Alexandria Real Estate Equities, Inc 10-Q, filed May 15, 2002
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-Q
Alexandria Real Estate Equities, Inc filed this 10-Q on May 15, 2002, covering the quarter ended March 31, 2002.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
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135 North Los Robles Avenue, Suite 250
Pasadena, California 91101
(Address of principal executive offices including zip code)
(626) 578-0777
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ],
As of May 13, 2002, 16,843,745 shares of common stock, par value $.01 per share, were outstanding.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets of Alexandria Real Estate Equities, Inc. and Subsidiaries as of March 31, 2002 and December 31, 2001 |
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Condensed Consolidated Income Statements of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 2002 and 2001 |
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Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 2002 and 2001 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| PART II. Other Information |
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| Item 1. Legal Proceedings |
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| Item 2. Changes in Securities and Use of Proceeds |
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| Item 3. Defaults Upon Senior Securities |
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| Item 4. Submission of Matters to a Vote of Security Holders |
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| Item 5. Other Information |
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| Item 6. Exhibits and Reports on Form 8-K |
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| Signatures |
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(DOLLARS IN THOUSANDS)
March 31, December 31,
2002 2001
------------ ------------
Assets
Rental properties, net $798,570 $796,626
Property under development 77,454 65,250
Cash and cash equivalents 5,012 2,376
Tenant security deposits and other restricted cash 9,398 11,528
Secured note receivable - 6,000
Tenant receivables 2,864 3,123
Deferred rent 22,006 20,593
Other assets 62,682 56,650
------------ ------------
Total assets $977,986 $962,146
============ ============
Liabilities and stockholders' equity
Secured notes payable $246,272 $245,161
Unsecured line of credit and unsecured term loan 273,000 328,000
Accounts payable, accrued expenses and tenant
security deposits 41,889 48,057
Dividends payable 10,173 8,290
------------ ------------
Total liabilities 571,334 629,508
Stockholders' equity:
Series A preferred stock 38,588 38,588
Series B preferred stock 57,500 -
Common stock 168 163
Additional paid-in capital 316,945 301,818
Deferred compensation (1,192) (1,782)
Retained earnings - -
Accumulated other comprehensive income (5,357) (6,149)
------------ ------------
Total stockholders' equity 406,652 332,638
------------ ------------
Total liabilities and stockholders' equity $977,986 $962,146
============ ============
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------
2002 2001
----------- -----------
Revenues:
Rental $27,458 $23,572
Tenant recoveries 6,962 6,335
Interest and other income 507 1,088
----------- -----------
34,927 30,995
Expenses:
Rental operations 6,894 6,720
General and administrative 3,473 2,874
Interest 6,720 7,361
Depreciation and amortization 8,237 6,734
----------- -----------
25,324 23,689
----------- -----------
Net income 9,603 7,306
Dividends on preferred stock 1,905 916
----------- -----------
Net income available to
common stockholders $7,698 $6,390
=========== ===========
Net income per common share:
-Basic $0.47 $0.41
=========== ===========
-Diluted $0.46 $0.41
=========== ===========
Weighted average shares of
common stock outstanding:
-Basic 16,409,258 15,471,100
=========== ===========
-Diluted 16,720,857 15,704,458
=========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
----------------------
2002 2001
---------- ----------
Operating Activities
Net income $9,603 $7,306
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,237 6,734
Amortization of loan fees and costs 693 303
Amortization of premiums on secured notes (83) (79)
Stock compensation expense 952 637
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash 2,130 (1,926)
Tenant receivables 259 (82)
Deferred rent (1,413) (1,607)
Other assets (4,699) (2,467)
Accounts payable, accrued expenses and tenant
security deposits (4,445) 8,648
---------- ----------
Net cash provided by operating activities 11,234 17,467
---------- ----------
Investing Activities
Purchase of rental properties - (16,291)
Additions to rental properties (8,893) (10,973)
Additions to property under development (12,204) (5,469)
Additions to investments, net (4,246) (3,940)
---------- ----------
Net cash used in investing activities (25,343) (36,673)
---------- ----------
Financing Activities
Proceeds from secured notes payable 2,913 2,472
Proceeds from exercise of stock options 1,694 631
Proceeds from issuance of common stock 16,168 -
Proceeds from issuance of preferred stock 55,129 -
Proceeds from repayment of note receivable 6,000 -
(Principal reductions to) net borrowings from unsecured
line of credit and unsecured term loan (55,000) 28,000
Principal reductions of secured notes payable (1,719) (1,271)
Dividends paid on common stock (7,524) (6,690)
Dividends paid on preferred stock (916) (916)
---------- ----------
Net cash provided by financing activities 16,745 22,226
---------- ----------
Net increase in cash and cash equivalents 2,636 3,020
Cash and cash equivalents at beginning of period 2,376 2,776
---------- ----------
Cash and cash equivalents at end of period $5,012 $5,796
========== ==========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Background
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of properties containing a combination of office and laboratory space. We refer to these properties as "life science facilities." Our life science facilities are designed and improved for lease primarily to pharmaceutical, biotechnology, life science product and service companies, not-for- profit scientific research institutions, universities and related government agencies. As of March 31, 2002, our portfolio consisted of 83 properties in nine states with approximately 5,320,000 rentable square feet.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001.
