Alexandria Real Estate Equities, Inc 10-Q, filed Nov 9, 2004
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-Q
Alexandria Real Estate Equities, Inc filed this 10-Q on November 9, 2004, covering the quarter ended September 30, 2004.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004 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, CA 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 [ ],
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ],
As of November 5, 2004, 19,535,311 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets - As of September 30, 2004 and December 31, 2003 |
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Condensed Consolidated Income Statements - for the Three and Nine Months Ended September 30, 2004 and 2003 |
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Condensed Consolidated Statements of Cash Flows - for the Nine Months Ended September 30, 2004 and 2003 |
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| Notes to Condensed Consolidated Financial Statements |
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| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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| Item 4. Controls and Procedures |
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| PART II. Other Information |
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| Item 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 |
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| Signatures |
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
Assets
Rental properties, net $ 1,152,350 $ 982,297
Properties under development 196,617 153,379
Cash and cash equivalents 5,330 4,985
Tenant security deposits and other restricted cash 14,879 11,057
Tenant receivables 2,351 1,969
Deferred rent 40,285 31,503
Investments 62,349 47,126
Other assets 49,518 40,261
------------ ------------
Total assets 1,523,679 1,272,577
============ ============
Liabilities and Stockholders' Equity
Secured notes payable 371,046 320,007
Unsecured line of credit and unsecured term loan 476,000 389,000
Accounts payable, accrued expenses and
tenant security deposits 46,234 43,408
Dividends payable 16,289 13,027
------------ ------------
Total liabilities 909,569 765,442
Stockholders' equity:
Series A preferred stock -- 38,588
Series B preferred stock 57,500 57,500
Series C preferred stock 129,638 --
Common stock 195 193
Additional paid-in capital 413,569 409,926
Deferred compensation (1,224) (2,232)
Retained earnings 6,735 8,635
Accumulated other comprehensive income (loss) 7,697 (5,475)
------------ ------------
Total stockholders' equity 614,110 507,135
------------ ------------
Total liabilities and stockholders' equity $ 1,523,679 $ 1,272,577
============ ============
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Rental $ 35,911 $ 31,258 $ 104,174 $ 93,729
Tenant recoveries 9,615 8,122 26,355 24,431
Other income 984 705 2,279 1,421
----------- ----------- ----------- -----------
46,510 40,085 132,808 119,581
Expenses
Rental operations 10,184 8,171 27,727 24,883
General and administrative 3,662 3,568 11,112 10,661
Interest 6,626 6,532 20,261 19,915
Depreciation and amortization 10,574 9,737 30,643 28,789
----------- ----------- ----------- -----------
31,046 28,008 89,743 84,248
----------- ----------- ----------- -----------
Income from continuing operations 15,464 12,077 43,065 35,333
Income from discontinued operations, net -- 9,517 1,626 10,959
----------- ----------- ----------- -----------
Net income $ 15,464 $ 21,594 $ 44,691 $ 46,292
=========== =========== =========== ===========
Dividends on preferred stock 4,094 2,225 8,603 6,674
Preferred stock redemption charge -- -- 1,876 --
----------- ----------- ----------- -----------
Net income available to common stockholders $ 11,370 $ 19,369 $ 34,212 $ 39,618
=========== =========== =========== ===========
Basic income per common share:
Income from continuing operations $ 0.80 $ 0.63 $ 2.23 $ 1.86
=========== =========== =========== ===========
Income from discontinued operations, net -- 0.50 0.08 0.58
=========== =========== =========== ===========
Net income $ 0.80 $ 1.14 $ 2.32 $ 2.44
=========== =========== =========== ===========
Net income available to common stockholders $ 0.59 $ 1.02 $ 1.77 $ 2.09
=========== =========== =========== ===========
Diluted income per common share:
Income from continuing operations $ 0.79 $ 0.63 $ 2.20 $ 1.84
=========== =========== =========== ===========
Income from discontinued operations, net $ -- $ 0.49 $ 0.08 $ 0.57
=========== =========== =========== ===========
Net income $ 0.79 $ 1.12 $ 2.28 $ 2.41
=========== =========== =========== ===========
Net income available to common stockholders $ 0.58 $ 1.00 $ 1.74 $ 2.06
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding:
Basic 19,352,670 19,023,162 19,281,678 18,957,609
=========== =========== =========== ===========
Diluted 19,668,360 19,276,932 19,614,092 19,191,021
=========== =========== =========== ===========
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------- ----------
2004 2003
---------- ----------
Operating Activities
Net income $ 44,691 $ 46,292
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain/loss on sales of property (1,627) (8,322)
Depreciation and amortization 30,643 29,034
Amortization of loan fees and costs 1,712 1,513
Amortization of premiums on secured notes (94) (259)
Stock compensation expense 1,895 1,974
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash (3,822) (1,226)
Tenant receivables (382) 820
Deferred rent (8,790) (5,044)
Other assets (12,260) (6,508)
Accounts payable, accrued expenses and tenant
security deposits 4,544 (2,865)
---------- ----------
Net cash provided by operating activities 56,510 55,409
---------- ----------
Investing Activities
Purchase of properties (103,354) (3,677)
Proceeds from sales of property 5,454 33,478
Additions to rental properties (48,246) (34,290)
Additions to properties under development (72,635) (68,234)
Additions to investments, net (3,983) (5,348)
---------- ----------
Net cash used in investing activities (222,764) (78,071)
---------- ----------
Financing Activities
Proceeds from secured notes payable 38,000 64,667
Proceeds from exercise of stock options 6,241 2,648
Proceeds from issuance of Series C Preferred Stock 124,009 --
Redemption of Series A Preferred Stock (38,588)
Principal borrowings from (reductions to) unsecured line
of credit and unsecured term loan 87,000 (4,000)
Principal reductions of secured notes payable (8,640) (4,847)
Dividends paid on common stock (34,830) (29,697)
Dividends paid on preferred stock (6,593) (6,674)
---------- ----------
Net cash provided by financing activities 166,599 22,097
---------- ----------
Net increase (decrease) in cash and cash equivalents 345 (565)
Cash and cash equivalents at beginning of period 4,985 3,790
---------- ----------
Cash and cash equivalents at end of period $ 5,330 $ 3,225
========== ==========
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Background
As used in this Form 10-Q, references to the "Company," "we", "our" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion 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 pharmaceutical, biotechnology, life science product, service, biodefense, educational and translational medicine institutions/entities, as well as related government agencies. As of September 30, 2004, our portfolio consisted of 101 properties in nine states with approximately 6.5 million rentable square feet.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, 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, 2004. These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.
