Alexandria Real Estate Equities, Inc 10-Q, filed Aug 9, 2004
Alexandria Real Estate Equities, Inc. (ARE)
About this 10-Q
Alexandria Real Estate Equities, Inc filed this 10-Q on August 9, 2004, covering the quarter ended June 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 June 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, 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 [ ],
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 August 5, 2004, 19,398,842 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 of Alexandria Real Estate Equities, Inc. and Subsidiaries as of June 30, 2004 and December 31, 2003 |
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Condensed Consolidated Income Statements of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months and six months ended June 30, 2004 and 2003 |
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Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the six months ended June 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 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)
June 30, December 31,
2004 2003
------------ ------------
Assets
Rental properties, net $1,068,493 $982,297
Properties under development 161,890 153,379
Cash and cash equivalents 3,030 4,985
Tenant security deposits and other restricted cash 13,259 11,057
Tenant receivables 2,097 1,969
Deferred rent 37,386 31,503
Investments 50,622 47,126
Other assets 42,967 40,261
------------ ------------
Total assets $1,379,744 $1,272,577
============ ============
Liabilities and Stockholders' Equity
Secured notes payable $360,486 $320,007
Unsecured line of credit and unsecured term loan 324,000 389,000
Accounts payable, accrued expenses and
tenant security deposits 38,090 43,408
Preferred stock redemption liability 38,588 -
Dividends payable 13,934 13,027
------------ ------------
Total liabilities 775,098 765,442
Stockholders' equity:
Series A preferred stock - 38,588
Series B preferred stock 57,500 57,500
Series C preferred stock 129,638 -
Common stock 194 193
Additional paid-in capital 410,932 409,926
Deferred compensation (1,085) (2,232)
Retained earnings 7,826 8,635
Accumulated other comprehensive loss (359) (5,475)
------------ ------------
Total stockholders' equity 604,646 507,135
------------ ------------
Total liabilities and stockholders' equity $1,379,744 $1,272,577
============ ============
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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues
Rental $34,489 $31,248 $68,263 $62,471
Tenant recoveries 8,426 7,830 16,740 16,309
Other income 608 378 1,295 716
----------- ----------- ----------- -----------
43,523 39,456 86,298 79,496
Expenses
Rental operations 8,808 8,136 17,543 16,712
General and administrative 3,814 3,544 7,450 7,093
Interest 6,926 6,512 13,635 13,383
Depreciation and amortization 10,088 9,678 20,069 19,052
----------- ----------- ----------- -----------
29,636 27,870 58,697 56,240
----------- ----------- ----------- -----------
Income from continuing operations 13,887 11,586 27,601 23,256
Income from discontinued operations, net - 963 1,626 1,442
----------- ----------- ----------- -----------
Net income $13,887 $12,549 $29,227 $24,698
=========== =========== =========== ===========
Dividends on preferred stock 2,284 2,225 4,509 4,450
Preferred stock redemption charge 1,876 - 1,876 -
----------- ----------- ----------- -----------
Net income available to common stockhold $9,727 $10,324 $22,842 $20,248
=========== =========== =========== ===========
Basic income per common share:
Income from continuing operations $0.72 $0.61 $1.43 $1.23
=========== =========== =========== ===========
Income from discontinued operations, net - $0.05 $0.08 $0.08
=========== =========== =========== ===========
Net income $0.72 $0.66 $1.52 $1.31
=========== =========== =========== ===========
Net income available to common stockholders $0.50 $0.54 $1.19 $1.07
=========== =========== =========== ===========
Diluted income per common share:
Income from continuing operations $0.71 $0.60 $1.41 $1.21
=========== =========== =========== ===========
Income from discontinued operations, net - $0.05 $0.08 $0.08
=========== =========== =========== ===========
Net income $0.71 $0.65 $1.49 $1.29
=========== =========== =========== ===========
Net income available to common stockholders $0.50 $0.54 $1.17 $1.06
=========== =========== =========== ===========
weighted average shares of common stock outstanding:
-Basic 19,284,631 18,952,445 19,245,792 18,924,290
=========== =========== =========== ===========
-Diluted 19,608,854 19,190,472 19,595,337 19,160,395
=========== =========== =========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
Six Months Ended
June 30,
----------------------
2004 2003
---------- ----------
Operating Activities
Net income $29,227 $24,698
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gain) loss on sales of property (1,627) 455
Depreciation and amortization 20,069 19,221
Amortization of loan fees and costs 1,141 979
Amortization of premiums on secured notes (62) (185)
Stock compensation expense 1,579 1,337
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash (2,202) (1,947)
Tenant receivables (128) 171
Deferred rent (5,891) (3,400)
Other assets (6,640) (2,351)
Accounts payable, accrued expenses and tenant
security deposits (521) 958
---------- ----------
Net cash provided by operating activities 34,945 39,936
---------- ----------
Investing Activities
Purchase of properties (62,272) (38,377)
Proceeds from sales of property 5,454 6,558
Additions to rental properties (32,554) (24,296)
Additions to properties under development (11,139) (20,477)
Additions to investments, net (3,391) (4,677)
---------- ----------
Net cash used in investing activities (103,902) (81,269)
---------- ----------
Financing Activities
Proceeds from secured notes payable 38,000 34,667
Proceeds from exercise of stock options 4,032 1,819
Proceeds from issuance of preferred stock 124,209 -
Principal (reductions to) borrowings from unsecured
line of credit and unsecured term loan (65,000) 32,000
Principal reductions of secured notes payable (6,986) (2,932)
Dividends paid on common stock (22,803) (19,563)
Dividends paid on preferred stock (4,450) (4,450)
---------- ----------
Net cash provided by financing activities 67,002 41,541
---------- ----------
Net (decrease) increase in cash and cash equivalents (1,955) 208
Cash and cash equivalents at beginning of period 4,985 3,790
---------- ----------
Cash and cash equivalents at end of period $3,030 $3,998
========== ==========
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 properties". Our life science properties are designed and improved for lease primarily to pharmaceutical, biotechnology, life science research, product, service, defense, educational and translational medicine companies/entities/institutions, as well as related government agencies. As of June 30, 2004, our portfolio consisted of 94 properties in nine states with approximately 6.0 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 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of the following (in thousands):
June 30, December 31,
2004 2003
------------ ------------
Unrealized gain on
marketable securities $929 $824
Unrealized loss on intere
rate swap agreements (1,288) (6,299)
------------ ------------
($359) ($5,475)
============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income $13,887 $12,549 $29,227 $24,698
Unrealized (loss) gain on
marketable securities (240) 515 105 521
Unrealized gain (loss) on
interest rate swap agreements 6,900 (545) 5,011 (400)
--------- --------- --------- ---------
Comprehensive income $20,547 $12,519 $34,343 $24,819
========= ========= ========= =========
2. Rental Properties, Net
Rental properties, net consist of the following (in thousands):
June 30, December 31,
2004 2003
----------- -----------
Land $161,269 $147,425
Buildings and improvements 935,512 854,152
Tenant and other improvements 129,374 122,280
----------- -----------
1,226,155 1,123,857
Less accumulated depreciation (157,662) (141,560)
----------- -----------
$1,068,493 $982,297
=========== ===========
During the second quarter of 2004, we acquired two properties aggregating approximately 90,000 square feet in the Eastern Massachusetts market for approximately $13.8 million. We assumed a $9.5 million loan secured by the properties and paid the balance in cash. We also acquired one property in the Suburban Washington D.C. market containing approximately 92,000 square feet for approximately $25.6 million in cash. We also acquired two properties aggregating approximately 35,000 square feet in the Seattle, Washington market for approximately $5.5 million in cash. Also during the second quarter of 2004, we completed the acquisition of one property in the San Francisco Bay market for approximately $25.3 million in 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):
June 30, December 31,
2004 2003
----------- -----------
Adjusted cost of available-for-sale
securities $ 2,854 $ 1,257
Gross unrealized gains 1,118 837
Gross unrealized losses (189) (13)
----------- -------------
Fair value of
available-for-sale securities $ 3,783 $ 2,081
=========== =============
Investments in privately-held entities as of June 30, 2004 and December 31, 2003, totaled $46,839,000 and $45,045,000, respectively. Of these totals, $45,918,000 and $42,331,000 are accounted for under the cost method. The remainder ($921,000 and $2,714,000 as of June 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 ("EITF") 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, 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 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, as amended, 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. As of June 30, 2004, borrowings outstanding on the unsecured line of credit carried a weighted average interest rate of 2.75%. The unsecured term loan expires in November 2008. As of June 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.76%.