Basis of Presentation and Significant Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
March 31, December 31,
2002 2001
------------ ------------
Unrealized (loss) gain on marketable
securities ($102) $829
Unrealized loss on interest rate
swap agreements (5,255) (6,978)
------------ ------------
($5,357) ($6,149)
============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended
March 31,
--------------------
2002 2001
--------- ---------
Net income $9,603 $7,306
Unrealized (loss) gain on
marketable securities (931) 386
Unrealized gain (loss) on
interest rate swap agreements 1,723 (2,457)
--------- ---------
Comprehensive income $10,395 $5,235
========= =========
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" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and have been included at fair value in other assets in the accompanying balance sheets. Fair value has been determined by the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The cost of investments sold is determined using the specific identification method, with realized gains and losses included in interest and other income.
The following table summarizes our available-for-sale securities (in thousands):
March 31, December 31,
2002 2001
------------- -----------
Cost of available-for-sale $ 3,124 $ 3,192
securities
Gross unrealized gains 782 1,527
Gross unrealized losses (884) (698)
------------- -----------
Fair value of
available-for-sale securities $ 3,022 $ 4,021
============= ===========
Investments in privately held entities as of March 31, 2002, totaled $28,731,000. These investments are accounted for under the cost method and are included in other assets in the accompanying balance sheets.
2. Rental Properties
Rental properties consist of the following (in thousands):
March 31, December 31,
2002 2001
----------- -----------
Land $121,005 $121,005
Buildings and improvements 675,964 667,435
Tenant and other improvements 92,640 92,276
----------- -----------
889,609 880,716
Less accumulated depreciation (91,039) (84,090)
----------- -----------
$798,570 $796,626
=========== ===========
3. Secured Note Receivable
In connection with the acquisition of a life science facility in San Diego, California, in March 1998, we made a $6,000,000 loan to the sole tenant of the property, fully secured by a first deed of trust on certain improvements at the property. The loan bore interest at a rate of 11% per year and was repaid in March 2002.
4. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings of up to $325 million and a $50 million unsecured term loan. Borrowings under the line of credit and term loan bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit and term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio, and a fixed charge coverage ratio. In addition, the terms of the line of credit and term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The line of credit and term loan expire February 2003 and provide for an extension (provided there is no default) of an additional one-year period upon notice by the company and consent of the participating banks. As of March 31, 2002, borrowings outstanding on the line of credit and term loan carried a weighted average interest rate of 3.61% and 3.41%, respectively.
Aggregate borrowings under the line of credit and the term loan are limited to an amount based on the net operating income derived from a pool of unencumbered assets. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the line of credit and the term loan will increase up to the combined maximum of $375 million. Under these provisions, as of March 31, 2002, aggregate borrowings under the line of credit and term loan were limited to $368 million.
