering of 5,185,500 shares of our 8.375% Series C cumulative redeemable preferred stock ("Series C preferred stock") (including the shares issued upon exercise of the underwriters' over-allotment option). The shares were issued at a price of $25.00 per share, resulting in aggregate proceeds of approximately $124.0 million (after deducting underwriters' discounts and other offering costs). The proceeds were used to redeem our Series A preferred stock with the remaining portion used to pay down our unsecured line of credit. The dividends on our Series C preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.09375 per share. Our Series C preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to June 29, 2009, except in order to preserve our status as a REIT. Investors in our Series C preferred stock generally have no voting rights. On or after June 29, 2009, we may, at our option, redeem our Series C preferred stock, in whole or in part, at any time for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
Preferred Stock and Excess Stock Authorizations
Our charter authorizes the issuance of up to 100,000,000 shares of preferred stock, of which 7,485,500 shares were issued and outstanding as of December 31, 2005. In addition, 200,000,000 shares of "excess stock" (as defined) are authorized, none of which were issued and outstanding at December 31, 2005.
12. Stock Option Plans and Stock Grants
1997 Stock Plan
In 1997, we adopted a stock option and incentive plan (the "Stock Plan") for the purpose of attracting and retaining the highest quality personnel, providing for additional incentives and promoting the success of the company by providing employees the opportunity to acquire common stock pursuant to (i) options to purchase common stock; and (ii) share awards. As of December 31, 2005, a total of 413,501 shares were reserved for the granting of future options and share awards under the Stock Plan.
Options under our plan have been granted at prices that are equal to the market value of the stock on the date of grant and expire ten years after the date of grant. Employee options vest ratably in three annual installments from the date of grant. Non-employee director options vest immediately on the date of grant. The options outstanding under the Stock Plan expire at various dates through October 2012.
In addition, the Stock Plan permits us to issue share awards to our employees and non-employee directors. A share award is an award of common stock, which (i) may be fully vested upon issuance or (ii) may be subject to the risk of forfeiture under Section 83 of the Internal Revenue Code. Shares issued generally vest over a one to three year period from the date of issuance and the sale of the shares is restricted prior to the date of vesting. During 2005, we awarded 162,387 shares of common stock. The unearned portion of these awards is amortized as stock compensation expense on a straight-line basis over the vesting period.
The fair values of the options issued under the Stock Plan were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2005, 2004 and 2003:
Year Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
Risk-free interest rate 4.34% 3.94% 3.65%
Dividend yield 3.19% 3.79% 3.95%
Volatility factor of the expected market price 21.14% 21.50% 21.20%
Weighted average expected life of the options 5.2 years 6.7 years 7.0 years
A summary of the stock option activity under our Stock Plan and related information for the years ended December 31, 2005, 2004 and 2003 follows:
2005 2004 2003
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding-beginning of year 607,331 $ 35.36 809,583 $ 35.39 1,011,166 $ 34.39
Granted -- -- -- -- -- --
Exercised (115,315) 37.22 (200,252) 35.44 (197,583) 30.08
Forfeited -- -- (2,000) 42.15 (4,000) 43.23
---------- ---------- ---------- ---------- ---------- ----------
Outstanding-end of year 492,016 $ 34.92 607,331 $ 35.36 809,583 $ 35.39
========== ========== ========== ========== ========== ==========
Exercisable at end of year 492,016 $ 34.92 500,000 $ 33.38 533,420 $ 31.35
========== ========== ========== ========== ========== ==========
Weighted average fair value of
options granted $ - $ - $ -
========== ========== ==========
The following table summarizes information about stock options outstanding at December 31, 2005:
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/05 Life Price at 12/31/05 Price
- --------------- ------------ ------------ --------- ------------ ---------
$20.00-$30.88 166,400 1.66 $22.19 166,400 $22.19
$31.88-$43.50 222,616 5.00 $38.55 222,616 $38.55
$44.99-$47.69 103,000 6.47 $47.65 103,000 $47.65
------------ ------------
$20.00-$47.69 492,016 4.18 $34.92 492,016 $34.92
============ ============
13. Non-Cash Transactions
During the twelve months ended December 31, 2005, we assumed seven secured notes payable in connection with the acquisitions of seven properties, in seven separate transactions, located in the San Francisco Bay, Suburban Washington D.C., Eastern Massachusetts, Seattle and Canada markets. During the twelve months ended December 31, 2004, we assumed six secured note payables in connection with the acquisitions of ten properties, in six separate transactions, located in the Eastern Massachusetts, Southeast, Suburban Washington D.C. and San Diego markets. The following table summarizes these transactions (in thousands):
2005 2004 2003
------------ ------------- -------------
Aggregate purchase price $ 55,400 $ 185,912 $ 6,900
Secured notes payable assumed 31,853 127,653 3,384
------------ ------------- -------------
Cash paid for the properties $ 23,547 $ 58,259 $ 3,516
============ ============= =============
In connection with the sale of a property in the Eastern Massachusetts market in August 2003, the buyer assumed a secured note payable totaling $17.3 million.
In 2005, 2004 and 2003, we incurred $5,136,000, $3,157,000 and $3,354,000, respectively, in non-cash stock compensation expense.
14. Discontinued Operations
The following is a summary of operations and net assets of the properties included in discontinued operations presented in compliance with SFAS 144 (in thousands):
Year Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
Total revenue $ 127 $ 217 $ 5,653
Operating expenses 14 38 1,428
------------ ------------- -------------
Revenue less operating expenses 113 179 4,225
Interest -- -- 924
Depreciation 17 47 303
------------ ------------- -------------
Income before gain/loss on sales of property 96 132 2,998
Gain/loss on sales of property 36 1,627 8,286
------------ ------------- -------------
Income from discontinued operations, net $ 132 $ 1,759 $ 11,284
============ ============= =============
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 2005, one property we sold during 2004 and three properties we sold during 2003 in accordance with the provisions of SFAS 144. See Note 2, Basis of Presentation and Summary of Significant Accounting Policies.
As of December 31, 2005 and 2004, we had no properties designated as "held for sale" in accordance with SFAS 144. During the third quarter of 2005, we sold one property located in the Southeast market that had been designated as "held for sale" as of June 30, 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" as of December 31, 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. During the fourth quarter of 2003, 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 $9.0 million. In connection with the sale, we recorded a loss on sale of property of approximately $36,000. During the third quarter of 2003, we sold one property located in the Eastern Massachusetts market that had been previously designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $46.5 million. In connection with this sale, we recorded a gain on sale of property of approximately $8.8 million. Interest expense included in discontinued operations represents interest related to a secured note payable, which was assumed by the buyer in connection with the sale of this property. During the first quarter of 2003, we sold one property located in the San Francisco Bay market which could not be redeveloped pursuant to our original strategic objectives and that had been designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $6.8 million. In connection with this sale, we recorded a loss on sale of property of approximately $455,000 in 2003. Gains and losses on sales of these properties are included in the income statement in income from discontinued operations, net.
15. Quarterly Financial Data (Unaudited)
The following is a summary of consolidated financial information on a quarterly basis for 2005 and 2004:
Quarter
----------------------------------------------------------
First Second Third Fourth
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
2005
- ----
Revenues $ 56,039 $ 58,217 $ 63,752 $ 66,076
Net income available to common stockholders $ 10,967 $ 12,250 $ 11,969 $ 12,157
Earnings per share:
Basic $ 0.56 $ 0.59 $ 0.57 $ 0.55
Diluted $ 0.55 $ 0.58 $ 0.56 $ 0.54
Quarter
----------------------------------------------------------
First Second Third Fourth
------------- ------------- ------------- -------------
(In thousands, except per share amounts)
2004
- ----
Revenues $ 42,724 $ 43,472 $ 46,459 $ 50,426
Net income available to common stockholders $ 13,115 $ 9,757 $ 11,370 $ 11,482
Earnings per share:
Basic $ 0.68 $ 0.51 $ 0.59 $ 0.59
Diluted $ 0.67 $ 0.50 $ 0.58 $ 0.58
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III
Consolidated Financial Statement Schedule of Rental Properties
and Accumulated Depreciation
December 31, 2005 (Unaudited)
(In thousands, except square foot data)
Initial Costs Costs Total Costs
Square ----------------------- Capitalized ----------------------
Footage Buildings and Subsequent to Buildings and Accumulated Year Built/
Property Name (unaudited) Land Improvements Acquisition Land Improvements Total Depreciation (1) Encumbrances (27) Renovated
------------- ---------- -------- ------------- ------------- -------- ------------ ----------- ---------------- ---------------- -------------------
North Torrey Pines Road #1 107,710 $ 1,321 $ 5,960 $ 6,719 $ 1,321 $ 12,679 $ 14,000 $ 2,915 $ - 1971/2003
Science Park Road 74,557 1,013 - 16,767 1,013 16,767 17,780 4,673 - 2000
North Torrey Pines Road #3 44,733 620 9,531 9,052 620 18,583 19,203 201 - 1962/2005
North Torrey Pines Road #2 86,962 2,663 10,649 5,203 2,663 15,852 18,515 5,362 - 1986/1996
General Atomics Court #1 76,084 2,651 18,046 1,447 2,651 19,493 22,144 6,888 37,928 (2) 1986/2000
General Atomics Court #2 43,600 1,227 9,554 30 1,227 9,584 10,811 3,466 - (2) 1991
Roselle Street #1 18,173 463 1,840 2,774 463 4,614 5,077 1,109 - (3) 1983/1998
Nexus Centre Drive 67,050 2,548 13,638 45 2,548 13,683 16,231 4,324 32,296 (4) 1989
Nancy Ridge Drive #1 29,333 733 2,273 1,878 733 4,151 4,884 1,655 - (5) 1997
Roselle Street #2 17,603 444 1,699 1,842 444 3,541 3,985 1,111 - late 1970's/1999
Tansy Street 15,410 651 1,375 1,899 651 3,274 3,925 1,422 - 1978/1999
John Hopkins Court #1 34,723 1,122 - 3,881 1,122 3,881 5,003 560 - (2) 2000
John Hopkins Court #2 55,200 1,683 - 5,647 1,683 5,647 7,330 1,084 - (2) 1999
Towne Centre Drive #1 45,030 275 8,621 3,661 275 12,282 12,557 1,754 89,580 (18) 1987/2003
Towne Centre Drive #2 52,228 320 10,070 2,948 320 13,018 13,338 2,342 - (18) 1987/2000
Towne Centre Drive #3 41,780 258 8,170 7,903 258 16,073 16,331 2,696 - (18) 1987/2000
Roselle Street #3 17,590 455 2,581 1,019 455 3,600 4,055 178 23,175 (3) 1981
Roselle Street #4 30,147 754 4,288 341 754 4,629 5,383 525 - (3) 1981/1998
Roselle Street #5 22,577 564 3,224 43 564 3,267 3,831 497 - (3) 1981/1995
Roselle Street #6 17,433 436 2,480 81 436 2,561 2,997 349 - (3) 1981/1999
Roselle Street #7 24,208 605 3,459 42 605 3,501 4,106 533 - (3) 1981/1995
Nancy Ridge Drive #2 21,940 515 1,566 2,502 515 4,068 4,583 750 - early 1980's/2001
Campus Point Drive 71,510 4,246 16,165 9,290 4,246 25,455 29,701 1,191 10,673 1986/1998
Nancy Ridge Drive #3 56,698 1,984 10,397 43 1,984 10,440 12,424 522 - (18) 1987/2001
Torreyana Road 87,140 9,980 9,448 1,975 9,980 11,423 21,403 112 - 1980
Nancy Ridge Drive #4 87,298 3,492 18,285 199 3,492 18,484 21,976 469 15,627 (17) 1999/2000
North Hill Avenue 31,343 2,172 812 9,848 2,172 10,660 12,832 1,697 - 1940's/2002
Harbor Bay Parkway #1 61,015 1,506 5,357 3,670 1,506 9,027 10,533 3,066 - (4) 1983/1999
Harbor Bay Parkway #2 27,745 775 1,917 1,632 775 3,549 4,324 1,141 - (4) 1984/2000
Harbor Bay Parkway #3 47,777 1,200 3,880 448 1,200 4,328 5,528 1,094 - (4) 1986/1994
Harbor Bay Parkway #4 68,711 1,800 9,731 743 1,800 10,474 12,274 2,336 1,230 1985/1994
Mitten Road & Malcolm Road 153,837 4,751 12,612 14,283 4,751 26,895 31,646 4,838 - 1962/2002
Hanover Street 32,074 - 6,628 7,840 - 14,468 14,468 4,029 - 1968/2000
Garcia Avenue & Bayshore
Parkway 98,964 - 21,323 20,571 - 41,894 41,894 5,771 - 1980/2003
Oyster Point Boulevard #1 53,980 3,519 - 12,942 3,519 12,942 16,461 3,307 32,750 (6) 2001
Oyster Point Boulevard #2 53,980 3,519 - 7,671 3,519 7,671 11,190 1,433 - (6) 2001
Gateway Boulevard #1 110,428 7,730 24,397 24 7,730 24,421 32,151 2,290 - 2000
Gateway Boulevard #2 59,816 4,187 14,020 25 4,187 14,045 18,232 2,004 - 2002
Harbor Bay Parkway #5 67,482 1,349 9,915 59 1,349 9,974 11,323 529 - 1984/2001
Porter Drive 91,644 - 19,154 1,074 - 20,228 20,228 1,004 - (18) 1962/2002
Shoreline Court 140,143 7,038 39,704 2,407 7,038 42,111 49,149 1,289 - 2001
Bayshore Road 60,000 4,800 6,693 2,871 4,800 9,564 14,364 76 6,886 (19) 1982
Grand Avenue 116,284 28,276 - - 28,276 - 28,276 - - 1985
Bernardo Avenue 58,400 3,504 5,255 - 3,504 5,255 8,759 - - 1982/1999
Columbia Street #1 162,394 5,654 22,916 15,518 5,654 38,434 44,088 9,960 15,539 (7) 1975/1997
Columbia Street #2 46,303 912 612 2,688 912 3,300 4,212 32 - (7) 1975/1997
Western Avenue 47,746 1,432 7,497 3,096 1,432 10,593 12,025 2,863 33,430 (8) 1929/2000
First Avenue 70,647 2,119 11,275 4,703 2,119 15,978 18,097 4,747 - 1980/2000
Eastlake Avenue #1 106,003 4,240 31,232 25 4,240 31,257 35,497 2,539 - 1997
Eastlake Avenue #2 97,366 1,570 15,917 14,929 1,570 30,846 32,416 1,966 - 1997
Eastlake Avenue #3 125,066 5,245 - 38,866 5,245 38,866 44,111 1,058 - 2004
Harrison Street 32,279 2,097 1,645 5,352 2,097 6,997 9,094 124 - 1962
Elliot Avenue West 2,896 1,700 344 103 1,700 447 2,147 17 - 1951
Eastlake Avenue #5 121,790 8,525 20,064 164 8,525 20,228 28,753 505 13,000 1962/2000
Fairview Avenue 27,633 2,212 6,788 22 2,212 6,810 9,022 85 4,056 (20) 1998
Professional Drive #1 47,558 871 5,362 3,095 871 8,457 9,328 2,807 - 1989/1999
Professional Drive #2 62,739 1,129 6,940 48 1,129 6,988 8,117 1,666 - 1987
West Watkins Mill Road #1 138,938 3,281 14,416 189 3,281 14,605 17,886 3,508 23,690 (9) 1989/1997
Quince Orchard Road #1 49,225 1,267 3,031 5,168 1,267 8,199 9,466 4,706 - (9) 1982/1997
Clopper Road #1 44,464 900 2,732 1,576 900 4,308 5,208 1,804 - (10) 1989
East Gude Drive #1 45,989 748 3,609 1,608 748 5,217 5,965 1,292 - (11) 1981/2003
Research Boulevard 105,000 1,733 9,611 3,598 1,733 13,209 14,942 2,601 - 1967/2000
East Gude Drive #2 44,500 775 4,122 329 775 4,451 5,226 990 - (11) 1981/1995
Piccard Drive 131,415 2,800 11,533 19,527 2,800 31,060 33,860 2,086 - 1994/2005
Newbrook Drive 248,186 4,800 27,639 390 4,800 28,029 32,829 6,188 - (8) 1992
Virginia Manor Road 191,884 - 13,679 1,484 - 15,163 15,163 3,303 29,234 (11) 1990/2003
Old Columbia Road 75,500 1,510 5,210 1,627 1,510 6,837 8,347 2,197 - 1983/1997
West Watkins Mill Road #4 102,815 1,783 18,946 20 1,783 18,966 20,749 221 - 2005
Firstfield Road #1 25,175 376 3,192 2,114 376 5,306 5,682 902 - 1974/2000
West Watkins Mill Road #2 57,410 859 4,149 2,482 859 6,631 7,490 1,420 - 1988/2000
Clopper Road #2 143,585 2,463 493 17,893 2,463 18,386 20,849 6,738 27,219 (10) 2000
Firstfield Road #2 53,464 971 5,141 6,410 971 11,551 12,522 2,220 - (12) 1980/2001
Firstfield Road #3 54,000 947 5,092 4,560 947 9,652 10,599 1,090 - (12) 1980/2003
Quince Orchard Road #2 54,874 970 5,138 1,053 970 6,191 7,161 831 9,458 (12) 1981/2003
Clopper Road #3 59,838 983 6,638 90 983 6,728 7,711 1,105 - (10) 1989/1992
Research Place 58,632 1,466 5,708 4,182 1,466 9,890 11,356 984 - 1972/2003
West Watkins Mill Road #3 92,449 2,773 23,906 2,630 2,773 26,536 29,309 439 - 1999
Parklawn Drive 49,185 1,476 7,267 37 1,476 7,304 8,780 243 - 1963/1979
Broschart Road 37,861 2,576 5,661 46 2,576 5,707 8,283 190 - 1999
Medical Center Drive #1 58,733 - 8,070 268 - 8,338 8,338 259 - 1998
Research Court 54,906 1,647 13,258 734 1,647 13,992 15,639 387 - 1970/1992
Clopper Road #4 180,650 5,527 26,365 1,394 5,527 27,759 33,286 768 15,498 1982
Medical Center Drive #2 41,887 1,480 14,532 590 1,480 15,122 16,602 375 77,208 (14) 1996/2002
Medical Center Drive #3 60,485 2,138 20,868 5,768 2,138 26,636 28,774 538 - (14) 1996/2002
Medical Center Drive #4 125,008 4,419 43,110 1,338 4,419 44,448 48,867 1,111 - (14) 1996/2002
Medical Center Drive #5 56,987 2,015 19,660 1,049 2,015 20,709 22,724 516 - (14) 1996/2002
Professional Drive #3 26,127 784 4,705 85 784 4,790 5,574 99 3,398 (21) 2000/2003
Industrial Drive 83,541 2,924 19,664 86 2,924 19,750 22,674 123 - 1972/1983
Charlestown Navy Yard 24,940 - 6,247 397 - 6,644 6,644 1,335 - (15) 1880/1991
Pond Street 24,867 622 3,053 59 622 3,112 3,734 353 - 1965/1990
Westview Street 40,200 960 3,032 8,194 960 11,226 12,186 845 - 1975
Plantation Street #1 92,711 2,352 14,173 1,098 2,352 15,271 17,623 2,981 18,067 (5) 1993
Innovation Drive 115,179 2,734 14,567 3,966 2,734 18,533 21,267 3,468 8,505 1991
Plantation Street #2 92,423 651 - 15,749 651 15,749 16,400 6,651 - 2000
Arsenal Street #1 92,500 3,360 7,316 14,729 3,360 22,045 25,405 5,334 - 1978/2001
Hartwell Avenue #1 59,000 1,475 7,194 11,399 1,475 18,593 20,068 3,040 37,068 (15) 1972/2002
Arsenal Street #2 96,150 6,413 5,457 28,939 6,413 34,396 40,809 1,408 - 1980/2003
Memorial Drive #1 51,000 6,507 - 21,759 6,507 21,759 28,266 3,135 - 2002
Memorial Drive #2 47,497 6,058 - 21,285 6,058 21,285 27,343 1,885 - 2002
Hartwell Avenue #2 46,700 2,567 4,522 9,763 2,567 14,285 16,852 489 - (18) 1972
Belmont Street 78,916 1,578 10,195 29 1,578 10,224 11,802 426 9,298 (16) 1929/2003
Plantation Street #3 11,774 228 1,501 151 228 1,652 1,880 45 - (16) 1940/2003
Wiggins Avenue 48,640 876 5,033 17 876 5,050 5,926 147 - 1975/1997
Bearfoot Road 60,759 1,220 22,375 44 1,220 22,419 23,639 467 - 1977
Beaver Street 81,456 1,466 9,046 482 1,466 9,528 10,994 178 7,400 1982/1997
Hartwell Avenue #3 26,828 1,341 8,448 36 1,341 8,484 9,825 141 5,857 (22) 1975/2000
Presidential Way 128,325 12,833 27,333 53 12,833 27,386 40,219 456 - 1999
DeAngelo Drive 30,000 750 3,312 37 750 3,349 4,099 56 2,739 (23) 1972/2001
First Street 45,820 2,749 7,679 332 2,749 8,011 10,760 80 - 1907/1982
Fortune Boulevard 36,000 1,440 5,238 14 1,440 5,252 6,692 66 - 1985/1996
Wiggins Avenue #2 38,000 893 4,000 67 893 4,067 4,960 25 1,909 (24) 1975/2004
Sidney Street 26,589 1,595 3,554 - 1,595 3,554 5,149 - - 1920
Preston Court 54,391 1,278 7,057 - 1,278 7,057 8,335 29 - 1973/2000
Canada #1 68,000 2,924 17,735 856 2,924 18,591 21,515 387 - 2004
Canada #2 162,362 6,982 20,651 1 6,982 20,652 27,634 43 - 1999
Canada #3 66,000 2,276 8,612 - 2,276 8,612 10,888 - 6,387 (25) 1969/2003
College Road 107,874 1,943 9,764 1,550 1,943 11,314 13,257 2,527 - 1968/1984
Williams Drive 37,000 740 4,506 1,264 740 5,770 6,510 877 - 1982/1994
Phillips Parkway 78,501 1,840 2,298 14,546 1,840 16,844 18,684 4,146 - (15) late 1960's/1999
Campus Drive 42,782 654 4,234 402 654 4,636 5,290 993 - (15) 1989
Electronic Drive 40,000 600 3,110 3,289 600 6,399 6,999 2,950 - 1983/1998
Princeton Road 42,600 1,075 1,438 4,179 1,075 5,617 6,692 2,327 - 1984/1999
Welsh Pool Road 41,015 621 4,258 31 621 4,289 4,910 151 - 1968
Lawrence Road 111,451 1,289 12,039 70 1,289 12,109 13,398 433 - 1997/2004
Capitola Drive #1 65,114 337 5,795 845 337 6,640 6,977 1,499 - (13) 1986
Capitola Drive #2 59,397 288 5,789 5,611 288 11,400 11,688 3,891 11,522 (13) 1985
Capitola Drive #3 60,519 289 5,899 6,951 289 12,850 13,139 1,978 - (13) 1985
Technology Parkway 20,580 214 3,802 - 214 3,802 4,016 678 - 1976/1993
Triangle Drive 32,120 161 3,410 224 161 3,634 3,795 740 - 1981
Alexander Road 86,239 - 376 11,609 - 11,985 11,985 1,947 - 2000
Kit Creek Road #1 38,861 339 3,383 7,164 339 10,547 10,886 1,656 - 1995/2003
Kit Creek Road #2 48,236 364 8,734 3,789 364 12,523 12,887 - - 2005
State Highway 54 81,580 713 12,827 168 713 12,995 13,708 432 8,449 1995
---------- -------- ------------- ------------- -------- ------------ ----------- ---------------- ----------------
8,824,369 $296,841 $ 1,161,446 $ 551,421 $296,841 $ 1,712,867 $ 2,009,708 $ 220,890 $ 619,076
========== ======== ============= ============= ======== ============ =========== ================ ================
_________________
- The depreciable life ranges from 30 to 40 years for buildings and improvements, 20 years for land improvements, and the term of the respective lease for tenant improvements.