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 in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Unrealized gain on
marketable securities $ 12,064 $ 824
Unrealized loss on interest
rate swap agreements (4,367) (6,299)
------------ ------------
$ 7,697 $ (5,475)
============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------ ------------- ------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income $ 15,464 $ 21,594 $ 44,691 $ 46,292
Unrealized gain (loss) on
marketable securities 11,135 (177) 11,240 344
Unrealized (loss) gain on
interest rate swap agreements (3,079) 1,776 1,932 1,376
------------ ------------ ------------ ------------
Comprehensive income $ 23,520 $ 23,193 $ 57,863 $ 48,012
============ ============ ============ ============
2. Rental Properties, Net
Rental properties, net consist of the following (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Land $ 182,005 $ 147,425
Buildings and improvements 1,002,372 854,152
Tenant and other improvements 134,487 122,280
------------ ------------
1,318,864 1,123,857
Less accumulated depreciation (166,514) (141,560)
------------ ------------
$ 1,152,350 $ 982,297
============ ============
During the third quarter of 2004, we acquired seven properties aggregating approximately 478,000 square feet in four markets. We purchased one property in the San Diego market, one property in the Southeast market, two properties in the New Jersey/Suburban Philadelphia market and three properties in the Suburban Washington D.C. market. We paid approximately $65.6 million cash for the properties together with the assumption of two secured notes payable totaling $12.2 million. Also, during the third quarter of 2004, we purchased land parcels with entitlements of approximately 508,000 square feet for $31.0 million cash.
3. Investments
We hold equity investments in certain publicly-traded companies and privately-held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The following table summarizes our available-for-sale securities (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Adjusted cost of available-for-sale
securities $ 2,980 $ 1,257
Gross unrealized gains 12,157 837
Gross unrealized losses (93) (13)
------------ ------------
Fair value of
available-for-sale securities $ 15,044 $ 2,081
============ ============
Investments in privately-held entities as of September 30, 2004 and December 31, 2003, totaled $47,305,000 and $45,045,000, respectively. Of these totals, $46,392,000 and $42,331,000 are accounted for under the cost method. The remainder ($914,000 and $2,714,000 as of September 30, 2004 and December 31, 2003, respectively) is 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".
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, as defined under the provisions of Emerging Issues Task Force Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", such investment is written down to its estimated fair value with a non-cash impairment charge to current earnings.
4. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings up to $440 million and an unsecured term loan for $150 million. Borrowings under our unsecured line of credit and our unsecured term loan bear interest at a floating rate based on our election of either a LIBOR-based rate or a rate related to the higher of the bank's reference rate and the Federal Funds rate. For each LIBOR- based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants, 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 unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. The unsecured term loan expires in November 2008. As of September 30, 2004, outstanding borrowings of $326.0 million under the unsecured line of credit carried a weighted average interest rate of 3.09%. As of September 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.93%.
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 of $590 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2004 (dollars in thousands):
Effective at
Notional Sept.30, Interest Fair
Transaction Dates Effective Dates Amounts 2004 Pay Rates Termination Dates Values
- ------------------ --------------- ------------ ------------- -------- ---------------- --------
Hedges for Unsecured Line of Credit
March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $ (431)
July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (297)
July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (299)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238)
November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (187)
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (200)
March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47
March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47
June 2004 June 30, 2005 50,000 -- 4.343% June 30, 2007 (890)
-------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 53
December 2003 December 31, 2004 50,000 -- 3.000% December 30, 2005 (169)
December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 (334)
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (742)
April 2004 April 30, 2004 50,000 50,000 1.550% April 29, 2005 184
April 2004 April 29, 2005 50,000 -- 3.140% April 28, 2006 (92)
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 (276)
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (305)
------------- --------
$ 100,000 $(4,367)
Total Interest Rate Swap Agreements in Effect ------------- ========
at September 30, 2004 $ 300,000
=============
5. Stockholders' Equity
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 9.50% Series A cumulative redeemable preferred stock ("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 in part, at any time for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
In July 2004, we redeemed all 1,543,500 outstanding shares of our 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 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", 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 in the second quarter of 2004.