We utilize interest rate swap agreements to hedge our exposure to variable interest rates associated with our unsecured line of credit. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of March 31, 2002 (dollars in thousands):
Notional Interest
Transaction Date Effective Date Amount Pay Rate Termination Date Fair Value
- ------------------- ---------------- ------------------ ---------- ----------------- ----------------
April 2000 May 20, 2000 $ 50,000 6.995% January 2, 2003 $ (1,683)
July 2000 May 31, 2001 $ 50,000 7.070% May 31, 2003 (2,289)
January 2001 January 31, 2001 $ 50,000 6.350% December 31, 2002 (1,431)
March 2002 December 31, 2002 $ 50,000 5.364% December 31, 2004 (208)
----------------
$ (5,611)
================
5. Stockholders' Equity
In January 2002, we completed a public offering of 2,300,000 shares of our 9.10% Series B cumulative redeemable 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 for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
In February 2002, we sold 418,970 shares of our common stock. The shares were issued at a price of $39.46 per share, resulting in aggregate proceeds of approximately $16.2 million (after deducting underwriting discounts and other offering costs).
On March 8, 2002, we declared a cash dividend on our common stock aggregating $8,421,000
($ 0.50 per share) for the calendar quarter ended March 31, 2002. We paid the dividend on April 15, 2002. On March 8, 2002, we
declared a cash dividend on our Series A preferred stock aggregating $916,000 ($ 0.59375 per share) for the period from January 15,
2002 through April 14, 2002. We paid the dividend on April 15, 2002. On March 8, 2002, we also declared a cash dividend on our
Series B preferred stock aggregating $1,206,000 ($0.52451 per share) for the period from January 23, 2002 through April 14, 2002. We
paid the dividend on April 15, 2002.
6. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------
2002 2001
----------- -----------
Net income available to common
stockholders $7,698 $6,390
=======================
Weighted average shares of
common stock outstanding - basic 16,409,258 15,471,100
Add: dilutive effect of
stock options and stock grants 311,599 233,358
----------- -----------
Weighted average shares of
common stock outstanding - diluted 16,720,857 15,704,458
=========== ===========
Net income per common share:
- Basic $0.47 $0.41
=========== ===========
- Diluted $0.46 $0.41
=========== ===========
Common dividends declared per share $0.50 $0.46
=========== ===========
7. Subsequent Event
In April 2002, we acquired two office/laboratory properties in the San Francisco Bay market for $49 million in cash. The properties contain approximately 170,000 square feet of office/laboratory space leased to a single life science tenant.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, those described below under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2001. We do not take any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events or otherwise. Readers of this Form 10-Q should also read our Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors. As used in this Form 10-Q, "we," "our," "ours" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing office/laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science facilities.
As of March 31, 2002, our portfolio consisted of 83 properties containing approximately 5,320,000 rentable square feet of office/laboratory space. As of that date, our properties were approximately 98.4% leased, excluding those properties in our redevelopment program. Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our acquisition and development activities.
Results of Operations
Comparison of Three Months Ended March 31, 2002 ("First Quarter 2002") to Three Months Ended March 31, 2001 ("First Quarter 2001")
Rental revenue increased by $3.9 million, or 16%, to $27.5 million for First Quarter 2002 compared to $23.6 million for First Quarter 2001. The increase resulted primarily from rental revenue from the properties acquired or placed in service after January 1, 2001. Rental revenue from the properties operating before January 1, 2001 (the "First Quarter Same Properties") increased by $837,000, or 4.1%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $627,000, or 10%, to $7.0 million for First Quarter 2002 compared to $6.3 million for First Quarter 2001. The increase resulted partially from tenant recoveries from the properties acquired or placed in service after January 1, 2001. Tenant recoveries for the First Quarter Same Properties increased by $284,000, or 5.2%, primarily due to increases in certain recoverable operating expenses.
Interest and other income decreased by $581,000, or 53%, to $507,000 for First Quarter 2002 compared to $1.1 million for First Quarter 2001.
Rental operating expenses increased by $174,000, or 3%, to $6.9 million for First Quarter 2002 compared to $6.7 million for First Quarter 2001. The increase resulted partially from rental operating expenses from the properties acquired or placed in service after January 1, 2001. Operating expenses for the First Quarter Same Properties increased by $116,000, or 2.1%, primarily due to increases in property taxes and property insurance, substantially all of which are recoverable from our tenants through tenant recoveries.
