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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999 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)
MARYLAND 95-4502084
(State or other jurisdiction (IRS Employer I.D. Number)
of incorporation or organization)
135 N. LOS ROBLES AVENUE, SUITE 250
PASADENA, CALIFORNIA 91101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 578-0777
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.01 par value per share New York Stock Exchange
9.50% Series A Cumulative New York Stock Exchange
Redeemable Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: NONE
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 such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the shares of Common Stock held by
non-affiliates was approximately $413.8 million based on the closing price
for such shares on the New York Stock Exchange on March 22, 2000.
As of March 22, 2000 the Registrant had 13,792,422 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive Proxy Statement to be mailed in connection with the registrant's
annual meeting of stockholders to be held on April 28, 2000.
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INDEX TO FORM 10-K
ALEXANDRIA REAL ESTATE EQUITIES, INC.
PAGE REFERENCE
PART I
Item 1. Business.......................................................................1
Item 2. Properties....................................................................13
Item 3. Legal Proceedings.............................................................20
Item 4. Submission of Matters to a Vote of Security Holders...........................20
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.....21
Item 6. Selected Financial Data.......................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................37
Item 8. Financial Statements and Supplementary Data...................................38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................38
PART III
Item 10. Directors and Executive Officers of the Registrant............................39
Item 11. Executive Compensation........................................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management................39
Item 13. Certain Relationships and Related Transactions................................39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............40
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PART I
This document contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify some of the
forward-looking statements by the use of forward-looking words such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates" or "anticipates," or the negative of these
words or similiar words. Forward-looking statements involve inherent risks
and uncertainties regarding events, conditions and financial trends that may
affect our future plan 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 the forward-looking
statements, including, but not limited to, those described below under the
headings "Business Risks" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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, whether as a result of
new information, future events or otherwise.
ITEM 1. BUSINESS.
GENERAL
Alexandria Real Estate Equities, Inc., a Maryland corporation formed in
October 1994, is a real estate investment trust ("REIT") engaged primarily in
the ownership, operation, management, acquisition, conversion, retrofit,
expansion and selective development and redevelopment of high quality,
strategically located properties containing office and laboratory space designed
and improved for lease principally to pharmaceutical, biotechnology, diagnostic
and personal care products companies, major scientific research institutions and
related government agencies (collectively, the "Life Science Industry").
Properties leased to tenants in the Life Science Industry typically consist of
suburban office buildings containing scientific research and development
laboratories and other improvements that are generic to tenants operating in the
Life Science Industry (such properties, "Life Science Facilities"). In addition
to principally serving the Life Science Industry, we provide creative space to
various high technology and Internet tenants. As of December 31, 1999, we owned
58 properties (the "Properties"), containing approximately 4.0 million rentable
square feet of office and laboratory space.
BUSINESS AND GROWTH STRATEGY.
We focus our operations and investment activities principally in the
following cluster markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle;
- suburban Washington, D.C. (including Maryland and Virginia);
- eastern Massachusetts;
- New Jersey and suburban Philadelphia; and
- the Southeast (including Georgia and North Carolina).
Our tenant base is broad and diverse and reflects our focus on regional,
national and international tenants with substantial financial and operational
resources. For a detailed description of our Properties and tenants, see "Item
2. Properties." Alexandria is led by a senior management team with extensive
experience in both the real estate and Life Science industries and is supported
by a highly experienced Board of Directors.
We seek to maximize growth in funds from operations ("FFO") and cash
available for distribution to stockholders through effective management,
operation, acquisition, conversion, expansion and selective development of
Life Science Facilities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Funds from Operations" for a
complete discussion of how we compute and view FFO, as well as a discussion
of other measures of cash flow. In particular, we seek to increase FFO and
cash available for distribution per share by:
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- acquiring high quality Life Science Facilities at prices that will
enable us to realize attractive returns in our cluster markets;
- realizing contractual rental rate escalations;
- retenanting and releasing space within our portfolio at higher
rental rates and with minimal non-revenue enhancing tenant
improvement costs;
- expanding existing Properties or converting existing office or
warehouse space to generic laboratory space that can be leased
at higher rental rates;
- selectively developing properties on a retrofit or build-to-suit
basis; and
- continuing to implement effective cost control measures, including
negotiating pass-through provisions in tenant leases for operating
expenses and certain capital expenditures.
INTERNAL GROWTH. We seek to achieve internal growth from several sources.
For example, we seek to:
- include rental rate escalation provisions in our leases;
- acquire undervalued or underperforming properties where we can
improve investment returns through releasing of vacant space and
replacement of existing tenants with new tenants at higher rental
rates;
- achieve higher rental rates as existing leases expire; and
- expand existing facilities that are fully leased and/or convert
existing office space to higher rent, generic laboratory space.
Our ability to negotiate contractual rent escalations in future leases and to
achieve increases in rental rates will depend upon market conditions and demand
for Life Science Facilities at the time the leases are negotiated and the
increases are proposed.
ACQUISITIONS. We seek to identify and acquire high quality Life Science
Facilities in our cluster markets. Critical evaluation of prospective property
acquisitions is an essential component of our acquisition strategy. When
evaluating acquisition opportunities, we assess a full range of matters relating
to the properties, including the:
- location of the property and our strategy in the market;
- quality of existing and prospective tenants;
- condition and capacity of the building infrastructure;
- quality and generic characteristics of laboratory facilities;
- physical condition of the shell structure and common area
improvements;
- opportunities available for leasing vacant space and for retenanting
occupied space; and
- opportunities to convert existing office space to higher rent
generic laboratory space.
DEVELOPMENT. Although we have historically emphasized acquisitions over
development in pursuing our growth objectives, completed development projects
are anticipated to represent a more significant portion of our growth in the
future. Our strategy is to selectively pursue build-to-suit and retrofit
development projects where we expect to achieve investment returns that will
equal or exceed our returns on acquisitions. We generally have undertaken
build-to-suit and retrofit projects only if our investment in infrastructure
will be substantially made for generic, rather than tenant specific,
improvements.
FINANCING/WORKING CAPITAL. We believe that cash provided by operations and
our unsecured line of credit will be sufficient to fund our working capital
requirements. We generally expect to finance future acquisitions through our
unsecured line of credit and then to periodically refinance some or all of that
indebtedness with additional equity or debt capital. We also may issue shares of
our common stock or interests in our subsidiaries as consideration for
acquisitions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources" for a
complete discussion of our unsecured line of credit and other outstanding
indebtedness.
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BUSINESS RISKS
WE ARE LARGELY DEPENDENT ON THE LIFE SCIENCE INDUSTRY FOR REVENUES FROM LEASE
PAYMENTS
In general, our strategy is to invest primarily in properties primarily
used by tenants in the Life Science Industry. Consequently, our revenues from
lease payments are largely dependent on a single industry. If the Life
Science Industry experiences an economic downturn, our business could be
adversely affected. Events within the Life Science Industry will have a more
pronounced effect on our ability to make distributions to our stockholders
than if we had diversified investments. Also, our Properties may be better
suited for a particular Life Science Industry tenant and could require
modification before we could release vacant space to another Life Science
Industry tenant. Our Properties also may not be suitable for lease to
traditional office tenants without significant expenditures on renovations.
OUR TENANTS MAY NOT BE ABLE TO PAY US IF THEY ARE UNSUCCESSFUL IN
DISCOVERING, DEVELOPING, MAKING OR SELLING THEIR PRODUCTS AND TECHNOLOGIES
Our Life Science Industry tenants are subject to a number of risks, any
one or more of which may adversely affect their ability to make rental
payments to us:
- Some of our tenants require significant funding to devolop and
commercialize their products and technologies, which is obtained
from private investors, the public market, companies in the Life
Science Industry or federal, state and local governments. Such
funding may be unavailable, decreased or discontinued in the future
which could adversely affect the ability of a tenant to successfully
discover, develop, make, market or sell its products and technologies,
to generate revenues or to make rental payments to us;
- Even with sufficient funding, some of our tenants may not be able to
successfully discover or identify potential drug targets in humans or
potential drugs for use in humans or to create tools or technologies
which are commercially useful in the discovery or identification of
potential drug targets or drugs;
- Some of our tenants developing potential drugs may find that their
drugs are not effective, or may even be harmful, when tested in humans;
- Some of our tenants may not be able to manufacture their drugs
ecomomically, even if such drugs are proven through human clinical
trials to be safe and effective in humans;
- Drugs which are developed and manufactured by some of our tenants
require governmental regulatory approval prior to being made,
marketed, sold and used. The regulatory approval process to manufacture
and market drugs is costly, typically takes several years, requires the
expenditure of substantial resources, is often unpredictable and a
tenant may fail or experience significant delays in obtaining these
approvals;
- Some of our tenants and their licensors typically require patent,
copyright and trade secret protection to succesfully develop, make,
market and sell their products and technologies. A tenant may be
unable to commercialize its products or technologies if patents
covering such products or technologies do not issue, or are
successfully challenged, narrowed, invalidated or circumvented by third
parties, or if a tenant fails to successfully obtain licenses to the
discoveries of third parties necessary to commercialize its products
or technologies; and
- A drug made by a tenant may not be well accepted by doctors and
patients, or may be less effective or accepted than competing drugs
made by others, or may be subsequently recalled from the market, even
if it is successfully developed, proven safe and effective in human
clinical trials, manufactured and the requisite regulatory approvals
obtained.
We cannot assure you that our tenants will be able to successfully
develop, make, market or sell their products and technologies due to the
risks inherent in the Life Science Industry. If a tenant is unable to
successfully avoid, or sufficiently mitigate, the risks described above, the
affected tenant may have difficulty making rental payments to us.