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. Under these provisions, as of June 30, 2004, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $510 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 June 30, 2004 (dollars in thousands):
Effective
Notional at Interest Fair
Transaction Dates Effective Dates Amounts June 30, 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 $(882)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.855% June 30, 2005 (368)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.865% June 30, 2005 (371)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 (156)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.155% December 31, 2005 (171)
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
June 2004 June 30, 2005 $ 50,000 $ - 4.343% June 30, 2007 (271)
------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 89
December 2003 December 31, 2004 $ 50,000 $ - 3.000% December 30, 2005 57
December 2003 December 30, 2005 $ 50,000 $ - 4.150% December 29, 2006 (26)
December 2003 December 29, 2006 $ 50,000 $ - 5.090% October 31, 2008 (78)
April 2004 April 30, 2004 $ 50,000 $ 50,000 1.550% April 29, 2005 279
April 2004 April 29, 2005 $ 50,000 $ - 3.140% April 28, 2006 156
April 2004 April 28, 2006 $ 50,000 $ - 4.230% April 30, 2007 74
April 2004 April 30, 2007 $ 50,000 $ - 4.850% April 30, 2008 54
------------ --------
$ 100,000 $(1,288)
Total Interest Rate Swap Agreements in Effect ------------ ========
at June 30, 2004 $ 300,000
============
5. Stockholders' Equity
In June 2004, we elected to redeem all 1,543,500 outstanding shares of our 9.50% Series A cumulative redeemable preferred stock ("Series A preferred stock"). The redemption occurred in July 2004 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", the original cost of issuance of our Series A preferred stock has been recorded as a charge to net income available to common stockholders at the date we elected to redeem all shares. Therefore, during the second quarter of 2004, a charge of approximately $1,876,000 was recorded for costs related to the redemption of the Series A preferred stock. The preferred stock redemption liability on the balance sheet as of June 30, 2004 reflects the Series A preferred stock at its redemption amount excluding the portion relating to accrued dividends. Accrued dividends relating to the Series A preferred stock as of June 30, 2004 have been included in dividends payable in the accompanying balance sheet.
In June 2004, we declared a cash dividend on our common stock aggregating
$12,020,000
($ 0.62 per share) for the calendar quarter ended June 30, 2004. In June 2004,
we also declared a cash dividend on our Series B preferred stock aggregating
$1,308,000 ($0.56875 per share) for the period April 15, 2004 through July 14,
2004. We paid these dividends on July 15, 2004.
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 $124.2 million (after deducting underwriters' discounts and other offering costs). The proceeds were used to redeem our 9.50% 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.
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 ofStatement 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 Six Months Ended
June 30, June 30,
----------------- -----------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income available to common
stockholders, as reported $9,727 $10,324 $22,842 $20,248
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 (187) (333) (377) (668)
-------- -------- -------- --------
Pro forma net income available to
common stockholders $9,540 $9,991 $22,465 $19,580
======== ======== ======== ========
Earnings per share:
Basic - as reported $0.50 $0.54 $1.19 $1.07
======== ======== ======== ========
Basic - pro forma $0.49 $0.53 $1.17 $1.03
======== ======== ======== ========
Diluted - as reported $0.50 $0.54 $1.17 $1.06
======== ======== ======== ========
Diluted - pro forma $0.49 $0.52 $1.15 $1.02
======== ======== ======== ========
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 Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income available to common
stockholders $9,727 $10,324 $22,842 $20,248
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding - basic 19,284,631 18,952,445 19,245,792 18,924,290
Add: dilutive effect of
stock options and stock grants 324,223 238,027 349,545 236,105
----------- ----------- ----------- -----------
Weighted average shares of
common stock outstanding - diluted 19,608,854 19,190,472 19,595,337 19,160,395
=========== =========== =========== ===========
Net income per common share:
- Basic $0.50 $0.54 $1.19 $1.07
=========== =========== =========== ===========
- Diluted $0.50 $0.54 $1.17 $1.06
=========== =========== =========== ===========
Common dividends declared per share $0.62 $0.53 $1.22 $1.06
=========== =========== =========== ===========
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 three properties we sold during 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 first quarter of 2003, we sold one property located in the San Francisco Bay market which could not be redeveloped pursuant to our original strategic objectives and that had been designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $6.8 million. In connection with this sale, we recorded a loss on sale of property of approximately $455,000 in 2003. 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 June 30, 2004.
The following is a summary of discontinued operations (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenue $ - $1,793 $14 $3,576
Operating expenses - 386 15 809
---------- ---------- ---------- ----------
Revenue less operating expenses - 1,407 (1) 2,767
Interest - 362 701
Depreciation - 82 - 169
Income before gain/loss on ---------- ---------- ---------- ----------
sales of property - 963 (1) 1,897
Gain (loss) on sales of property - - 1,627 (455)
Income from discontinued ---------- ---------- ---------- ----------
operations $ - $963 $1,626 $1,442
========== ========== ========== ==========
June 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 operation $ - $3,601
========== ==========
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 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, "we", "our", "ours" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing a combination of office and laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science properties".
As of June 30, 2004, our portfolio consisted of 94 properties containing approximately 6.0 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 94% 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 property acquisition, development and redevelopment activities.
Results of Operations
Comparison of Three Months Ended June 30, 2004 ("Second Quarter 2004") to Three Months Ended June 30, 2003 ("Second Quarter 2003")
Rental revenue increased by $3.2 million, or 10%, to $34.5 million for Second Quarter 2004 compared to $31.2 million for Second Quarter 2003. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after April 1, 2003. Rental revenue from the properties operating continuously since April 1, 2003 (the "Second Quarter Same Properties") increased by $461,000, or 1.7%, primarily due to increases in rental rates. The occupancy level of the Second Quarter Same Properties as of June 30, 2004 was 96.4%, compared to 96.2% as of June 30, 2003.
Tenant recoveries increased by $596,000, or 8%, to $8.4 million for Second Quarter 2004 compared to $7.8 million for Second Quarter 2003. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after April 1, 2003. Tenant recoveries for the Second Quarter Same Properties were virtually unchanged, decreasing by $30,000, or 0.4%.