The following is a comparison of property operating data computed under accounting principles generally accepted in the United States ("GAAP Basis") and under accounting principles generally accepted in the United States, adjusted to exclude the effect of straight line rent adjustments required by GAAP ("Cash Basis") for the First Quarter Same Properties (dollars in thousands):
For the Three Months
Ended March 31,
-----------------------
2002 2001 Change
----------- ----------- ---------
GAAP BASIS:
Revenue $27,196 $26,109 4.2%
Rental operating expenses 5,547 5,431 2.1%
----------- ----------- ---------
Net operating income $21,649 $20,678 4.7%
=========== =========== =========
CASH BASIS (1):
Revenue $26,557 $24,851 6.9%
Rental operating expenses 5,547 5,431 2.1%
----------- ----------- ---------
Net operating income $21,010 $19,420 8.2%
=========== =========== =========
_________
- Revenue and operating expenses are computed in accordance with GAAP, except that revenue excludes the effect of straight line rent adjustments.
General and administrative expenses increased by $599,000, or 21%, to $3.5 million for First Quarter 2002 compared to $2.9 million for First Quarter 2001. The increase was primarily due to general and administrative expenses associated with the continued expansion in the scope of our national operations.
Interest expense decreased by $641,000, or 9%, to $6.7 million for First Quarter 2002 compared to $7.4 million for First Quarter 2001. The decrease resulted primarily from a decline in variable interest rates on our unsecured line of credit and unsecured term loan.
Depreciation and amortization increased by $1.5 million, or 22%, to $8.2 million for First Quarter 2002 compared to $6.7 million for First Quarter 2001. The increase resulted primarily from depreciation associated with the properties acquired or placed in service after January 1, 2001.
As a result of the foregoing, net income was $9.6 million for First Quarter 2002 compared to $7.3 million for First Quarter 2001.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities for First Quarter 2002 decreased by $6.3 million, to $11.2 million compared to $17.5 million for First Quarter 2001. The decrease resulted primarily from decreases in accounts payable resulting from (a) the return of $3.5 million in deposits from certain tenants as security for improvement projects they were undertaking and (b) a decrease in trade accounts payable due to the timing of these disbursements. The decrease was partially offset by increases in operating cash flows from properties acquired or placed in service after January 1, 2001.
Net cash used in investing activities decreased by $11.4 million, to $25.3 million for First Quarter 2002 compared to $36.7 million for First Quarter 2001 primarily due to the fact that we did not acquire any properties during the First Quarter 2002.
Net cash provided by financing activities decreased by $5.5 million, to $16.7 million for First Quarter 2002 compared to $22.2 million for First Quarter 2001. Cash provided by financing activities for First Quarter 2002 consisted primarily of net proceeds from the repayment of a note receivable, issuance of our common and preferred stock, net proceeds from our secured debt and exercise of stock options, partially offset by principal reductions on our secured debt, unsecured line of credit and distributions to stockholders. Cash provided by financing activities for First Quarter 2001 consisted primarily of net proceeds from net proceeds from our unsecured line of credit, secured debt and exercise of stock options, partially offset by principal reductions on our secured debt and distributions to stockholders.
Commitments
As of March 31, 2002, we were committed under the terms of certain leases to complete the construction of buildings and related improvements at a remaining aggregate cost of $10.2 million.
As of March 31, 2002, we were also committed to fund approximately $56.1 million for the construction of building infrastructure improvements under the terms of various leases and for certain investments.
As of March 31, 2002, we were committed under the terms of ground leases at five of our properties. The ground leases have remaining lease terms of 14 to 53 years, with aggregate remaining ground lease payments of approximately $15.2 million.