WE COULD BE HELD LIABLE FOR DAMAGES RESULTING FROM OUR TENANTS' USE OF HAZARDOUS
MATERIALS
Some of our Life Science Industry tenants engage in research and
development activities that involve the controlled use of hazardous materials,
chemicals and biological and radioactive compounds. In the event of
contamination or injury from the use of these hazardous materials, we could be
held liable for any damages that result. This liability could exceed our
resources and our environmental remediation coverage and could adversely affect
our ability to make distributions to our stockholders.
We and our tenants must comply with federal, state and local laws and
regulations that govern the use, manufacture, storage, handling and disposal of
hazardous materials and waste products. Changes in these laws and regulations
could adversely affect our business or our tenants' business and their ability
to make rental payments to us.
THE INABILITY OF ANY TENANT TO MAKE RENTAL PAYMENTS TO US COULD ADVERSELY AFFECT
OUR BUSINESS
Our revenues are derived primarily from rental payments under our leases.
Therefore, if our tenants, especially significant tenants, failed to make rental
payments under their leases, our financial condition and our ability to make
distributions to our stockholders could be adversely affected.
As of December 31, 1999, we had 169 leases with a total of 160 tenants.
Twenty-seven of our Properties were single-tenant properties. Three of our
tenants accounted for approximately 14.8% of our aggregate Annualized Base Rent,
or approximately 5.9%, 5.3% and 3.6%, respectively. "Annualized Base Rent" means
the annualized fixed base rental amount in effect as of December 31, 1999, using
rental revenue calculated on a straight-line basis in accordance with generally
accepted accounting principles ("GAAP"). Annualized Base Rent does not include
real estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants in the case of triple net
leases.
The bankruptcy or insolvency of a major tenant also may adversely affect
the income produced by a Property. If any of our tenants becomes a debtor in a
case under the U.S. Bankruptcy Code, we cannot evict that tenant solely
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because of its bankruptcy. The bankruptcy court might authorize the tenant to
reject and terminate its lease with us. Our claim against such a tenant for
unpaid, future rent would be subject to a statutory limitation that might be
substantially less than the remaining rent actually owed to us under the
tenant's lease. Any shortfall in rent payments could adversely affect our
cash flow and our ability to make distributions to our stockholders.
OUR U.S. GOVERNMENT TENANTS MAY NOT RECEIVE ANNUAL APPROPRIATIONS, WHICH COULD
ADVERSELY AFFECT THEIR ABILITY TO PAY US
U.S. government tenants are subject to annual appropriations. If one of
our U.S. government tenants failed to receive its annual appropriation, it might
not be able to make its lease payments to us. In addition, defaults under leases
with federal government tenants are governed by federal statute and not state
eviction or rent deficiency laws. All of our leases with U.S. government tenants
provide that the government tenant may terminate the lease under certain
circumstances. As of December 31, 1999, leases with U.S. government tenants at
our Properties accounted for approximately 7.6% of our aggregate Annualized Base
Rent.
LOSS OF A TENANT COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS
A lessee may not renew its lease upon the expiration of the initial term.
In addition, we may not be able to locate a qualified replacement tenant upon
expiration or termination of a lease. Consequently, we could lose the cash flow
from the affected Property, which could negatively impact our business. We may
have to divert cash flow generated by other Properties to meet our mortgage
payments, if any, or to pay other expenses related to owning the affected
Property. As of December 31, 1999, leases at our Properties representing
approximately 16.9% and 10.3% of the square footage of our Properties were
scheduled to expire in 2000 and 2001, respectively.
POOR ECONOMIC CONDITIONS IN OUR CLUSTER MARKETS COULD ADVERSELY AFFECT OUR
BUSINESS
Our Properties are located only in the following markets:
- California (in the San Diego, Pasadena and San Francisco Bay areas);
- Seattle;
- suburban Washington, D.C. (including Maryland and Virginia);
- eastern Massachusetts;
- New Jersey and suburban Philadelphia; and
- the Southeast (including North Carolina and Georgia).
As a result of this geographic concentration, we are dependent upon the
local economic conditions in each of these markets, including local real estate
conditions and competition. If there is a downturn in the economy in any of
these markets, our operations and our ability to make distributions to
stockholders could be adversely affected. We cannot assure you that these
markets will continue to grow or will remain favorable to the Life Science
Industry.
WE MAY HAVE DIFFICULTY MANAGING OUR RAPID GROWTH
We have grown rapidly and expect to continue to grow by acquiring and
selectively developing additional properties. To manage our growth effectively,
we must successfully integrate new acquisitions into our existing structure. We
may not succeed with the integration. In addition, we may not effectively manage
new properties, and new properties may not perform as expected. If we are
unsuccessful in managing our growth, our business would be adversely affected.
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OUR DEBT SERVICE OBLIGATIONS MAY HAVE ADVERSE CONSEQUENCES ON OUR BUSINESS
OPERATIONS
We use debt to finance our operations, including acquisitions of
properties. Our incurrence of debt may have consequences, including the
following:
- our cash flow from operations may be not be sufficient to meet
required payments of principal and interest;
- we may be forced to dispose of one or more of our Properties,
possibly on disadvantageous terms, to make payments on our debt;
- we may default on our debt obligations, and the lenders or
mortgagees may foreclose on our Properties that secure those loans;
- a foreclosure on one of our Properties could create taxable income
without any accompanying cash proceeds to pay the tax;
- we may default under a mortgage loan that has cross default
provisions, causing us automatically to default on another loan;
- we may not be able to refinance or extend our existing debt; and
- the terms of any refinancing or extension may not be as favorable as
the terms of our existing debt.
As of December 31, 1999, we had outstanding mortgage indebtedness of
approximately $158.5 million, secured by fourteen Properties, and outstanding
debt under our unsecured line of credit of approximately $192.0 million.
OUR LINE OF CREDIT RESTRICTS OUR ABILITY TO ENGAGE IN SOME BUSINESS ACTIVITIES
Our unsecured revolving credit facility contains customary negative
covenants and other financial and operating covenants that, among other things:
- restrict our ability to incur additional indebtedness;
- restrict our ability to make certain investments;
- restrict our ability to merge with another company;
- restrict our ability to make distributions to stockholders;
- require us to maintain financial coverage ratios; and
- require us to maintain a pool of unencumbered assets approved by the
lenders.
These restrictions could have a negative effect on our operations and our
ability to make distributions to our stockholders.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FURTHER OUR BUSINESS
OBJECTIVES
Our ability to acquire or develop properties is dependent upon our ability
to obtain capital. An inability to obtain capital on acceptable terms could
delay or prevent us from acquiring, structuring and closing desirable
investments, which would adversely affect our business. Also, the issuance of
additional shares of capital stock or interests in subsidiaries to obtain
capital for the acquisition of additional properties could result in a dilution
of ownership for the then existing stockholders.
IF INTEREST RATES RISE, OUR DEBT SERVICE COSTS WILL INCREASE
Borrowings outstanding under our unsecured line of credit and certain
other borrowings bear interest at a variable rate, and we may incur additional
variable rate debt in the future. Increases in market interest rates would
increase our interest expenses under these debt instruments and would increase
the costs of refinancing existing indebtedness or obtaining new debt.
Accordingly, these increases could adversely affect our financial position and
our ability to make distributions to stockholders.
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WE MAY NOT BE ABLE TO ACQUIRE PROPERTIES OR OPERATE THEM SUCCESSFULLY
Our success depends in large part upon our ability to acquire additional
properties on satisfactory terms and to operate them successfully. If we are
unable to do so, our business could be adversely affected. In addition, the
acquisition of Life Science Facilities generally involves a higher per square
foot price than the acquisition of traditional suburban office properties.
The acquisition, ownership and operation of real estate is subject to many
risks, including:
- our Properties may not perform as we expect;
- we may not be able to acquire a desired property because of
competition from other real estate investors with significant
capital;
- we may lease space at rates below our expectations;
- we may not be able to obtain financing on acceptable terms;
- we may overpay for new acquisitions; and
- we may underestimate the cost of improvements required to bring an
acquired property up to standards established for the market
position intended for that property.
If we encounter any of these risks, our business and our ability to make
payments to stockholders could be adversely affected.
WE MAY NOT BE ABLE TO COMPLETE DEVELOPMENT PROJECTS EFFECTIVELY
Our expansion and development activities subject us to many risks,
including:
- possible delays in construction;
- budget overruns;
- increasing costs of materials;
- financing availability;
- volatility in interest rates;
- labor availability;
- timing of the commencement of rental payments; and
- other property development uncertainties.
In addition, expansion and development activities, regardless of whether
they are ultimately successful, typically require a substantial portion of
management's time and attention. This may detract management from focusing on
other operational activities. If we are unable to successfully complete
expansion and development projects, our business may be adversely affected.
IF OUR REVENUES ARE LESS THAN OUR EXPENSES, WE MAY HAVE TO BORROW ADDITIONAL
FUNDS AND WE MAY NOT MAKE DISTRIBUTIONS TO OUR STOCKHOLDERS
If our Properties do not generate revenues sufficient to meet our
operating expenses, including debt service and other capital expenditures, we
may have to borrow additional amounts to cover fixed costs and cash flow needs.
This could adversely affect our ability to make distributions to our
stockholders. Factors that could adversely affect the revenues from and the
value of our Properties include:
- national and local economic conditions;
- competition from other Life Science Facilities;
- changes within the Life Science Industry;
- real estate conditions in our target markets;
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- our ability to collect rent payments;
- availability of financing;
- changes in interest rate levels;
- vacancies at our Properties and our ability to release space;
- changes in tax or other regulatory laws;
- cost of compliance with government regulation;
- illiquidity of real estate investments; and
- increased operating costs.
In addition, if a lease at a Property is not a triple net lease, we will
have greater expenses associated with that Property, and, as such, greater
exposure to increases in such expenses. Significant expenditures, such as
mortgage payments, real estate taxes, insurance and maintenance costs, generally
are fixed and do not decrease when revenues at the related property decrease.