Other income increased by $230,000, or 61%, to $608,000 for Second Quarter 2004 compared to $378,000 for Second Quarter 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $672,000, or 8%, to $8.8 million for Second Quarter 2004 compared to $8.1 million for Second Quarter 2003. The increase resulted primarily from rental operating expenses from properties acquired, placed in service or redeveloped after April 1, 2003. Operating expenses for the Second Quarter Same Properties decreased by $41,000, or 1%, primarily due to a decrease in property taxes from successful appeals at certain properties and a decrease in repairs and maintenance expenses, offset by an increase in utility expenses, substantially all of which are recoverable from our tenants through tenant recoveries.
General and administrative expenses increased by $270,000, or 8%, to $3.8 million for Second Quarter 2004 compared to $3.5 million for Second Quarter 2003 primarily due to general increases in administrative costs, primarily payroll and related expenses.
Interest expense increased by $414,000, or 6%, to $6.9 million for Second Quarter 2004 compared to $6.5 million for Second Quarter 2003. The increase resulted from an increase in indebtedness on our secured notes payable offset by principal reductions on our unsecured line of credit and a reduction in the floating interest rates on our unsecured line of credit and unsecured term loan. The weighted average interest rate on borrowings outstanding on our unsecured line of credit and unsecured term loan (excluding the effect of swap agreements) decreased from 2.84% as of June 30, 2003 to 2.75% as of June 30, 2004.
Depreciation and amortization increased by $410,000, or 4%, to $10.1 million for Second Quarter 2004 compared to $9.7 million for Second Quarter 2003. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after April 1, 2003.
Income from discontinued operations, net was none and $963,000 for Second Quarter 2004 and Second Quarter 2003, respectively. It reflects the results of operations of three properties we sold during 2003 and one property we sold during the first quarter of 2004.
As a result of the foregoing, net income was $13.9 million for Second Quarter 2004 compared to $12.5 million for Second Quarter 2003.
Comparison of Six Months Ended June 30, 2004 ("Six Months 2004") to Six Months Ended June 30, 2003 ("Six Months 2003")
Rental revenue increased by $5.8 million, or 9%, to $68.3 million for Six Months 2004 compared to $62.5 million for Six 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 "Six Months Same Properties") increased by $1.2 million, or 2.3%, primarily due to increases in rental rates. The occupancy level of the Six Months Same Properties as of June 30, 2004 was 96.2%, compared to 96.3% as of June 30, 2003.
Tenant recoveries increased by $431,000, or 3%, to $16.7 million for Six Months 2004 compared to $16.3 million for Six Months 2003. The increase resulted primarily from properties acquired, placed in service or redeveloped after January 1, 2003. Tenant recoveries for the Six Months Same Properties decreased by $530,000, or 3.8%, primarily due to decreases in certain recoverable operating expenses during Six Months 2004.
Other income increased by $579,000, or 81%, to $1.3 million for Six Months 2004 compared to $716,000 for Six Months 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $831,000, or 5%, to $17.5 million for Six Months 2004 compared to $16.7 million for Six 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 Six Months Same Properties decreased by $278,000, or 2.0%, primarily due to a decrease in property taxes from successful appeals at certain properties and a decrease in repairs and maintenance expenses offset by an increase in utility expenses, substantially all of which are recoverable from our tenants through tenant recoveries.
General and administrative expenses increased by $357,000, or 5%, to $7.5 million for Six Months 2004 compared to $7.1 million for Six Months 2003 primarily due to general increases in administrative costs, primarily payroll and related expenses.
Interest expense increased by $252,000, or 2%, to $13.6 million for Six Months 2004 compared to $13.4 million for Six Months 2003. The increase resulted primarily from an increase in indebtedness on our secured notes payable offset by principal reductions on our unsecured line of credit and unsecured term loan and a reduction in the floating interest rates on our unsecured line of credit and unsecured term loan. The weighted average interest rate on borrowings outstanding on our unsecured line of credit and unsecured term loan (excluding the effect of swap agreements) decreased from 2.84% as of June 30, 2003 to 2.75% as of June 30, 2004.
Depreciation and amortization increased by $1.0 million, or 5%, to $20.1 million for Six Months 2004 compared to $19.1 million for Six 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 $1.4 million for Six Months 2004 and Six Months 2003, respectively. It reflects the results of operations of three properties we sold during 2003 and one property we sold during the first quarter of 2004.
As a result of the foregoing, net income was $29.2 million for Six Months 2004 compared to $24.7 million for Six Months 2003.
Liquidity and Capital Resources
Cash flows
Net cash provided by operating activities for Six Months 2004 decreased by $5.0 million to $34.9 million for Six Months 2004 compared to $39.9 million for Six Months 2003. The decrease resulted primarily from an increase in other assets.
Net cash used in investing activities increased by $22.6 million to $103.9 million for Six Months 2004 compared to $81.3 million for Six Months 2003. This increase was primarily due to the higher level of property acquisitions for Six Months 2004 compared to Six Months 2003.
Net cash provided by financing activities increased by $25.5 million to $67.0 million for Six Months 2004 compared to $41.5 million for Six Months 2003. Cash provided by financing activities for Six Months 2004 primarily consisted of net proceeds from our preferred stock offering, offset by principal reductions to our unsecured line of credit and distributions to stockholders.
Contractual obligations and commitments
Contractual obligations as of June 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) $ 360,296 $ 3,057 $ 55,199 $ 54,556 $ 247,484
Ground lease obligations 64,588 834 3,529 3,631 56,594
Other obligations 502 260 242 - -
------------- -------- --------- --------- ----------
Total $ 425,386 $ 4,151 $ 58,970 $ 58,187 $ 304,078
============= ======== ========= ========= ==========
- Excludes unamortized premium of $190,000 as of June 30, 2004.
Secured notes payable as of June 30, 2004 include 17 notes secured by 44 properties.
Ground lease obligations as of June 30, 2004 include leases at six of our properties and one land development parcel. These lease obligations have remaining lease terms of 29 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 $11.8 million.
As of June 30, 2004, we were also committed to fund approximately $15.5 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $20.0 million for certain investments.
Tenant security deposits and other restricted cash
Tenant security deposits and other restricted cash as of June 30, 2004 consist of the following (in thousands):
Amount
---------
Funds held in trust under the terms of certain
secured notes payable $10,857
Security deposit funds based on the terms of certain
lease agreements 2,035
Other funds held in escrow 367
---------
$13,259
=========
Secured debt
Secured debt as of June 30, 2004 consists of the following (dollars in thousands):
Balance at Stated
June 30, Interest
Location of Collateral 2004 Rates Maturity Dates
- ------------------------------------------ ------------ ------------ --------------
San Francisco, CA (two properties) $22,370 LIBOR + 1.70% January 2005 (1)
Worcester, MA (2) 9,444 8.75% January 2006
Durham, NC (two properties) 11,796 8.68% December 2006
Gaithersburg, MA (three properties) 9,644 8.25% August 2007
Chantilly, VA and Seattle, WA 34,180 7.22% May 2008
San Diego, CA (four properties) 39,680 6.95% July 2009
Worcester, MA and San Diego, CA 18,320 8.71% January 2010
Worcester, MA (two properties) 9,496 5.35% September 2010
Gaithersburg, MD (two properties) 24,023 8.33% November 2010
San Diego, CA (six properties) 23,526 7.75% July 2011
Gaithersburg, MD (three properties) 27,648 7.40% January 2012
Alameda, CA (three properties) and San Diego, CA 33,261 6.21% March 2013
Rockville, MD (two properties) and Beltsville, MD 29,736 6.36% September 2013
Alameda, CA 1,412 7.165% January 2014
Charlestown, MA, Lexington, MA, Montvale, NJ and
Plymouth Meeting, PA 37,870 5.82% April 2016
Seattle, WA (two properties) 16,898 7.75% June 2016
San Diego, CA 11,182 7.50% August 2021
------------
$360,486
============
_________
- The loan may be extended, at our option, for an additional year.