In September 2004, we declared a cash dividend on our common stock
aggregating $12,455,000
($ 0.64 per share) for the calendar quarter ended September 30, 2004. In
September 2004, we also declared a cash dividend on our 9.10% Series B
Cumulative Redeemable Preferred Stock ("Series B preferred stock") aggregating
$1,308,000 ($0.56875 per share) for the period July 15, 2004 through October 14,
2004. In September 2004, we declared the initial cash dividend for our Series C
Preferred Stock aggregating $3,197,000 ($0.6164931 per share) for the period
June 29, 2004 through October 14, 2004. The dividends on our common stock,
Series B preferred stock and Series C preferred stock were paid on October 15,
2004.
6. Stock Option Plan
For 2002 and all prior years, we 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. Under APB 25, because the exercise price of the options we granted equals the market price of the underlying stock on the date of grant, no compensation expense had been recognized.
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure" ("SFAS 148"), which addresses alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. Effective January 1, 2003, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003. There have been no options issued since January 1, 2003.
The following table provides pro forma disclosures of the estimated fair value of the options amortized to expense over the options' vesting periods as if we had accounted for our stock options under the fair value method under SFAS 123 since the date they were granted (in thousands, except per share information):
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income available to common
stockholders, as reported $ 11,370 $ 19,369 $ 34,212 $ 39,618
Add: Stock-based employee compensation
expense included in reported net income -- -- -- --
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (181) (329) (558) (997)
----------- ----------- ----------- -----------
Pro forma net income available to
common stockholders $ 11,189 $ 19,040 $ 33,654 $ 38,621
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $0.59 $1.02 $1.77 $2.09
=========== =========== =========== ===========
Basic - pro forma $0.58 $1.00 $1.75 $2.04
=========== =========== =========== ===========
Diluted - as reported $0.58 $1.00 $1.74 $2.06
=========== =========== =========== ===========
Diluted - pro forma $0.57 $0.99 $1.72 $2.01
=========== =========== =========== ===========
7. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------ ----------- ------------ -----------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income available to common
stockholders $11,370 $19,369 $34,212 $39,618
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding - basic 19,352,670 19,023,162 19,281,678 18,957,609
Add: dilutive effect of
stock options and stock grants 315,690 253,770 332,414 233,412
----------- ----------- ----------- -----------
Weighted average shares of
common stock outstanding - diluted 19,668,360 19,276,932 19,614,092 19,191,021
=========== =========== =========== ===========
Net income per common share:
- Basic $0.59 $1.02 $1.77 $2.09
=========== =========== =========== ===========
- Diluted $0.58 $1.00 $1.74 $2.06
=========== =========== =========== ===========
Common dividends declared per share $0.64 $0.56 $1.86 $1.62
=========== =========== =========== ===========
8. Discontinued Operations
On January 1, 2002, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") became effective. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Under SFAS 144, 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 ceases commencing on the date they are designated as "held for sale". The accompanying statements have been presented in compliance with SFAS 144.
Income from discontinued operations, net includes the results of operations for two properties we sold during the first nine months of 2003 and one property we sold during the first quarter of 2004 under the provisions of SFAS 144. During the first quarter of 2004, we sold one property located in the Suburban Washington D.C. market that had been designated as "held for sale" during the fourth quarter of 2003. The total sale price for the property was approximately $5.7 million. In connection with the sale, we recorded a gain on sale of property of approximately $1.6 million. During the third quarter of 2003, we sold one property located in the Eastern Massachusetts market that had been designated as "held for sale" beginning in the fourth quarter of 2002. The total sales 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 during the third quarter of 2003. Interest expense included in discontinued operations for the three and nine months ended September 30, 2003 represents interest related to a secured note payable, which was assumed by the buyer in connection with this sale. 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 during the first quarter of 2003. Gain/loss on sales of these properties are included on the income statement in income from discontinued operations.
No properties have been designated as "held for sale" as of September 30, 2004.
The following is a summary of discontinued operations (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ------------ ----------- ----------
2004 2003 2004 2003
------------ ------------ ---------- ----------
Revenue $ -- $ 1,454 $ 14 $ 5,030
Operating expenses -- 415 15 1,224
------------ ------------ ---------- ----------
Revenue less operating expenses -- 1,039 (1) 3,806
Interest -- 223 -- 924
Depreciation -- 76 -- 245
Income before gain/loss on ------------ ------------ ---------- ----------
sales of property -- 740 (1) 2,637
Gain (loss) on sales of property -- 8,777 1,627 8,322
Income from discontinued ------------ ------------ ---------- ----------
operations $ -- $ 9,517 $ 1,626 $ 10,959
============ ============ ========== ==========
September 30, December 31,
2004 2003
------------ ------------
Properties held for sale, net $ -- $ 3,518
Tenant security deposits and other
restricted cash -- 6
Tenant receivables -- 82
Deferred rent -- 8
Other assets -- 66
------------ ------------
Total assets $ -- $ 3,680
============ ============
Accounts payable, accrued expenses
and tenant security deposits $ -- $ 79
------------ ------------
Total liabilities -- 79
------------ ------------
Net assets of discontinued operations $ -- $ 3,601
============ ============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes", "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, those described below in this report and under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2003. 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, references to the "Company," "we", "our" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, 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 properties".