- Loan secured by General Atomics Court #1, General Atomics Court #2, John Hopkins Court #1 and John Hopkins Court #2 is shown under General Atomics Court #1.
- Loan secured by Roselle Street #1, Roselle Street #3, Roselle Street #4, Roselle Street #5, Roselle Street #6 and Roselle Street #7 is shown under Roselle Street #3.
- Loan secured by Nexus Centre Drive, Harbor Bay Parkway #1, Harbor Bay Parkway #2 and Harbor Bay Parkway #3 is shown under Nexus Centre Drive.
- Loan secured by Nancy Ridge Drive #1 and Plantation Street #1 is shown under Plantation Street #1.
- Loan secured by Oyster Point Boulevard #1 and Oyster Point Boulevard #2 is shown under Oyster Point Boulevard #1.
- Loan secured by Columbia Street #1 and Columbia Street #2 is shown under Columbia Street #1.
- Loan secured by Western Avenue and Newbrook Drive is shown under Western Avenue.
- Loan secured by West Watkins Mill Road #1 and Quince Orchard Road #1 is shown under West Watkins Mill Road #1.
- Loan secured by Clopper Road #1, Clopper Road #2 and Clopper Road #3 is shown under Clopper Road #2.
- Loan secured by East Gude Drive #1, East Gude Drive #2 and Virginia Manor is shown under Virginia Manor.
- Loan secured by Firstfield Road #2, Firstfield Road #3 and Quince Orchard Road #2 is shown under Quince Orchard Road #2.
- Loan secured by Capitola Drive #1, Capitola Drive #2 and Capitola Drive #3 is shown under Capitola Drive #2.
- Loan secured by Medical Center Drive #2, Medical Center Drive #3, Medical Center Drive #4 and Medical Center Drive #5 is shown under Medical Center Drive #2. The balance shown includes an unamortized premium of $1,208,000.
- Loan secured by Hartwell Avenue #1, Charlestown Navy Yard, Phillips Parkway and Campus Drive is shown under Hartwell Avenue #1.
- Loan secured by Belmont Street and Plantation Street #3 is shown under Belmont Street.
- The balance shown includes an unamortized premium of $1,504,000.
- Loan secured by Towne Centre Drive #1, Towne Centre Drive #2, Towne Centre Drive #3, Nancy Ridge Drive #3, Porter Drive and Hartwell Avenue #2 is shown under Towne Centre Drive #1.
- The balance shown includes an unamortized premium of $175,000.
- The balance shown includes an unamortized premium of $329,000.
- The balance shown includes an unamortized premium of $231,000.
- The balance shown includes an unamortized premium of $418,000.
- The balance shown includes an unamortized premium of $287,000.
- The balance shown includes an unamortized premium of $108,000.
- The balance shown includes an unamortized premium of $259,000.
- The aggregate cost of real estate for federal income tax purposes is not materially different from the cost basis under GAAP (unaudited).
- Excludes $47.6 million of encumbrances related to three land parcels located in the San Francisco and Seattle markets.
A summary of activity of consolidated rental properties and accumulated depreciation is as follows (in thousands):
Rental Properties
Year Ended December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
Balance at beginning of period $ 1,603,912 $ 1,123,857 $ 1,089,899
Purchase of rental properties 272,532 383,350 48,729
Sale of properties (1,237) (4,084) (56,741)
Additions 94,210 70,248 48,264
Transfer of costs from (to) properties
under development 40,291 30,541 (6,294)
------------ ------------- -------------
Balance at end of period $ 2,009,708 $ 1,603,912 $ 1,123,857
============ ============= =============
Accumulated Depreciation
December 31,
------------------------------------------
2005 2004 2003
------------ ------------- -------------
Balance at beginning of period $176,059 $141,560 $113,477
Depreciation expense on rental properties 45,066 35,052 32,786
Accumulated depreciation on properties sold (235) (553) (4,703)
------------ ------------- -------------
Balance at end of period $220,890 $176,059 $141,560
============ ============= =============
Exhibit 3.3
ALEXANDRIA REAL ESTATE EQUITIES, INC.
BYLAWS
(Amended February 27, 2006)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation in the State of Maryland shall be located at such place as the Board of Directors may designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional offices, including a principal executive office, at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on a date and at the time set by the Board of Directors during the 31-day period beginning on the twenty-fifth (25th) day of April and ending on the twenty-fifth (25th) day of May in each year.
Section 3. SPECIAL MEETINGS.
(a) General. The chairman of the board, the vice chairman of the board, the chief executive officer, the chief operating officer or the Board of Directors may call a special meeting of the stockholders. Subject to subsection (b) of this Section 3, a special meeting of stockholders shall also be called by the secretary of the Corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
(b) Stockholder Requested Special Meetings. (1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the "Record Date Request Notice") by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the "Request Record Date"). The Record Date Request Notice shall set forth the purpose of the meeting and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or such agent) and shall set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which the Record Date Request Notice is received by the secretary.
(2) In order for any stockholder to request a special meeting, one or more written requests for a special meeting signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority (the "Special Meeting Percentage") of all of the votes entitled to be cast at such meeting (the "Special Meeting Request") shall be delivered to the secretary. In addition, the Special Meeting Request (a) shall set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the secretary), (b) shall bear the date of signature of each such stockholder (or such agent) signing the Special Meeting Request, (c) shall set forth the name and address, as they appear in the Corporation's books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), the class, series and number of all shares of stock of the Corporation which are owned by each such stockholder, and the nominee holder for, and number of, shares owned by such stockholder beneficially but not of record, (d) shall be sent to the secretary by registered mail, return receipt requested, and (e) shall be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder (or agent duly authorized in a writing accompanying the revocation or the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary.
(3) The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Corporation's proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 3(b), the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of the meeting.
(4) Except as provided in the next sentence, any special meeting shall be held at such place, date and time as may be designated by the chairman of the board, the vice chairman of the board, the chief executive officer, the chief operating officer or the Board of Directors, whoever has called the meeting. In the case of any special meeting called by the secretary upon the request of stockholders (a "Stockholder Requested Meeting"), such meeting shall be held at such place, date and time as may be designated by the Board of Directors; provided, however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting (the "Meeting Record Date"); and provided further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the "Delivery Date"), a date and time for a Stockholder Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90th day after the Meeting Record Date or, if such 90th day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for any special meeting, the chairman of the board, the vice chairman of the board, the chief executive officer, the chief operating officer or the Board of Directors may consider such factors as he, she or it deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (3) of this Section 3(b).
(5) If written revocations of requests for the special meeting have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing), as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting to the secretary, the secretary shall: (i) if the notice of meeting has not already been mailed, refrain from mailing the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for the special meeting, or (ii) if the notice of meeting has been mailed and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting written notice of any revocation of a request for the special meeting and written notice of the secretary's intention to revoke the notice of the meeting, revoke the notice of the meeting at any time before ten days before the commencement of the meeting. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.
(6) The chairman of the board, the vice chairman of the board, the chief executive officer, the chief operating officer or the Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported request shall be deemed to have been delivered to the secretary until the earlier of (i) five Business Days after receipt by the secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).
(7) For purposes of these Bylaws, "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of Maryland are authorized or obligated by law or executive order to close.
Section 4. NOTICE. Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail, by presenting it to such stockholder personally, by leaving it at the stockholder's residence or usual place of business or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholder's address as it appears on the records of the Corporation, with postage thereon prepaid.
Subject to Section 11(a) of this Article II, any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice.
Section 5. ORGANIZATION AND CONDUCT. Every meeting of stockholders shall be conducted by an individual appointed by the Board of Directors to be chairman of the meeting or, in the absence of such appointment, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting: the vice chairman of the board, if there be one, the chief executive officer, the president, the chief operating officer, the vice presidents in their order of rank and seniority, or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary, or, in the secretary's absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the Board of Directors or, in the absence of such appointment, a person appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of the stockholders, an assistant secretary, or in the absence of assistant secretaries, an individual appointed by the Board of Directors or the chairman of the meeting, shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such chairman, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on such matter, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) determining when the polls should be opened and closed; (f) maintaining order and security at the meeting; (g) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; and (h) concluding a meeting or recessing or adjourning the meeting to a later date and time and at a place announced at the meeting. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
Section 6. QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the chairman of the meeting shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.
The stockholders present either in person or by proxy, at a meeting which has been duly called and convened, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
Section 7. VOTING. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted, without cumulation, for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Unless otherwise provided by statute or by the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Voting on any question or in any election may be viva voce unless the chairman of the meeting shall order that voting be by ballot.
Section 8. PROXIES. A stockholder may cast the votes entitled to be cast by the shares of stock owned of record by the stockholder in person or by proxy executed by the stockholder or by the stockholder's duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Corporation before or at the meeting. No proxy shall be valid more than eleven months after its date unless otherwise provided in the proxy.
Section 9. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director or other fiduciary may vote stock registered in his or her name as such fiduciary, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification.
Section 10. INSPECTORS. The Board of Directors, in advance of any meeting, may, but need not, appoint one or more individual inspectors or one or more entities that designate individuals as inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the chairman of the meeting. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. Each such report shall be in writing and signed by him or her or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.
Section 11. ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS.
(a) Annual Meetings of Stockholders. (1) Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record both at the time of giving of notice by the stockholder as provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who has complied with this Section 11(a).
(2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by the stockholders. To be timely, a stockholder's notice shall set forth all information required under this Section 11 and shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 150th day nor later than 5:00 p.m., Pacific Time, on the 120th day prior to the first anniversary of the date of mailing of the notice for the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year's annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the 150th day prior to the date of such annual meeting and not later than 5:00 p.m., Pacific Time, on the later of the 120th day prior to the date of such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. The public announcement of a postponement or adjournment of an annual meeting shall not commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each individual whom the stockholder proposes to nominate for election or reelection as a director, (A) the name, age, business address and residence address of such individual, (B) the class, series and number of any shares of stock of the Corporation that are beneficially owned by such individual, (C) the date such shares were acquired and the investment intent of such acquisition and (D) all other information relating to such individual that is required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder (including such individual's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a description of such business, the reasons for proposing such business at the meeting and any material interest in such business of such stockholder and any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder and the Stockholder Associated Person therefrom; (iii) as to the stockholder giving the notice and any Stockholder Associated Person, the class, series and number of all shares of stock of the Corporation which are owned by such stockholder and by such Stockholder Associated Person, if any, and the nominee holder for, and number of, shares owned beneficially but not of record by such stockholder and by any such Stockholder Associated Person; (iv) as to the stockholder giving the notice and any Stockholder Associated Person covered by clauses (ii) or (iii) of this paragraph (2) of this Section 11(a), the name and address of such stockholder, as they appear on the Corporation's stock ledger and current name and address, if different, and of such Stockholder Associated Person; and (v) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder's notice.
(3) Notwithstanding anything in this subsection (a) of this Section 11 to the contrary, in the event the Board of Directors increases or decreases the maximum or minimum number of directors in accordance with Article III, Section 2 of these Bylaws, and there is no public announcement of such action at least 130 days prior to the first anniversary of the date of mailing of the notice of the preceding year's annual meeting, a stockholder's notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive office of the Corporation not later than 5:00 p.m., Pacific Time, on the tenth day following the day on which such public announcement is first made by the Corporation.
(4) For purposes of this Section 11, "Stockholder Associated Person" of any stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (ii) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder and (iii) any person controlling, controlled by or under common control with such Stockholder Associated Person.
(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more individuals to the Board of Directors, any such stockholder may nominate an individual or individuals (as the case may be) for election as a director as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (2) of this Section 11(a) shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 120th day prior to such special meeting and not later than 5:00 p.m., Pacific Time on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting shall not commence a new time period for the giving of a stockholder's notice as described above.
(c) General. (1) Upon written request by the secretary or the Board of Directors or any committee thereof, any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall provide, within five Business Days of delivery of such request (or such other period as may be specified in such request), written verification, satisfactory, in the discretion of the Board of Directors or any committee thereof or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 11. If a stockholder fails to provide such written verification within such period, the information as to which written verification was requested may be deemed not to have been provided in accordance with this Section 11.
(2) Only such individuals who are nominated in accordance with this Section 11 shall be eligible for election by stockholders as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with this Section 11. The chairman of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 11.
(3) For purposes of this Section 11, (a) the "date of mailing of the notice" shall mean the date of the proxy statement for the solicitation of proxies for election of directors and (b) "public announcement" shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable news service or (ii) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.
(4) Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation's proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act.
Section 12. CONTROL SHARE ACQUISITION ACT. Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place for the holding of regular meetings of the Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman or vice chairman of the board, the chief executive officer, the chief operating officer or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by them. The Board of Directors may provide, by resolution, the time and place for the holding of special meetings of the Board of Directors without other notice than such resolution.
Section 5. NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, United States mail or courier to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least 24 hours prior to the meeting. Notice by United States mail shall be given at least three days prior to the meeting. Notice by courier shall be given at least two days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Corporation by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to applicable law, the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group.
The directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute. If enough directors have withdrawn from a meeting to leave less than a quorum but the meeting is not adjourned, the action of the majority of the directors still present at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable statute.
Section 8. ORGANIZATION. At each meeting of the Board of Directors, the chairman of the board and the vice chairman of the board, if any, shall act as Co-Chairman. In the absence of both the chairman and vice chairman of the board, the chief executive officer or in the absence of the chief executive officer, the president or in the absence of the president, a director chosen by a majority of the directors present, shall act as Chairman. The Secretary or, in his or her absence, an Assistant Secretary of the corporation, or in the absence of the Secretary and all Assistant Secretaries, a person appointed by the Co-Chairman, shall act as Secretary of the meeting.