- The balance shown includes an unamortized premium of $190,000. 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 June 30, 2004 (in thousands):
Weighted
Average
Year Amount Interest Rate
---------------------- ----------- -----------
2004 $3,057 6.87%
2005 28,863 (1) 7.13%(1)
2006 26,336 7.12%(1)
2007 15,891 7.06%
2008 38,665 7.02%
Thereafter 247,484 7.01%
----------- -----------
Subtotal 360,296 7.03%
Unamortized Premium 190 ===========
-----------
Total $360,486
===========
(1) Of this amount, $22,370,000 represents the outstanding balance on a loan which has a maturity date of 2005 and currently carries interest at 2.92% per annum, and may be extended for an additional year. If we extend the maturity date of this loan to 2006, the weighted average interest rates for 2005 and 2006 would be 6.87% and 7.12%, respectively.
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, as amended, 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. As of June 30, 2004, borrowings outstanding on the unsecured line of credit carried a weighted average interest rate of 2.75%. The unsecured term loan expires in November 2008. As of June 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.76%.
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. Under these provisions, as of June 30, 2004, aggregate borrowings under our unsecured line of credit and unsecured term loan were limited to $510 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 June 30, 2004 (dollars in thousands):
Effective
Notional at Interest Fair
Transaction Dates Effective Dates Amounts June 30, 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 $ (882)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.855% June 30, 2005 (368)
July 2002 January 1, 2003 $ 25,000 $ 25,000 3.865% June 30, 2005 (371)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
December 2002 January 2, 2003 $ 25,000 $ 25,000 3.285% June 30, 2006 (147)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.115% December 31, 2005 (156)
November 2002 June 1, 2003 $ 25,000 $ 25,000 3.155% December 31, 2005 (171)
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
March 2004 December 31, 2004 $ 25,000 $ - 2.956% December 31, 2006 310
June 2004 June 30, 2005 $ 50,000 $ - 4.343% June 30, 2007 (271)
------------
$ 200,000
Hedges for Unsecured Term Loan
December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 89
December 2003 December 31, 2004 $ 50,000 $ - 3.000% December 30, 2005 57
December 2003 December 30, 2005 $ 50,000 $ - 4.150% December 29, 2006 (26)
December 2003 December 29, 2006 $ 50,000 $ - 5.090% October 31, 2008 (78)
April 2004 April 30, 2004 $ 50,000 $ 50,000 1.550% April 29, 2005 279
April 2004 April 29, 2005 $ 50,000 $ - 3.140% April 28, 2006 156
April 2004 April 28, 2006 $ 50,000 $ - 4.230% April 30, 2007 74
April 2004 April 30, 2007 $ 50,000 $ - 4.850% April 30, 2008 54
------------ --------
$ 100,000 $(1,288)
Total Interest Rate Swap Agreements in Effect ------------ ========
at June 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 six months ended June 30, 2004 (dollars in thousands):
|
Property-related capital expenditures (1) |
$ 1,481 |
|
Leasing costs (2) |
$ 493 |
|
Property-related redevelopment costs (3) |
$ 35,549 |
|
Property-related development costs |
$ 11,139 |
_______
- Property-related capital expenditures include all capital expenditures except capital expenditures that are recoverable from tenants, revenue-enhancing capital expenditures and costs related to the redevelopment of a property. Capital expenditures fluctuate in any given period due to the nature, extent or timing of improvements required and the extent to which they are recoverable from tenants. Approximately 90% 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 $1,286,000.
Inflation
Approximately 88% 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 7% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 94% 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 flow from real estate operations are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the 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 for REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Cash Flows" for information regarding these measures of cash flow.) We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the three months and six months ended June 30, 2004 and 2003 and a reconciliation of GAAP net income to FFO (in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income $13,887 $12,549 $29,227 $24,698
Add
Depreciation and amortization (1) 10,088 9,760 20,069 19,221
Subtract
Dividends on preferred stock (2,284) (2,225) (4,509) (4,450)
Preferred stock redemption charge (2) (1,876) - (1,876) -
(Gain) loss on sales of property (3) - - (1,627) 455
----------- ----------- ----------- -----------
Funds from operations (FFO) $19,815 $20,084 $41,284 $39,924
=========== =========== =========== ===========
- 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.
- (Gain) loss on sales of property consist 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 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 June 30, 2004 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentage
----------- ----------- ---------- -----------
Markets
California - Pasadena 1 31,343 $525 63.3% (1)
California - San Diego 20 920,273 25,873 95.2%
California - San Francisco Bay 10 642,578 19,918 100.0%
Eastern Massachusetts 12 730,633 21,934 88.0%
New Jersey/Suburban Philadelphia 4 267,319 5,424 100.0%
Southeast 5 259,414 3,860 77.8% (1)
Suburban Washington D.C. 18 1,473,261 25,638 93.4%
Washington - Seattle 7 593,269 21,693 100.0%
----------- ----------- ---------- -----------
Total 77 4,918,090 $124,865 93.9% (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 June 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 52 (1) 272,539 5.4% $25.98
2005 31 327,707 6.5% $27.48
2006 41 870,651 17.2% $24.46
2007 17 314,735 6.2% $23.64
2008 15 346,492 6.8% $26.92
Thereafter 60 2,932,946 57.9% $28.16
_________
(1) Includes 22 month-to-month leases for approximately 63,000 square feet.
The following table is a summary of our lease activity for the three months ended June 30, 2004 computed on a Cash Basis and on a GAAP Basis:
Rental TI's/Lease Average
Number Square Expiring New Rate Commissions Lease
of Leases Footage Rates Rates Changes Per Foot Terms
--------- --------- --------- --------- -------- ------------ ---------
Leasing Activity
Lease Expirations
Cash Basis 37 248,360 $23.67 -- -- -- --
GAAP Basis 37 248,360 $25.27 -- -- -- --
Renewed / Releasable Space Leased
Cash Basis 13 159,461 $23.54 $26.63 13.1% $1.02 5.9 Years
GAAP Basis 13 159,461 $26.27 $28.95 10.2% $1.02 5.9 Years
Month-to-Month Leases In Effect
Cash Basis 22 62,967 $22.63 $22.65 0.1% -- --
GAAP Basis 22 62,967 $22.63 $22.65 0.1% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 9 87,066 -- $28.48 -- $6.98 10.3 Years
GAAP Basis 9 87,066 -- $34.28 -- $6.98 10.3 Years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 22 246,527 -- $27.28 -- $3.12 7.5 Years
GAAP Basis 22 246,527 -- $30.83 -- $3.12 7.5 Years
Including Month-to-Month Leases
Cash Basis 44 309,494 -- $26.34 -- -- --
GAAP Basis 44 309,494 -- $29.17 -- -- --
The following table is a summary of our lease activity for the six months ended June 30, 2004 computed on a Cash Basis and on a GAAP Basis:
Rental TI's/Lease Average
Number Square Expiring New Rate Commission Lease
of Leases Footage Rates Rates Changes Per Foot Terms
-------- -------- -------- -------- -------- --------- ---------
Leasing Activity
Lease Expirations
Cash Basis 56 681,258 $21.86 -- -- -- --
GAAP Basis 56 681,258 $22.80 -- -- -- --
Renewed / Releasable Space Leased
Cash Basis 23 315,155 $22.54 $24.00 6.5% $2.70 5.4 Years
GAAP Basis 23 315,155 $23.88 $26.16 9.5% $2.70 5.4 Years
Month-to-Month Leases In Effect
Cash Basis 22 62,967 $22.53 $22.65 0.5% -- --
GAAP Basis 22 62,967 $22.50 $22.65 0.7% -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 18 220,005 -- $23.10 -- $19.42 9.6 Years
GAAP Basis 18 220,005 -- $30.92 -- $19.42 9.6 Years
Leasing Activity Summary
Excluding Month-to-Month Leases
Cash Basis 41 535,160 -- $23.63 -- $9.57 7.1 Years
GAAP Basis 41 535,160 -- $28.12 -- $9.57 7.1 Years
Including Month-to-Month Leases
Cash Basis 63 598,127 -- $23.53 -- -- --
GAAP Basis 63 598,127 -- $27.54 -- -- --
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 June 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 $240,000. 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 June 30, 2004, would increase annual future earnings and cash flows by approximately $240,000. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $25.2 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $26.4 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 June 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 June 30, 2004 would decrease their fair value by approximately $5.1 million.