As of September 30, 2004, our portfolio consisted of 101 properties containing approximately 6.5 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 96% leased, excluding those properties in our redevelopment program. Our primary sources of revenue are rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our property acquisition, development and redevelopment activities.
Results of Operations
Comparison of Three Months Ended September 30, 2004 ("Third Quarter 2004") to Three Months Ended September 30, 2003 ("Third Quarter 2003")
Rental revenue increased by $4.7 million, or 15%, to $35.9 million for Third Quarter 2004 compared to $31.3 million for Third Quarter 2003. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after July 1, 2003. Rental revenue from the properties operating continuously since July 1, 2003 (the "Third Quarter Same Properties") increased by $745,000, or 3%, primarily due to increases in rental rates and a slight increase in occupancy. The occupancy level of the Third Quarter Same Properties as of September 30, 2004 was 96.4%, compared to 95.6% as of September 30, 2003.
Tenant recoveries increased by $1.5 million, or 18%, to $9.6 million for Third Quarter 2004 compared to $8.1 million for Third Quarter 2003. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after July 1, 2003. Tenant recoveries for the Third Quarter Same Properties increased by $540,000, or 8%, primarily due to increases in certain recoverable expenses during Third Quarter 2004.
Other income increased by $279,000, or 40%, to $1.0 million for Third Quarter 2004 compared to $705,000 for Third Quarter 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $2.0 million, or 25%, to $10.2 million for Third Quarter 2004 compared to $8.2 million for Third Quarter 2003. The increase resulted primarily from rental operating expenses from properties acquired, placed in service or redeveloped after July 1, 2003. Operating expenses for the Third Quarter Same Properties increased by $754,000, or 11%, primarily due to increases in utility expenses and repairs and maintenance expenses, substantially all of which are recoverable from our tenants through tenant recoveries.
General and administrative expenses were virtually unchanged, increasing by $94,000, or 3%, to $3.7 million for Third Quarter 2004 compared to $3.6 million for Third Quarter 2003.
Interest expense was virtually unchanged, increasing by $94,000, or 1%, to $6.6 million for Third Quarter 2004 compared to $6.5 million for Third Quarter 2003.
Depreciation and amortization increased by $837,000 or 9%, to $10.6 million for Third Quarter 2004 compared to $9.7 million for Third Quarter 2003. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after July 1, 2003.
Income from discontinued operations, net was $9.5 million for Third Quarter 2003, which reflects the results of operations of one property sold during Third Quarter 2003. No properties were sold during Third Quarter 2004.
As a result of the foregoing, net income was $15.5 million for Third Quarter 2004 compared to $21.6 million for Third Quarter 2003.
Comparison of Nine Months Ended September 30, 2004 ("Nine Months 2004") to Nine Months Ended September 30, 2003 ("Nine Months 2003")
Rental revenue increased by $10.4 million, or 11%, to $104.2 million for Nine Months 2004 compared to $93.7 million for Nine Months 2003. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after January 1, 2003. Rental revenue from the properties operating continuously since January 1, 2003 (the "Nine Months Same Properties") increased by $1.6 million, or 2%, primarily due to increases in rental rates. The occupancy level of the Nine Months Same Properties as of September 30, 2004 was 96.5%, compared to 96.3% as of September 30, 2003.
Tenant recoveries increased by $1.9 million, or 8%, to $26.4 million for Nine Months 2004 compared to $24.4 million for Nine Months 2003. The increase resulted primarily from properties acquired, placed in service or redeveloped after January 1, 2003. Tenant recoveries for the Nine Months Same Properties were virtually unchanged, increasing by $80,000, or 0.4%.
Other income increased by $858,000, or 60%, to $2.3 million for Nine Months 2004 compared to $1.4 million for Nine Months 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $2.8 million, or 11%, to $27.7 million for Nine Months 2004 compared to $24.9 million for Nine Months 2003. The increase resulted primarily from rental operating expenses from properties acquired, placed in service or redeveloped after January 1, 2003. Operating expenses for the Nine Months Same Properties increased by $326,000, or 2%, primarily due to increases in utility expenses, substantially all of which are recovered from our tenants through tenant recoveries.
General and administrative expenses increased by $451,000, or 4%, to $11.1 million for Nine Months 2004 compared to $10.7 million for Nine Months 2003 primarily due to general increases in administrative costs, primarily payroll and related expenses.
Interest expense was virtually unchanged, increasing by $346,000, or 2%, to $20.3 million for Nine Months 2004 compared to $19.9 million for Nine Months 2003.
Depreciation and amortization increased by $1.9 million, or 6%, to $30.6 million for Nine Months 2004 compared to $28.8 million for Nine Months 2003. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after January 1, 2003.