Section 9. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 10. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each director and filed with the minutes of proceedings of the Board of Directors.
Section 11. VACANCIES. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Any vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy shall hold office for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualified.
Section 12. COMPENSATION. Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor.
Section 13. LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited.
Section 14. SURETY BONDS. Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his or her duties.
Section 15. RELIANCE. Each director, officer, employee and agent of the Corporation shall, in the performance of his or her duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the advisers, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director.
Section 16. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The directors shall have no responsibility to devote their full time to the affairs of the Corporation. Any director or officer, employee or agent of the Corporation, in his or her personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to, or in addition to or in competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee, a Compensation Committee, a Nominating & Governance Committee and other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two members of any committee (if there are at least two members of the Committee) may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.
Section 5. CONSENT BY COMMITTEES WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each member of the committee and is filed with the minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. NUMBER. The officers of the Corporation shall be a president, a secretary and a treasurer and may include a chief executive officer, a chairman of the board, a chief operating officer, a vice chairman of the board, one or more vice presidents and such other officers, including one or more assistant treasurers and assistant secretaries, with such powers and duties as the Board of Directors shall deem necessary or desirable. Any two or more offices may be held by the same person, except those of chairman and vice chairman or president and vice president may not be held concurrently by the same person. The Board of Directors may establish and elect one or more officers of the Board of Directors, which officers of the Board of Directors shall not be deemed to be officers of the Corporation.
Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The officers shall be elected annually by the Board of Directors, except that the chief executive officer may appoint one or more vice presidents, assistant secretaries and assistant treasurers or other officers. Election or appointment of an officer shall not of itself create contract rights between the Corporation and such officer.
The Board of Directors may from time to time authorize any officer or officers to appoint and remove officers, agents and employees and to prescribe their powers and duties. Such officers, agents and employees shall have such authority and perform such duties as the Board of Directors or the officer or officers appointing the same may from time to time prescribe. Unless otherwise set forth in a written agreement between an officer and the Corporation or otherwise prescribed by the Board of Directors or the officer or officers appointing the same, officers shall hold their respective office until the next annual election of officers and until a successor shall have been duly elected and qualified, or until the death, resignation or removal in the manner hereinafter provided of any such officer.
Section 3. DUTIES. The respective officers of the Corporation shall have such authority, responsibilities and duties as may be prescribed therefor from time to time by resolution of the Board of Directors or by a written agreement between any such officer and the Corporation or as the officer or officers appointing the same may prescribe.
Section 4. REMOVAL. Any officer or agent of the Corporation may be removed, with or without cause, by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.
Section 5. RESIGNATIONS. Subject to the terms of a written agreement between an officer and the Corporation, any officer may resign at any time by giving written notice to the Board of Directors or to the president or to the secretary of the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Such resignation shall be without prejudice to the rights, if any, of the Corporation.
Section 6. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term in the manner prescribed in these Bylaws for regular election or appointment to such office.
Section 7. SALARIES. The salaries and other compensation of the officers shall be fixed from time to time by the Board of Directors or a committee thereof and may be evidenced by a written agreement executed from time to time between the Corporation and any of such officers. No officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the Corporation or a member of any committee.
Section 8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the chairman or the vice chairman of the board, the chief executive officer, the president or any officer of the Corporation authorized by the chairman of the board, the chief executive officer or the president shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which the Corporation may hold securities and otherwise to exercise any and all rights and powers which the Corporation may possess by reason of its ownership or securities in such other corporation.
Section 9. CHAIRMAN OF THE BOARD. The chairman of the board shall be an agent of the Corporation and, subject to the direction of the Board of Directors, shall perform such functions and duties as from time to time may be assigned to him or her by the Board of Directors. The chairman of the board, if present, shall preside with the vice chairman of the board, if any, at all meetings of the stockholders and all meetings of the Board of Directors.
Section 10. VICE CHAIRMAN OF THE BOARD. The vice chairman of the board shall be an agent of the Corporation and, subject to the direction of the Board of Directors, shall perform such functions and duties as from time to time may be assigned to him or her by the Board of Directors. The vice chairman of the Board, if present, shall preside with the chairman of the board at all meetings of the stockholders and all meetings of the Board of Directors.
Section 11. CHIEF EXECUTIVE OFFICER. The chief executive officer of the Corporation shall, subject to the direction of the Board of Directors, have general charge of the business, affairs and property of the Corporation and general supervision over its other officers and agents. In general, the chief executive officer shall perform all duties incident to such office of a stock corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. Unless otherwise prescribed by the Board of Directors, the chief executive officer shall have full power and authority on behalf of the Corporation to attend, act and vote at any meeting of stockholders of other corporations in which the Corporation may hold securities. At any such meeting, the chief executive officer shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation possesses and has the power to exercise. The Board of Directors from time to time may confer like powers upon any other person or persons.
Section 12. CHIEF OPERATING OFFICER. The chief operating officer of the Corporation shall, subject to the direction of the Board of Directors and the chief executive officer, have day-to-day general charge over the operation of the business, affairs and property of the Corporation and general supervision over its other officers and agents. In general, the chief operating officer shall perform all duties incident to the office of chief operating officer of a stock corporation. In the absence or disability of the chief operating officer, the chief executive officer shall perform the duties and exercise the powers of the chief operating officer.
Section 13. PRESIDENT. The president of the Corporation shall perform such functions and duties as from time to time may be assigned to him or her by the Board, the Chief Executive Officer or the Chief Operating Officer. In the absence or disability of the chief operating officer, the president shall perform the duties and exercise the powers of the chief operating officer.
Section 14. VICE PRESIDENTS. In the absence or disability of the president, the vice president, if any (or in the event there is more than one, the vice presidents in the order designated or, in the absence of any designation, then in the order of their election), shall perform the duties and exercise the powers of the president. The vice president(s) also generally shall assist the president, the chief executive officer and the chief operating officer and shall perform such other duties and have such other powers as from time to time may be prescribed by the Board of Directors.
Section 15. SECRETARY. The secretary shall attend all meetings of the Board of Directors and of the stockholders and shall record all votes and the proceedings of all meetings in a book to be kept for such purposes. The secretary also shall perform like duties for the committees, if required by any such committee. The secretary shall give (or cause to be given) notice of all meetings of stockholders and all special meetings of the Board and shall perform such other duties as from time to time may be prescribed by the Board of Directors, the chairman or vice chairman of the board or the president. The secretary shall have custody of the seal of the Corporation, shall have authority (as shall any assistant secretary) to affix the same to any instrument requiring it, and to attest the seal by his or her signature. The Board of Directors may give general authority to officers other than the secretary or any assistant secretary to affix the seal of the Corporation and to attest the affixing thereof by his or her signature.
Section 16. ASSISTANT SECRETARY. The assistant secretary, if any (or in the event there is more than one, the assistant secretaries in the order designated, or in the absence of any designation, in the order of their election), in the absence or disability of the secretary, shall perform the duties and exercise the powers of the secretary. The assistant secretary(ies) shall perform such other duties and have such other powers as from time to time may be prescribed by the Board of Directors.
Section 17. TREASURER. The treasurer shall be the chief financial officer of the Corporation and shall monitor the custody of the corporate funds, securities, other similar valuable effects, and evidences of indebtedness, shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and payroll matters and shall cause to be deposited all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as from time to time may be designated by the Board of Directors. The treasurer shall cause to be disbursed the funds of the Corporation in such manner as may be ordered by the Board of Directors from time to time and shall render to the chairman or vice chairman of the board, the president and the Board, at regular meetings of the Board or whenever any of them may so require, an account of all transactions and of the financial condition of the Corporation.
Section 18. ASSISTANT TREASURER. The assistant treasurer, if any (or in the event there is more than one, the assistant treasurers in the order designated, or in the absence of any designation, in the order of their election), in the absence or disability of the treasurer, shall perform the duties and exercise the powers of the treasurer. The assistant treasurer(s) shall perform such other duties and have such other powers as from time to time may be prescribed by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors, the Executive Committee or another committee of the Board of Directors within the scope of its delegated authority may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Corporation when duly authorized or ratified by action of the Board of Directors or the Executive Committee or such other committee and executed by an authorized person.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Except as otherwise provided in these Bylaws, this Section shall not be interpreted to limit the authority of the Board of Directors to issue some or all of the shares of any or all of the Corporation's classes or series without certificates. Each stockholder, upon written request to the secretary of the Corporation, shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the chairman of the board, the president or a vice president and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his or her discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner's legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words "Incorporated Maryland." The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity. The Corporation may, with the approval of its Board of Directors or any duly authorized committee thereof, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The indemnification and payment of expenses provided in these Bylaws shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment of expenses may be or may become entitled under any bylaw, regulation, insurance, agreement or otherwise.
Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Bylaws or charter of the Corporation inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
Exhibit 10.9
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of November 16, 2005
among
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
ARE-QRS CORP.,
ARE ACQUISITIONS, LLC,
and
The Other Subsidiaries Party Hereto
as the Borrowers,
BANK OF AMERICA, N.A.,
as Administrative Agent,
and
The Other Lenders Party Hereto
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this "Amendment") is dated as of November 16, 2005 (the "Amendment Effective Date"), and entered into by and among Alexandria Real Estate Equities, Inc., a Maryland corporation ("Parent"), Alexandria Real Estate Equities, L.P., a Delaware limited partnership ("Operating Partnership"), ARE-QRS Corp., a Maryland corporation ("QRS"), ARE Acquisitions, LLC, a Delaware limited liability company ("ARE"), and the other Subsidiaries of Parent party hereto (collectively, together with Parent, Operating Partnership, QRS and ARE, the "Borrowers"), Bank of America, N.A. ("Bank of America"), as administrative agent (in such capacity, the "Administrative Agent"), and the Lenders (as defined below) party hereto and is made with reference to that certain Amended and Restated Credit Agreement, dated as of December 22, 2004, by and among the Borrowers, each lender from time party thereto (collectively, the "Lenders" and individually, a "Lender"), and Bank of America, as Administrative Agent, Swing Line Lender and L/C Issuer, Citicorp North America, Inc. and Commerzbank AG New York and Grand Cayman Branches, as Co-Syndication Agents, Societe Generale and Eurohypo AG, New York Branch, as Co-Documentation Agents, and Banc of America Securities LLC, and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners (the "Credit Agreement") and that certain First Amendment to Amended and Restated Credit Agreement, dated as of February 11, 2005, by and among the Borrowers, Administrative Agent and the Required Lenders (the "First Amendment")(the Credit Agreement as amended by the First Amendment and this Amendment, the "Amended Agreement"). Capitalized terms used in this Amendment shall have the meanings set forth in the Credit Agreement unless otherwise defined herein.
RECITALS
WHEREAS, Borrowers desire to amend the Credit Agreement as more particularly set forth below;
WHEREAS, pursuant to the Credit Agreement, the amendment set forth herein requires the consent of the Required Lenders, and the Required Lenders hereby consent thereto;
NOW, THEREFORE, in consideration of the agreements, provisions and covenants contained herein, the parties agree as follows:
Section 1. AMENDMENT TO THE CREDIT AGREEMENT
1.1 Amendment to Subsection 1.01 - Defined Terms.
A. Subsection 1.01 shall be amended by deleting the definition of "Adjusted Tangible Net Worth."
B. Subsection 1.01 shall be amended by deleting the definitions for "Asset Value," "Borrowing Base," "Capitalization Rate," "Development Investments," "Fee Letter," "Leverage Ratio," "Qualified Unencumbered Asset Pool Property," "Term Loan Amount," "Unencumbered," and "Unencumbered Asset Pool" in their entirety and replacing them with the following:
"Asset Value" means, as of any date of determination and without double counting any item, the sum of the following:
(a) with respect to any improved Real Property (other than Real Property constituting Development Investments) owned by a Person for a full four consecutive fiscal quarter period or longer, an amount equal to (i) the Adjusted NOI of such Person from such Real Property for the prior four full consecutive fiscal quarters divided by (ii) the Capitalization Rate;
(b) with respect to any Real Property owned by a Person for less than four full consecutive fiscal quarters, an amount equal to (i) the Adjusted NOI of such Real Property for the period which a Person has owned and operated such Real Property, adjusted by the Borrowers to an annual Adjusted NOI in a manner reasonably acceptable to the Administrative Agent, divided by (ii) the Capitalization Rate;
(c) with respect to improved Real Property that is not a Development Investment but which is being renovated by a Person or with respect to which a partial or total renovation was recently completed by a Person, an amount as determined at the sole election of the Administrative Agent based on (i) the annualized Adjusted NOI with respect to such Real Property, annualized based on bona fide, arms length signed tenant leases which are in full force and effect requiring current rental payments, and divided by the Capitalization Rate, or (ii) on the cost basis of the Real Property determined in accordance with GAAP; and
(d) with respect to any Real Property that is Qualified Land, an amount equal to, at the option of the Borrowers, cost basis or the Appraised Value (if any) of such Qualified Land.
"Borrowing Base" means, as of any date of determination and without duplication, an amount equal to the lesser of (a) the amount which, when added to the total outstanding principal amount of all unsecured Indebtedness of the Parent and its Subsidiaries (including the Outstanding Amount of the Loans), would not exceed the sum of: (i) 60% of the aggregate Asset Value of the Revenue-Producing Properties in the Unencumbered Asset Pool, as of such date, plus (ii) 50% of the aggregate Asset Value of the Qualified Lands in the Unencumbered Asset Pool, as of such date, and (b) the amount which, when added to the total outstanding principal amount of all unsecured Indebtedness of the Parent and its Subsidiaries (including the Outstanding Amount of the Loans), would not cause the Interest Coverage Ratio to be less than 2.00:1.00.
"Capitalization Rate" means 8.75%.
"Development Investments" means, as of any date of determination, direct or indirect investments in Real Property which, as of such date, is the subject of ground-up development, new construction, substantial renovation or expansion of improvements to Real Property for its own account, of properties to be used principally for office, office/laboratory, research or manufacturing/warehouse purposes; provided, that, such Real Property or any portion thereof will only constitute a Development Investment from the date construction has commenced thereon until the date on which the Real Property and applicable improvements receive a final certificate of occupancy or equivalent certification allowing legal occupancy for its intended purpose.
"Fee Letter" means that certain letter agreement dated as of November __, 2005 among the Parent, the Administrative Agent and BAS, which letter agreement supercedes and replaces that certain letter agreement dated as of December 22, 2004 among the Parent, the Administrative Agent and BAS.
"Leverage Ratio" means, as of the last day of each fiscal quarter, the ratio (expressed as a percentage) of (a) Total Indebtedness of Parent and its Subsidiaries as of that date to (b) the Adjusted Tangible Assets of Parent and its Subsidiaries as of that date.
"Qualified Unencumbered Asset Pool Property" means Qualified Land and Qualified Revenue-Producing Property.
"Term Loan Amount" means, at any time, the aggregate principal amount of the Term Loans outstanding, which amount on the Second Amendment Date is equal to $500,000,000, as such amount may be increased from time to time pursuant to Section 2.15 or decreased from time to time.
"Unencumbered" means, with respect to any Revenue-Producing Property or Qualified Land, that such Revenue-Producing Property or Qualified Land (a) is not subject to any Lien other than Liens permitted under Section 7.01, (b) is not subject to any Negative Pledge and (c) is not held by a Person any of whose direct or indirect equity interests are subject to a Lien or Negative Pledge.
"Unencumbered Asset Pool" means, as of any date of determination, (a) the Initial Pool Properties, plus (b) each other Qualified Unencumbered Asset Pool Property added to the Unencumbered Asset Pool pursuant to Section 2.16 as of such date, excluding (c) any Revenue-Producing Property or Qualified Land removed from the Unencumbered Asset Pool pursuant to Section 2.16 as of such date.
C. Subsection 1.01 shall be amended by adding the following definitions in the appropriate alphabetical order:
"Appraised Value" means, as of any date of determination, without duplication, with respect to any Real Property, the appraised value (if any) thereof based on its unimproved as-is basis determined pursuant to an appraisal prepared by an M.A.I. certified appraisal and otherwise reasonably satisfactory to Administrative Agent (it being understood and agreed that in no event shall the Borrowers be required to deliver updated appraisals more frequently than once during any 24-month period).
"Minimum Book Value" means, as of any date of determination, without duplication, the sum of: (a) all consolidated assets of Parent and its Subsidiaries as of that date, plus (b) Parent's and its Subsidiaries' minority interest in unconsolidated assets as of that date, minus (i) Intangible Assets of Parent and its Subsidiaries and (ii) Total Liabilities of Parent and its Subsidiaries as of that date.
"Qualified Land" means, as of any date of determination, without duplication, Real Property that:
(a) has received all entitlements required for the contemplated development of the Real Property into Revenue-Producing Property;
(b) is wholly owned in fee simple absolute by Parent or any other Borrower that is a Wholly-Owned Subsidiary;
(c) to the best of Borrowers' knowledge and belief, does not have any title, survey, environmental or other defects that would give rise to a materially adverse effect as to the value, use of or ability to sell or refinance such property;
(d) is Unencumbered; and
(e) would not cause the Borrowers to be in violation of the covenant set forth in Section 6.13.
"Qualified Revenue-Producing Property" means Revenue-Producing Property that:
(a) is wholly owned in fee simple absolute or a leasehold interest pursuant to a Mortgageable Ground Lease by Parent or any other Borrower that is a Wholly-Owned Subsidiary;
(b) is occupied or available for occupancy (subject to final tenant improvements);
(c) to the best of Borrowers' knowledge and belief, does not have any title, survey, environmental or other defects that would give rise to a materially adverse effect as to the value, use of or ability to sell or refinance such property;
(d) is Unencumbered; and
(e) would not cause the Borrowers to be in violation of the covenant set forth in Section 6.13.
"Second Amendment Date" means November __, 2005. "Total Indebtedness" means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:
(a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;
(b) all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers' acceptances and bank guaranties;
(c) net obligations of such Person under any Swap Contract;
(d) all obligations of such Person to pay the deferred purchase price of property or services (other than trade accounts payable in the ordinary course of business);
(e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;
(f) Capital Lease Obligations; and
(g) all Guarantees of such Person in respect of any of the foregoing.
For all purposes hereof, Total Indebtedness shall not include any Minority Interest's share of any of the foregoing. The amount of any net obligation under any Swap Contract on any date shall be deemed to be (i) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (ii) for any date prior to the date referenced in clause (i), zero. The amount of any Capital Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.
1.2 Amendment to Subsection 2.01(b) - Term Loan Commitments.
A. Subsection 2.01(b) shall be deleted in its entirety and replaced with the following:
(b) Term Loan. Subject to the terms and conditions set forth herein, each Term Lender severally agrees to fund the portion of the Term Loan Amount represented by its Term Loan Commitment to the Borrowers on the Closing Date or Second Amendment Date, as applicable, in an aggregate amount not to exceed such Term Lender's Term Loan Commitment or the Term Loan Amount. The Term Loan shall be made in two draws on the Closing Date and the Second Amendment Date. To the extent all or any portion of the Term Loans are repaid or prepaid, they may not be reborrowed. Term Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.