Restricted Cash
Restricted cash as of March 31, 2002 consists of the following (in thousands):
Amount
---------
Funds held in trust as additional security required under
the terms of certain secured notes payable $5,431
Security deposit funds based on the terms of certain
lease agreements 1,941
Funds held in escrow to complete the development of an
office/laboratory facility 2,026
---------
$9,398
=========
Secured Debt
Secured debt as of March 31, 2002 consists of the following (dollars in thousands):
Balance at Stated
March 31, Interest
Collateral 2002 Rate Maturity Date
- ------------------------------------------ ------------ ------------ --------------
Worcester, MA (1) $10,674 8.75% January 2006
Durham, NC (two properties) 12,147 8.68% December 2006
Gaithersburg, MA (three properties) 9,880 8.25% August 2007
Cambridge, MA (2) 19,066 9.125% October 2007
Chantilly, VA and Seattle, WA 35,155 7.22% May 2008
Worcester, MA and San Diego, CA 18,638 8.71% January 2010
Gaithersburg, MD (two properties) 24,458 8.33% November 2010
San Diego, CA (six properties) 23,977 7.75% July 2011
San Diego, CA 11,845 7.50% August 2011
Gaithersburg, MD (three properties) 28,201 7.40% January 2012
Alameda, CA 4,177 7.165% January 2014
San Diego, CA (two properties) 7,537 9.00% December 2014
Seattle, WA (two properties) 18,664 7.75% June 2016
San Francisco, CA (two properties) (3) 21,853 LIBOR + 1.70% June 2003 (4)
------------
$246,272
============
- The balance shown includes an unamortized premium of $465,000. The effective rate of the loan is 7.25%.
- The balance shown includes an unamortized premium of $1,565,000. The effective rate of the loan is 7.25%.
- The borrowings shown represent the amount drawn on a construction loan that provides for borrowings of up to $25,175,000.
- The loan may be extended for two additional 15-month periods.
The following is a summary of the scheduled principal payments for our secured debt as of March 31, 2002 (in thousands):
Year Amount
-------------------------------------------
2002 $3,919
2003 27,975
2004 5,901
2005 5,713
2006 24,764
Thereafter 175,970
-----------
Subtotal 244,242
Unamortized Premium 2,030
-----------
$246,272
===========
Unsecured line of credit and unsecured term loan
We have an unsecured line of credit that provides for borrowings of up to $325 million and a $50 million unsecured term loan. Borrowings under the line of credit and term loan bear interest at a floating rate based on our election of either a LIBOR based rate or the higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based advance, we must elect to fix the rate for a period of one, two, three or six months.
The line of credit and term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio, and a fixed charge coverage ratio. In addition, the terms of the line of credit and term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The line of credit and term loan expire February 2003 and provide for an extension (provided there is no default) of an additional one-year period upon notice by the company and consent of the participating banks. As of March 31, 2002, borrowings outstanding on the line of credit and term loan carried a weighted average interest rate of 3.61% and 3.41%, respectively.
Aggregate borrowings under the line of credit and term loan are 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 line of credit and the term loan will increase up to the combined maximum of $375 million. Under these provisions, as of March 31, 2002, aggregate borrowings under the line of credit and the term loan were limited to $368 million.
We utilize interest rate swap agreements to hedge our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one- month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements (dollars in thousands):
Notional Interest
Transaction Date Effective Date Amount Pay Rate Termination Date Fair Value
- ------------------- ---------------- ------------------ ---------- ----------------- ----------------
April 2000 May 20, 2000 $ 50,000 6.995% January 2, 2003 $ (1,683)
July 2000 May 31, 2001 $ 50,000 7.070% May 31, 2003 (2,289)
January 2001 January 31, 2001 $ 50,000 6.350% December 31, 2002 (1,431)
March 2002 December 31, 2002 $ 50,000 5.364% December 31, 2004 (208)
----------------
$ (5,611)
================
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as the counterparties are established, well-capitalized financial institutions. In addition, we have entered into master derivative agreements to minimize those risks.
Other Resources and Liquidity Requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using our working capital and net cash provided by operating activities. We believe that the net cash provided by operating activities will continue to be sufficient to make distributions necessary to enable us to continue qualifying as a REIT. We also believe that net cash provided by operations will be sufficient to fund our recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non-recurring capital improvements, through excess net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our line of credit and the issuance of additional debt and/or equity securities.