Income from discontinued operations, net was $1.6 million and $11.0 million for Nine Months 2004 and Nine Months 2003, respectively. It reflects the results of operations of one property we sold during Nine Months 2004 and two properties we sold during Nine Months 2003.
As a result of the foregoing, net income was $44.7 million for Nine Months 2004 compared to $46.3 million for Nine Months 2003.
Liquidity and Capital Resources
Cash flows
Net cash provided by operating activities increased by $1.1 million to $56.5 million for Nine Months 2004 compared to $55.4 million for Nine Months 2003. The increase resulted primarily from increases in cash flows from our operating properties and a decrease in accounts payable, accrued expenses and tenant security deposits, partially offset by an increase in other assets.
Net cash used in investing activities increased by $144.7 million to $222.8 million for Nine Months 2004 compared to $78.1 million for Nine Months 2003. This was primarily due to an increase in property acquisitions, a decrease in proceeds from sales of property and an increase in additions to rental properties.
Net cash provided by financing activities increased by $144.5 million to $166.6 million for Nine Months 2004 compared to $22.1 million for Nine Months 2003. Cash provided by financing activities for Nine Months 2004 primarily consisted of net proceeds from our Series C preferred stock offering and an increase in borrowings from our unsecured line of credit. This was partially offset by the redemption of our Series A preferred stock and a decrease in proceeds from secured notes payable.
Contractual obligations and commitments
Contractual obligations as of September 30, 2004, consist of the following (dollars in thousands):
Payments by Period
-----------------------------------------
Total 2004 2005-2006 2007-2008 Thereafter
------------- -------- --------- --------- ----------
Contractual Obligations
Secured notes payable (1) $ 370,888 $ 1,619 $ 55,882 $ 55,428 $ 257,959
Ground lease obligations 65,776 430 3,634 3,737 57,975
Other obligations 384 142 242 -- --
------------- -------- --------- --------- ----------
Total $ 437,048 $ 2,191 $ 59,758 $ 59,165 $ 315,934
============= ======== ========= ========= ==========
- Excludes unamortized premium of $158,000 as of September 30, 2004.
Secured notes payable as of September 30, 2004 include 19 notes secured by 46 properties.
Ground lease obligations as of September 30, 2004 include leases at seven of our properties and one land development parcel. These lease obligations have remaining lease terms of 28 to 51 years, exclusive of extension options.
In addition to the above, we were committed under the terms of construction contracts to complete the construction of properties under development at a remaining aggregate cost of approximately $5.0 million.
As of September 30, 2004, we were also committed to fund approximately $30.3 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $18.6 million for certain investments.
Tenant security deposits and other restricted cash
Tenant security deposits and other restricted cash as of September 30, 2004 consist of the following (in thousands):
Amount
---------
Funds held in trust under the terms of certain
secured notes payable $ 10,972
Security deposit funds based on the terms of certain
lease agreements 2,039
Other funds held in escrow 1,868
---------
$ 14,879
=========
Secured debt
Secured debt as of September 30, 2004 consists of the following (dollars in thousands):
Balance at Stated
September 30, Interest
Market Location of Collateral 2004 Rates Maturity Dates
- ----------------------------------------------- ------------ ------------- ----------------
San Francisco Bay (two properties) $ 22,257 LIBOR + 1.70% January 2005 (1)
Eastern Massachusetts (2) 9,294 8.75% January 2006
Southeast (two properties) 11,753 8.68% December 2006
Suburban Washington D.C. (three properties) 9,616 8.25% August 2007
Suburban Washington D.C. and Seattle 34,065 7.22% May 2008
Suburban Washington D.C. 3,645 LIBOR + 2.15% March 2009
San Diego (four properties) 39,401 6.95% July 2009
Eastern Massachusetts and San Diego 18,283 8.71% January 2010
Eastern Massachusetts (two properties) 9,464 5.35% September 2010
Suburban Washington D.C. (two properties) 23,974 8.33% November 2010
San Diego (six properties) 23,474 7.75% July 2011
Southeast 8,593 5.88% December 2011
Suburban Washington D.C. (three properties) 27,583 7.40% January 2012
San Francisco Bay (three properties) and San Diego 33,106 6.21% March 2013
Suburban Washington D.C. (three properties) 29,659 6.36% September 2013
San Francisco Bay 1,352 7.165% January 2014
Eastern Massachusetts (two properties), Southeast
and New Jersey/Suburban Philadelphia 37,744 5.82% April 2016
Seattle (two properties) 16,682 7.75% June 2016
San Diego 11,101 7.50% August 2021
------------
$ 371,046
============
_________
- In November 2004, we exercised our option to extend the maturity date of this loan to January 2006.
- The balance shown includes an unamortized premium of $158,000. The effective interest rate of the loan is 7.25%.