1.3 Amendment to Subsection 2.15(a) - Increase in Commitments.
A. Subsection 2.15(a) shall be deleted in its entirety and replaced with the following:
(a) Request for Increase. Provided there exists no Default or Event of Default (nor would any occur after giving effect to the increase described herein) and in consultation with the Administrative Agent in order to minimize costs associated therewith, upon notice to the Administrative Agent (which shall promptly notify the Lenders), the Borrowers may request an increase in the Aggregate Commitments (which may be, at the option of the Borrowers, Revolving Commitments and/or Term Loan Commitments) by an aggregate amount not exceeding $200,000,000; provided, that, any such request for an increase shall be in a minimum amount of $25,000,000 (unless approved by the Administrative Agent). At the time of sending such notice, the Borrowers (in consultation with the Administrative Agent) shall specify the time period within which each Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Lenders).
1.4 Amendment to Subsection 2.16 - Unencumbered Asset Pool.
A. Subsection 2.16 shall be deleted in its entirety and replaced with the following:
2.16 Unencumbered Asset Pool. Borrowers may at any time add a Qualified Unencumbered Asset Pool Property to the Unencumbered Asset Pool pursuant to this Section 2.16, by Borrowers' delivery to the Administrative Agent (which the Administrative Agent shall promptly distribute to the Revolving Lenders) of the following:
(a) a complete description of the proposed Qualified Unencumbered Asset Pool Property;
(b) for any Revenue-Producing Property only, the prior twelve (12) months' operating income statements related to such Qualified Unencumbered Asset Pool Property (to the extent available);
(c) for any Revenue-Producing Property only, cash flow projections for such Qualified Unencumbered Asset Pool Property for at least the next twelve (12) months;
(d) for any Revenue-Producing Property only, a description of all tenants and leases with respect to such Qualified Unencumbered Asset Pool Property;
(e) a certification of a Responsible Officer of the Borrowers that Parent has obtained a current written report prepared by a qualified independent expert with respect to Hazardous Materials related thereto which discloses that such property would not be in violation of the representations and covenants of this Agreement; and
(f) such other written materials reasonably requested by any Revolving Lender.
Borrowers may remove any Qualified Unencumbered Asset Pool Property from the Unencumbered Asset Pool by delivery to the Administrative Agent (for prompt distribution to the Revolving Lenders) of a written notice to that effect, accompanied by a certificate of a Responsible Officer of Borrowers setting forth the revised Borrowing Base as of the most recently-ended fiscal quarter for which financial statements are required to be delivered pursuant to this Agreement resulting from such removal, which removal shall be effective on the third (3rd) day after receipt of such notice by Administrative Agent.
1.5 Amendment to Subsection 5.01(a) - Existence.
A. Subsection 5.01(a) shall be deleted in its entirety and replaced with the following:
(a) is duly organized or formed, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization except to the extent permitted by Sections 7.04, or 10.21.
1.6 Amendment to Subsection 6.01 - Financial Statements.
A. Subsection 6.01(c) shall be deleted in its entirety and replaced with the following:
(c) As soon as practicable, and in any event within 60 days after the end of each of the first 3 fiscal quarters in any fiscal year, statements of operating income for such fiscal quarter for each of the Revenue-Producing Properties in the Unencumbered Asset Pool and a summary Rent Roll for each of the Revenue-Producing Properties in the Unencumbered Asset Pool, each in reasonable detail. For the fourth fiscal quarter of each fiscal year, as soon as practicable, and in any event within 90 days after the end of such fourth fiscal quarter, provide such above-mentioned detail; and
1.7 Amendment to Subsection 6.02 - Certificates; Other Information.
A. Subsections 6.02(a) and (g) shall be deleted in their entirety and replaced with the following:
(a) As soon as practicable, and in any event no later than 90 days after the commencement of each fiscal year, a budget and projection by fiscal quarter for that fiscal year and by fiscal year for the next two succeeding fiscal years, including for the first such fiscal year, projected consolidated balance sheets, statements of operations and statements of cash flow and, for the second and third such fiscal years, projected consolidated balance sheets and statements of operations and cash flows, of Parent and its Subsidiaries, all in reasonable detail;
(g) Not later than sixty (60) days after the end of each fiscal quarter of the Borrowers (other than the fourth fiscal quarter in any fiscal year), (i) a statement listing the properties of Parent and its respective Subsidiaries which are Development Investments and providing a brief summary of the status of such development, and (ii) an updated Schedule 5.13 containing a current listing of all then existing Subsidiaries. Not later than ninety (90) days after the fourth fiscal quarter in any fiscal year, the items required to be delivered in clause (i) and (ii) above for such fourth fiscal quarter;
1.8 Amendment to Subsection 6.13 - Unencumbered Asset Pool.
A. Subsection 6.13 shall be deleted in its entirety and replaced with the following:
6.13 Unencumbered Asset Pool.
(a) Cause each of the Revenue-Producing Properties in the Unencumbered Asset Pool to satisfy all of the following conditions:
(i) the Revenue-Producing Properties shall be owned by a Borrower or leased by a Borrower pursuant to a Mortgageable Ground Lease (subject to the terms of this Agreement); and
(ii) the Revenue-Producing Properties in the Unencumbered Asset Pool shall consist solely of Revenue- Producing Properties which have an aggregate occupancy level (on a portfolio basis) of at least 80% as of the end of the previous four fiscal quarters of the Borrowers based on bona fide, arms-length tenant leases which are in full force and effect requiring current rental payments and which are in good standing.
(b) Cause no more than 25% of the total Borrowing Base to be derived from Qualified Lands.
(c) Provide to the Administrative Agent on and as of the Second Amendment Date as part of the Compliance Certificate (i) a list of the Revenue-Producing Properties and Qualified Lands in the Unencumbered Asset Pool, (ii) the certification of a Responsible Officer of the Borrowers of the Asset Values of such properties and that such properties are in compliance with Section 6.13 (together with appraisals (if any) to support any applicable Appraised Values for each Qualified Land), (iii) operating statements setting forth the NOI for each of the Revenue-Producing Properties in the Unencumbered Asset Pool for the previous four fiscal quarters (or such shorter period as the Revenue-Producing Property has been held by the Borrowers if such statements are not available to Borrowers) certified as true and correct by a Responsible Officer of the Borrowers, and (iv) a certificate that the Revenue-Producing Properties and Qualified Lands in the Unencumbered Asset Pool comply with the terms of Sections 5.09 and 5.19. If all or any material portion of a Revenue-Producing Property or a Qualified Land within the Unencumbered Asset Pool shall be materially damaged or taken by condemnation, then such property shall no longer be a part of the Unencumbered Asset Pool unless and until such damage is repaired or restored, such property becomes fully operational and the Administrative Agent shall receive evidence satisfactory to the Administrative Agent of the value and NOI of such Revenue-Producing Property or the Appraised Value of Qualified Land following such repair or restoration.
1.9 Amendment to Section 6.14 - Revenue-Producing Properties.
A. Subsection 6.14 shall be deleted in its entirety and replaced with the following:
6.14 Revenue-Producing Property and Qualified Land. Cause each Revenue-Producing Property and each Qualified Land in the Unencumbered Asset Pool to remain a Qualified Unencumbered Asset Pool Property so long as it is in the Unencumbered Asset Pool; provided, that, nothing herein shall preclude the removal of any such property from the Unencumbered Asset Pool in accordance with this Agreement.
1.10 Amendment to Section 6.15 - Additional Borrowers.
A. Subsection 6.15 shall be deleted in its entirety and replaced with the following:
6.15 Additional Borrowers. Cause each Wholly-Owned Subsidiary of Parent which is not then a Borrower and which holds a Revenue-Producing Property or Qualified Land which becomes part of the Unencumbered Asset Pool, to execute and deliver a joinder agreement concurrently with the addition of such Revenue-Producing Property or such Qualified Land to the Unencumbered Asset Pool.
1.11 Amendment to Section 7.02 - Investments.
A. Subsections 7.02(f) and (g) shall be deleted in their entirety and replaced with the following:
(f) Investments in Real Property of the Borrower and their Subsidiaries consisting of (i) Development Investments (the amount of such Investment shall be an amount equal to the aggregate costs incurred in connection therewith), (ii) undeveloped land without improvements, or (iii) any other Real Property, other than an improved real estate property used principally for office, office/laboratory, research, or manufacturing/warehouse purposes (and appurtenant amenities); provided, that, as of the most recently ended fiscal quarter, the book value of such Investments may not exceed 35% of the Adjusted Tangible Assets. To determine such book value of Investments described in this Section 7.02(f) which are not owned 100%, directly or indirectly, by Parent or any of its Subsidiaries, the book value of such Investment shall be adjusted by multiplying the same by the Parent's or such Subsidiaries' interest therein during the fiscal quarter of the Parent ending as of the date of determination of such book value;
(g) Investments in Development Investments; provided, that, at any time the aggregate amount of costs incurred in connection therewith from the date of computation of acquiring the applicable Real Property and developing, constructing, renovating, rehabilitating and leasing the improvements thereon, to any date of determination, does not exceed 25% of the Adjusted Tangible Assets as of the most recently ended fiscal quarter;
1.12 Amendment to Section 7.09 - Burdensome Agreements.
A. Subsection 7.09 shall be deleted in its entirety and replaced with the following:
7.09 Burdensome Agreements. Enter into any agreement, instrument or transaction which has or may have the effect of prohibiting or limiting any Borrower's ability to pledge to Administrative Agent the Revenue-Producing Property and Qualified Land within the Unencumbered Asset Pool. Borrowers and their respective Subsidiaries, shall take such actions as are necessary to preserve the right and ability of Borrowers to pledge to Administrative Agent for the benefit of Lenders those Revenue-Producing Properties and Qualified Lands without any such pledge after the date hereof causing or permitting the acceleration (after the giving of notice or the passage of time, or otherwise) of any other Indebtedness of Borrowers or any of their respective Subsidiaries. Borrowers shall, upon demand, provide to the Administrative Agent such evidence as the Administrative Agent may reasonably require to evidence compliance with this Section 7.09, which evidence shall include, without limitation, copies of any agreements or instruments which would in any way restrict or limit a Borrower's ability to pledge to Administrative Agent Revenue- Producing Properties and Qualified Lands within the Unencumbered Asset Pool as security for the Obligations, or which provide for the occurrence of a default (after the giving of notice or the passage of time, or otherwise) if Revenue- Producing Properties or Qualified Lands within the Unencumbered Asset Pool are pledged to Administrative Agent in the future as security for the Obligations.
1.13 Amendment to Section 7.11 - Financial Covenants.
A. Subsection 7.11 shall be deleted in its entirety and replaced with the following:(a) Permit the Fixed Charge Coverage Ratio, as of the last day of any fiscal quarter, to be less than 1.50:1.00;
(b) Permit the Secured Debt Ratio, as of the last day of any fiscal quarter, to exceed 0.45:1.00;
(c) Permit the Leverage Ratio, as of the last day of any fiscal quarter, to exceed 0.60:1.00;
(d) Permit Minimum Book Value, as of the last day of any fiscal quarter, to be less than the sum of (i) $456,000,000, plus (ii) 85% of the net issuance proceeds of all Equity Offerings from and after the Closing Date (excluding the amount of Exchange Proceeds); and
(e) Permit recourse Indebtedness (whether secured or unsecured) of Parent and its Subsidiaries (excluding the Obligations) to exceed an amount equal to 40% of Adjusted Tangible Assets as of the most recently ended fiscal quarter.
1.14 Amendment to Section 10.21 - Release of Borrowers.
A. Subsection 10.21 shall be deleted in its entirety and replaced with the following:
10.21 Release of Borrower. Notwithstanding anything to the contrary contained in this Agreement, Parent may sell, assign, transfer or dispose of its interest in another Borrower (other than Operating Partnership) that is a Subsidiary of Parent; provided, that, on or before the closing of such sale the Borrowers shall have delivered to the Administrative Agent a certification, together with such other evidence as Administrative Agent may require, that the Borrowers will be in compliance with all covenants in this Agreement after giving effect to such sale, assignment, transfer or other disposition; and, provided, further, that from and after any such sale, the assets of such Borrower shall no longer be included within the Unencumbered Asset Pool. Administrative Agent shall promptly notify the Lenders of any such sale, assignment, transfer or other disposition permitted hereunder. In the event that the Borrowers shall comply with the foregoing provisions, such Borrower shall be released from liability under this Agreement by the Administrative Agent. The Administrative Agent may also release a Borrower from liability if all of the Revenue-Producing Properties and Qualified Lands of such Borrower are sold or all of the Revenue- Producing Properties and Qualified Lands of such Borrower cease to be Unencumbered; provided, that, on or before the effective date of such release, the Borrowers shall have delivered to the Administrative Agent a certification, together with such other evidence as the Administrative Agent may require, that the Borrowers will be in compliance with all covenants in this Agreement after giving effect to such release.
1.15 Amendment to Exhibit D - Form of Compliance Certificate.
A. Exhibit D - Form of Compliance Certificate shall be deleted in its entirety and replaced with Exhibit D - Form of Compliance Certificate attached hereto as Annex I.
1.16 Amendment to Schedule 2.01A - Revolving Commitments and Applicable Percentages.
A. Schedule 2.01A - Revolving Commitments and Applicable Percentages shall be deleted in its entirety and replaced with Schedule 2.01A - Revolving Commitments and Applicable Percentages attached hereto as Annex II.
Section 2. CONDITIONS TO EFFECTIVENESS
This Amendment shall become effective as of the Amendment Effective Date, at such time that all of the following conditions are satisfied:
A. Required Lenders shall have executed this Amendment and delivered their counterpart signature page to Administrative Agent and Parent shall have executed the Fee Letter;
B. Borrowers shall have delivered (i) Revolving Notes in favor of each Revolving Lender requesting either a new Revolving Note in an amount equal to such new Revolving Lender's Revolving Commitment or a revised Revolving Note in an amount equal to such Revolving Lender's increased Revolving Commitment, and (ii) Term Notes in favor of each Term Lender requesting either a new Term Note in an amount equal to such new Term Lender's Term Loan Commitment or a revised Term Note in an amount equal to such Term Lender's increased Term Loan Commitment;
C. Each new Lender shall have executed a Joinder Agreement;
D. On or before the Amendment Effective Date, Borrowers shall have paid to Administrative Agent an amendment fee in an aggregate amount equal to the sum of $5,000 times the number of Lenders who are party to this Amendment and who were Lenders prior to the Amendment Effective Date. The amendment fee will be distributed to each Lender who is a party to this Amendment and who was a Lender prior to the Amendment Effective Date in accordance with the foregoing;
E. On or before the Amendment Effective Date, Borrowers shall have paid to Administrative Agent the fees set forth in the Fee Letter. The fees will be distributed to each Lender who is a party to this Amendment in accordance with the Fee Letter;
F. Lenders and their respective counsel shall have received originally executed copies of one or more favorable written opinions of counsel for Borrowers in form and substance reasonably satisfactory to Administrative Agent and its counsel, dated as of the Amendment Effective Date, with respect to the validity, binding effect and enforceability of this Amendment, and due authorization, execution and delivery thereof, and as to such other matters as Administrative Agent acting on behalf of Lenders may reasonably request; and
G. Borrowers shall have paid the reasonable fees, costs and expenses of Administrative Agent's counsel in connection with this Amendment.
Section 3. BORROWERS' REPRESENTATIONS AND WARRANTIES
In order to induce the Required Lenders to enter into this Amendment and to amend the Credit Agreement in the manner provided herein, Borrowers represent and warrant to each Lender that the following statements are true, correct and complete:
3.1 Corporate Power and Authority. Borrowers have all requisite power and authority to enter into this Amendment and any other agreements, guaranties or other operative documents to be delivered pursuant to this Amendment, to carry out the transactions contemplated by, and perform their obligations under, the Amended Agreement. Each of the Borrowers is in good standing in the respective states of their organization on the Amendment Effective Date;
3.2 Authorization of Agreements. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary action on the part of Borrowers. Except as disclosed on Schedule 3.2, the organizational documents of the Borrowers have not been modified in any material respect since (i) December 22, 2004 in the case of Borrowers party to the Credit Agreement on such date or (ii) the date on which the applicable Borrower joined the Credit Agreement as an additional Borrower, in the case of additional Borrowers joined after December 22, 2004 pursuant to Section 6.15 of the Credit Agreement;
3.3 No Default. After giving effect to this Amendment, no Default or Event of Default exists under the Credit Agreement as of the Amendment Effective Date. Further, after giving effect to this Amendment, no Default or Event of Default would result under the Amended Agreement from the consummation of this Amendment;
3.4 No Conflict. The execution, delivery and performance by Borrowers of this Amendment and the performance of the Amended Agreement by Borrowers does not and will not (i) violate any provision of any applicable material law or any governmental rule or regulation applicable to Borrowers or any of their Subsidiaries, the Organization Documents of Borrowers or any of their Subsidiaries or any order, judgment or decree of any court or other Governmental Authority binding on Borrowers or any of their Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material Contractual Obligation of Borrowers or any of their Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Borrowers or any of their Subsidiaries not otherwise permitted by the Amended Agreement, or (iv) require any approval of members or stockholders or any approval or consent of any Person under any Contractual Obligation of Borrowers or any of their Subsidiaries, except for such approvals or consents which have been or will be obtained on or before the Amendment Effective Date;
3.5 Governmental Consents. The execution and delivery by Borrowers of this Amendment and the performance by Borrowers under the Amended Agreement does not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body;
3.6 Binding Obligation. The Credit Agreement, as amended by this Amendment, has been duly executed and delivered by Borrowers and is enforceable against Borrowers in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability; and
3.7 Incorporation of Representations and Warranties From Credit Agreement. After giving effect to this Amendment, the representations and warranties contained in Article V of the Credit Agreement are and will be true, correct and complete in all material respects on and as of the Amendment Effective Date to the same extent as though made on and as of such date, except representations and warranties solely to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date.
Section 4. MISCELLANEOUS
4.1 Reference to and Effect on the Credit Agreement and the Other Loan Documents.A. On and after the Amendment Effective Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement, as amended by this Amendment.
B. Except as specifically amended by this Amendment, the Credit Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of Administrative Agent or any Lender under, the Credit Agreement or any of the other Loan Documents.
4.2 Fees and Expenses. Borrowers acknowledge that all reasonable costs, fees and expenses incurred by Administrative Agent and its counsel with respect to this Amendment and the documents and transactions contemplated hereby shall be for the account of Borrowers. Borrowers hereby agree to pay the reasonable fees, cost and expenses of Administrative Agent's counsel in connection with this Amendment.