Inflation
Approximately 82.8% of our leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses, including increases therein. In addition, approximately 11.2% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 92.3% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 4%) or indexed based on the consumer price index or another index. Accordingly, we do not believe that our earnings or cash flow are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
We believe that funds from operations ("FFO") is helpful to investors as an additional measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of our ability to incur and service debt, to make capital expenditures and to make distributions. We compute FFO in accordance with standards established by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in its April 2002 White Paper (the "White Paper"), which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for our discretionary use because a portion of FFO is needed for capital replacement or expansion, debt service obligations, or other commitments and uncertainties. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered as an alternative to net income determined in accordance with GAAP as an indication of our financial performance or to cash flows from operating activities determined in accordance with GAAP as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
The following table presents our FFO for the three ended March 31, 2002 and 2001 (in thousands):
For the Three Months End
March 31,
-----------------------
2002 2001
----------- -----------
Net income $9,603 $7,306
Add:
Depreciation and amortization 8,237 6,734
Subtract:
Dividends on preferred stock (1,905) (916)
----------- -----------
FFO $15,935 $13,124
=========== ===========
Property and Lease Information
The following table is a summary of our property portfolio as of March 31, 2002 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentage
----------- ----------- ----------- -----------
Suburban Washington D.C. 19 1,613,529 $25,655 97.1% (1)
California - San Diego 20 841,575 24,049 99.3%
California - San Francisco Bay 7 412,172 12,438 100.0%
Southeast 3 183,473 3,271 95.1% (1)
New Jersey/Suburban Philadelphia 6 344,390 6,135 100.0%
Eastern Massachusetts 6 445,474 14,226 99.0%
Washington - Seattle 3 281,948 9,434 100.0%
----------- ----------- ----------- -----------
Subtotal 64 4,122,561 95,208 98.4%
Redevelopment Properties 19 1,197,384 13,550 49.7%
----------- ----------- ----------- -----------
Total 83 5,319,945 $108,758 87.4%
=========== =========== =========== ===========
________
- All, or substantially all, of the vacant space is office or warehouse space.
The following table provides information with respect to the lease expirations at our properties as of March 31, 2002:
Square Square Footage Annualized Base
Year of Number of Footage of as a Percentage Rent of Expiring
Lease Expiring Expiring of Leased Leases (per
Expiration Leases Leases Portfolio square foot)
- --------- ---------- ------------ ---------------- ----------------
2002 (1) 39 354,156 7.6% $18.31
2003 26 432,777 9.3% $19.54
2004 28 436,294 9.4% $21.32
2005 15 312,837 6.7% $26.43
2006 29 659,141 14.2% $23.61
Thereafter 52 2,455,165 52.8% $31.06
_________
(1) Represents leases expiring between April 1, 2002 and December 31, 2002.
The following table is a summary of our lease activity for the three months ended March 31, 2002 computed on a GAAP Basis and on a Cash Basis:
Rental TI's/Lease Average
Number Square Expiring New Rate Commissions Lease
of Leases Footage Rate Rate Increase Per Foot Term
--------- --------- --------- --------- --------- ------------ ---------
Lease Activity - Expired Leases
Lease Expirations
Cash Rent 35 260,876 $23.65 -- -- -- --
GAAP Rent 35 260,876 $23.85 -- -- -- --
Renewed / Released Space
Cash Rent 8 105,982 $25.90 $24.02 -7.3% (a) $1.23 2.5 Years
GAAP Rent 8 105,982 $25.15 $24.67 -1.9% (a) $1.23 2.5 Years
Month-to-Month Leases
Cash Rent 14 33,806 $15.96 $15.59 -2.3% -- --
GAAP Rent 14 33,806 $15.55 $15.59 0.3% -- --
Total Leasing
Cash Rent 22 139,788 $23.49 $21.99 -6.4% (b) -- --
GAAP Rent 22 139,788 $22.83 $22.47 -1.6% (b) -- --
Vacant Space Leased
Cash Rent 8 64,772 -- $23.84 -- $21.73 4.1 Years
GAAP Rent 8 64,772 -- $24.52 -- $21.73 4.1 Years
All Lease Activity
Cash Rent 30 204,560 -- $22.57 -- -- --
GAAP Rent 30 204,560 -- $23.12 -- -- --
- Excluding a lease for 8,424 square feet in the San Francisco Bay market, rental rates for renewed or released space were on average approximately 12.3% higher than expiring rates on a Cash Basis and approximately 18.0% higher than expiring rates on a GAAP Basis.