The following is a summary of the scheduled principal payments for our secured debt and the weighted average interest rates as of September 30, 2004 (in thousands):
Weighted
Average
Year Amount Interest Rate
- ---------------------- ----------- -----------
2004 $ 1,619 6.84%
2005 29,139 (1) 7.07%(1)
2006 26,743 7.06%(1)
2007 16,318 7.00%
2008 39,110 6.95%
Thereafter 257,959 6.94%
----------- -----------
Subtotal 370,888 6.98%
Unamortized Premium 158 ===========
-----------
Total $ 371,046
===========
(1) Of this amount, $22,257,000 represents the outstanding balance on a loan which has a maturity date of January 2005 and currently carries interest at 3.35% per annum. In November 2004, we exercised our option to extend the maturity date of this loan to January 2006. The weighted average interest rates for 2005 and 2006 would be 6.84% and 7.06%, respectively, based on this extended maturity date.
Unsecured line of credit and unsecured term loan
We have an unsecured line of credit that provides for borrowings of up to $440 million and an unsecured term loan for $150 million. Borrowings under our unsecured line of credit and our unsecured term loan bear interest at a floating rate based on our election of either a LIBOR-based rate or a rate related to the higher of the bank's reference rate and the Federal Funds rate. For each LIBOR- based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants, 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 unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. The unsecured term loan expires in November 2008. As of September 30, 2004, outstanding borrowings of $326.0 million on the unsecured line of credit carried a weighted average interest rate of 3.09%. As of September 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.93%.
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 of $590 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2004 (dollars in thousands):
Effective at
Notional Sept. 30, Interest Fair
Transaction Dates Effective Dates Amounts 2004 Pay Rates Termination Dates Values
- ------------------ --------------- ------------ ------------- -------- ---------------- --------
Hedges for Unsecured Line of Credit
March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $ (431)
July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (297)
July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (299)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238)
December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238)
November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (187)
November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (200)
March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47
March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47
June 2004 June 30, 2005 50,000 -- 4.343% June 30, 2007 (890)
-------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 53
December 2003 December 31, 2004 50,000 -- 3.000% December 30, 2005 (169)
December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 (334)
December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (742)
April 2004 April 30, 2004 50,000 50,000 1.550% April 29, 2005 184
April 2004 April 29, 2005 50,000 -- 3.140% April 28, 2006 (92)
April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 (276)
April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (305)
------------- --------
$ 100,000 $(4,367)
Total Interest Rate Swap Agreements in Effect ------------- ========
at September 30, 2004 $ 300,000
=============
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.
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 net cash provided by operating activities will continue to be sufficient to make the 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 recurring capital expenditures and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as for property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non- recurring capital improvements, through net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our unsecured line of credit and unsecured term loan, and the issuance of additional debt and/or equity securities.
Capital Expenditures and Leasing Costs
The following provides additional information with respect to capital expenditures and leasing costs incurred during the nine months ended September 30, 2004 (in thousands):
|
Property-related capital expenditures (1) |
$ 3,258 |
|
Leasing costs (2) |
$ 584 |
|
Property-related redevelopment costs (3) |
$ 48,659 |
|
Property-related development costs |
$ 74,118 |
_______
- Property-related capital expenditures include all capital expenditures except capital expenditures that are recoverable from tenants, revenue-enhancing capital expenditures and costs related to the redevelopment of a property. Capital expenditures fluctuate in any given period due to the nature, extent or timing of improvements required and the extent to which they are recoverable from tenants. Property-related capital expenditures also include an HVAC system upgrade at one property totaling approximately $1.3 million for the nine months ended September 30, 2004. Approximately 92% of our leases (based on rentable square feet) provide for the recapture of certain capital expenditures (such as HVAC systems maintenance and/or replacement, roof replacement and parking lot resurfacing). In addition, we implement an active preventative maintenance program at each of our properties to minimize capital expenditures.
- Leasing costs consist of tenant improvements and leasing commissions related to leasing of acquired vacant space and second generation space. Leasing costs exclude tenant improvements that are revenue-enhancing.
- Includes capital expenditures recoverable from tenants of approximately $1,722,000.
Inflation
Approximately 83% of our leases (on a square footage basis) are triple net leases that require tenants to pay substantially all real estate taxes and insurance and common area and other operating expenses, including increases therein. In addition, approximately 6% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 93% of our leases (on a square footage basis) contain 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 flows 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 miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of Funds From Operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance of REITs, it 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. (See "Cash Flows" for information regarding these measures of cash flows.) We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the three and nine months ended September 30, 2004 and 2003 and a reconciliation of GAAP net income to FFO (in thousands):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $ $15,464 $ $21,594 $ $44,691 $ $46,292
Add
Depreciation and amortization (1) 10,574 9,813 30,643 29,034
Subtract
Dividends on preferred stock (4,094) (2,225) (8,603) (6,674)
Preferred stock redemption charge (2) -- -- (1,876) --
(Gain) loss on sales of property (3) -- (8,777) (1,627) (8,322)
----------- ----------- ----------- -----------
Funds from operations (FFO) $ $21,944 $ $20,405 $ $63,228 $ $60,330
=========== =========== =========== ===========
- Includes depreciation and amortization on assets sold or "held for sale" reflected as discontinued operations (for the periods prior to when such assets were sold or designated as "held for sale").
- During the second quarter of 2004, we elected to redeem our 9.50% Series A cumulative redeemable preferred stock. Accordingly, in compliance with Emerging Issues Task Force Topic D-42, we recorded a charge in the second quarter of 2004 for costs related to the redemption of our Series A preferred stock.