Item 4. CONTROLS AND PROCEDURES
As of June 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 June 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to June 30, 2004.
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
Updating our previous disclosure, Peter J. Nelson will be stepping down from the position of Chief Financial Officer and Treasurer effective after August 10, 2004. Dean 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 will be continuing as Senior Vice President - Operations through October 20, 2004, and will be terminating his full-time employment as of such date. 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.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.3* Bylaws (amended as of May 12, 2004) (filed as an exhibit to Alexandria's current report on Form 8-K filed with the Commission on June 21, 2004).
10.1 First Amendment to Fourth Amended and Restated Revolving Loan Agreement, dated as of June 30, 2004, among Alexandria Real Estate Equities, Inc., Alexandria Real Estate Equities, L.P., ARE-QRS Corp., ARE Acquisitions, LLC, the other borrowers then and thereafter a party thereto, the banks therein named, the other banks which may become parties thereto, Fleet National Bank, as Administrative Agent, Fleet Securities, Inc. and JP Morgan Securities, Inc., as Co-Lead Arrangers, JP Morgan Securities, Inc. and Societe Generale, as Co- Syndication Agents, CommerzBank AG, New York and Grand Cayman Branches, and KeyBank National Association, as Co-Documentation Agents and Eurohypo AG, New York Branch, as Senior Managing Agent.
10.2 First Amendment to Term Loan Agreement, dated as of June 30, 2004, among Alexandria, the Operating Partnership, ARE-QRS Corp., ARE Acquisitions, LLC, the Other Borrowers Then or Thereafter a Party Thereto, the Banks therein named, the Other Banks Which May Become Parties Thereto, Fleet National Bank, as Managing Agent, and Fleet Securities, Inc., as Arranger.
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.
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.
____________
(*) Incorporated by reference
(b) Reports on Form 8-K
We filed a current report on Form 8-K on April 28, 2004, in which we provided certain additional information regarding our fees billed by Ernst & Young LLP for 2003.
We filed a current report on Form 8-K on May 3, 2004, pursuant to which we furnished to the Securities and Exchange Commission our earnings release dated May 3, 2004, regarding our quarter ended March 31, 2004 financial results.
We filed a current report on Form 8-Kon June 2, 2004, in which we reported our intention to redeem all of our outstanding shares of 9.50% Series A Cumulative Redeemable Preferred Stock.
We filed a current report on Form 8-K on June 21, 2004, in which we reported our entering of an underwriting agreement for the sale of 5,185,500 shares of our 8.375% Series C Cumulative Redeemable Preferred Stock.
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 August 9, 2004.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
/s/ Joel S. Marcus
Joel S. Marcus
Chief Executive Officer
(Principal Executive Officer)
/s/ Peter J. Nelson
Peter J. Nelson
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
EXHIBIT 10.1
FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED
REVOLVING LOAN AGREEMENT
THIS FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED REVOLVING LOAN AGREEMENT (this "Amendment") made this 30th day of June, 2004, by and among ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation ("Parent"), ALEXANDRIA REAL ESTATE EQUITIES, L.P., a Delaware limited partnership ("Operating Partnership"), ARE-QRS CORP., a Maryland corporation ("QRS"), ARE ACQUISITIONS, LLC, a Delaware limited liability company ("ARE"), the other Borrowers whose names are set forth on the signature pages of this Amendment (collectively, with Parent, Operating Partnership, QRS and ARE, the "Borrowers", all on a joint and several basis), each lender whose name is set forth on the signature pages of this Amendment as a "Bank" (collectively, the "Banks" and individually, a "Bank") and FLEET NATIONAL BANK, as Administrative Agent for the Banks (the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, Borrowers, Administrative Agent and the Banks are parties to that certain Fourth Amended and Restated Revolving Loan Agreement dated as of November 3, 2003 (the "Loan Agreement"); and
WHEREAS, the parties hereto desire to modify and amend certain terms and provisions of the Loan Agreement; and
WHEREAS, as a condition to such modifications, the parties hereto hereby agree to execute this Amendment;
NOW, THEREFORE, for and in consideration of the sum of TEN and NO/100 DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows:
- Definitions. All the terms used herein which are not otherwise defined herein shall have the meanings set forth in the Loan Agreement.
- Modification of the Loan Agreement. Borrowers, the Banks and Administrative Agent do hereby modify and amend the Loan Agreement by deleting in its entirety the definition of the term "Capitalization Rate" appearing in §1.1 of the Loan Agreement, and inserting in lieu thereof the following:
- References to Loan Agreement. All references in the Loan Documents to the Loan Agreement shall be deemed a reference to the Loan Agreement, as modified and amended herein.
- Representations. Borrowers represent and warrant to Administrative Agent and the Banks as follows:
- Each of the Borrowers has all requisite power and authority to execute and deliver this Amendment and to perform its obligations hereunder.
- The execution, delivery and performance by each of Borrowers of this Amendment have been duly authorized by all necessary corporate, partnership or limited liability company action, as applicable, and do not and will not:
- Require any consent or approval not heretofore obtained of any partner, director, stockholder, security holder or creditor of Borrowers;
- Violate or conflict with any provision of Borrowers' charter, articles of incorporation, bylaws or other organizational agreements, as applicable;
- Result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any Property now owned or leased or hereafter acquired by Borrowers;
- Violate any Requirement of Law applicable to Borrowers; or
- Result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other Contractual Obligation to which Borrowers are a party or by which Borrowers or any of their Property is bound or affected.
- Except as previously obtained or made, no authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, any Governmental Agency is or will be required to authorize or permit under applicable Laws the execution, delivery and performance by any of Borrowers of this Amendment.
- This Amendment will, when executed and delivered by Borrowers, constitute the legal, valid and binding obligation of Borrowers, enforceable against Borrowers in accordance with its terms, except as enforcement may be limited by Debtor Relief Laws or equitable principles relating to the granting of specific performance and other equitable remedies as a matter of judicial discretion.
- No Default. By execution hereof, each of the Borrowers certifies that such Persons are and will be in compliance with all covenants under the Loan Documents after the execution and delivery of this Amendment, and that no Default or Event of Default has occurred and is continuing.