IMPROVEMENTS TO LIFE SCIENCE FACILITIES ARE MORE COSTLY THAN TRADITIONAL OFFICE
SPACE
Our Properties contain generic infrastructure improvements that are more
costly than other property types. These improvements include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- significantly upgraded electrical, gas and plumbing infrastructure;
- heavy-duty HVAC systems; and
- laboratory benches.
Although we have historically been able to reflect the additional
investment in generic infrastructure improvements in higher rental rates, we are
not sure that we will be able to continue to do so in the future.
WE MAY NOT BE ABLE TO SELL OUR PROPERTIES QUICKLY TO RAISE MONEY
Investments in real estate are relatively illiquid. Accordingly, we may
not be able to sell our Properties when we desire or at acceptable prices in
response to changes in economic or other conditions. In addition, the Internal
Revenue Code limits our ability to sell properties held for fewer than four
years. These limitations on our ability to sell our Properties may adversely
affect our cash flows and our ability to make distributions to stockholders.
WE FACE SUBSTANTIAL COMPETITION IN OUR TARGET MARKETS
The significant competition for business in our target markets could have
an adverse effect on our operations. We compete for investment opportunities
with:
- insurance companies;
- pension and investment funds;
- partnerships;
- developers;
- investment companies; and
- other REITs.
Many of these entities have substantially greater financial resources than
we do and may be able to accept more risk than we can manage. These entities may
be less sensitive to risks with respect to the creditworthiness of a tenant or
the geographic proximity of its investments. Competition from other entities
also may reduce the number of suitable investment opportunities offered to us or
may increase the bargaining power of property owners seeking to sell.
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OUR PROPERTIES MAY HAVE DEFECTS UNKNOWN TO US
Although we review the physical condition of our Properties before they
are acquired, and on a periodic basis after acquisition, any of our Properties
may have characteristics or deficiencies unknown to us that could adversely
affect the Property's valuation or revenue potential.
IF WE FAIL TO QUALIFY AS A REIT, WE WOULD BE TAXED AT CORPORATE RATES AND WOULD
NOT BE ABLE TO TAKE CERTAIN DEDUCTIONS WHEN COMPUTING OUR TAXABLE INCOME
If in any taxable year we fail to qualify as a REIT:
- we would be subject to federal income tax on our taxable income at
regular corporate rates;
- we would not be allowed a deduction for distributions to
stockholders in computing taxable income;
- unless we were entitled to relief under the Internal Revenue Code,
we would also be disqualified from treatment as a REIT for the four
taxable years following the year during which we lost qualification;
and
- we would no longer be required by the Internal Revenue Code to make
any distributions to our stockholders.
As a result of the additional tax liability, we might need to borrow funds
or liquidate certain investments in order to pay the applicable tax.
Accordingly, funds available for investment or distribution to our stockholders
would be reduced for each of the years involved.
Qualification as a REIT involves the application of highly technical and
complex provisions of the Internal Revenue Code to our operations and the
determination of various factual matters and circumstances not entirely within
our control. There are only limited judicial or administrative interpretations
of these provisions. Although we believe that we have operated since January
1996 in a manner so as to qualify as a REIT, we cannot assure you that we are or
will remain so qualified.
In addition, although we are not aware of any pending tax legislation that
would adversely affect our ability to operate as a REIT, new legislation,
regulations, administrative interpretations or court decisions could change the
tax laws or interpretations of the tax laws regarding qualification as a REIT,
or the federal income tax consequences of that qualification, in an adverse
manner.
Although certain of our officers and directors have extensive experience
in the acquisition, leasing, operation financing and development of real
properties, prior to commencement of our operations, no officer had significant
experience in operating a business in accordance with the requirements for
maintaining qualification as a REIT under the Internal Revenue Code.
THERE ARE LIMITS ON THE OWNERSHIP OF OUR CAPITAL STOCK; A STOCKHOLDER MAY LOSE
BENEFICIAL OWNERSHIP OF ITS SHARES OF OUR COMMON STOCK BECAUSE OF THE OWNERSHIP
LIMITS
The Internal Revenue Code provides that, in order for us to maintain our
qualification as a REIT, not more than 50% of the value of our outstanding
capital stock may be owned, directly or constructively, by five or fewer
individuals or entities.
In addition, our charter prohibits, with certain limited exceptions,
direct or constructive ownership of shares of our capital stock representing
more than 9.8% of the combined total value of outstanding shares of our capital
stock by any person (the "Ownership Limit"). Our Board of Directors may exempt a
stockholder from the Ownership Limit if, prior to the exemption, our Board of
Directors receives any information it deems necessary to determine or ensure our
status as a REIT.
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The constructive ownership rules are complex and may cause shares of our
common stock owned directly or constructively by a group of related individuals
or entities to be constructively owned by one individual or entity. A transfer
of shares to a person who, as a result of the transfer, violates the Ownership
Limit may be void or may be transferred to a trust, for the benefit of one or
more qualified charitable organizations designated by us. In that case, the
intended transferee will have only a right to share, to the extent of the
transferee's original purchase price for such shares, in proceeds from the
trust's sale of those shares.
THE OWNERSHIP LIMIT AND OTHER PROVISIONS OF OUR CHARTER MAY DELAY OR PREVENT
TRANSACTIONS THAT WOULD OTHERWISE BE BENEFICIAL TO OUR STOCKHOLDERS
The Ownership Limit may have the effect of delaying, deferring or
preventing a transaction or a change in control that might involve a premium
price for our common stock or otherwise be in the best interest of our
stockholders.
Our charter allows our Board of Directors to cause us to issue additional
authorized but unissued shares of our common stock or preferred stock without
any stockholder approval. The issuance of preferred stock could make it more
difficult for another party to gain control of Alexandria. In addition, our
Board of Directors could establish a series of preferred stock that could delay,
defer or prevent a transaction that might involve a premium price for our common
stock or otherwise be in the best interest of our common stockholders. Our Board
of Directors could also establish one or more additional series of preferred
stock that has a dividend preference, which may adversely affect our ability to
pay dividends on our common stock.
OUR INSURANCE MAY NOT ADEQUATELY COVER ALL POTENTIAL LOSSES
If we experience a loss at any of our Properties that is not covered by
insurance or that exceeds our insurance policy limits, we could lose the capital
invested in the affected Property and, possibly, future revenues from that
Property. In addition, we would continue to be obligated on any mortgage
indebtedness or other obligations related to the affected Properties.
We carry comprehensive liability, fire, extended coverage and rental loss
insurance with respect to our Properties. We have obtained earthquake insurance
for all of our Properties because many of them are located in the vicinity of
active earthquake faults. We also carry environmental remediation insurance and
have title insurance policies on all of our Properties. We obtain our title
insurance policies when we acquire the Property. As a result, each policy covers
an amount equal to the initial purchase price of each Property. Any of our title
insurance policies may be in an amount less than the current value of the
related Property.
We believe that our insurance policy specifications, insured limits and
deductibles are consistent with or superior to those customarily carried for
similar properties. In addition, we require our tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that we and our tenants do not generally insure because they are
either uninsurable or because it is not economical to insure against them. In
addition, certain disaster-type insurance (covering catastrophic events) may not
be available or may only be available at rates that, in the opinion of our
management, are prohibitive.
WE COULD INCUR SIGNIFICANT COSTS COMPLYING WITH ENVIRONMENTAL LAWS
Federal, state and local environmental laws and regulations may require
us, as a current or previous owner or operator of real estate, to investigate
and clean up hazardous or toxic substances or petroleum products released at or
from any of our Properties. The cost of investigating and cleaning up
contamination could be substantial. In addition, the presence of contamination,
or the failure to properly clean it up, may adversely affect our ability to sell
or rent an affected Property or to borrow funds using that Property as
collateral.
9
Under environmental laws and regulations, we may have to pay governmental
entities or third parties for property damage and for investigation and clean-up
costs incurred by those parties relating to contaminated Properties regardless
of whether we knew of or caused the presence of the contaminants. Even if more
than one person may have been responsible for the contamination, we may be held
responsible for all of the clean-up costs. In addition, third parties may sue us
for damages and costs resulting from environmental contamination from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos-containing materials. These laws may impose fines and penalties on us
for the release of asbestos-containing materials and may allow third parties to
seek recovery from us for personal injury from exposure to asbestos fibers. We
have detected asbestos-containing materials at some of our Properties, but we do
not expect that it will result in material environmental costs or liabilities to
us.
Environmental laws and regulations also require the removal or upgrading
of certain underground storage tanks and regulate:
- the discharge of storm water, wastewater and any water pollutants;
- the emission of air pollutants;
- the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes; and
- workplace health and safety.
Some of our tenants routinely handle hazardous substances and wastes as
part of their operations at our Properties. Environmental laws and regulations
subject our tenants, and potentially us, to liability resulting from these
activities. Environmental liabilities could also affect a tenant's ability to
make rental payments to us. We require our tenants to comply with these
environmental laws and regulations and to indemnify us for any related
liabilities. We are not aware of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of our Properties.
Independent environmental consultants have conducted Phase I or similar
environmental assessments at all of our Properties. We anticipate that
consultants will conduct similar environmental assessments on our future
acquisitions. This type of assessment generally includes a site inspection,
interviews and a public records review, but no subsurface sampling. These
assessments and certain additional investigations of our Properties have not
revealed any environmental liability that we believe would have a material
adverse effect on our business or results of operations.
The additional investigations included, as appropriate:
- asbestos surveys;
- radon surveys;
- lead surveys;
- additional public records review;
- subsurface sampling; and
- other testing.
Nevertheless, it is possible that the assessments on our Properties have
not revealed, or that the assessments on future acquisitions will not reveal,
all environmental liabilities. Consequently, there may be material environmental
liabilities of which we are unaware that may result in substantial costs to us
or our tenants and could have a material adverse effect on our business.