- Consists of a $1.6 million gain related to the sale of one property in the Suburban Washington D.C. market in the first quarter of 2004 that had been designated as "held for sale" during the quarter ended December 31, 2003, a gain of $8.8 million on the sale of one property in the Eastern Massachusetts market in the third quarter of 2003 that had been designated for sale during the quarter ended December 31, 2002, and a $455,000 loss related to the sale of one property in the San Francisco Bay market in the first quarter of 2003 that had been designated as "held for sale" during the quarter ended December 31, 2002.
Property and Lease Information
The following table is a summary of our property portfolio as of September 30, 2004 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentage
----------- ----------- ---------- -----------
Markets
California - Pasadena 1 31,343 $602 79.4%(1)
California - San Diego 21 1,007,413 27,750 96.3%
California - San Francisco Bay 10 642,578 19,918 100.0%
Eastern Massachusetts 12 730,633 21,934 87.1%
New Jersey/Suburban Philadelphia 7 456,785 7,625 100.0%
Southeast 6 340,994 5,451 81.4%(1)
Suburban Washington D.C. 21 1,629,734 28,638 97.8%
Washington - Seattle 7 597,273 21,913 100.0%
----------- ----------- ---------- -----------
Total 85 5,436,753 $133,831 95.6%(2)
=========== =========== ========== ===========
________
- All, or substantially all, of the vacant space is office or warehouse space.
- Excludes properties under full or partial redevelopment.
The following table provides information with respect to the lease expirations at our properties as of September 30, 2004:
Square Percentage of Annualized Base
Year of Number of Footage of Aggregate Rent of Expiring
Lease Expiring Expiring Portfolio Leased Leases (per
Expiration Leases Leases Square Footage square foot)
- ------------- ------------ -------------- ---------------- ----------------
2004 40 (1) 232,500 4.1% $ 24.29
2005 37 367,277 6.5% $ 27.70
2006 41 862,691 15.3% $ 24.44
2007 19 341,825 6.1% $ 23.98
2008 14 368,045 6.5% $ 26.45
Thereafter 74 3,469,022 61.5% $ 26.12
_________
(1) Includes 24 month-to-month leases for approximately 67,000 square feet.
The following table is a summary of our lease activity for the three months ended September 30, 2004 computed on a Cash Basis and on a GAAP Basis:
TI's/Lease
Rental Commissions Average
Number Square Expiring New Rate Per Lease
of Leases Footage Rates Rates Changes Square Foot Terms
--------- --------- --------- --------- -------- ------------ ---------
Leasing Activity
Lease Expirations
Cash Basis 45 371,625 $28.69 -- -- -- --
GAAP Basis 45 371,625 $30.55 -- -- -- --
Renewed/Releasable Space Leased
Cash Basis 17 229,474 $30.73 $32.57 6.0% $0.27 2.0 years
GAAP Basis 17 229,474 $34.44 $37.11 7.8% $0.27 2.0 years
Month-to-Month Leases In Effect
Cash Basis 24 67,065 $22.80 $22.85 0.2% -- --
GAAP Basis 24 67,065 $22.80 $22.85 0.2% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 12 266,820 -- $18.64 -- $14.68 6.8 years
GAAP Basis 12 266,820 -- $20.49 -- $14.68 6.8 years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 29 496,294 -- $25.08 -- $8.02 4.6 years
GAAP Basis 29 496,294 -- $28.18 -- $8.02 4.6 years
Including Month-to-Month Leases
Cash Basis 53 563,359 -- $24.82 -- -- --
GAAP Basis 53 563,359 -- $27.54 -- -- --
The following table is a summary of our lease activity for the nine months ended September 30, 2004 computed on a Cash Basis and on a GAAP Basis:
TI's/Lease
Rental Commissions Average
Number Square Expiring New Rate Per Lease
of Leases Footage Rates Rates Changes Square Foot Terms
--------- --------- -------- -------- -------- ----------- ---------
Leasing Activity
Lease Expirations
Cash Basis 74 955,762 $24.37 -- -- -- --
GAAP Basis 74 955,762 $25.80 -- -- -- --
Renewed/Releasable Space Leased
Cash Basis 38 625,983 $24.09 $24.80 2.9% $2.50 4.7 years
GAAP Basis 38 625,983 $26.01 $28.05 7.8% $2.50 4.7 years
Month-to-Month Leases In Effect
Cash Basis 24 67,065 $22.68 $22.85 0.7% -- --
GAAP Basis 24 67,065 $22.65 $22.85 0.9% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 25 364,805 -- $23.64 -- $20.66 8.6 years
GAAP Basis 25 364,805 -- $28.92 -- $20.66 8.6 years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 63 990,788 -- $24.37 -- $9.19 6.1 years
GAAP Basis 63 990,788 -- $28.37 -- $9.19 6.1 years
Including Month-to-Month Leases
Cash Basis 87 1,057,853 -- $24.27 -- -- --
GAAP Basis 87 1,057,853 -- $28.02 -- -- --
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on September 30, 2004, we estimate that a 1% increase in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $1.8 million. We further estimate that a 1% decrease in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect on September 30, 2004, would increase annual future earnings and cash flows by approximately $1.8 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $25.0 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $26.3 million.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on September 30, 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 September 30, 2004 would decrease their fair value by approximately $6.2 million.