- Waiver of Claims. Each of the Borrowers acknowledges, represents and agrees that none of such Persons has any defenses, setoffs, claims, counterclaims or causes of action of any kind or nature whatsoever with respect to the Loan Documents, the administration or funding of the Loan or with respect to any acts or omissions of Administrative Agent or any Bank, or any past or present officers, Administrative Agents or employees of Administrative Agent or any Bank, and each of such Persons does hereby expressly waive, release and relinquish any and all such defenses, setoffs, claims, counterclaims and causes of action, if any.
- Ratification. Except as hereinabove set forth, all terms, covenants and provisions of the Loan Agreement remain unaltered and in full force and effect, and the parties hereto do hereby expressly ratify and confirm the Loan Documents and the Loan Agreement as modified and amended herein. Nothing in this Amendment shall be deemed or construed to constitute, and there has not otherwise occurred, a novation, cancellation, satisfaction, release, waiver, extinguishment or substitution of the indebtedness evidenced by the Notes or the other obligations of Borrowers under the Loan Documents.
- Amendment as Loan Document. This Amendment shall constitute a Loan Document.
- Effective Date. This Amendment shall be deemed effective and in full force and effect as of the date hereof upon (i) the execution and delivery of this Amendment by Borrowers, Administrative Agent and the Requisite Banks and (ii) the Administrative Agent confirming the satisfaction of all requirements for effectiveness of that certain First Amendment to Term Loan Agreement dated as of even date herewith among Borrowers, Fleet individually and as Administrative Agent and the other lenders which are signatories thereto, other than the effectiveness of this Amendment.
- Counterparts. This Amendment may be executed in any number of counterparts which shall together constitute but one and the same agreement.
- Miscellaneous. This Amendment shall be construed and enforced in accordance with the laws of the State of California. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors, successors-in-title and assigns as provided in the Loan Agreement.
'Capitalization Rate' means nine and one quarter percent (9.25%). Any change to the Capitalization Rate shall be subject to the prior written approval of the Requisite Banks.
[Signatures on Following Pages]
IN WITNESS WHEREOF, the parties hereto have hereto set their hands and affixed their seals as of the day and year first above written.
BORROWERS:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
a Delaware limited partnership
By: ARE-QRS Corp., a Maryland corporation,
general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-QRS CORP., a Maryland corporation
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE ACQUISITIONS, LLC
By: ARE-QRS Corp., a Maryland corporation,
managing member
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-215 COLLEGE ROAD, LLC
ARE-819/863 MITTEN ROAD, LLC
ARE-150/154 TECHNOLOGY PARKWAY, LLC
ARE-19 FIRSTFIELD ROAD, LLC
ARE-10150 OLD COLUMBIA, LLC
ARE-170 WILLIAMS DRIVE, LLC
ARE-3005 FIRST AVENUE, LLC
ARE-5 TRIANGLE DRIVE, LLC
ARE-50 WEST WATKINS MILL, LLC
ARE-279 PRINCETON ROAD, LLC
ARE-3770 TANSY STREET, LLC
ARE-10505 ROSELLE STREET, LLC
ARE-9363/9373/9393 TOWNE CENTRE, LLC
ARE-2425/2400/2450 GARCIA BAYSHORE, LLC
ARE-108 ALEXANDER ROAD, LLC
ARE-480 ARSENAL STREET, LLC
ARE-500 ARSENAL STREET, LLC
ARE-7030 KIT CREEK, LLC
ARE-6146 NANCY RIDGE, LLC
ARE-901/951 GATEWAY BOULEVARD LLC
ARE-770/784/790 MEMORIAL DRIVE, LLC
ARE-1201/1208 EASTLAKE AVENUE, LLC
ARE-1208 EASTLAKE AVENUE,
ARE-EASTLAKE AVENUE NO. 3, LLC
ARE-HARBOR BAY NO. 4, LLC
ARE-NANCY RIDGE NO. 3, LLC
ARE-PORTER DRIVE, LLC
ARE-2625/2627/2631 HANOVER, LLC
ARE-129/153/161 HILL STREET, LLC, Delaware limited liability
companies
By: Alexandria Real Estate Equities, L.P., a Delaware
limited partnership, managing member
By: ARE-QRS Corp., a Maryland corporation,
general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-5 RESEARCH PLACE, LLC, a Maryland limited liability company
By: Alexandria Real Estate Equities, L.P., a Delaware limited partnership, its managing member
By: ARE-QRS Corp., a Maryland
corporation, general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-280 POND STREET, LLC
ARE-60 WESTVIEW, LLC
ARE-381 PLANTATION STREET, LLC, Delaware limited liability companies
By: AREE-Holdings, L.P., a Delaware limited
partnership, managing member
By: ARE-GP Holdings QRS Corp., a Delaware corporation, general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-702 ELECTRONIC DRIVE, L.P., a Delaware limited partnership
By: AREE-Holdings, L.P., a Delaware limited
partnership, general partner
By: ARE-GP Holdings QRS Corp., a Delaware corporation, general partner
By:/s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-10933 NORTH TORREY PINES, LLC
ARE-11099 NORTH TORREY PINES, LLC
By: Alexandria Real Estate Equities, Inc., a Maryland corporation, their sole member
By:/s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-Maryland No. 7 Corp., a Maryland Corporation
/s/ Peter J. Nelson
Peter J. Nelson, CFO
ADMINISTRATIVE AGENT AND
BANKS:
FLEET NATIONAL BANK, a Bank of America company, individually and as Administrative Agent
By: /s/ Eric Nesset
Name: Eric Nesset
Title: Vice President
Address:
c/o Bank of America
555 California Street, 12th Floor
San Francisco, CA 94104
Attn: Mr. Frank H. Stumpf
[Signatures Continue on Following Pages]
JPMORGAN CHASE BANK
By: /s/ Susan M. Tate
Name: Susan M. Tate
Title: Vice President
Address:
JPMorgan Chase Bank
707 Travis Street
6th Floor North
Houston, Texas 75201
Attn: Ms. Susan Tate
[Signatures Continue on Following Pages]
SOCIETE GENERALE
By: /s/ Scott Gosslee
Name: Scott Gosslee
Title: Director
Address:
Societe Generale
2001 Ross Avenue
Suite 4900
Dallas, Texas 75201
Attn: Mr. Scott Gosslee
[Signatures Continue on Following Pages]
COMMERZBANK AG , NEW YORK AND GRAND CAYMAN BRANCHES
By: /s/ Douglas Traynor & Christian Berry
Name: Douglas Traynor & Christian Berry
Title: Senior Vice President and Vice President
Address:
Commerzbank AG, New York and
Grand Cayman Branches
2 World Financial Center
New York, New York 10281
Attn: Mr. Ralph Marra
[Signatures Continue on Following Pages]
KEYBANK NATIONAL ASSOCIATION
By: /s/ Dan Stegemoeller
Name: Dan Stegemoeller
Title: Vice President
Address:
KeyBank National Association
1675 Broadway
Suite 400
Denver, Colorado 80202
Attn: Mr. Scott Childs
[Signatures Continue on Following Pages]
SUNTRUST BANK
By: Blake K. Thompson
Name: Blake K. Thompson
Title: Vice President
Address:
SunTrust Bank
8245 Boone Boulevard
Suite 820
Vienna, Virgina 22182
Attn: Mr. Blake Thompson
[Signatures Continue on Following Pages]
CITIZENS BANK OF MASSACHUSETTS
By: /s/ Craig E. Schermerhorn
Name: Craig E. Schermerhorn
Title: Vice President
Address:
Citizens Bank of Massachusetts
1 Citizens Plaza RC 0440
Providence, Rhode Island 02903
Attn: Mr. Craig Schermerhorn
[Signatures Continue on Following Pages]
SOVEREIGN BANK
By: /s/ T. Gregory Donohue
Name: T. Gregory Donohue
Title:Senior Vice President
Address:
Sovereign Bank
75 State Street
MA 1 SST 04 11
Boston, Massachusetts 02109
Attn: Mr. T. Gregory Donohue
[Signatures Continue on Following Pages]
CHEVY CHASE BANK, F.S.B.