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH THE AMERICANS WITH DISABILITIES
ACT AND SIMILAR LAWS
Under the Americans with Disabilities Act, places of public accommodation
and/or commercial facilities are required to meet federal requirements related
to access and use by disabled persons. We may be required to make substantial
capital expenditures at our Properties to comply with this law. In addition, our
noncompliance could result in the imposition of fines or an award of damages to
private litigants.
10
A number of additional federal, state and local laws and regulations exist
regarding access by disabled persons. These regulations may require
modifications to our Properties or may affect future renovations. This may limit
the overall returns on our investments.
We believe that our Properties are substantially in compliance with the
present requirements of the Americans with Disabilities Act and similar laws. We
have not, however, conducted an audit or an investigation of all of our
Properties to determine our compliance.
WE MAY INCUR SIGNIFICANT COSTS IF WE FAIL TO COMPLY WITH LAWS OR IF LAWS CHANGE
Our Properties are subject to many federal, state and local regulatory
requirements and to state and local fire and life-safety requirements. If we do
not comply with all of these requirements, we may have to pay fines to
governmental authorities or damage awards to private litigants.
We believe that our Properties are currently in compliance with all of
these regulatory requirements. We do not know whether these requirements will
change or whether new requirements will be imposed. Changes in these regulatory
requirements could require us to make significant unanticipated expenditures.
These expenditures could have an adverse effect on us and our ability to make
distributions to stockholders.
THE LOSS OF SERVICES OF ANY OF OUR EXECUTIVE OFFICERS COULD ADVERSELY AFFECT US
We depend upon the services of our executive officers. The loss of
services of any one of our executive officers could have an adverse effect on
our business, financial condition and prospects. We use the extensive personal
and business relationships that members of our management have developed over
time with owners of Life Science Facilities and with major Life Science Industry
tenants. We have employment agreements with most of our executive officers, but
we cannot assure you that our executive officers will remain employed with us.
WE MAY CHANGE OUR BUSINESS POLICIES WITHOUT STOCKHOLDER APPROVAL
Our Board of Directors determines all of our business policies, with
management's input, including our:
- status as a REIT;
- investment initiatives;
- growth management;
- debt incurrence;
- general financing;
- acquisition and selective development activities;
- shareholder distributions; and
- operations.
Our Board of Directors may amend or revise these policies at any time
without a vote of our stockholders. A change in these policies could adversely
affect us and our ability to make distributions to our stockholders.
WE COULD BECOME HIGHLY LEVERAGED AND OUR DEBT SERVICE OBLIGATIONS COULD INCREASE
Our organizational documents do not limit the amount of debt that we may
incur. Therefore, we could become highly leveraged. This would result in an
increase in our debt service obligations that could adversely affect our cash
flow and our ability to make distributions to our stockholders.
We have adopted a policy of incurring debt only if upon such incurrence
our debt to total market capitalization ratio would not exceed 57.5%. Our total
market capitalization is the market value of our capital stock, including
11
interests exchangeable for shares of capital stock, plus total debt. Our Board
of Directors could, however, change or eliminate this policy at any time. Higher
leverage also increases the risk of default on our debt obligations.
OUR DISTRIBUTIONS TO STOCKHOLDERS MAY DECLINE AT ANY TIME
We may not continue our current level of distributions to stockholders.
Our Board of Directors will determine future distributions based on a number of
factors, including:
- our amount of cash available for distribution;
- our financial condition;
- any decision by our Board of Directors to reinvest funds rather than
to distribute such funds;
- our capital expenditures;
- the annual distribution requirements under the REIT provisions of
the Internal Revenue Code; and
- other factors our Board of Directors deems relevant.
THE YEAR 2000 PROBLEM COULD DISRUPT OUR BUSINESS OPERATIONS
The year 2000 problem results from an inability of computer systems to
accurately recognize dates on and after January 1, 2000. The year 2000 problem
could lead to significant disruptions in our operations and in our tenants'
operations, which could adversely affect their ability to make rental payments
to us.
We have identified the following as the principal risks to us associated
with the year 2000 problem:
- disruption of our operations due to the failure of third parties,
including tenants, vendors and financial institutions, to achieve
year 2000 readiness; and
- business interruption due to building system failures at our
Properties.
We formed a Year 2000 Task Force to address the effects of the year
2000 problem on us. We have not experienced, and are not currently aware of,
any material year 2000-related problems that may pose significant operational
problems for our computer systems. We have also evaluated our significant
third-party vendors, our financial institutions and our major tenants for
their year 2000 readiness. We have not been informed by any of these parties
of the occurrence of any year 2000-related problems. However, we cannot
guarantee that our company, or our third-party vendors, financial
institutions or major tenants, will not experience any year 2000-related
problems in the future. If such problems do occur, there can be no assurance
that they will not have a material impact on our operations.
We have used internal staff and outside consultants to address our year
2000 problems. Our year 2000 costs to date have been minimal, and we do not
expect future costs to be material. However, unexpected future costs could be
significant and could have a material effect on our operations.
POSSIBLE FUTURE SALES OF SHARES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK
We cannot predict the effect, if any, of future sales of shares of our
common stock on the market price of our common stock prevailing from time to
time. Sales of substantial amounts of capital stock (including common stock
issued upon the exercise of stock options), or the perception that such sales
could occur, may adversely affect prevailing market prices for our common stock.
We have reserved for issuance to our officers, directors and employees
pursuant to our Amended and Restated 1997 Stock Award and Incentive Plan (the
"Plan") that number of shares of our common stock equal to 10% of the total
number of shares outstanding at any time, provided that in no event may the
number of shares of our common stock available for issuance under the Plan
exceed 3,000,000 shares at any time. Our Board of Directors has approved an
amendment to the Plan (the "Amendment") that would increase the number of shares
of our common stock reserved for issuance under the Plan to that number of
shares of our common stock equal to 12% of the total number of shares
12
outstanding at any time, provided that the number of shares available for
issuance under the Plan may still not exceed 3,000,000 shares at any time. The
Amendment is subject to approval by our stockholders at our annual meeting of
stockholders to be held on April 28, 2000.
As of December 31, 1999, there were options outstanding to purchase
785,000 shares of our common stock, of which options to purchase 426,003
shares of our common stock were exercisable. We have filed a registration
statement with respect to the issuance of shares of our common stock pursuant
to grants under the stock option plan. In addition, any shares issued under
our stock option plan will be available for sale in the public market from
time to time without restriction by persons who are not our Affiliates (as
defined in Rule 144 promulgated under the Securities Act). Affiliates will be
able to sell shares of our common stock pursuant to exemptions from the
registration requirements or upon registration.
FINANCIAL INFORMATION REGARDING INDUSTRY SEGMENTS AND OPERATIONS.
We are involved only in the real estate industry segment within the United
States, and we have no foreign operations. Accordingly, all financial statements
contained in this report relate to the real estate industry segment. See "Item
2. Properties" and "Item 8. Financial Statements and Supplementary Data" for
detailed financial information regarding our business.
EMPLOYEES
As of December 31, 1999, we had 38 full-time employees and one part-time
employee.
ITEM 2. PROPERTIES.
GENERAL.
Our Properties range in size from approximately 15,000 to 250,000 square
feet, are built to accommodate single or multiple tenants and are generally one
or two story concrete tilt-up or block and steel frame structures. The exteriors
typically resemble traditional suburban office properties, but interior
infrastructures are designed to accommodate the needs of Life Science Industry
tenants. These improvements typically are generic to Life Science Industry
tenants rather than specific to a particular tenant. As a result, we believe
that the improvements have long-term value and utility and are readily usable by
a wide range of Life Science Industry tenants. Generic infrastructure
improvements include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- increased floor to ceiling heights;
- heavy-duty HVAC systems;
- advanced environmental control technology;
- significantly upgraded electrical, gas and plumbing infrastructure;
and
- laboratory benches.
We own fee simple title in each of our Properties, except with respect to:
- 1311, 1401 and 1431 Harbor Bay Parkway, in which we own a commercial
condominium interest, together with an undivided interest in the
common areas of the project in which the Property is a part; and
- 2425 Garcia Avenue, 2400/2450 Bayshore Parkway, 2625/2627/2631
Hanover Street, Buildings 79 & 96, Charlestown Navy Yard, and
8000/9000/10000 Virginia Manor Road,, in which we own ground
leasehold interests.
13
As of December 31, 1999, we had 169 leases with a total of 160 tenants,
and 27 of our Properties were single-tenant properties. Leases in our
multi-tenant buildings typically have terms of three to seven years, while the
single-tenant building leases typically have terms of 10 to 20 years. As of
December 31, 1999:
- approximately 79% of our leases (on a square footage basis) were
triple net leases, requiring tenants to pay substantially all real
estate taxes and insurance, common area and other operating expenses
(including increases thereto) in addition to base rent;
- approximately 16% of our leases (on a square footage basis) required
the tenants to pay a majority of operating expenses;
- approximately 85% of our leases (on a square footage basis)
contained effective annual rent escalations that are either fixed
(ranging from 2.5% to 4.0%) or indexed based on a consumer price
index or other index; and
- approximately 80% of our leases (on a square footage basis) provided
for the recapture of certain capital expenditures (such as HVAC
systems maintenance and/or replacement, roof replacement and parking
lot resurfacing), which we believe would typically be borne by the
landlord in traditional office leases.
Our leases also typically give us the right to review and approve tenant
alterations to the Property. Generally, tenant-installed improvements to the
facilities remain our property after termination of the lease. However, we are
permitted under the terms of most of our leases to require that the tenant
remove the improvements and restore the premises to their original condition.
As of December 31, 1999, we managed 57 of our Properties. The remaining
Property was managed by a third-party professional management company. We make
all material decisions with respect to this Property.