4.3 Headings. Section and subsection headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect.
4.4 Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Amendment shall become effective upon the execution of a counterpart hereof by each Borrower and the Required Lenders, and receipt by Borrowers and Administrative Agent of written, facsimile or telephonic notification of such execution and authorization of delivery thereof.
4.5 Entire Agreement. This Amendment embodies the entire agreement and understanding among the parties with respect to the amendment to the Credit Agreement referred to herein, and supersedes all prior agreements and understandings, oral or written, relating thereto.
[Signatures on Next Page]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first written above.
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
a Delaware limited partnership
By: ARE-QRS Corp., a Maryland corporation, general
partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-QRS CORP.,
a Maryland corporation
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE ACQUISITIONS, LLC,
a Delaware limited liability company
By: ARE-QRS Corp.,
a Maryland corporation, managing member
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-215 COLLEGE ROAD, LLC
ARE-819/863 MITTEN ROAD, LLC
ARE-150/154 TECHNOLOGY PARKWAY, LLC
ARE-19 FIRSTFIELD ROAD, LLC
ARE-10150 OLD COLUMBIA, LLC
ARE-170 WILLIAMS DRIVE, LLC
ARE-3005 FIRST AVENUE, LLC
ARE-5 TRIANGLE DRIVE, LLC
ARE-50 WEST WATKINS MILL, LLC
ARE-279 PRINCETON ROAD, LLC
ARE-3770 TANSY STREET, LLC
ARE-10505 ROSELLE STREET, LLC
ARE-9363/9373/9393 TOWNE CENTRE, LLC
ARE-2425/2400/2450 GARCIA BAYSHORE, LLC
ARE-108 ALEXANDER ROAD, LLC
ARE-480 ARSENAL STREET, LLC
ARE-500 ARSENAL STREET, LLC
ARE-7030 KIT CREEK, LLC
ARE-6146 NANCY RIDGE, LLC
ARE-901/951 GATEWAY BOULEVARD, LLC
ARE-770/784/790 MEMORIAL DRIVE, LLC
ARE-1201/1208 EASTLAKE AVENUE, LLC
ARE-1208 EASTLAKE AVENUE, LLC
ARE-EASTLAKE AVENUE NO. 3, LLC
ARE-HARBOR BAY NO. 4, LLC
ARE-NANCY RIDGE NO. 3, LLC
ARE-PORTER DRIVE, LLC
ARE-2625/2627/2631 HANOVER, LLC
ARE-SEATTLE NO. 10, LLC
ARE-SD REGION NO. 17, LLC
ARE-SAN FRANCISCO NO. 17, LLC
ARE-MA REGION NO. 13, LLC
ARE-129/153/161 HILL STREET, LLC
ARE-SAN FRANCISCO NO. 16, LLC,
each a Delaware limited liability company
By: Alexandria Real Estate Equities, L.P.,
a Delaware limited partnership, their sole member
By: ARE-QRS Corp.,
a Maryland corporation, general partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-MARYLAND NO. 32, LLC
ARE-5 RESEARCH PLACE, LLC,
each a Maryland limited liability company
ARE-MARYLAND NO. 23, LLC
ARE-MA REGION NO. 14, LLC
ARE-MA REGION NO. 20, LLC
ARE-30 WEST WATKINS, LLC
ARE-MA REGION NO. 19, LLC
ARE-35 HARTWELL AVENUE, LLC
ARE-MA REGION NO. 21, LLC
ARE-NEXUS CENTRE II, LLC
ARE-700/730 SOUTH RAYMOND, LLC
ARE-14 FIRSTFIELD ROAD, LLC
ARE-681 GATEWAY BOULEVARD, LLC,
each a Delaware limited liability company
By: Alexandria Real Estate Equities, L.P.,
a Delaware limited partnership,
its managing member
By: ARE-QRS Corp.,
a Maryland corporation, general partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-MARYLAND NO. 25, LLC
ARE-MARYLAND NO. 26, LLC
ARE-MARYLAND NO. 27, LLC
each a Maryland limited liability company
By: Alexandria Real Estate Equities, L.P.,
a Delaware limited partnership, their sole member
By: ARE-QRS Corp.,
a Maryland corporation, general partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-60 WESTVIEW, LLC
ARE-381 PLANTATION STREET, LLC,
each a Delaware limited liability company
By: AREE-Holdings, L.P.,
a Delaware limited partnership, managing member
By: ARE-GP Holdings QRS Corp.,
a Delaware corporation, general partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-PA REGION NO. 3, L.P.
ARE-PA REGION NO. 4, L.P.
ARE-702 ELECTRONIC DRIVE, L.P.,
each a Delaware limited partnership
By: AREE-Holdings, L.P.,
a Delaware limited partnership, general partner
By: ARE-GP Holdings QRS Corp.,
a Delaware corporation, general partner
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
ARE-10933 NORTH TORREY PINES, LLC
ARE-11099 NORTH TORREY PINES, LLC,
each a Delaware limited liability company
By: Alexandria Real Estate Equities, Inc.,
a Maryland corporation, their sole member
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
A.R.E. QUEBEC NO. 1, INC.
By: /s/ Dean A. Shigenaga
Name: Dean A. Shigenaga
Title: Chief Financial Officer
BANK OF AMERICA, N.A.,
as Administrative Agent for Required Lenders
By: /s/ Kathleen M. Carry
Name: Kathleen M. Carry
Title: Vice President
BANK OF AMERICA, N.A.,
as a Lender
By: /s/ James P. Johnson
Name: James P. Johnson
Title: Senior Vice President
CITICORP NORTH AMERICA INC.
By: /s/ Jeanne M. Craig
Name: Jeanne M. Craig
Title: Vice President
COMMERZBANK AG NEW YORK AND GRAND CAYMAN BRANCHES
By: /s/ David Goldman
Name: David Goldman
Title: Vice President By: /s/ Judy Tam
Name: Judy Tam
Title: Assistant Vice President
SOCIETE GENERALE
By: /s/ Scott Gosslee
Name: Scott Gosslee
Title: Director
CITIZENS BANK OF RHODE ISLAND
By: /s/ Craig E. Schermerhorn
Name: Craig E. Schermerhorn
Title: Vice President
SUNTRUST BANK
By: /s/ Blake K. Thompson
Name: Blake K. Thompson
Title: Vice President
CALYON NEW YORK BRANCH
By: /s/ John A. Wain
Name: John A. Waain
Title: Managing Director By: /s/ Daniel J. Reddy
Name: Daniel J. Reddy
Title: Director
SOVEREIGN BANK
By: /s/ Katherine Felpel
Name: Katherine Felpel
Title: Assistant Vice President
THE BANK OF NOVA SCOTIA
By: /s/ Mark Sparrow
Name: Mark Sparrow
Title: Director
UNION BANK OF CALIFORNIA, N.A.
By: /s/ David B. Murphy
Name: David B. Murphy
Title: SVP/Regional Manager
BANK OF THE WEST
By: /s/ Wendi D. Reed
Name: Wendi D. Reed
Title: Vice President By: /s/ Chuck Weerasooriya
Name: Chuck Weerasooriya
Title: Senior Vice President
CHEVY CHASE BANK, F.S.B.
By: /s/ Frederick H. Denecke
Name: Frederick H. Denecke
Title: Vice President
AMSOUTH BANK
By: /s/ Lawrence Clark
Name: Lawrence Clark
Title: VP
LASALLE BANK NATIONAL ASSOCIATION
By: /s/ Stephen J. Shockey
Name: Stephen J. Shockey
Title: FVP
MIDFIRST BANK,
a Federally Chartered Saving Association
By: /s/ Darrin Rigler
Name: Darrin Rigler
Title: Vice President
COMERICA BANK
By: /s/ James Graycheck
Name: James Graycheck
Title: Assistant Vice President
COMPASS BANK
By: /s/ Johanna Duke Paley
Name: Johanna Duke Paley
Title: Senior Vice President
MANUFACTURERS BANK,
a California banking corporation
By: /s/ Manny Ahsan
Name: Manny Ahsan
Title: Vice President
FIRST HORIZON BANK,
a division of First Tennessee Bank, N.A.
By: /s/ Blake Bowers
Name: Blake Bowers
Title: Vice President
CEDARS BANK
By: /s/ Christopher Colella
Name: Christopher Colella
Title: Senior Vice President/Chief Credit Officer
SCOTIABANC, INC.
By: /s/ William E. Zarrett
Name: William E. Zarrett
Title: Managing Director
THE INTERNATIONAL COMMERCIAL BANK OF CHINA, NEW YORK AGENCY
By: /s/ Nae-Yee Lung
Name: Nae-Yee Lung
Title: EVP & General Manager
EUROHYPO AG, NEW YORK BRANCH
By: /s/ Alfred Koch
Name: Alfred Koch
Title: Managing Director By: /s/ Alice Ha
Name: Alice Ha
Title: Associate
EXHIBIT 10.10
EXECUTIVE EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made between Alexandria Real Estate Equities, Inc. (the "Company") and James H. Richardson ("Employee"), effective as of January 1, 2005 (the "Effective Date").
RECITALS
Whereas, Employee is currently employed by the Company as its President, pursuant to an Executive Employment Agreement originally adopted on December 31, 1997 and subsequently extended through December 31, 2004; and
Whereas, the Company desires to continue to employ Employee as its President, and Employee is willing to continue such employment by the Company, on the terms and subject to the conditions set forth in this Agreement.
AGREEMENT
Now, Therefore, in consideration of the mutual promises and subject to the terms and conditions set forth herein, the parties hereto agree as follows:
SECTION 1. POSITION; DUTIES; LOCATION.
During the Term (as defined in Section 2 below), Employee agrees to be employed by and to serve the Company as its President, and the Company agrees to employ and retain Employee in such capacity. In addition, Employee agrees to serve in such capacities for the Company's subsidiaries, and in such additional capacities consistent with Employee's current position as a senior executive of the Company, as may be determined by the Board of Directors of the Company (the "Board"), and the Company agrees to employ Employee in such capacities. Employee shall devote such of his business time, energy, and skill to the affairs of the Company and its subsidiaries as shall be necessary to perform the duties of such positions. Notwithstanding the foregoing, subject to any written policies of the Company, nothing in this Agreement shall preclude Employee from (i) engaging in charitable and community affairs and not-for- profit activities, so long as they are consistent with his duties and responsibilities under this Agreement; (ii) managing his personal investments; (iii) serving on the boards of directors of non-profit companies; and (iv) serving on the boards of directors of other for-profit companies; provided, however, that, prior to accepting a position on any such for-profit board of directors, Employee shall obtain the approval of the Board (or, if applicable, the appropriate committee thereof), which shall not be unreasonably withheld; and provided, further, however, that Employee shall submit to the Board (or the appropriate committee thereof) a list of any for-profit boards of directors on which Employee is serving as of the Effective Date of this Agreement. Employee shall report to the Chief Executive Officer ("CEO") and at all times during the Term shall have powers and duties at least commensurate with his position as a senior executive officer. Employee shall be based in the San Francisco Bay Area, except for required travel on the Company's business.
SECTION 2. TERM.
The term of this Agreement (the "Term") shall be for a period commencing on the "Effective Date" and ending on December 31, 2009, unless terminated earlier pursuant to Section 3 of this Agreement. Commencing on December 31, 2009, and on each subsequent anniversary thereof, the Term shall be automatically extended for one (1) additional year unless, no later than six (6) months before such date, either party shall have given written notice to the other that it does not wish to extend the Term. References herein to the Term shall refer to both the initial Term and any such extended Term.
SECTION 3. COMPENSATION AND OTHER BENEFITS.
In consideration of Employee's employment, and except as otherwise provided herein, Employee shall receive from the Company the compensation and benefits described in this Section 3. Employee authorizes the Company to deduct and withhold from all compensation to be paid to Employee any and all sums required to be deducted or withheld by the Company pursuant to the provisions of any federal, state, or local law, regulation, ruling, or ordinance, including, but not limited to, income tax withholding and payroll taxes.
3.1 Base Salary. During the Term and subject to the terms and conditions set forth herein, the Company agrees to pay Employee an annual base salary equal to Four Hundred and Seventy Five Thousand Dollars ($475,000), less standard payroll deductions and tax withholdings, payable on the Company's regular payroll schedule (the "Base Salary"). Employee's Base Salary shall be reviewed no less frequently than on each anniversary of the Effective Date during the Term by the Board (or such committee as may be appointed by the Board for such purpose). The Base Salary payable to Employee shall be increased on each such anniversary date (and such other times as the Board or a committee of the Board may deem appropriate during the Term) to an amount determined by the Board (or a committee of the Board). Each such new Base Salary shall become the base for each successive annual increase; provided, however, that such increase, at a minimum, shall be equal to the cumulative cost-of-living increment as reported in the "Consumer Price Index, San Francisco, California, All Items," published by the U.S. Department of Labor (using January 1, 2005 as the base date for comparison). Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligations of the Company hereunder and, once established at an increased specified rate, Employee's Base Salary shall not be reduced unless Employee otherwise agrees in writing.
3.2 Bonus. Employee shall be eligible to receive a bonus for each fiscal year of the Company (or portion thereof) during the Term (each, a "Bonus"), with the Bonus to consist of (i) a retention bonus equal to 50% of Employee's Base Salary (the "Retention Bonus") for the Employee's continued good faith service through the end of such fiscal year, which shall be deemed to be earned as of January 1 of the next fiscal year and paid no later than the end of the first quarter of that next fiscal year at the time at which such Retention Bonuses are paid by the Company to senior executives; and (ii) an amount (the "Performance Bonus") as determined in the sole discretion of the Board (or a committee of the Board) based upon its evaluation of Employee's performance and the performance of the Company during such year and such other factors and conditions as the Board (or a committee of the Board) deems relevant (the "Performance Bonus Criteria"), with the amount payable upon achievement of target levels of performance being no less than 50% of Base Salary (the "Performance Bonus Target"); provided, however, that the Board, in its reasonable discretion, may provide for an award in an amount less than the Performance Bonus Target in the event that the Performance Bonus Criteria are not fully achieved and for an award in an amount more than the Performance Bonus Target in the event that the Performance Bonus Criteria are exceeded. Any such Performance Bonus shall be payable within 185 days after the end of Corporation's fiscal year (the "Bonus Year") to which such Performance Bonus relates; provided that, in the event that Employee terminates employment with the Company for any reason other than a termination by the Company for Cause after the end of the Bonus Year and prior to the date when such Performance Bonuses are paid by the Company to senior executives, then Employee shall receive the same Performance Bonus that would have been awarded to Employee in the absence of such termination and it shall be paid to Employee at the same time that Performance Bonuses are paid by the Company to other senior executives. The Performance Bonus Criteria shall be developed in the reasonable discretion of the Board (or a committee of the Board) after consultation with Employee.
3.3 Restricted Stock; Options. As of January 1, 2006, Employee shall be granted 12,500 shares (the "Signing Bonus Shares") of restricted Company stock, as a signing bonus in recognition of, among other things, his superior performance during his previous period of employment, which shares shall vest in equal monthly increments over a period of twenty-four (24) months. Employee shall also be eligible for additional grants of restricted stock in the Company from time to time as shall be determined by the Compensation Committee of the Board in its sole discretion, and subject to such vesting, exercisability, and other provisions as the Board may determine in its discretion, after reviewing the performance of both Employee and the Company. Any stock options that Employee has already been granted by the Company prior to the execution of this Agreement shall continue to be governed in all respects by the terms of the applicable stock option agreement, grant notice and plan documents.
3.4 Vacation. Employee shall be entitled to accrue a minimum of six (6) weeks of paid vacation during each calendar year during the Term and any extensions thereof, prorated for partial years. Any accrued vacation not taken during any year may be carried forward to subsequent years; provided that Employee may not accrue more than twelve (12) weeks of unused vacation at any time. Unused vacation in excess of Employee's allowable accrued vacation under the foregoing proviso shall be promptly paid to Employee at the end of each year in a cash amount equal to the number of weeks of excess vacation time, multiplied by Employee's weekly Base Salary.
3.5 Life Insurance. During the Term, the Company shall, at its sole cost and expense, procure and keep in effect term life insurance on the life of Employee, payable to such beneficiaries as Employee may from time to time designate, in the aggregate amount of $2,500,000. Such policy shall be owned by Employee or by a member of his immediate family. The Company shall have no incidents of ownership therein.
3.6 Disability Insurance. During the Term, the Company shall, at its sole cost and expense, procure and keep in effect long-term disability, accidental death and disability, and short-term disability insurance coverage comparable to Employee's current disability insurance policy, payable to Employee in an annual amount not less than sixty percent (60%) of Employee's then existing Base Salary.
3.7 Other Benefits. Employee shall be eligible to participate in such of the Company's benefit and deferred compensation plans as may be made available to executive officers of the Company, including, without limitation, the Company's stock incentive plans, annual incentive compensation plans, profit sharing/pension plans, deferred compensation plans, annual physical examinations, dental plans, vision plans, sick pay, medical plans, personal catastrophe and accidental death insurance plans, financial planning, automobile arrangements, retirement plans and supplementary executive retirement plans, if any. For purposes of establishing the length of service under any benefit plans or programs of the Company, Employee's employment with the Company shall be deemed to have commenced on July 31, 1997.
3.8 Reimbursement for Expenses. During the Term, the Company shall reimburse Employee for all reasonable out-of-pocket business and/or entertainment expenses incurred by Employee for the purpose of and in connection with the performance of his services pursuant to this Agreement. Employee shall be entitled to such reimbursement upon the presentation by Employee to the Company of vouchers or other statements itemizing such expenses in reasonable detail consistent with the Company's policies. In addition, Employee shall be entitled to reimbursement for (i) dues and membership fees in professional organizations and/or industry associations in which Employee is currently a member or becomes a member; (ii) appropriate industry seminars and mandatory continuing education and (iii) membership in a health club of Employee's choosing up to a maximum annual fee of $2,500.
SECTION 4. TERMINATION; SEVERANCE.
4.1 Termination. Either the Company or Employee may terminate this Agreement at any time prior to the end of the Term, with or without Cause or Good Reason, subject to the terms and conditions set forth herein.
4.2 Compensation and Benefits Upon Termination. Upon the termination of this Agreement for any reason, the Company shall pay Employee: (a) all of Employee's accrued and unused vacation and unpaid Base Salary earned through Employee's last day of employment (the "Separation Date"); and (b) any Bonus earned but unpaid as of the Separation Date (i.e., in the event Employee has worked through the end of the fiscal year and earned a Bonus, but such Bonus has not been paid as of the Separation Date).
4.3 Termination For Cause. The Company shall be entitled to terminate this Agreement for Cause (as defined herein) immediately upon written notice to Employee, which notice shall specify the reason for and the effective date of such termination. In that event, the Company shall pay Employee the compensation set forth in Section 4.2 of this Agreement, and Employee shall not be entitled to any further compensation from the Company, including severance benefits.