- Excluding a lease for 8,424 square feet in the San Francisco Bay market, rental rates for all lease activity for expired leases were on average approximately 9.1% higher than expiring rates on a Cash Basis and approximately 14.1% higher than expiring rates on a GAAP Basis.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
In general, market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is the result of many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on, March 31, 2002, a 1% increase in interest rates on our line of credit and term loan would decrease annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.2 million. A 1% decrease in interest rates on our line of credit and term loan would increase annual future earnings and cash flows, after considering the effect of our interest rate swap agreements, by approximately $1.2 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their fair value by approximately $18.1 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their fair value by approximately $19.4 million. A 1% increase or decrease in interest rates on our secured note receivable would not have a material impact on its fair value.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on March 31, 2002. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
To our knowledge, no litigation is pending against us, other than routine actions and administrative proceedings, none of which, in the aggregate, are expected to have a material adverse effect on our financial condition, results of operations or cash flows, and substantially all of which are expected to be covered by liability insurance.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends
(b) Reports on Form 8-K.
On January 2, 2002, we filed a Current Report on Form 8-K to report the acquisition of certain properties.
On January 18, 2002, we filed a Current Report on Form 8-K to report the offering and sale of up to 2,300,000 shares of our 9.10% Series B Cumulative Redeemable Preferred Stock.
On February 27, 2002, we filed a Current Report on Form 8-K to report the sale of 418,970 shares of our common stock.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 15, 2002.
| ALEXANDRIA REAL ESTATE EQUITIES, INC. |
| (Registrant) |
| By: | /s/ Joel. S. Marcus |
|
| |
| Joel S. Marcus | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| By: | /s/ Peter J. Nelson |
|
| |
| Peter J. Nelson | |
| Chief Financial Officer, Treasurer and Secretary | |
| (Principal Financial and Accounting Officer) |
EXHIBIT 12.1
ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
For the
Three Months
Ended
March 31,
2002 2001 2000 1999 1998 1997
--------- --------- --------- --------- --------- ---------
Earnings (Loss): ........................ $9,603 $30,277 $26,009 $22,053 $19,403 ($2,797)
Add Back:
Interest Expense....................... 6,720 26,126 25,791 19,697 14,033 7,043
Write-off of Unamortized Loan Costs.... -- -- -- -- -- 2,295
Acquisition LLC Financing Costs........ -- -- -- -- -- 6,973
--------- --------- --------- --------- --------- ---------
Earnings Available for Fixed Charges. $16,323 $56,403 $51,800 $41,750 $33,436 $13,514
--------- --------- --------- --------- --------- ---------
Combined Fixed Charges:
Interest Incurred...................... $7,855 $40,840 $33,832 $23,792 $16,264 $7,139
Write-off of Unamortized Loan Costs(a). -- -- -- -- -- 2,295
Acquisition LLC Financing Costs(b)..... -- -- -- -- -- 6,973
Preferred Dividends.................... 1,905 3,666 3,666 2,036 -- 3,038
--------- --------- --------- --------- --------- ---------
Fixed Charges........................ $9,760 $44,506 $37,498 $25,828 $16,264 $19,445
--------- --------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends(c)........... 1.67 1.27 1.38 1.62 2.06 0.69
-------------------
- This amount represents unamortized loan costs associated with debt retired in connection with the IPO.
- This amount represents the portion of the purchase price of the membership interests in ARE Acquisitions, LLC (the "Acquisition LLC") paid by the Company in excess of the cost incurred by the Acquisition LLC to acquire the three Life Science Facilities owned by it.
- For purposes of calculating the consolidated ratio of earnings to combined fixed charges and preferred stock dividends, earnings consist of earnings before income taxes and fixed charges. Fixed charges consist of interest incurred (including amortization of deferred financing costs and capitalized interest), write-off of unamortized loan costs, Acquisition LLC Financing Costs (see Note (b)), and preferred stock dividends.