The following table sets forth pertinent information with respect to our
Properties as of December 31, 1999:
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
SAN DIEGO
10933 North Torrey Pines 1971/1994 107,753 100% $ 2,353,543
Road
San Diego, CA
11099 North Torrey Pines 1986/1996 86,962 100 2,154,570
Road
San Diego, CA
3535 General Atomics Court 1986/1991 76,084 41 1,175,767
San Diego, CA
3565 General Atomics Court 1991 43,600 100 1,526,949
San Diego, CA
11025 Roselle Street 1983 18,173 100 401,568
San Diego, CA
4757 Nexus Centre Drive 1989 67,050 100 2,107,557
San Diego, CA
6166 Nancy Ridge Drive 1997 29,333 100 638,633
San Diego, CA
10505 Roselle Street late 1970's/1999 17,603 42 176,076
San Diego, CA
3770 Tansy Street 1978/1999 15,410 -- --
San Diego, CA
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
10933 North Torrey Pines 3.2% $21.84 16.41 The Scripps Research
Road Institute
San Diego, CA Advanced Tissue Sciences,
Inc.
11099 North Torrey Pines 2.9 24.78 22.96 Agouron Pharmaceuticals,
Road Inc. (5)
San Diego, CA Axys Pharmaceuticals, Inc.
3535 General Atomics Court 1.6 37.82 37.80 The Scripps Research
San Diego, CA Institute
Syntro Corporation(6)
3565 General Atomics Court 2.1 35.02 35.02 Agouron Pharmaceuticals,
San Diego, CA Inc. (5)
11025 Roselle Street 0.5 22.10 19.44 Collateral Therapeutics, Inc.
San Diego, CA Ciblex Corporation
4757 Nexus Centre Drive 2.9 31.43 24.53 Matrix Pharmaceutical, Inc.
San Diego, CA
6166 Nancy Ridge Drive 0.9 21.77 15.42 Arena Pharmaceuticals, Inc.
San Diego, CA
10505 Roselle Street 0.2 23.57 19.74 Structural GenomiX, Inc.(7)
San Diego, CA
3770 Tansy Street -- -- -- Vacant(7)
San Diego, CA
14
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
3550 John Hopkins Court 1999 55,000 45 1,563,653
San Diego, CA
9363 Towne Centre Drive 1987 45,030 100 864,871
San Diego, CA
9373 Towne Centre Drive 1987 53,688 78 993,809
San Diego, CA
9393 Towne Centre Drive 1987 41,794 100 1,118,408
San Diego, CA
PASADENA
129/153/161 North Hill Street 1940's/1950's/ 51,980 -- --
Pasadena, CA 1960's
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 1983/1999 61,015 100 911,230
Alameda, CA
1311 Harbor Bay Parkway 1984 27,745 34 154,599
Alameda, CA
1401 Harbor Pay Parkway 1986/1994 47,777 100 518,593
Alameda, CA
1431 Harbor Bay Parkway 1985/1994 68,711 100 1,413,968
Alameda, CA
819-863 Mitten Road & 866 1962/1997 153,584 93 2,710,279
Malcolm Road
Burlingame, CA
2625/2627/2631 Hanover Street 1968/1985 32,074 100 1,058,442
Palo Alto, CA
2425 Garcia Avenue & 1980 98,964 100 3,639,360
2400/2450 Bayshore Parkway
Mountain View, CA
SEATTLE
1102/1124 Columbia Street 1975/1997 209,828 94 5,307,330
Seattle, WA
3000/3018 Western Avenue 1929/1990 47,746 100 1,458,386
Seattle, Washington
3005 First Avenue 1980/1990 70,647 100 2,190,993
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 1989 47,558 51 475,448
Gaithersburg, MD
401 Professional Drive 1987 62,739 100 1,038,585
Gaithersburg, MD
25/35/45 West Watkins Mill 1989/1997 138,938 100 1,984,161
Road
Gaithersburg, MD
708 Quince Orchard Road 1982/1997 49,225 100 1,461,699
Gaithersburg, MD
940 Clopper Road 1989 44,464 84 501,605
Gaithersburg, MD
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
3550 John Hopkins Court 2.1 62.55 62.55 Axys Pharmaceuticals, Inc. (8)
San Diego, CA Genos Biosciences, Inc. (8)
9363 Towne Centre Drive 1.2 19.21 19.21 Orincon Corporation
San Diego, CA
9373 Towne Centre Drive 1.3 23.88 23.87 Amylin Pharmaceuticals, Inc.
San Diego, CA Vical Incorporated
9393 Towne Centre Drive 1.5 26.76 26.76 Cytel Corporation
San Diego, CA
PASADENA
129/153/161 North Hill Street -- -- -- Vacant(7)
Pasadena, CA
SAN FRANCISCO BAY AREA
1201 Harbor Bay Parkway 1.2 14.93 9.80 Avigen, Inc.
Alameda, CA Lucent Technologies Inc.
1311 Harbor Bay Parkway 0.2 16.58 15.22 Berkeley Heartlab, Inc.
Alameda, CA
1401 Harbor Pay Parkway 0.7 10.85 10.51 Chiron Diagnostics
Alameda, CA
1431 Harbor Bay Parkway 1.9 20.58 16.57 U.S. Food & Drug
Alameda, CA Administration
819-863 Mitten Road & 866 3.7 18.88 16.44 Valentis, Inc.
Malcolm Road Mills Peninsula Medical Group,
Burlingame, CA Inc.
U.S. Federal Aviation
Administration
2625/2627/2631 Hanover Street 1.4 33.00 33.00 Alza Corporation
Palo Alto, CA
2425 Garcia Avenue & 4.9 36.77 36.77 Scios, Inc.
2400/2450 Bayshore Parkway Google, Inc.
Mountain View, CA
SEATTLE
7.2 27.00 25.69 Corixa Corporation
1102/1124 Columbia Street Fred Hutchinson Cancer
Seattle, WA Research Center
Swedish Medical Center
2.0 30.54 26.21 University of Washington
3000/3018 Western Avenue
Seattle, Washington
3.0 31.01 26.91 Dendreon Corporation
3005 First Avenue
Seattle, Washington
SUBURBAN WASHINGTON, D.C.
300 Professional Drive 0.6 19.68 18.85 Antex Biologics Inc.
Gaithersburg, MD
401 Professional Drive 1.4 16.55 16.55 Gillette Capital
Gaithersburg, MD Corporation(9)
25/35/45 West Watkins Mill 2.7 14.28 14.02 Genetic Therapy, Inc.(10)
Road MedImmune, Inc.
Gaithersburg, MD
708 Quince Orchard Road 2.0 29.69 18.27 Gene Logic, Inc.
Gaithersburg, MD
940 Clopper Road 0.7 13.36 11.43 Immunomatrix, Inc.
Gaithersburg, MD BHC Securities, Inc.
15
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
1401 Research Boulevard 1966 48,800 100 722,904
Rockville, MD
1500 East Gude Drive 1981/1986 45,989 100 624,334
Rockville, MD
1413 Research Boulevard 1967/1996 105,000 100 1,815,917
Rockville, MD
1550 East Gude Drive 1981/1995 44,500 100 735,374
Rockville, MD
1330 Piccard Drive 1978/1994 131,511 100 1,903,653
Rockville, MD
14225 Newbrook Drive 1992 248,186 100 4,341,125
Chantilly, VA
8000/9000/10000 Virginia 1990 191,884 100 1,968,601
Manor Road
Beltsville, MD
10150 Old Columbia Road 1983/1997 75,500 100 1,087,343
Columbia, MD
19 Firstfield Road 1974 25,175 100 417,446
Gaithersburg, MD
15020 Shady Grove Road 1987 41,062 100 759,754
Gaithersburg, MD
2001 Aliceanna Street early 1950's/1995 179,397 84 862,752
Baltimore, MD
50 West Watkins Mill Road 1988 57,410 100 677,438
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96 Charlestown 1880/1991 24,940 100 710,000
Navy Yard
Boston, MA
280 Pond Street 1960's 24,867 100 404,622
Randolph, MA
60 Westview Street 1975 32,000 100 832,000
Lexington, MA
377 Plantation Street 1993 92,711 100 2,185,284
Worcester, MA
620 Memorial Drive 1920's/1997 96,500 100 3,947,688
Cambridge, MA
One Innovation Drive 1991 113,571 98 2,119,665
Worcester, MA
NEW JERSEY/SUBURBAN PHILADELPHIA
215 College Road 1968/1974/ 106,036 97 1,585,807
Paramus, NJ 1984
170 Williams Drive 1982/1994 37,000 100 536,500
Ramsey, NJ
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
1401 Research Boulevard 1.0 14.81 14.04 U.S. Bureau of Alcohol
Rockville, MD Tobacco and Firearms
1500 East Gude Drive 0.9 13.58 12.72 bioMerieux Vitek, Inc.
Rockville, MD
1413 Research Boulevard 2.5 17.29 15.65 U.S. Army Corps of
Rockville, MD Engineers
1550 East Gude Drive 1.0 16.53 16.08 Shire Pharmaceuticals Group
Rockville, MD plc
1330 Piccard Drive 2.6 14.48 14.46 Intracel Corporation
Rockville, MD
14225 Newbrook Drive 5.7 17.49 17.49 American Medical
Chantilly, VA Laboratories, Inc.
8000/9000/10000 Virginia 2.7 10.26 10.17 Digene Corporation
Manor Road North American Vaccine, Inc.
Beltsville, MD
10150 Old Columbia Road 1.5 14.40 11.37 North American Vaccine, Inc.
Columbia, MD
19 Firstfield Road 0.6 16.58 16.58 Genetic Therapy, Inc. (10)
Gaithersburg, MD
15020 Shady Grove Road 1.0 18.50 11.25 Human Genome Sciences, Inc.
Gaithersburg, MD
2001 Aliceanna Street 1.2 5.74 5.74 Maryland Economic
Baltimore, MD Development Corporation
The National Aquarium of
Baltimore, Inc.