4.4 Termination Without Cause. The Company shall be entitled to terminate this Agreement without Cause (as defined herein) immediately upon written notice to Employee. In that event, the Employee shall receive the following severance benefits:
(a) A lump sum amount (payable within ten (10) days following the Separation Date) equal to the Base Salary otherwise payable to Employee during the remainder of the Term had such early termination of this Agreement not occurred (but in no event less than two years of Base Salary), plus a lump sum amount equal to Employee's target bonus for the fiscal year in which Employee's employment termination is effective as determined by the Board (or a committee thereof) (or if such target has not yet been determined, the average of the annual bonuses earned by Employee in the two (2) years immediately preceding the date of termination) ("Target Bonus"). These amounts shall be subject to standard payroll deductions and withholdings.
(b) The Company shall accelerate the vesting of any equity awards previously granted to Employee by the Company (whether in the form of stock options or shares of restricted stock) such that all unvested shares shall be deemed vested as of the Separation Date.
In the event the Company terminates Employee's employment without Cause following a Change in Control (as defined herein), then Employee shall be entitled to the accelerated vesting set forth above in Section 4.4(b) of this Agreement, as well as the cash severance payments set forth in Section 4.4(a) of this Agreement, except that such lump-sum amounts shall be multiplied by three (3); provided that the total of such lump sums shall not exceed three times Employee's Base Salary plus three times Employee's Target Bonus.
4.5 Termination Upon Death or Disability. The Agreement shall terminate immediately upon Employee's death or Disability (as defined herein). In that event, Employee shall be entitled to the compensation set forth in Section 4.2 of this Agreement, as well as the severance benefits set forth in Sections 4.4(a) and (b) of this Agreement.
4.6 Resignation Without Good Reason. Employee shall be entitled to resign without Good Reason at any time upon written notice to the Company thirty (30) days prior to the effective date of such resignation, which shall be specified in Employee's notice of resignation. In that event, the Company shall pay Employee the compensation set forth in Section 4.2 of this Agreement, and Employee shall not be entitled to any further compensation from the Company, including severance benefits.
4.7 Resignation For Good Reason Not Following A Change In Control. Employee shall be entitled to terminate this Agreement upon a material breach of this Agreement by the Company, or a failure to provide directors and officers liability insurance coverage applicable to Employee, at any time not following a Change in Control, if such breach or failure is not cured by the Company within thirty (30) days after Employee delivers the Company written notice thereof specifying the nature of such breach or failure. In that event, the Employee's resignation shall be deemed a resignation for Good Reason, and Employee shall be entitled to the compensation set forth in Section 4.2 of this Agreement, as well as the severance benefits set forth in Sections 4.4(a) and (b) of this Agreement. Employee's right to terminate Employee's employment under this Section 4.7, as well as under Section 4.8 for Good Reason following a Change in Control, shall not be affected by any Disability of Employee, and Employee's continued employment by the Company shall not constitute a consent to, or a waiver of rights with respect to, any circumstance giving rise to a resignation for Good Reason under either Sections 4.7 or 4.8 of this Agreement.
4.8 Resignation For Good Reason Following A Change In Control. Employee shall be entitled to terminate this Agreement for Good Reason following a Change in Control (as defined in Section 4.10.3 herein). In that event, Employee shall be entitled to the accelerated vesting set forth above in Section 4.4(b) of this Agreement, as well as the cash severance payments set forth in Section 4.4(a) of this Agreement, except that such lump-sum amounts shall be multiplied by three (3); provided that the total of such lump sums shall not exceed three times Employee's Base Salary plus three times Employee's Target Bonus.
4.9 Release. As a condition to receipt of any severance benefits under this Agreement, Employee (or Employee's heirs, in the event of Employee's death) shall be required to provide the Company with an effective general release of any and all known and unknown claims against the Company and its officers, directors, employees, shareholders, parents, subsidiaries, successors, agents, and affiliates, in a form reasonably required by the Company.
4.10 Definitions. For purposes of this Agreement, the following definitions shall apply:
4.10.1 Disability. The term "disability" shall mean a physical or mental disability that renders Employee unable to perform one or more of the essential functions of his job, as determined by the Board, for a period of 180 days during any 365 day period.
4.10.2 Cause. For purposes of this Agreement, "Cause" shall mean: (a) Employee's use of alcohol or narcotics which proximately results in the willful Material Breach (as defined below) or habitual willful neglect of Employee's duties under this Agreement; (b) Employee's criminal conviction of fraud, embezzlement, misappropriation of assets, malicious mischief, or any felony; or (c) Employee's willful Material Breach of this Agreement, if such willful Material Breach is not cured by Employee within thirty (30) days after the Company's written notice thereof specifying the nature of such willful Material Breach. For purposes of this Section 4.10.2, the term willful "Material Breach" shall mean the substantial and continual willful nonperformance of Employee's duties under this Agreement which the Board determines has resulted or is likely to result in material injury to the Company.
4.10.3 Good Reason Following A Change In Control. Following a Change in Control (as defined in Section 4.10.4 below), "Good Reason" shall mean, without the Employee's express written consent, a material breach of this Agreement by the Company, including the occurrence of any of the following circumstances, which breach is not fully corrected within thirty (30) days after written notice thereof specifying the nature of such breach has been delivered to the Company: (a) the assignment to the Employee of any duties inconsistent with the position in the Company that the Employee held immediately prior to the Change in Control, or an adverse alteration in the nature or status of the Employee's responsibilities from those in effect immediately prior to such change; (b) a reduction by the Company in the Employee's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (c) the relocation of the Employee's offices to a location outside the San Francisco Peninsula (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control), or the Company's requiring Employee to travel on the Company's business to an extent not substantially consistent with Employee's business travel obligations immediately prior to the Change in Control; (d) the failure by the Company to pay the Employee any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all the Employees of the Company and all the Employees of any entity whose actions resulted in a Change in Control, or to pay Employee any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (e) the failure by the Company to continue in effect any compensation plan in which the Employee participates immediately prior to the Change in Control which is material to the Employee's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue Employee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of participation relative to other participants, as existed at the time of the Change in Control; (f) the failure by the Company to continue to provide Employee with benefits substantially similar to those under any of the Company's directors and officers liability insurance, life insurance, medical, health and accident, or disability plans in which the Employee was participating at the time of the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Employee of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by the Company to provide the Employee with the number of paid vacation days to which he is entitled in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (g) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement.
4.10.4 Change of Control. A "Change in Control" shall be deemed to have occurred if:
(a) any Person, as such term is used in section 3(a)(9) of the Securities Exchange Act of 1934, as amended from time to time (the "Exchange Act"), as modified and used in sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) a Company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, or (E) a person or group as used in Rule 13d-1(b) under the Exchange Act, that is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or
(b) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(c) there is consummated a merger or consolidation of the Company with any other Company, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least seventy-five percent (75%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or
(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least seventy-five (75%) of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
4.11 Gross-Up. If any of the Total Payments (as hereinafter defined) will be subject to the tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (the "Excise Tax"), the Company shall pay to the Employee, no later than the tenth (10th) day following the Separation Date, an additional amount (the "Gross-Up Payment") such that the net amount retained by him, after deduction of any Excise Tax on the Total Payments and any federal, state and local income tax and excise tax upon the payment provided for by this Section 4.11, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all payments or benefits received or to be received by the Employee in connection with a Change in Control or the termination of the Employee's employment (whether payable pursuant to the terms of this Agreement or of any other plan, arrangement or agreement with the Company, its successors, any person whose actions result in a Change in Control or any person affiliated (or which, as a result of the completion of the transactions causing a Change in Control, will become affiliated) with the Company or such person within the meaning of Section 1504 of the Code (the "Total Payments")) shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Employee, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, and all "excess parachute payments" (within the meaning of Section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax, unless in the opinion of such tax counsel such excess parachute payments represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code, or are not otherwise subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the residence of Employee on the Separation Date, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes.
SECTION 5. PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Employee shall be required to continue compliance with his obligations under the Employee Proprietary Information and Inventions Agreement that Employee previously executed with the Company.
SECTION 6. COMPANY POLICIES.
Employee shall be required to continue compliance with the Company's employee policies and procedures established by the Company from time to time.
SECTION 7. ASSIGNABILITY.This Agreement is binding upon and inures to the benefit of the parties and their respective heirs, executors, administrators, personal representatives, successors and assigns. The Company may assign its rights or delegate its duties under this Agreement at any time and from time to time. However, the parties acknowledge that the availability of Employee to perform services and the covenants provided by Employee hereunder are personal to Employee and have been a material consideration for the Company to enter into this Agreement. Accordingly, Employee may not assign any of Employee's rights or delegate any of Employee's duties under this Agreement, either voluntarily or by operation of law, without the prior written consent of the Company, which may be given or withheld by the Company in its sole and absolute discretion.
SECTION 8. NOTICES.All notices and other communications under this Agreement shall be in writing and shall be given by facsimile, first class mail (certified or registered with return receipt requested), or Federal Express overnight delivery, and shall be deemed to have been duly given three days after mailing or twenty-four (24) hours after transmission of a facsimile or Federal Express overnight delivery (if the receipt of the facsimile or Federal Express overnight delivery is confirmed) to the respective persons named below:
If to the Company: Alexandra Real Estate Equities, Inc.
385 E. Colorado Boulevard
Suite 299
Pasadena, CA 91101
Phone: (626) 578 0777
If to Employee: James H. Richardson
c/o Alexandria Real Estate Equities, Inc.
2929 Campus Drive
Suite 400A
San Mateo, CA 94403-2537
Any Party may change such Party's address for notices by notice duly given pursuant hereto.
SECTION 9. ARBITRATION.To ensure the timely and economical resolution of disputes that may arise in connection with Employee's employment with the Company, Employee and the Company agree that any and all disputes, claims, or causes of action arising from or relating to the enforcement, breach, performance, negotiation, execution, or interpretation of this Agreement, Employee's employment, or the termination of Employee's employment, shall be resolved to the fullest extent permitted by law by final, binding and confidential arbitration, by a single arbitrator, in Los Angeles, California, conducted by JAMS under the then applicable JAMS rules. By agreeing to this arbitration procedure, both Employee and the Company waive the right to resolve any such dispute through a trial by jury or judge or administrative proceeding. The arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decision, to include the arbitrator's essential findings and conclusions and a statement of the award. The arbitrator shall be authorized to award any or all remedies that Employee or the Company would be entitled to seek in a court of law. The Company shall pay all JAMS' arbitration fees in excess of the amount of court fees that would be required if the dispute were decided in a court of law. Nothing in this Agreement is intended to prevent either Employee or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration.
SECTION 10. MISCELLANEOUS.10.1 Entire Agreement. This Agreement contains the full, complete, and exclusive embodiment of the entire agreement of the parties with regard to the subject matter hereof and supersedes all prior communications, representations, or agreements, oral or written, and all negotiations, conversations or discussions between or among the parties relating to this Agreement. Employee has not entered into this Agreement in reliance on any representations, written or oral, other than those contained herein. Any ambiguity in this document shall not be construed against either party as the drafter.
10.2 Amendment. This Agreement may not be amended except by an instrument in writing duly executed by the parties hereto.
10.3 Applicable Law; Choice of Forum. This Agreement has been made and executed under, and will be construed and interpreted in accordance with, the laws of the State of California.
10.4 Provisions Severable. Every provision of this Agreement is intended to be severable from every other provision of this Agreement. If any provision of this Agreement is held to be invalid, illegal or unenforceable, in whole or in part, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement; and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein except to the extent that such provision may be construed and modified so as to render it valid, lawful, and enforceable in a manner consistent with the intent of the parties to the extent compatible with the applicable law as it shall then appear.
10.5 Non-Waiver of Rights and Breaches. Any waiver by a party of any breach of any provision of this Agreement will not be deemed to be a waiver of any subsequent breach of that provision, or of any breach of any other provision of this Agreement. No failure or delay in exercising any right, power, or privilege granted to a party under any provision of this Agreement will be deemed a waiver of that or any other right, power or privilege. No single or partial exercise of any right, power or privilege granted to a party under any provision of this Agreement will preclude any other or further exercise of that or any other right, power or privilege.
10.6 Headings. The headings of the Sections and Paragraphs of this Agreement are inserted for ease of reference only, and will have no effect in the construction or interpretation of this Agreement.
10.7 Counterparts. This Agreement and any amendment or supplement to this Agreement may be executed in two or more counterparts, each of which will constitute an original but all of which will together constitute a single instrument. Transmission by facsimile of an executed counterpart signature page hereof by a party hereto shall constitute due execution and delivery of this Agreement by such party.
10.8 Indemnification. In addition to any rights to indemnification to which Employee is entitled under the Company's Charter and By-Laws, the Company shall indemnify Employee at all times during and after the Term of this Agreement to the maximum extent permitted under Section 2-418 of the General Corporation Law of the State of Maryland or any successor provision thereof and any other applicable state law, and shall pay Employee's expenses in defending any civil or criminal action, suit, or proceeding in advance of the final disposition of such action, suit, or proceeding, to the maximum extent permitted under such applicable state laws.
In Witness Whereof, the parties hereto have caused this Agreement to be duly executed on January 9, 2006, effective as of the Effective Date.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By:/s/Joel S. Marcus
Name:Joel S. Marcus
Title:Chief Executive Officer
JAMES H. RICHARDSON
/s/James H. Richardson
EXHIBIT 10.11
AMENDED AND RESTATED
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement"), originally made and entered into as of the 5th day of January, 1994 (the "Original Effective Date"), and thereafter amended from time to time, by and between Alexandria Real Estate Equities, Inc., a Maryland corporation ("Corporation") and Joel S. Marcus, an individual ("Officer"), is hereby amended and restated in its entirety effective as of January 1, 2005 (the "Effective Date") to read as follows:
RECITAL
WHEREAS, Corporation desires to continue to employ Officer as its Vice Chairman and Chief Executive Officer, and Officer is willing to continue to accept such employment by Corporation, on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree to amend and restate this Agreement as follows:
- Position and Duties; Location.
- Term of Employment.
- Compensation, Benefits and Reimbursement.
- Minimum Base Salary. During the Term and subject to the terms and conditions set forth herein, Corporation agrees to pay to Officer an annual "Base Salary" of $675,000, or such higher amount as may from time to time be determined by Corporation. Unless otherwise agreed in writing by Officer and Corporation, the salary shall be payable in substantially equal semi-monthly installments in accordance with the standard policies of Corporation in existence from time to time.
- Earned Base Salary. For purposes of any early termination of this Agreement as provided in Paragraph 4 below, the term "Earned Base Salary" shall mean all semi-monthly installments of the Base Salary which have become due and payable to Officer, together with any partial monthly installment prorated on a daily basis up to and including the applicable Termination Date.
- Bonus. Officer shall be eligible to receive a Bonus for each fiscal year of Corporation (or portion thereof) during the Term, with the Bonus to consist of (i) a retention bonus equal to 50% of Base Salary (the "Retention Bonus"), which shall be deemed earned as of January 1 of the next fiscal year and paid no later than the end of the first quarter of that next fiscal year; and (ii) an amount (the "Performance Bonus") as determined in the sole discretion of the Board (or a committee of the Board) based upon its evaluation of Officer's performance during such year and such other factors and conditions as the Board (or a committee of the Board) deems relevant (the "Performance Bonus Criteria"), with the amount payable upon achievement of target levels of performance being no less than 50% of Base Salary (the "Performance Bonus Target"); provided, however, that the Board, in its reasonable discretion, may provide for an award in an amount less than the Performance Bonus Target in the event that the Performance Bonus Criteria are not fully achieved and for an award in an amount more than the Performance Bonus Target in the event that the Performance Bonus Criteria are exceeded. Any such Performance Bonus shall be payable within 185 days after the end of Corporation's fiscal year to which such Bonus relates. Officer shall also receive a cash signing bonus, which shall be earned and paid on a monthly basis in the form of twelve (12) monthly payments of $100,000 each, beginning with a $100,000 payment on April 1, 2006, and ending with the twelfth payment on March 1, 2007.
- Determination of Bonus. The Performance Bonus Criteria shall be developed in the reasonable discretion of the Board (or a committee of the Board) after consultation with Officer.
- Officer Benefits. Officer shall be eligible to participate in such of Corporation's benefit and deferred compensation plans as are made available to executive officers of Corporation, including, without limitation, Corporation's stock incentive and other equity- based compensation plans, annual incentive compensation plans, profit sharing/pension plans, deferred compensation plans, annual physical examinations, dental plans, vision plans, sick pay, medical plans, personal catastrophe and accidental death insurance plans, financial planning, automobile arrangements, retirement plans and supplementary executive retirement plans, if any. For purposes of establishing the length of service under any benefit plans or programs of Corporation, Officer's employment with Corporation shall be deemed to have commenced on the Original Effective Date of this Agreement.
- Vacation. Officer shall be entitled to accrue a minimum of six weeks of paid vacation during each year during the Term and any extensions thereof, prorated for partial years. Any accrued vacation not taken during any year may be carried forward to subsequent years; provided that Officer may not accrue more than 12 weeks of unused vacation at any time. Unused vacation in excess of Officer's allowable accrued vacation under the foregoing proviso shall be promptly paid to Officer at the end of each year in a cash amount equal to (i) the number of weeks of excess vacation time, multiplied by (ii) weekly Base Salary.
- Life Insurance. During the Term, Corporation shall, at its sole cost and expense, procure and keep in effect term life insurance (a minimum five year term certain policy) on the life of Officer, payable to such beneficiaries as Officer may from time to time designate, in the aggregate amount of $5,000,000. Such policy shall be owned by Officer or by a member of his immediate family. Corporation shall have no incidents of ownership therein.
- Disability Insurance. During the Term, Corporation shall, at its sole cost and expense, procure and keep in effect long-term disability and accidental death and disability insurance and short-term disability coverage (the "Disability Policy") similar to Officer's current disability insurance policy on Officer, payable to Officer in an annual amount not less than 60% of Officer's then existing Base Salary, Retention Bonus, Performance Bonus, and other cash compensation subject to such limitations as may be applicable under California law and under standard insurance underwriters requirements. The premiums for the foregoing coverage shall be included in Officer's gross income.
- Reimbursement for Expenses. During the Term, Corporation shall reimburse Officer for all reasonable out-of-pocket business and/or entertainment expenses incurred by Officer for the purpose of and in connection with the performance of his services pursuant to this Agreement. Officer shall be entitled to such reimbursement upon the presentation by Officer to Corporation of vouchers or other statements itemizing such expenses in reasonable detail consistent with Corporation's policies. In addition, Officer shall be entitled to reimbursement for (i) dues and membership fees in professional organizations and/or industry associations in which Officer is currently a member or becomes a member; (ii) appropriate industry seminars and mandatory continuing education and (iii) membership in a health club or other health-related activity of Officer's choosing up to a maximum annual fee of $5,000. Corporation shall pay Officer for all reasonable attorney's fees, disbursements and costs incurred by Officer in connection with the negotiation, preparation and execution of this Agreement, within 15 days following presentation of invoices which have been paid.