By: /s/ Frederick H. Denecke
Name: Frederick H. Denecke
Title: Vice President
Address:
Chevy Chase Bank, F.S.B.
7501 Wisconsin Avenue
12th Floor
Bethesda, Maryland 20814
Attn: Mr. Frederick H. Denecke
[Signatures Continue on Following Pages]
COMERICA BANK
By: /s/ James Graycheck
Name: James Graycheck
Title: Assistant Vice President
Address:
Comerica Bank
500 Woodward Avenue
MC: 3256
Detroit, Michigan 48226
Attn: Mr. Case L. Ostrander
[Signatures Continue on Following Pages]
CEDARS BANK
By: /s/ Steven K. Clark
Name: Steven K. Clark
Title: Vice President
Address:
Cedars Bank
444 S. Flower Street
14th Floor
Los Angeles, California
Attn: Mr. Steven Clark
[Signatures Continue on Following Pages]
COMPASS BANK
By: /s/ Johanna Duke Paley
Name: Johanna Duke Paley
Title: Senior Vice President
Address:
Compass Bank
15 South 20th Street
Suite 1501
Birmingham, Alabama 35233
Attn: Ms. Johanna Paley
[Signatures Continue on Following Pages]
BANK ONE, NATIONAL ASSOCIATION
By: /s/ Angela L. Kleiman
Name: Angela L. Kleiman
Title: Director
Address:
Bank One, National Association
1 Bank One Plaza
Suite 111-0315
Chicago, Illinois 60670
Attn: Ms. Angela L. Kleiman
EXHIBIT 10.2
FIRST AMENDMENT TO TERM LOAN AGREEMENT
THIS FIRST AMENDMENT TO TERM LOAN AGREEMENT (this "Amendment") made this 30th day of June, 2004, by and among ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation ("Parent"), ALEXANDRIA REAL ESTATE EQUITIES, L.P., a Delaware limited partnership ("Operating Partnership"), ARE-QRS CORP., a Maryland corporation ("QRS"), ARE ACQUISITIONS, LLC, a Delaware limited liability company ("ARE"), the other Borrowers whose names are set forth on the signature pages of this Amendment (collectively, with Parent, Operating Partnership, QRS and ARE, the "Borrowers", all on a joint and several basis), each lender whose name is set forth on the signature pages of this Amendment as "Banks" (collectively, the "Banks" and individually, a "Bank") and FLEET NATIONAL BANK, as Administrative Agent for the Banks (the "Administrative Agent").
W I T N E S S E T H:
WHEREAS, Borrowers, Administrative Agent and the Banks are parties to that certain Term Loan Agreement dated as of November 3, 2003 (the "Loan Agreement"); and
WHEREAS, the parties hereto desire to modify and amend certain terms and provisions of the Loan Agreement; and
WHEREAS, as a condition to such modifications the parties hereto hereby agree to execute this Amendment; and
NOW, THEREFORE, for and in consideration of the sum of TEN and NO/100 DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows:
- Definitions. All the terms used herein which are not otherwise defined herein shall have the meanings set forth in the Loan Agreement.
- Modification of the Loan Agreement. Borrowers, the Banks and Administrative Agent do hereby modify and amend the Loan Agreement by deleting in its entirety the definition of the term "Capitalization Rate" appearing in § 1.1 of the Loan Agreement, and inserting in lieu thereof the following:
- References to Loan Agreement. All references in the Loan Documents to the Loan Agreement shall be deemed a reference to the Loan Agreement, as modified and amended herein.
- Representations. Borrowers represent and warrant to Administrative Agent and the Banks as follows:
- Each of the Borrowers has all requisite power and authority to execute and deliver this Amendment and to perform its obligations hereunder.
- The execution, delivery and performance by each of Borrowers of this Amendment have been duly authorized by all necessary corporate, partnership or limited liability company action, as applicable, and do not and will not:
- Require any consent or approval not heretofore obtained of any partner, director, stockholder, security holder or creditor of Borrowers;
- Violate or conflict with any provision of Borrowers' charter, articles of incorporation, bylaws or other organizational agreements, as applicable;
- Result in or require the creation or imposition of any Lien or Right of Others upon or with respect to any Property now owned or leased or hereafter acquired by Borrowers;
- Violate any Requirement of Law applicable to Borrowers; or
- Result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other Contractual Obligation to which Borrowers are a party or by which Borrowers or any of their Property is bound or affected.
- Except as previously obtained or made, no authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, any Governmental Agency is or will be required to authorize or permit under applicable Laws the execution, delivery and performance by any of Borrowers of this Amendment.
- This Amendment will, when executed and delivered by Borrowers, constitute the legal, valid and binding obligation of Borrowers, enforceable against Borrowers in accordance with its terms, except as enforcement may be limited by Debtor Relief Laws or equitable principles relating to the granting of specific performance and other equitable remedies as a matter of judicial discretion.
- No Default. By execution hereof, each of the Borrowers certifies that such Persons are and will be in compliance with all covenants under the Loan Documents after the execution and delivery of this Amendment, and that no Default or Event of Default has occurred and is continuing.
- Waiver of Claims. Each of the Borrowers acknowledges, represents and agrees that none of such Persons has any defenses, setoffs, claims, counterclaims or causes of action of any kind or nature whatsoever with respect to the Loan Documents, the administration or funding of the Loan or with respect to any acts or omissions of Administrative Agent or any Bank, or any past or present officers, Administrative Agents or employees of Administrative Agent or any Bank, and each of such Persons does hereby expressly waive, release and relinquish any and all such defenses, setoffs, claims, counterclaims and causes of action, if any.
- Ratification. Except as hereinabove set forth, all terms, covenants and provisions of the Loan Agreement remain unaltered and in full force and effect, and the parties hereto do hereby expressly ratify and confirm the Loan Documents and the Loan Agreement as modified and amended herein. Nothing in this Amendment shall be deemed or construed to constitute, and there has not otherwise occurred, a novation, cancellation, satisfaction, release, waiver, extinguishment or substitution of the indebtedness evidenced by the Notes or the other obligations of Borrowers under the Loan Documents.
- Amendment as Loan Document. This Amendment shall constitute a Loan Document.
- Effective Date. This Amendment shall be deemed effective and in full force and effect as of the date hereof upon (i) the execution and delivery of this Amendment by Borrowers, Administrative Agent and the Requisite Banks and (ii) the Administrative Agent confirming the satisfaction of all requirements for effectiveness of that certain First Amendment to Fourth Amended and Restated Revolving Loan Agreement dated as of even date herewith among Borrowers, Fleet individually and as Administrative Agent and the other lenders which are signatories thereto, other than the effectiveness of this Amendment.