50 West Watkins Mill Road 0.9 11.80 11.80 Federal Express Corporation
Gaithersburg, MD
EASTERN MASSACHUSETTS
Buildings 79 & 96 Charlestown 1.0 28.47 26.34 Diacrin, Inc.
Navy Yard
Boston, MA
280 Pond Street 0.5 16.27 16.27 Ares Advanced Technology,
Randolph, MA Inc.
60 Westview Street 1.1 26.00 23.61 U.S. Environmental Protection
Lexington, MA Agency
377 Plantation Street 3.0 23.57 23.57 University of Massachusetts
Worcester, MA Phytera, Inc.
620 Memorial Drive 5.3 40.91 40.91 Pfizer, Inc.
Cambridge, MA
One Innovation Drive 2.9 19.04 19.04 AstraZeneca plc Massachusetts
Worcester, MA Biotechnology
Research Institute, Inc.
NEW JERSEY/SUBURBAN PHILADELPHIA
215 College Road 2.1 15.49 14.91 Gryphon Development, Inc.
Paramus, NJ Synaptic Pharmaceutical
Corporation
170 Williams Drive 0.7 14.50 14.49 Alteon Inc.
Ramsey, NJ
16
ANNUALIZED
YEAR BUILT/ RENTABLE PERCENTAGE BASE
PROPERTIES RENOVATED (1) SQUARE FEET LEASED (2) RENT (2)(3)
---------- ------------- ----------- ---------- -----------
100 Phillips Parkway late 1960's 74,000 -- --
Montvale, NJ
5100/5110 Campus Drive 1989 42,782 100 528,483
Plymouth Meeting, PA
702 Electronic Drive 1983/1998 40,000 100 937,527
Horsham, PA
279 Princeton Parkway 1984 42,600 100 530,182
Princeton, NJ
SOUTHEAST
100 Capitola Drive 1986 65,114 100 1,030,700
Durham, NC
800 & 801 Capitola Drive 1985 119,916 100 1,556,753
Durham, NC
150/154 Technology Parkway 1976/1985/ 37,080 100 675,560
Norcross, GA 1993
5 Triangle Drive 1981 32,120 100 486,825
Research Triangle Park, NC
Total/Weighted Average (10): 4,046,126 91.5% $73,884,319
========= ===== ===========
PERCENTAGE OF ANNUALIZED ANNUALIZED
AGGREGATE BASE RENT NET EFFECTIVE
PORTFOLIO PER LEASED RENT PER
ANNUALIZED SQUARE FOOT LEASED SQUARE
PROPERTIES BASE RENT (3) FOOT (4) MAJOR TENANTS
---------- --------- ----- -------- -------------
100 Phillips Parkway -- -- -- Vacant(7)
Montvale, NJ
5100/5110 Campus Drive 0.7 12.35 11.82 Gen Trak, Inc.
Plymouth Meeting, PA Biomol Research Laboratories,
Inc.
Magainin Pharmaceuticals Inc.
702 Electronic Drive 1.3 23.44 23.44 Cell Pathways, Inc.
Horsham, PA
279 Princeton Parkway 0.7 12.45 12.45 Coelacanth Chemical
Princeton, NJ Corporation
SOUTHEAST
100 Capitola Drive 1.4 15.83 9.99 American Social Health
Durham, NC Association, Inc.
Batelle Survey Research, Inc.
800 & 801 Capitola Drive 2.1 12.98 11.21 Triangle Laboratories, Inc.
Durham, NC Ventana Communications
Group, Inc.
150/154 Technology Parkway 0.9 18.22 18.10 CytRx Corporation
Norcross, GA Oread, Inc.
5 Triangle Drive 0.7 15.16 14.85 Mantech Environmental
Research Triangle Park, NC Technology, Inc.
City Search, Inc.
Total/Weighted Average (11): 100.0% $19.97 $18.47
====== ====== ======
- ----------
(1) Includes year in which construction was completed and, where applicable,
year of most recent major renovation.
(2) Based on all leases at the respective Property in effect as of December
31, 1999.
(3) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases. This amount, divided by the rentable square feet
leased at the Property as of December 31, 1999, is the Annualized Base
Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
December 31, 1999, less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions. This amount,
divided by the rentable square feet leased at the Property as of December
31, 1999, is the Annualized Net Effective Rent per Leased Square Foot.
(5) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of
Warner-Lambert Company.
(6) Syntro Corporation is a wholly owned subsidiary of Schering-Plough
Corporation.
(7) All, or a significant portion, of this Property is currently under
renovation.
(8) The leases with Axys Pharmaceuticals, Inc. and Genos Biosciences, Inc.
terminated on December 31, 1999 and the Annualized Base Rent per Leased
Square Foot and the Annualized Net Effective Rent per Leased Square
Foot reflect the short-term nature of these leases.
(9) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(10) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(11) Weighted Average based on a percentage of aggregate leased square feet.
17
LOCATION AND TYPE OF SPACE
The following table sets forth, as of December 31, 1999, the gross
revenues and type of space within our Properties by rentable square footage in
each of our existing markets.
GROSS REVENUES AND TYPE OF SPACE
TOTAL RENTABLE % OF TOTAL RENTABLE ANNUALIZED % OF ANNUALIZED
GEOGRAPHIC AREA SQUARE FOOTAGE SQUARE FOOTAGE BASE RENT(1) BASE RENT
- --------------- -------------- ------------------- ------------ ---------------
San Diego 657,480 16.2% $15,075,404 20.4%
Pasadena 51,980 1.3 - 0.0
San Francisco Bay Area 489,870 12.1 10,406,471 14.1
Seattle 328,221 8.1 8,956,709 12.1
Suburban Washington, D.C. 1,537,338 38.0 21,378,139 28.9
Eastern Massachusetts 384,589 9.5 10,199,259 13.8
New Jersey/Suburban Philadelphia 342,418 8.5 4,118,499 5.6
Southeast 254,230 6.3 3,749,838 5.1
--------- ------ ----------- ------
Total 4,046,126 100.0% $73,884,319 100.0%
========== ====== =========== ======
- ----------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases.
TENANTS
Our Properties are leased principally to tenants engaged in a variety of
activities in the Life Science Industry. The following table sets forth
information regarding leases with our 20 largest tenants based upon Annualized
Base Rent as of December 31, 1999.
18
20 LARGEST TENANTS
REMAIN-
ING INI- APPROXIMATE PERCENTAGE OF
NUMBER TIAL LEASE AGGREGATE AGGREGATE
OF TERM IN RENTABLE LEASED
TENANT LEASES YEARS SQUARE FEET SQUARE FEET
------ ------ ----- ----------- -----------
American Medical
Laboratories, Inc. 1 17.0 248,186 6.7%
Pfizer, Inc. 1 12.3 96,500 2.6%
Corixa Corporation 1 5.0 69,997 1.9%
Agouron Pharmaceuticals, 2 0.8 70,506 1.9%
Inc.(3) 1.8
Scios, Inc. 1 0.1 56,332 1.5%
0.3
Dendreon Corporation 1 9.0 70,647 1.9%
Matrix Pharmaceutical, Inc. 1 11.2 67,050 1.8%
Axys Pharmaceuticals, Inc. 2 2.0 70,056 1.9%
Intracel Corporation 1 7.1 131,511 3.6%
U.S. Army Corps of 1 2.4 105,000 2.8%
Engineers
Advanced Tissue
Sciences, Inc. 2 0.7 84,524 2.3%
North American Vaccine, Inc. 2 1.2 110,531 3.0%
8.2
Gene Logic Inc. 1 7.9 49,225 1.3%
University of Washington 1 14.1 47,746 1.3%
Google, Inc. 1 4.6 42,632 1.2%
U.S. Food & Drug 1 14.1 68,711 1.9%
Administration
Fred Hutchinson Cancer 2 4.9 66,754 1.8%
Research Center
The Scripps Research 2 0.4 41,538 1.1%
Institute 1.8
MedImmune, Inc. 2 6.9 84,668 2.3%
University of Massachusetts 1 16.0 80,153 2.2%
-- ----- --------- -----
Total/Weighted Average (4) 27 6.7 1,662,267 45.0%
== ===== ========= =====
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
AGGREGATE ANNUALIZED PORTFOLIO
ANNUALIZED PORTFOLIO AN- NET EFFECTIVE ANNUALIZED
BASE RENT (IN NUALIZED RENT (IN NET EFFECTIVE
TENANT THOUSANDS)(1) BASE RENT THOUSANDS)(2) RENT
------ ------------- --------- ------------- ----
American Medical
Laboratories, Inc. $4,341 5.9% $4,341 6.4%
Pfizer, Inc. 3,948 5.3% 3,948 5.9%
Corixa Corporation 2,672 3.6% 2,418 3.6%
Agouron Pharmaceuticals, 2,309 3.1% 2,233 3.3%
Inc.(3)
Scios, Inc. 2,204 3.0% 2,204 3.3%
Dendreon Corporation 2,191 3.0% 1,901 2.8%
Matrix Pharmaceutical, Inc. 2,108 2.9% 1,645 2.4%
Axys Pharmaceuticals, Inc. 1,945 2.6% 1,864 2.8%
Intracel Corporation 1,904 2.6% 1,902 2.8%
U.S. Army Corps of 1,816 2.5% 1,643 2.4%
Engineers
Advanced Tissue 1,723 2.3% 1,388 2.1%
Sciences, Inc.