- Withholding. Compensation and benefits paid to Officer under this Agreement shall be subject to applicable federal, state and local wage deductions and other deductions required by law.
- Certain Restricted Stock; Certain Other Equity- Related Provisions. Effective as of the date that this Agreement is executed by Corporation and Officer, Officer shall be granted 30,000 shares of restricted stock of Corporation as a stock signing bonus in recognition of, among other things, his superior performance during his previous period of employment. These 30,000 shares of restricted stock shall be granted effective January 1, 2006 and vest 1/24th each month over the 24-month period from January 1, 2006 through December 31, 2007. In addition, without limiting the generality of Paragraph 3.4(a) above, Officer shall be eligible during the Term to participate in any stock incentive or other equity-based compensation plans of Corporation on a basis that is no less favorable than that applicable to other senior executives of Corporation. With respect to restricted stock and other equity or equity-based compensation awards (excluding awards of stock options and stock appreciation rights), Corporation shall pay Officer an additional cash amount as a tax gross-up upon each vesting or other taxation date with respect to such awards equal to 40% of the value of the shares, other property or cash included in Officer's taxable income on such date (but not more than $1 million in any calendar year; provided that any unused potential gross- up under such $1 million cap shall be carried over and available so as to increase the cap for the next and all subsequent years for which there could be a required gross-up payment, until such carried-over amount is used up); regardless of whether the applicable award was, is or will be made before, concurrently with or after the date hereof. Officer will receive the full cash dividends attributable to all nonforfeited shares of restricted stock (or units), regardless of whether such shares (or units) have become vested on or before the record date for such dividends on the shares (or, as applicable, the underlying shares). Upon a Change in Control (as defined below), (i) any and all equity or equity-based compensation shall vest; and (ii) any and all options shall be exercisable for their full terms without regard to the termination of Officer's employment.
- Termination of this Agreement.
- Termination Without Cause. Subject to the
provisions set forth in
Paragraph 4.3 below, "Termination Without Cause" shall constitute any termination of Officer's employment by Corporation other than termination for Cause (as defined below). - Termination for Cause. Subject to the
provisions set forth in
Paragraph 4.3 below, prior to the Termination Date, Corporation shall have the right to terminate this Agreement for Cause 30 days after written notice has been delivered to Officer, which notice shall specify the specific facts relating to and reason for, and the effective date of, such termination (which date shall be the applicable Early Termination Date). For purposes of this Agreement, "Cause" shall mean the following: - Officer's use of alcohol or narcotics which proximately results in the willful material breach or habitual willful neglect of Officer's duties under this Agreement;
- Officer's criminal conviction of fraud, embezzlement, misappropriation of assets, or any felony, but in no event traffic or similar violations; or
- Officer's willful Material Breach (as defined below) of this Agreement, if such willful Material Breach is not cured by Officer within 30 days after Corporation's written notice thereof specifying the nature of such willful Material Breach. For purposes of this Paragraph 4.1(b), the term willful "Material Breach" (A) shall mean the substantial and continual willful nonperformance of Officer's material duties under this Agreement resulting from Officer's gross negligence or willful misconduct which the Board reasonably determines has resulted in material injury to Corporation and (B) notwithstanding anything in this Paragraph 4.1(b) to the contrary, the term willful "Material Breach" shall include Officer's willful material violation of any specific and proper resolution passed by the Board (or a committee thereof) consistent with this Agreement.
- Termination by Reason of Death or Disability. Subject to the provisions set forth in Paragraph 4.3 below, prior to the Termination Date, Corporation shall have the right to terminate this Agreement by reason of Officer's death or Permanent Disability. For purposes of this benefit, "Permanent Disability" shall mean any physical or mental disability which causes Officer to be unable to perform all of Officer's material duties as an employee of Corporation for 180 consecutive business days. Notwithstanding the foregoing, if Corporation asserts that Officer has a Permanent Disability; (i) Corporation shall give Officer at least 15 business days' advance written notice thereof; (ii) Officer shall have the right within 10 business days after such notice to dispute Corporation's assertion; (iii) within 10 business days after exercising such right Officer shall submit to a physical examination by a physician affiliated with any major metropolitan hospital and selected by Officer; provided, however, that, prior to such physical examination, Officer shall obtain the approval of the Board (or if applicable, its designated committee) with respect to the selection of such physician, which approval shall not be unreasonably withheld; and (iv) if such physician shall issue his written statement to the effect that in his opinion, based on his diagnosis, Officer is capable of resuming his employment and devoting his full time and energy to discharging his duties within 10 business days after the date of such statement, Corporation shall not have the right to terminate Officer under this Paragraph 4.1(c) without further dispute.
- Termination Other than for Good Reason. Subject to the provisions set forth in Paragraph 4.3 below, Officer shall have the right to terminate this Agreement for any reason other than for Good Reason (as defined below), at any time prior to the Termination Date, upon written notice delivered to Corporation 30 days prior to the effective date of termination specified in such notice (which date shall be the applicable Early Termination Date).
- Termination for Good Reason. Subject to the provisions of Paragraph 4.3 below, Officer shall have the right to terminate this Agreement prior to the Termination Date in the event of Good Reason. For the purposes of this Agreement, "Good Reason" shall mean, without Officer's express written consent, the occurrence of any of the following circumstances, and in the case of clauses (i), (iii), (v), (vi), (vii), (viii) and (ix) of this Paragraph 4.2(b), failure of Corporation to cure such circumstances within 30 days after written notice thereof specifying the nature of such circumstances has been delivered to Corporation (it being agreed that, if Corporation effects a cure of an event or condition under any particular one of such clauses, it shall not again be permitted during the Term to cure an event or condition under that same clause); provided that Officer shall be required to provide such written notice to Corporation within 30 days following the date that such circumstance first becomes known to Officer:
- the assignment to Officer of any duties inconsistent with Officer's positions as set forth in Paragraph l, or an adverse alteration in the nature or status of Officer's responsibilities;
- upon or after a Change in Control (as defined below), a substantial change in the nature of the business operations of Corporation;
- a reduction by Corporation in Officer's Base Salary or Retention Bonus as in effect on the date hereof or as the same may be increased from time to time;
- the relocation of Corporation's principal executive offices to a location outside the Los Angeles and Pasadena, California metropolitan areas, or Corporation's requiring Officer to be based anywhere other than Corporation's principal executive offices except for required travel on Corporation's business to an extent substantially consistent with Officer's business travel obligations immediately to the date hereof;
- the failure by Corporation to pay Officer any portion of his current compensation, or to pay Officer any portion of an installment of deferred compensation under any deferred compensation program of Corporation, within seven days of the date such compensation is due;
- upon or after a Change in Control, the failure by Corporation to continue in effect any compensation plan in which Officer participates immediately prior to the Change in Control which is material to Officer's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by Corporation to continue Officer's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of participation relative to other participants, as existed prior to the Change in Control;
- upon or after a Change in Control, the failure by Corporation to continue to provide Officer with benefits substantially similar to those under any of Corporation's directors and officers liability insurance, life insurance, medical, health and accident, or disability plans in which Officer was participating at the time of a Change in Control, the taking of any action by Corporation which would directly or indirectly materially reduce any of such benefits or deprive Officer of any material fringe benefit enjoyed by him at the time of a Change in Control, or the failure by Corporation to provide Officer with the number of paid vacation days to which he is entitled on the basis of years of service with Corporation in accordance with Corporation's normal vacation policy in effect at the time of the Change in Control;
- the failure of Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement; or
- a material breach of this Agreement by Corporation.
- Termination by Corporation.
- Termination Without Cause. In the event that Corporation terminates this Agreement without Cause pursuant to Paragraph 4.1(a) above, Officer shall be entitled to: (i) Earned Base Salary; (ii) any earned Bonus, for the fiscal year of Corporation immediately prior to the fiscal year in which Officer is terminated, that Officer is entitled to receive, pursuant to Paragraph 3.3 of this Agreement, but which has not been paid to Officer as of the Early Termination Date, in the amount in which such bonus either has been determined or approved by the Board (or a committee of the Board) or is readily ascertainable (in all cases without regard to any ability of the Board (or committee) to exercise any negative discretion regarding payment), at the same time that other executive bonuses are determined, by reference to Performance Bonus Criteria previously established by the Board (or a committee of the Board) (an "Earned Bonus"); (iii) vested benefits pursuant to written employee benefit plans ("Earned Benefits") and reimbursable expenses; (iv) any compensation earned but deferred ("Deferred Amounts"); (v) a pro rata Bonus for the portion of the fiscal year in which Officer's termination occurs, equal to the sum of (a) a pro rata portion of the Retention Bonus for the applicable year and (b) a pro rata portion of the Performance Bonus for the applicable year, which shall be determined by an independent certified public accountant mutually acceptable to Officer and Corporation, based on Corporation's or Officer's, as applicable, level of achievement of the Performance Bonus Criteria during the financial quarters in the year of Officer's termination that were completed prior to such termination, provided that if such termination occurs prior to the end of the first financial quarter of the applicable year, the Performance Bonus shall be determined based on Corporation's or Officer's, as applicable, level of achievement of the Performance Bonus Criteria for the immediately preceding year, and provided, further, that in any event, for purposes of this clause (b), the Performance Bonus that is to be prorated for the applicable year shall not be less than the Performance Bonus for the immediately preceding year (a "Pro Rata Bonus"); (vi) the Severance Payment (as defined below); (vii) continued participation throughout the three-year period following Officer's termination of employment in all employee welfare and pension benefit plans, programs or arrangements to the extent permitted by those plans (but at such costs no higher than as in effect immediately preceding such termination, provided that Corporation shall in no event be required to provide any benefits otherwise required by this clause (vii) after such time as Officer becomes entitled to receive benefits of the same type from another employer or recipient of Officer's services; (viii) payment of full salary in lieu of all accrued vacation; (ix) for a period of up to 180 days following Officer's termination of employment, outplacement services (which shall be reasonable for an officer of Officer's status at a company such as Corporation) through a bona fide outplacement organization acceptable to Officer that, at a minimum, agrees to supply Officer with outplacement counseling, a private office and administrative support, including telephone service ("Applicable Outplacement Services"); (x) full and immediate vesting of any and all outstanding and unvested equity or equity-based compensation awards (including without limitation restricted stock and stock options) granted to Officer under Corporation's stock option or incentive compensation plans and exercisability of any and all outstanding options for their full terms without regard to the termination (for the avoidance of doubt, such awards for purposes of this Agreement include, without limitation, the grants of restricted stock and options listed on Schedule A hereto); and (xi) any payments which would have been payable under the last sentence of Section 3.3(a) (Bonus) herein if Officer's employment had not terminated. In the event Officer's participation in any such plan, program or arrangement described in this Paragraph 4.3(a)(i) is barred, Corporation shall arrange to provide Officer with substantially similar benefits (on a post-tax basis).
- Termination for Cause. In the event
that Corporation terminates this Agreement for Cause pursuant to Paragraph
4.1(b) above, Officer shall be entitled to
(i) Earned Base Salary; (ii) any Earned Bonus; (iii) Earned Benefits and reimbursable expenses; and (iv) any Deferred Amounts. Officer shall not be entitled to any Pro Rata Bonus, future annual Bonus or Severance Payment. - Termination Due to Death or Permanent Disability. In the event that Officer's employment is terminated by reason of death or Permanent Disability, he shall be entitled to all compensation and benefits described in Paragraph 4.3(a)(i) above, except subparagraph (ix) therein.
- Termination Due to Non-Renewal. In the event that Corporation does not renew this Agreement as contemplated by Paragraph 2 above, and either party terminates Officer's employment upon the scheduled expiration of the Term (and, for the avoidance of doubt, the termination is not treated as a termination for Good Reason under the last sentence of Paragraph 4.2(b) above), Officer shall be entitled to all of the compensation and benefits to which he would be entitled under Paragraph 4.3(a)(i) above in the event of a termination by Corporation without Cause, except that the definition of "Severance Payment" in Paragraph 4.4(a) below shall be applied by substituting "two times" for "three times," as the latter appears therein.
- Termination by Officer.
- Termination Other than for Good Reason. In the event that Officer terminates this Agreement other than for Good Reason, Officer shall be entitled to (i) Earned Base Salary; (ii) any Earned Bonus; (iii) Earned Benefits and reimbursable expenses; and (iv) any Deferred Amounts. Officer shall not be entitled to any Pro Rata Bonus, future annual Bonus or Severance Payment.
- Termination for Good Reason. In the event that Officer terminates this Agreement for Good Reason, Officer shall be entitled to all of the compensation and benefits to which he would be entitled under Paragraph 4.3(a)(i) above in the event of a termination by Corporation without Cause; provided, however, that in the event that Officer terminates this Agreement for Good Reason pursuant to Paragraph 4.2(b)(iii), Earned Base Salary shall mean all semi-monthly installments of Base Salary as in effect on the date of termination or the date immediately prior to any reduction under Paragraph 4.2(b)(iii), whichever is greater, which have become due and payable to Officer, together with any partial monthly installment prorated on a daily basis up to and including the applicable Termination Date.
- Definition of "Severance Payment." For purposes of this Agreement, the term "Severance Payment" shall mean an amount equal to three times Officer's Aggregate Compensation. For the purposes of this Agreement, "Aggregate Compensation" shall mean the sum of (i) Officer's Base Salary as in effect on the date of termination and (ii) the sum of (a) the Retention Bonus for the applicable year and (b) the Performance Bonus for the applicable year, as determined pursuant to Paragraph 4.3(a)(i)(v)(b) above; provided, however, that in the event that Officer terminates this Agreement for Good Reason pursuant to Paragraph 4.2(b)(iii), Aggregate Compensation shall mean the sum of (i) Officer's Base Salary, as in effect on the date of termination or the date immediately prior to any reduction described in Paragraph 4.2(b)(iii), whichever is greater, and (ii) the sum of (a) the Retention Bonus for the applicable year or as in effect on the date immediately prior to any reduction described in Paragraph 4.2(b)(iii), whichever is greater, and (b) the Performance Bonus for the applicable year, as determined pursuant to Paragraph 4.3(a)(i)(v)(b) above. In the event that Officer is entitled to a Severance Payment, except by virtue of death or Permanent Disability, Officer shall provide post-employment consulting services pursuant to Paragraph 4.4(c) below).
- Payment of Severance Payment. In the event that Officer is entitled to any Severance Payment pursuant to Paragraph 4.3 above, such Severance Payment shall be payable in a lump sum within 10 days following Officer's termination. Officer and Corporation agree that one-half of such Severance Payment shall constitute consideration for Officer's compliance with the post-employment consulting provisions of Paragraph 4.4(c) below and the noncompetition obligation of Paragraph 5.
- Post-Employment Consulting.
- Consulting Period. In the event that Officer is entitled to a Severance Payment, except by virtue of death or Permanent Disability, Officer shall continue to provide services to Corporation as a consultant for the period (the "Consulting Period") from the termination of Officer's employment through the earlier of: the 12-month period following Officer's termination of employment, or the date of the termination of Officer's service as a consultant by Corporation due to Officer's material breach of this Agreement.
- Consulting Duties. Officer shall be available to provide consulting services during the Consulting Period (or shorter period, if applicable) in Officer's areas of expertise, as requested by the Chief Executive Officer of Corporation or the Board (or a committee of the Board). Officer shall make himself available to provide such services for up to 20 hours per month for the first three months of the Consulting Period, and five hours per month for the remainder of the Consulting Period; provided that the Executive shall not be required to provide services that would conflict with or otherwise interfere in any way with his duties or responsibilities (including without limitation as to the time, place and manner of services) for any subsequent employer or other recipient of his services. Corporation shall require such services at reasonable times and places mutually agreed upon by Company and Officer. By way of example, it shall not be a breach of this Agreement if Officer has made himself available to render such services and Corporation does not require Officer to render all such services.
- Independent Contractor Status. During the Consulting Period (or shorter period, if applicable), Officer acknowledges and agrees that he (i) shall be an independent contractor of Corporation and not an employee, and (ii) shall not be entitled to any of the benefits that Corporation may make available solely to its employees, except as otherwise specifically set forth in this Agreement or to the extent that Officer elects continued health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or analogous provisions of state law. Consultant shall execute Corporation's standard form of independent contractor consulting agreement, which shall among other things, require Consultant to refrain from unauthorized use and disclosure of the Company's confidential and proprietary information (but which shall in no event be more restrictive than this Agreement as to such matters).
- Expense Reimbursement. Corporation shall reimburse Officer for all reasonable out-of-pocket business expenses incurred by Officer for the purpose of and in connection with the performance of his consulting services pursuant to this Agreement. Officer shall be entitled to such reimbursement upon the presentation by Officer to Corporation of vouchers or other statements itemizing such expenses in reasonable detail consistent with Corporation's policies.
- Full Settlement of All Obligations. Officer hereby acknowledges and agrees that any Severance Payment paid to Officer hereunder shall be deemed to be in full and complete settlement of all obligations of Corporation under this Agreement.
- Change in Control. For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if:
- Any Person, as such term is used in section 3(a)(9) of the Securities Exchange Act of 1934 as amended from time to time (the "Exchange Act"), as modified and used in sections 13(d) and 14(d) thereof, except that such term shall not include (A) Corporation or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of Corporation or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) a corporation owned, directly or indirectly, by the stockholders of Corporation in substantially the same proportions as their ownership of stock of Corporation, or (E) a person or group as used in Rule 13d-1(b) under the Exchange Act, that is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from Corporation or its affiliates other than in connection with the acquisition by Corporation or its affiliates of a business) representing 25% or more of the combined voting power of Corporation's then outstanding securities; or
- The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Corporation) whose appointment or election by the Board or nomination for election by Corporation's stockholders was approved or recommended by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
- There is consummated a merger or consolidation of Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Corporation or any subsidiary of Corporation, at least 75% of the combined voting power of the securities of Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of Corporation (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from Corporation or its affiliates other than in connection with the acquisition by Corporation or its affiliates of a business) representing 25% or more of the combined voting power of Corporation's then outstanding securities; or
- The stockholders of Corporation approve a plan of complete liquidation or dissolution of Corporation or there is consummated an agreement for the sale or disposition by Corporation of all or substantially all of Corporation's assets, other than a sale or disposition by Corporation of all or substantially all of Corporation's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by stockholders of Corporation in substantially the same proportions as their ownership of Corporation immediately prior to such sale.
- Noncompetition.
- Miscellaneous.