- Counterparts. This Amendment may be executed in any number of counterparts which shall together constitute but one and the same agreement.
- Miscellaneous. This Amendment shall be construed and enforced in accordance with the laws of the State of California. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors, successors-in-title and assigns as provided in the Loan Agreement.
'Capitalization Rate' means nine and one quarter percent (9.25%). Any change to the Capitalization Rate shall be subject to the prior written approval of the Requisite Banks."
[Signatures on Following Pages]
IN WITNESS WHEREOF, the parties hereto have hereto set their hands and affixed their seals as of the day and year first above written.
BORROWERS:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ALEXANDRIA REAL ESTATE EQUITIES, L.P.,
a Delaware limited partnership
By: ARE-QRS Corp., a Maryland corporation,
general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-QRS CORP., a Maryland corporation
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE ACQUISITIONS, LLC
By: ARE-QRS Corp., a Maryland corporation,
managing member
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-215 COLLEGE ROAD, LLC
ARE-819/863 MITTEN ROAD, LLC
ARE-150/154 TECHNOLOGY PARKWAY, LLC
ARE-19 FIRSTFIELD ROAD, LLC
ARE-10150 OLD COLUMBIA, LLC
ARE-170 WILLIAMS DRIVE, LLC
ARE-3005 FIRST AVENUE, LLC
ARE-5 TRIANGLE DRIVE, LLC
ARE-50 WEST WATKINS MILL, LLC
ARE-279 PRINCETON ROAD, LLC
ARE-3770 TANSY STREET, LLC
ARE-10505 ROSELLE STREET, LLC
ARE-9363/9373/9393 TOWNE CENTRE, LLC
ARE-2425/2400/2450 GARCIA BAYSHORE, LLC
ARE-108 ALEXANDER ROAD, LLC
ARE-480 ARSENAL STREET, LLC
ARE-500 ARSENAL STREET, LLC
ARE-7030 KIT CREEK, LLC
ARE-6146 NANCY RIDGE, LLC
ARE-901/951 GATEWAY BOULEVARD LLC
ARE-770/784/790 MEMORIAL DRIVE, LLC
ARE-1201/1208 EASTLAKE AVENUE, LLC
ARE-1208 EASTLAKE AVENUE,
ARE-EASTLAKE AVENUE NO. 3, LLC
ARE-HARBOR BAY NO. 4, LLC
ARE-NANCY RIDGE NO. 3, LLC
ARE-PORTER DRIVE, LLC
ARE-2625/2627/2631 HANOVER, LLC
ARE-129/153/161 HILL STREET, LLC, Delaware limited liability
companies
By: Alexandria Real Estate Equities, L.P., a Delaware
limited partnership, managing member
By: ARE-QRS Corp., a Maryland corporation,
general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-5 RESEARCH PLACE, LLC, a Maryland limited liability company
By: Alexandria Real Estate Equities, L.P., a Delaware limited partnership, its managing member
By: ARE-QRS Corp., a Maryland
corporation, general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-280 POND STREET, LLC
ARE-60 WESTVIEW, LLC
ARE-381 PLANTATION STREET, LLC, Delaware limited liability companies
By: AREE-Holdings, L.P., a Delaware limited
partnership, managing member
By: ARE-GP Holdings QRS Corp., a Delaware corporation, general partner
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-702 ELECTRONIC DRIVE, L.P., a Delaware limited partnership
By: AREE-Holdings, L.P., a Delaware limited
partnership, general partner
By: ARE-GP Holdings QRS Corp., a Delaware corporation, general partner
By:/s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-10933 NORTH TORREY PINES, LLC
ARE-11099 NORTH TORREY PINES, LLC
By: Alexandria Real Estate Equities, Inc., a Maryland corporation, their sole member
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ARE-Maryland No. 7 Corp., a Maryland Corporation
By: /s/ Peter J. Nelson
Peter J. Nelson, CFO
ADMINISTRATIVE AGENT AND
BANKS:
FLEET NATIONAL BANK, a Bank of America company individually and as Administrative Agent
By: /s/ Eric Nesset
Name: Eric Nesset
Title: Vice President
Address:
c/o Bank of America
555 California Street,12th Floor
San Francisco, CA 94104
Attn: Mr. Frank H. Stumpf
[Signatures Continue on Following Pages]
JPMORGAN CHASE BANK
By: /s/ Susan M. Tate
Name: Susan M. Tate
Title: Vice President
Address:
JPMorgan Chase Bank
707 Travis Street
6th Floor North
Houston, Texas 75201
Attn: Ms. Susan Tate
[Signatures Continue on Following Pages]
SOCIETE GENERALE
By: /s/ Scott Gosslee
Name: Scott Gosslee
Title: Director
Address:
Societe Generale
2001 Ross Avenue
Suite 4900
Dallas, Texas 75201
Attn: Mr. Scott Gosslee
[Signatures Continue on Following Pages]
COMMERZBANK AG , NEW YORK AND GRAND CAYMAN BRANCHES
By: /s/ Douglas Traynor and Christian Berry
Name: Douglas Traynor and Christian Berry
Title: Senior Vice President and Vice President
Address:
Commerzbank AG, New York and
Grand Cayman Branches
2 World Financial Center
New York, New York 10281
Attn: Mr. Ralph Marra
[Signatures Continue on Following Pages]
KEYBANK NATIONAL ASSOCIATION
By: /s/ Dan Stegemoeller
Name: Dan Stegemoeller
Title: Vice President
Address:
KeyBank National Association
1675 Broadway
Suite 400
Denver, Colorado 80202
Attn: Mr. Scott Childs
[Signatures Continue on Following Page]
BANK ONE, NA
By: /s/ Angela L. Kleiman
Name: Angela L. Kleiman
Title: Director
Address:
Bank One, NA
1 Bank One Plaza
Suite 111-0315
Chicago, IL 60670
Attn: Ms. Angela L. Kleiman
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)
Six Months For the Year Ended December 31, (a)
Ended -----------------------------------------
6/30/04 2003 2002 (b) 2001 2000
----------- --------- --------- --------- ---------
Income From Continuing Operations:....... $27,601 $48,504 $38,271 $27,582 $23,437
Add Back:
Interest Expense....................... 13,635 26,416 24,984 27,666 24,307
----------- --------- --------- --------- ---------
Earnings Available for Fixed Charges $41,236 $74,920 $63,255 $55,248 $47,744
----------- --------- --------- --------- ---------
Combined Fixed Charges and Preferred
Stock Dividends:
Interest Incurred...................... $17,509 $40,647 $39,865 $39,380 $32,348
Preferred Stock Dividends.............. 4,509 8,898 8,579 3,666 3,666
----------- -------- --------- --------- ---------
Total Combined Fixed Charges and
Preferred Stock Dividends............ $22,018 $49,545 $48,444 $43,046 $36,014
----------- -------- --------- --------- ---------
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends(c)....... 1.87 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 No. 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.
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: August 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, Peter J. Nelson, 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: August 9, 2004
/s/ Peter J. Nelson
Peter J. Nelson
Chief Financial Officer and Treasurer
(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 June 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.
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By: /s/ Joel S. Marcus |
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Name: Joel S. Marcus |
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Title: Chief Executive Officer |
I, Peter J. Nelson, 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 June 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.
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By: /s/ Peter J. Nelson |
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Name: Peter J. Nelson |
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Title: Chief Financial Officer |