North American Vaccine, Inc. 1,496 2.0% 1,267 1.9%
Gene Logic Inc. 1,462 2.0% 900 1.3%
University of Washington 1,458 2.0% 1,251 1.9%
Google, Inc. 1,436 1.9% 1,436 2.1%
U.S. Food & Drug 1,414 1.9% 1,138 1.7%
Administration
Fred Hutchinson Cancer 1,406 1.9% 1,403 2.1%
Research Center
The Scripps Research 1,376 1.9% 1,126 1.7%
Institute
MedImmune, Inc. 1,324 1.8% 1,305 1.9%
University of Massachusetts 1,315 1.8% 1,298 1.9%
--------- ----- ------ -----
Total/Weighted Average (4) $39,848 54.0% $36,611 54.3%
======= ===== ======= =====
19
- ----------
(1) Annualized Base Rent means the annualized fixed base rental amount in
effect as of December 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases.
(2) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
December 31, 1999 (using rental revenue computed on a straight-line basis
in accordance with GAAP), less (for gross leases) real estate taxes and
insurance, common area and other operating expenses and (for all leases)
amortized tenant improvements and leasing commissions.
(3) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of
Warner-Lambert Company.
(4) Weighted Average based on percentage of aggregate leased square feet.
ITEM 3. LEGAL PROCEEDINGS.
To our knowledge, no litigation is pending against us, other than routine
actions and administrative proceedings, substantially all of which are expected
to be covered by liability insurance or which, in the aggregate, are not
expected to have a material adverse effect on our financial condition, results
of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders in the fourth
quarter of the fiscal year ended December 31, 1999.
20
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "ARE". On March 22, 2000, the last reported sales price per share of
our common stock was $31-1/8, and there were approximately 233 holders of
record of our common stock (excluding beneficial owners whose shares are held in
the name of Cede & Co.). The following table sets forth the quarterly high and
low sales prices per share of our common stock as reported on the NYSE and the
distributions paid by us with respect to each such period.
PER SHARE
PERIOD HIGH LOW DISTRIBUTION
- ------ ---- --- ------------
1998
First Quarter................... 34-9/16 30-7/8 $0.40
Second Quarter.................. 34-1/2 28-1/2 $0.40
Third Quarter................... 31-11/16 25-3/16 $0.40
Fourth Quarter.................. 31-15/16 25-15/16 $0.40
1999
First Quarter................... 31-9/16 25-1/8 $0.40
Second Quarter.................. 33 24-7/8 $0.43
Third Quarter................... 31-7/16 28-7/8 $0.43
Fourth Quarter.................. 32 27-3/4 $0.43
Future distributions on our common stock will be determined by our Board
of Directors and will be dependent upon a number of factors, including actual
cash available for distribution, our financial condition and capital
requirements, the annual distribution requirements under the REIT provisions of
the Internal Revenue Code and such other factors as our Board of Directors deems
relevant. To maintain our qualification as a REIT, we must make annual
distributions to stockholders of at least 95% of our taxable income for the
current taxable year, and for taxable years beginning after December 31, 2000,
we must make annual distributions to stockholders of at least 90% of our taxable
income, in each case determined without regard to deductions for dividends paid
and by excluding any net capital gains. Under certain circumstances, we may be
required to make distributions in excess of cash flow available for
distributions to meet the distribution requirements. In that case, we may borrow
funds or may raise funds through the issuance of additional debt or equity
capital. We cannot assure you that we will make any future distributions.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 1996 1995
-------------- --------------- --------------- ------------ ------------
OPERATING DATA:
Total revenue ....................................... $ 86,262 $ 61,016 $ 34,846 $ 17,673 $ 9,923
Total expenses ...................................... 64,209 41,613 37,643 15,498 9,057
-------------- --------------- --------------- ------------ ------------
Income (loss) from operations ....................... 22,053 19,403 (2,797) 2,175 866
Charge in lieu of taxes ............................. - - - - (105)
-------------- --------------- --------------- ------------ ------------
Net income (loss) ................................... $ 22,053 $ 19,403 $ (2,797) $ 2,175 $ 761
============== =============== =============== ============ ============
Net income (loss) per share of common stock (pro
forma for 1997, pro forma and restated for
1996 and 1995)
- Basic ........................................ $ 1.48 $ 1.60 $ (0.35) $ 0.60 $ 0.43
============== =============== =============== ============ ============
- Diluted ...................................... $ 1.46 $ 1.58 $ (0.35) $ 0.60 $ 0.43
============== =============== =============== ============ ============
Weighted average shares of common stock
outstanding (pro forma for 1997, pro forma
and restated for 1996 and 1995) (1)
- Basic ........................................ 13,525,840 12,098,959 8,075,864 3,642,131 1,765,923
============== =============== =============== ============ ============
- Diluted ...................................... 13,670,568 12,306,470 8,075,864 3,642,131 1,765,923
============== =============== =============== ============ ============
Cash dividends declared per share of common
stock (pro forma for 1997, pro forma and
restated for 1996 and 1995) ...................... $ 1.69 $ 1.60 $ 1.60 $ 0.87 $ 0.51
============== =============== =============== ============ ============
BALANCE SHEET DATA (AT YEAR END):
Rental properties - net of accumulated
depreciation...................................... $ 554,706 $ 471,907 $ 227,076 $ 146,960 $ 54,353
Total assets ........................................ $ 643,118 $ 530,296 $ 248,454 $ 160,480 $ 58,702
Mortgage loans payable and unsecured line of
credit ........................................... $ 350,512 $ 309,829 $ 70,817 $ 113,182 $ 40,894
Total liabilities ................................... $ 380,535 $ 330,527 $ 81,537 $ 120,907 $ 42,369
Mandatorily redeemable Series V preferred stock ..... $ - $ - $ - $ 25,042 $ -
Stockholders' equity ................................ $ 262,583 $ 199,769 $ 166,917 $ 14,531 $ 16,333
OTHER DATA:
Net income (loss) ................................... $ 22,053 $ 19,403 $ (2,797) $ 2,175 $ 761
Less:
Preferred dividends ................................. (2,036) - - - -
Add:
Depreciation and amortization ....................... 18,532 10,296 4,866 2,405 1,668
-------------- --------------- --------------- ------------ ------------
Funds from operations (2) ........................... $ 38,549 $ 29,699 $ 2,069 $ 4,580 $ 2,429
============== =============== =============== ============ ============
Cash flows from operating activities ................ $ 42,295 $ 26,111 $ 3,883 $ (1,646) $ 355
Cash flows from investing activities ................ $ (109,833) $ (246,753) $ (87,620) $ (94,900) $ (1,554)
Cash flows from financing activities ................ $ 69,430 $ 220,136 $ 84,101 $ 97,323 $ 927
Number of properties owned at year end .............. 58 51 22 12 4
Rentable square feet of properties owned
at year end ...................................... 4,046,126 3,588,154 1,747,837 1,031,070 313,042
Occupancy of properties owned at year end ........... 92%(3) 93%(3) 97% 97% 96%
22
(1) Pro forma shares of common stock outstanding for the years ended December
31, 1997 and 1996 include all shares outstanding after giving effect to the
initial public offering, weighted for the period beginning from the date of
the Offering, conversion of all series of preferred stock, the 1,765.923 to
1 stock split, the issuance of the stock grants and exercise of substitute
stock options. Pro forma restated shares of common stock outstanding for
the year ended December 31, 1995 also include shares outstanding after
giving effect to the 1,765.923 to 1 stock split.
(2) We compute funds from operations ("FFO") in accordance with standards
established by the Board of Governors of NAREIT in its October 1999 White
Paper ("White Paper"). The White Paper defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. FFO
for 1997 has been restated to conform to the White Paper as amended in
October 1999. FFO for 1997 has been impacted by non-recurring expenses
associated with the initial public offering of $12,197,000, and the
write-off of unamortized loan costs of $2,295,000. For a more detailed
discussion of FFO, see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Funds from Operations."
(3) Includes properties under renovation.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The terms "we," "our," "ours" and "us" as used in this Form 10-K
refer to Alexandria Real Estate Equities, Inc. and its subsidiaries. The
following discussion should be read in conjunction with our consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-K.
OVERVIEW
In June 1997, we completed an initial public offering of our common
stock (the "Offering"). Since the Offering, we have devoted substantially all
of our resources to the ownership, operation, management, acquisition,
conversion, retrofit, expansion and selective development and redevelopment
of high quality, strategically located properties leased principally to
tenants in the life science industry (we refer to these properties as "Life
Science Facilities").
In 1999, we:
- Sold 1,150,000 shares of common stock resulting in aggregate
proceeds of approximately $29.8 million, net of underwriting
discounts and commissions and other offering costs.
- Sold 1,543,500 shares of Series A cumulative redeemable preferred
stock resulting in aggregate proceeds of approximately $36.9
million, net of underwriters' discounts and commissions and other
offering costs.
- Acquired seven properties with an aggregate of approximately
437,000 rentable square feet. In addition, we completed the
development of one property with approximately 55,000 rentable
square feet.
Our primary source of revenue is rental income and tenant recoveries
from leases at the properties we own. Of the 58 properties we owned as of
December 31, 1999, four were acquired in calendar year 1994, eight in 1996,
10 in 1997 (the "1997 Properties"), 29 in 1998 (the "1998 Properties") and
seven in 1999. In addition, we completed the development of one property in
1999 (together with the seven properties acquired in 1999, the "1999
Properties"). As a result of our acquisition activities, there were
significant increases in total revenues and expenses for 1999 as compared to
1998.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998
Rental revenue increased by $19.9 million, or 41%, to $68.4 million
for 1999 compared to $48.5 million for 1998. The increase resulted primarily
from the 1998 Properties being owned for a full period and the addition of
the 1999 Properties. Rental revenue from the properties we acquired before
January 1, 1998 (the "1999 Same Properties") increased by $1.1 million, or
3.8%, due to increases in rental rates and occupancy.