During the Term (as defined below), Officer agrees to be employed by and to serve Corporation as its Vice Chairman and Chief Executive Officer. In addition, Officer agrees to serve in such capacities for Corporation's subsidiaries, and in such additional capacities consistent with Officer's current position as a senior executive officer, as may be determined by the Board of Directors of Corporation (the "Board"). Corporation agrees to employ and retain Officer in such capacities. Officer shall devote such of his business time, energy, and skill to the affairs of Corporation and its subsidiaries as shall be necessary to perform the duties of such positions. Notwithstanding the foregoing, subject to any written policies of Corporation, nothing in this Agreement shall preclude Officer from (i) engaging in charitable and community affairs and not-for-profit activities, so long as they are consistent with his duties and responsibilities under this Agreement; (ii) managing his family and other personal investments; (iii) serving on the boards of directors of non-profit companies; and (iv) serving on the boards of directors of other for-profit companies; provided, however, that, prior to accepting a position hereafter on any such for-profit board of directors, Officer shall obtain the approval of the Board (or, if applicable, the appropriate committee thereof), which shall not be unreasonably withheld; and provided, further, however, that Officer shall submit to the Board (or the appropriate committee thereof) a list of any for-profit boards of directors on which Officer is serving as of the Effective Date. Officer shall only report to and be responsible directly to the Chairman of the Board and to the Board and at all times during the Term shall have powers and duties at least commensurate with his positions, including, without limitation, the right to hire or terminate any subordinate officers and any employees without the approval or consent of the Board or any other officer of Corporation; provided, however, that Officer shall consult with the Board before exercising his right to hire or terminate the Chief Financial Officer, Chief Operating Officer, and President of Corporation; and provided further that Officer and Corporation acknowledge that nothing in this Agreement modifies the authority of the Compensation Committee of the Board to establish the aggregate compensation levels of senior officers, above the level of vice president, of Corporation. Officer shall be based at the principal executive offices of Corporation in the Los Angeles, California metropolitan area, except for reasonable required travel on Corporation's business.
The Term of this Agreement (the "Term") shall be for a period commencing on January 1, 2005 and ending on December 31, 2009 (together with any later date resulting from an extension as contemplated below, the "Termination Date"), unless terminated earlier pursuant to this Agreement (the "Early Termination Date," and, as the context so requires, a "Termination Date"). Commencing on December 31, 2009, and on each subsequent anniversary thereof, the Term shall be automatically extended for one additional year unless, no later than six months before such date, either party shall have given written notice to the other that it does not wish to extend the Term. References herein to the Term shall refer to both the initial Term and any such extended Term.
3.1 Base Salary. During the Term, Officer shall be entitled to the following base salary:
3.2 Increases in Base Salary. Officer's Base Salary shall be reviewed no less frequently than on each anniversary of the Effective Date during the Term by the Board (or such committee as may be appointed by the Board for such purpose). The Base Salary payable to Officer shall be increased on each such anniversary date (and such other times as the Board or a committee of the Board may deem appropriate during the Term) to an amount determined by the Board (or a committee of the Board). Each such new Base Salary shall become the base for each successive annual increase; provided, however, that such increase, at a minimum, shall be equal to the cumulative cost-of-living increment as reported in the "Consumer Price Index, Los Angeles, California, All Items," published by the U.S. Department of Labor (using January 1, 2005 as the base date for comparison). Any increase in Base Salary or other compensation shall in no way limit or reduce any other obligations of Corporation hereunder and, once established at an increased specified rate, Officer's Base Salary shall not be reduced unless Officer otherwise agrees in writing.
3.3 Bonus. During the Term, Officer is eligible for the following cash bonus (each, a "Bonus"):
3.4 Additional Benefits. During the Term, Officer shall be entitled to the following additional benefits:
4.1 Termination by Corporation Defined.
Notwithstanding the foregoing, Cause shall in no event be deemed to exist except (i) as to any event or condition allegedly constituting Cause, as to which notice is given not more than 30 days following the date that such event or condition first becomes known to the Board, and (ii) upon a finding reflected in a resolution of the Board approved by at least two-thirds of the members of the Board, excluding Officer (whose finding shall not be binding upon or entitled to any deference by any court, arbitrator or other decision-maker ruling on this Agreement), at a meeting of which Officer shall have been given proper notice and at which Officer (and Officer's counsel) shall have a reasonable opportunity to present Officer's case.
For purposes of this Paragraph 4.1(b), no act or omission or other conduct shall be considered "willful" if Officer believed in good faith that such act or omission or conduct was in or not opposed to the best interests of Corporation.
4.2 Termination by Officer Defined.
Officer's right to terminate Officer's employment for Good Reason shall not be affected by Officer's incapacity due to physical or mental illness. In addition, notwithstanding any other provision of this Agreement, (i) any termination of employment by Corporation (other than a termination by Corporation for Cause), or failure to renew this Agreement, during the six-month period following a Change in Control (the "Six-Month Period") shall be treated as a termination by Officer for Good Reason, and (ii) any termination of employment (other than a termination by Corporation for Cause), regardless of the reason therefor or the party initiating the termination, shall be treated as a termination by Officer for Good Reason if it occurs within the 30-day period following the Six-Month Period.
4.3 Effect of Termination. In the event that this Agreement is terminated by Corporation or Officer prior to the Termination Date in accordance with the provisions of this Paragraph 4, the obligations and covenants of the parties under this Paragraph 4 shall be of no further force and effect, except for the obligations of the parties set forth below in this Paragraph 4.3, and such other provisions of this Agreement which shall survive termination of this Agreement as provided in Paragraph 6.11 below. Except as otherwise specifically set forth in this Agreement, all amounts due upon termination shall be payable on the date such amounts would otherwise have been paid had the Agreement continued through its Term; provided, however, that Deferred Amounts (as defined below) shall be payable within 30 days following the Early Termination Date. In the event of any such early termination in accordance with the provisions of this Paragraph 4.3, Officer shall be entitled to the following:
4.4 Severance Payment; Post-Employment Consulting
4.5 Gross-Up. If any of the Total Payments (as hereinafter defined) will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, Corporation shall pay to Officer, no later than the 10th day following the Early Termination Date, an additional amount (the "Gross-Up Payment") such that the net amount retained by him, after deduction of any Excise Tax on the Total Payments and any federal and state and local income tax upon the payment provided for by this Paragraph, shall be equal to the excess of the Total Payments over the payment provided for by this Paragraph. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all payments or benefits received or to be received by Officer in connection with a Change in Control or the termination of Officer's employment (whether payable pursuant to the terms of this Agreement or of any other plan, arrangement or agreement with Corporation, its successors, any person whose actions result in a Change in Control or any person affiliated (or which, as a result of the completion of the transactions causing a Change in Control, will become affiliated) with Corporation or such person within the meaning of Section 1504 of the Code (the "Total Payments")) shall be treated as "parachute payments" (within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by Corporation's independent auditors and reasonably acceptable to Officer, such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of Section 280G(b)(4)(A) of the Code, and all "excess parachute payments" (within the meaning of Section 280G(b)(1) of the Code) shall be treated as subject to the Excise Tax, unless in the opinion of such tax counsel such excess parachute payments represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code, or are not otherwise subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by Corporation's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income and other taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the residence of Officer on the Early Termination Date, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes.
4.6 No Mitigation or Offset. Officer shall not be required to mitigate damages under this Agreement by seeking other comparable employment or otherwise, and the amount of any payment or benefit provided for in this Agreement, shall not be reduced by any compensation earned by or provided to Officer as the result of employment by an employer other than Corporation.
During the Term and ending 12 months following the date that Officer ceases to be an employee of Corporation, Officer shall not engage in any activity directly and materially competitive, with a material adverse impact on Corporation, with the business of Corporation. (By way of example and for avoidance of ambiguity, the noncompetition period in the preceding sentence is intended to run for one year from termination of employment, regardless of whether Executive is consulting for all or part of that one year period pursuant to the terms of Paragraph 4.4 above.) This provision shall not be construed to prohibit Officer from owning up to 5% of the outstanding voting shares of the equity securities of any corporation whose common stock is listed for trading on any national securities exchange or on the NASDAQ system.
6.1 Payment Obligations. Corporation's obligation to pay Officer the compensation and to make the arrangements provided herein shall be unconditional, and Officer shall have no obligation whatsoever to mitigate damages hereunder. If arbitration after a Change in Control shall be brought to enforce or interpret any provision contained herein, Corporation shall, to the extent permitted by applicable law and Corporation's Articles of Incorporation and By-Laws, indemnify Officer for Officer's attorneys' fees and disbursements incurred in such arbitration.
6.2 Confidentiality. Officer agrees that all confidential and proprietary information relating to the business of Corporation shall be kept and treated as confidential both during and after the Term, except as may be permitted in writing by the Board or as such information is within the public domain or comes within the public domain without any breach of this Agreement; provided, however, that this Paragraph 6.2 imposes no obligation upon Officer with respect to information that (i) was in Officer's possession before receipt from Employer; (ii) is disclosed to immediate family members, or to tax, financial, or legal advisors for purposes of obtaining such advice; (iii) is rightfully received by Officer from a third party who does not have a duty of confidentiality; or (iv) is disclosed as required by law or legal process.
6.3 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof.
6.4 Entire Agreement; Modifications. Except as otherwise provided herein, this Agreement (together with the agreements and plans referred to herein) represents the entire understanding among the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof, including without limitation any understandings, agreements or obligations respecting any past or future compensation, Bonuses, reimbursements or other payments to Officer from Corporation. All modifications to the Agreement must be in writing and signed by the party against whom enforcement of such modification is sought.
6.5 Notices. All notices and other
communications under this Agreement shall be in writing and shall be given by
facsimile or first class mail, certified or registered with return receipt
requested, and shall be deemed to have been duly given three days after mailing
or
24 hours after transmission of a facsimile (if the receipt of the facsimile is
confirmed) to the respective persons named below:
If to Corporation: Alexandra Real Estate Equities, Inc.
385 East Colorado Boulevard
Suite 299
Pasadena, CA 91101
Phone: (626) 578 0777
If to Officer: Joel S. Marcus,
at the address shown on the execution page hereof.
With a copy to:
Clifford Chance US LLP
31 West 52nd Street
New York, New York 10019
Attention: Andrew L. Oringer, Esq.
Phone: (212) 878 8171
Any Party may change such Party's address for notices by notice duly given pursuant hereto.
6.6 Headings. The Paragraph headings herein are intended for reference only and shall not by themselves determine the construction or interpretation of this Agreement.
6.7 Governing Law. Other than with respect to Paragraph 6.13 below, this Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to its principles of conflict of laws.
6.8 Arbitration. Any dispute arising out of or relating to this Agreement or its enforcement, breach, performance, or interpretation, that cannot be settled by good faith negotiation between the parties shall be submitted to Judicial Arbitration and Mediation Services, Inc. ("JAMS"), or its successor, for final and binding arbitration by a single arbitrator in Los Angeles, California, pursuant to JAMS' then applicable arbitration rules (incorporated herein by reference), which arbitration shall be the exclusive remedy of the parties hereto. By agreeing to this arbitration procedure, the parties waive the right to resolve any such dispute through a trial by jury or judge or by administrative proceeding. The resulting arbitration shall be deemed equivalent to a final order of a court having jurisdiction over the subject matter, shall not be appealable, and shall be enforceable in any court of competent jurisdiction. The arbitrator shall (i) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law, and (b) issue a written arbitration decision including the arbitrator's essential findings and conclusions and a statement of the award. Corporation shall pay all of JAMS' administrative fees (including but not limited to arbitrator fees) for this arbitration. Submission to arbitration shall not preclude the right of any party hereto involved in a dispute regarding this Agreement (each, a "Disputing Party" and collectively, the "Disputing Parties") to institute proceedings for injunctive relief to prevent irreparable harm pending the arbitration of a matter subject to arbitration pursuant to this Agreement. Subject to the exceptions contained in Paragraph 6.2, any documentation and information submitted by any party in the arbitration proceeding shall be kept strictly confidential by the parties and the arbitrator. In addition to any other relief or award that may be granted by the arbitrator to Officer in a proceeding conducted under this paragraph, Officer shall be entitled to receive from Corporation, at least monthly as expenses are incurred, all reasonable attorneys' fees, disbursements and costs incurred in connection with any dispute arising under or relating to this Agreement, including but not limited to the interpretation, enforcement or reasonableness thereof; provided, however, that, if the arbitrator or other applicable decision-maker presiding over the proceeding affirmatively finds on each and every material issue that Officer failed to prevail, Officer shall pay his own attorneys' fees, disbursements and costs (other than JAMS' administrative fees) and, if applicable, return any amounts theretofore paid to Officer or on his behalf under this Paragraph 6.8.
6.9 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, and enforced along with all other provisions of this Agreement to the extent possible under applicable law consistent with the intent of the parties.
6.10 Survival of Corporation's Obligations. Corporation's obligations hereunder shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business, or similar event relating to Corporation. This Agreement shall not be terminated by any merger or consolidation or other reorganization of Corporation. In the event any such merger, consolidation or reorganization shall be accomplished by transfer of stock or by transfer of assets or otherwise, the provisions of this Agreement shall be binding upon and inure to the benefit of the surviving or resulting corporation or person. This Agreement shall be binding upon and inure to the benefit of the executors, administrators, heirs, successors and assigns of the parties; provided, however, that except as herein expressly provided, this Agreement shall not be assignable either by Corporation (except to an affiliate of Corporation, in which event Corporation shall remain liable if the affiliate fails to meet any obligations to make payments or provide benefits or otherwise) or by Officer.
6.11 Survival of Certain Rights and Obligations. The rights and obligations of the parties hereto pursuant to Paragraphs 4.3, 4.4, 4.5, 4.6, 5, 6.1 through 6.11, and 6.13 hereof shall survive the termination of this Agreement.
6.12 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same Agreement.
6.13 Indemnification and Insurance. In addition to any rights to indemnification to which Officer is entitled under Corporation's Articles of Incorporation and By- Laws, Corporation shall indemnify Officer at all times during and after the Term to the maximum extent permitted under Section 2-418 of the General Corporation Law of the State of Maryland or any successor provision thereof and any other applicable state law, and shall pay Officer's expenses in defending any civil or criminal action, suit, or proceeding in advance of the final disposition of such action, suit, or proceeding, to the maximum extent permitted under such applicable state laws. It is expressly understood and agreed that Corporation shall continue to indemnify Officer as provided above and maintain such liability insurance coverage for Officer, after the Term has ended for any claims that may be made against him with respect to his service as a director or officer of Corporation. Corporation shall cover Officer, at Corporation's expense, under director and officer insurance which provides coverage not less than the amount of coverage on the date hereof, covering any and all claims arising out of Officer's tenure as an officer or manager of Corporation, both during and, at all times while potential liability exists, after the Term on a basis no less favorable in each and every respect as is applicable to any officer (whether current or former) of Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
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CORPORATION: ALEXANDRIA REAL ESTATE EQUITIES, INC., By: /s/Richard B. Jennings Date: March 13, 2006 |
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OFFICER: By: /s/Joel S. Marcus Date: March 13, 2006 |
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EXHIBIT 10.12
SUMMARY OF DIRECTOR COMPENSATION ARRANGEMENTS
Non-employee directors of Alexandria Real Estate Equities, Inc. (the "Company") will receive the following compensation in 2006:
- An annual retainer fee of $20,000;
- The committee chairpersons will receive additional annual fees as follows:
|
Board of Directors Chairperson |
$10,000 |
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Audit Committee Chairperson |
$15,000 |
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Compensation Committee Chairperson |
$10,000 |
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Nominating & Governance Committee Chairperson |
$ 5,000 |
- A fee payable for each meeting attended of the Company's Board of Directors, or committee thereof, equal to $1,000;
- Reimbursement of out-of-pocket expenses incurred to attend such meetings;
- A restricted stock grant of 1,200 shares of common stock on January 1, 2006 under the Company's Amended and Restated 1997 Stock Award and Incentive Plan, such shares vesting in full on January 1, 2009; and
- A tax "gross-up" fee of $38,640, equal to 40% of the value of the restricted stock grant of 1,200 shares of common stock based on the closing price of our common stock on January 1, 2006.
The Company's non-employee directors may elect to defer all or any portion of the fees above in accordance with the Company's deferred compensation plan for its directors.
Directors who are also employees of the Company will not receive any compensation for their services as directors of the Company.
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)
Year Ended December 31, (a)
-----------------------------------------------------
2005 2004 2003 2002(b) 2001
----------- --------- --------- --------- ---------
Income from continuing operations
before minority interest.............. $63,935 $58,436 $48,359 $38,131 $27,441
Add: Interest expense................... 49,116 28,670 26,416 24,984 27,666
Subtract: Minority interest in income of
subsidiaries which have not incurred
fixed charges......................... (571) - - - -
----------- --------- --------- --------- ---------
Earnings available for fixed charges $112,480 $87,106 $74,775 $63,115 $55,107
----------- --------- --------- --------- ---------
Combined fixed charges and preferred
stock dividends:
Interest incurred..................... $77,695 $46,733 $40,647 $39,865 $39,380
Preferred stock dividends............. 16,090 12,595 8,898 8,579 3,666
Preferred stock redemption charge..... - 1,876 - - -
----------- -------- --------- --------- ---------
Total combined fixed charges and
preferred stock dividends........... $93,785 $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
____________
- 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 and fixed charges less 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 21.1
List of Subsidiaries of Alexandria Real Estate Equities, Inc.
The list below excludes subsidiaries in the same line of business (ownership and operation of commercial real estate) and includes the immediate parent of each excluded subsidiary. The list also excludes subsidiaries which in the aggregate, as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2005. A total of 201 subsidiaries have been excluded.
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ARE-QRS Corp. |
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Alexandria Real Estate Equities, L.P. |
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AREE-HOLDINGS, L.P. |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-34223 and Form S-8 No. 333-60075) pertaining to the Amended and Restated 1997 Stock Award and Incentive Plan of Alexandria Real Estate Equities, Inc., the Registration Statement (Form S-3 No. 333-118082) of Alexandria Real Estate Equities, Inc. and in the related Prospectus, the Amended Registration Statement (Form S-3/A No. 333-56449) of Alexandria Real Estate Equities, Inc. and in the related Prospectus, and the Amended Registration Statement (Form S-3/A No. 333-81985) of Alexandria Real Estate Equities, Inc. and in the related Prospectus, of our reports dated March 9, 2006, with respect to the consolidated financial statements and schedule of Alexandria Real Estate Equities, Inc., Alexandria Real Estate Equities, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Alexandria Real Estate Equities, Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.
/s/ Ernst & Young LLP
Los Angeles, California
March 15, 2006
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 annual report on Form 10-K 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: March 16, 2006
/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 annual report on Form 10-K 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: March 16, 2006
/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 Annual Report on Form 10-K of Alexandria Real Estate Equities, Inc. for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, as amended, 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: March 16, 2006
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/s/ Joel S. Marcus |
|
|
Joel S. Marcus |
|
|
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 Annual Report on Form 10-K of Alexandria Real Estate Equities, Inc. for the year ended December 31, 2005 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934, as amended, 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: March 16, 2006
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/s/ Dean A. Shigenaga |
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|
Dean A. Shigenaga |
|
|
Chief Financial Officer |