Item 4. CONTROLS AND PROCEDURES
As of September 30, 2004, 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. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to September 30, 2004.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 12, 2004, we held our Annual Meeting of Stockholders.
At the meeting, eight directors were elected to serve for a one-year term and until their successors are duly elected and qualify. The following directors were elected to pursuant to the votes indicated:
|
Director |
"For" |
"Withheld" |
|
Jerry M. Sudarsky |
10,336,190 |
7,300,850 |
|
Joel S. Marcus |
17,261,615 |
375,425 |
|
James H. Richardson |
17,315,461 |
321,579 |
|
Richard B. Jennings |
16,606,907 |
1,030,133 |
|
Richard H. Klein |
16,639,857 |
997,183 |
|
Anthony M. Solomon |
17,486,475 |
150,565 |
|
Alan G. Walton |
17,453,525 |
183,515 |
|
Richmond A. Wolf |
17,486,475 |
150,565 |
At the meeting, our stockholders also voted to ratify the selection of Ernst & Young LLP as our independent public accountants for the fiscal year ending December 31, 2004. A total of 15,589,194 shares voted "for" the ratification, 1,042,594 shares voted "against" and 5,222 shares abstained.
Item 5. OTHER INFORMATION
Peter J. Nelson stepped down from the position of Chief Financial Officer and Treasurer effective after August 10, 2004. Dean A. Shigenaga, Vice President has been appointed Acting Chief Financial Officer and Etsuko Mason, Vice President, has been appointed Treasurer, both effective after August 10, 2004. Mr. Nelson continued as Senior Vice President - Operations through October 20, 2004, and terminated his full-time employment as of such date. As previously announced, Mr. Nelson will be continuing as Corporate Secretary and as a senior financial advisor to management of the Company and its Board of Directors through at least April 30, 2007.
Anthony M. Solomon resigned from his position on our Board of Directors on August 4, 2004 for personal health reasons.
Item 6. EXHIBITS
|
12.1 |
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. |
|
31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 9, 2004.
|
ALEXANDRIA REAL ESTATE EQUITIES INC. |
|
/s/ Joel S. Marcus Joel S. Marcus |
|
/s/ Dean A. Shigenaga |
EXHIBIT 12.1
ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)
Nine Months For the Year Ended December 31, (a)
Ended -----------------------------------------
9/30/04 2003 2002 (b) 2001 2000
----------- --------- --------- --------- ---------
Income From Continuing Operations........ $43,065 $48,504 $38,271 $27,582 $23,437
Add Back:
Interest Expense....................... 20,261 26,416 24,984 27,666 24,307
----------- --------- --------- --------- ---------
Earnings Available for Fixed Charges $63,326 $74,920 $63,255 $55,248 $47,744
----------- --------- --------- --------- ---------
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Incurred...................... $33,215 $40,647 $39,865 $39,380 $32,348
Preferred Stock Dividends.............. 8,603 8,898 8,579 3,666 3,666
Preferred Stock Redemption Charge...... 1,876 - - - -
----------- -------- --------- --------- ---------
Total Combined Fixed Charges and
Preferred Stock Dividends............ $43,694 $49,545 $48,444 $43,046 $36,014
----------- -------- --------- --------- ---------
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends(c)....... 1.45 (d) 1.51 1.31 1.28 1.33
____________
- Amounts disclosed for periods prior to 2003 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. 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 six months ended June 30, 2004 includes the effect of the preferred stock redemption charge pursuant to Emerging Issues Task Force Topic D-42, as described in Note 5 to the consolidated financial statements. Excluding the impact of this charge, the ratio of earnings to combined fixed charges and preferred stock dividends for the nine months ended September 30, 2004 is 1.51.
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 report on Form 10-Q of Alexandria Real Estate Equities, Inc.;
- Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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;
- 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 board of directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
- Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2004
/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, Acting Chief Financial Officer (Principal Financial and Accounting Officer) of Alexandria Real Estate Equities, Inc., certify that:
- I have reviewed this report on Form 10-Q of Alexandria Real Estate Equities, Inc.;
- Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
- Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
- The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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;
- 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 board of directors (or persons performing the equivalent functions):
- All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
- Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 9, 2004
/s/ Dean A. Shigenaga
Dean A. Shigenaga
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER
PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Joel S. Marcus, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Alexandria Real Estate Equities, Inc. for the quarterly period ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly represents in all material respects the financial condition and results of operations of Alexandria Real Estate Equities, Inc.
|
By: /s/ Joel S. Marcus |
|
|
Name: Joel S. Marcus |
|
|
Title: Chief Executive Officer |
I, Dean A. Shigenaga, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Alexandria Real Estate Equities, Inc. for the quarterly period ended September 30, 2004 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in such report fairly represents in all material respects the financial condition and results of operations of Alexandria Real Estate Equities, Inc.
|
By: /s/ Dean A. Shigenaga |
|
|
Name: Dean A. Shigenaga |
|
|
Title: Acting Chief Financial Officer |