Tenant recoveries increased by $5.0 million, or 44%, to $16.3
million for 1999 compared to $11.3 million for 1998. The increase resulted
primarily from the 1998 Properties being owned for a full period and the
addition of the 1999 Properties. Tenant recoveries for the 1999 Same
Properties increased by $838,000, or 11.7%, generally due to an increase in
recoverable operating expenses.
24
Interest and other income increased by $298,000, or 24%, to $1.5
million for 1999 compared to $1.2 million for 1998. The increase resulted
from an increase in storage and parking income at certain of our properties
and from the increase in interest income from our secured note receivable,
which was funded in March 1998.
Rental operating expenses increased by $5.6 million, or 42%, to
$19.0 million for 1999 compared to $13.4 million for 1998. The increase
resulted primarily from the 1998 Properties being owned for a full period and
the addition of the 1999 Properties. Operating expenses for the 1999 Same
Properties increased by $711,000, or 9.2%, primarily due to the increase in
property taxes. The increase in property taxes, substantially all of which
was recoverable from the tenants at the respective properties, was partially
offset by lower premiums on our blanket property and liability insurance
policies for all of our properties.
The following is a comparison of property operating data for the
1999 Same Properties computed under generally accepted accounting principles
("GAAP Basis") and under generally accepted accounting principles, adjusted
to exclude the effect of straight line rent adjustments required by GAAP
("Cash Basis") (in thousands, except percentage data):
FOR THE YEAR ENDED
DECEMBER 31
--------------------------
1999 1998 CHANGE
------------------------------------------
GAAP BASIS:
Revenue $37,109 $35,244 5.3%
Rental operating expenses 8,435 7,724 9.2%
------------------------------------------
Net operating income $28,674 $27,520 4.2%
==========================================
CASH BASIS (1):
Revenue $34,427 $31,839 8.1%
Rental operating expenses 7,902 7,176 10.1%
------------------------------------------
Net operating income $26,525 $24,663 7.5%
==========================================
(1) The Cash Basis presentation excludes the results for 1431 Harbor Bay
Parkway, Alameda, California. The lease for this property (which was in
place when we acquired the property in 1996) contains significant step-down
provisions that affected the cash rent paid by the tenant beginning in
January 1999. As a result, cash rent paid was reduced from $2,948,000 for
1998 to $2,128,000 for 1999. The lease, which expires in January 2014,
requires another step-down in rent beginning in January 2004 to $750,000
per year. If this property was included in the Cash Basis presentation for
1999, revenue would have increased 5.0%, rental operating expenses would
have increased 9.2% and net operating income would have increased 3.8%. On
a GAAP Basis, rental income from this property throughout 1998 and 1999 was
$1,414,000.
General and administrative expenses increased by $3.1 million, or
79%, to $7.0 million for 1999 compared to $3.9 million for 1998 due to the
continued expansion in the scope of our operations.
Interest expense increased by $5.7 million, or 40%, to $19.7 million
for 1999 compared to $14.0 million for 1998. The increase resulted primarily
from the indebtedness we incurred to acquire the 1998 Properties and the 1999
Properties.
25
Depreciation and amortization increased by $8.2 million, or 80%, to
$18.5 million for 1999 compared to $10.3 million for 1998. The increase
resulted primarily from depreciation associated with the 1998 Properties
being owned for a full period and the addition of the 1999 Properties.
As a result of the foregoing, net income was $22.1 million for 1999
compared to $19.4 million for 1998.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31,
1997
Rental revenue increased by $22.9 million, or 89%, to $48.5 million
for 1998 compared to $25.6 million for 1997. The increase resulted primarily
from the 1997 Properties being owned for a full period and the addition of
the 1998 Properties. A portion of the increase was due to $277,000 in rental
termination payments received in 1998 associated with leases at two of the
properties. Rental revenue from the properties we acquired before January 1,
1997 (the "1998 Same Properties") increased by $234,000, or 1.6%, due to
increases in rental rates and occupancy.
Tenant recoveries increased by $2.9 million, or 35%, to $11.3
million for 1998 compared to $8.4 million for 1997. The increase resulted
primarily from the 1997 Properties being owned for a full period and the
addition of the 1998 Properties. Tenant recoveries for the 1998 Same
Properties increased by $149,000, or 2.8%, generally due to the improved
identification and recovery of costs at certain properties.
Interest and other income increased by $398,000, or 48%, to $1.2
million for 1998 compared to $836,000 for 1997, resulting primarily from
$511,000 of interest income from a $6.0 million secured loan made in
connection with the acquisition of one of the 1998 Properties. This increase
was partially offset by a decrease in interest income resulting from a lower
level of cash equivalents in 1998 compared to 1997, because cash equivalents
had been used to acquire properties.
Rental operating expenses increased by $4.6 million, or 53%, to
$13.4 million for 1998 compared to $8.8 million for 1997. The increase
resulted almost entirely from the 1997 Properties being owned for a full
period and the addition of the 1998 Properties. Operating expenses for the
1998 Same Properties decreased by $145,000, or 2.5%, primarily due to lower
premiums on our blanket property and liability insurance policies.
26
The following is a comparison of property operating data computed on
a GAAP Basis and on a Cash Basis for the 1998 Same Properties (in thousands,
except percentage data):
FOR THE YEAR ENDED
DECEMBER 31
--------------------------
1998 1997 CHANGE
------------------------------------------
GAAP BASIS:
Revenue $20,878 $20,432 2.2%
Rental operating expenses 5,616 5,761 -2.5%
------------------------------------------
Net operating income $15,262 $14,671 4.0%
==========================================
CASH BASIS:
Revenue $22,401 $21,520 4.1%
Rental operating expenses 5,616 5,761 -2.5%
------------------------------------------
Net operating income $16,785 $15,759 6.5%
==========================================
General and administrative expenses increased by $1.4 million, or
57%, to $3.9 million for 1998 compared to $2.5 million for 1997 due to owning
a larger portfolio of properties in 1998 compared to 1997 and increased costs
incurred as a result of being a public company for a full year.
Interest expense increased by $7.0 million, or 100%, to $14.0
million for 1998 compared to $7.0 million for 1997. The increase resulted
from indebtedness we incurred to acquire the 1997 Properties and the 1998
Properties, offset by a reduction in ongoing interest expense due to the
payoff of $72.7 million in secured notes payable in June 1997 with proceeds
from the Offering.
We incurred $12.2 million of non-recurring expenses in 1997
associated with the Offering.
Write-off of unamortized loan costs in 1997 represents the write-off
of $2.1 million in loan costs associated with $72.7 million of secured notes
we repaid with proceeds of the Offering and $148,000 in loan costs associated
with the payoff of debt in November 1997.
Depreciation and amortization increased by $5.4 million, or 112%, to
$10.3 million for 1998 compared to $4.9 million for 1997. The increase
resulted primarily from depreciation associated with the 1997 Properties
being owned for a full period and the addition of the 1998 Properties.
As a result of the foregoing, net income was $19.4 million for 1998
compared to a net loss of $2.8 million for 1997.
27
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities for 1999 increased by
$16.2 million to $42.3 million compared to $26.1 million for 1998. The
increase resulted primarily from operating cash flows from the addition of
the 1998 Properties and the 1999 Properties.
Net cash used in investing activities decreased by $137.0 million to
$109.8 million for 1999 compared to $246.8 million for 1998. The decrease was
primarily due to a lower level of property acquisitions during 1999 compared
to 1998.
Net cash provided by financing activities decreased by $150.7
million to $69.4 million for 1999 compared to $220.1 million for 1998. Cash
provided by financing activities for 1999 primarily consisted of net proceeds
from the issuance/repurchase of our common stock, issuance of preferred stock
and borrowings of secured debt, partially offset by principal reductions on
our secured debt, principal reductions on our unsecured line of credit and
distributions to stockholders. Cash provided by financing activities for 1998
primarily consisted of net proceeds from the issuance of our common stock,
borrowings under our line of credit and secured debt, partially offset by
principal reductions on our secured debt and distributions to stockholders.
COMMITMENTS
As of December 31, 1999, we were committed under the terms of
certain leases to complete the construction of buildings and certain related
improvements at a remaining aggregate cost of $33.2 million.
As of December 31, 1999, we were also committed to fund
approximately $20.9 million for the construction of tenant improvements under
the terms of various leases and for certain investments in limited
partnerships.
RESTRICTED CASH
As of December 31, 1999, we had $8.1 million in cash and cash
equivalents, including $4.7 million in restricted cash. Restricted cash
consists of the following (in thousands):
AMOUNT
----------
Funds held in trust as additional security required under
the terms of certain secured notes payable $ 2,982
Security deposit funds based on the terms of certain
lease agreements 1,699
----------
$ 4,681
==========
28
SECURED DEBT
Secured debt as of December 31, 1999 consists of the following (dollars in
thousands):
BALANCE AT STATED
DECEMBER 31, INTEREST
COLLATERAL 1999 RATE MATURITY DATE
- ---------------------------------------- ---------------------------------------------------------
One Innovation Drive,
Worcester, MA (1) $ 11,720 8.75% January 2006
100/800/801 Capitola Drive,
Durham, NC 12,435 8.68% December 2006
620 Memorial Drive,
Cambridge, MA (2) 19,842 9.125% October 2007
14225 Newbrook Drive, Chantilly,
VA and 3000/3018 Western
Avenue, Seattle, WA 35,995 7.22% May 2008
377 Plantation Street, Worcester,
MA and 6166 Nancy Ridge Road,
San Diego, CA 18,900 8.71% December 2009
1431 Harbor Bay Parkway,
Alameda, CA 7,146 7.165% January 2014
3535/3565 General Atomics Court,
San Diego, CA 17,063 9.00% December 2014
1102/1124 Columbia Street,
Seattle, WA 20,148 7.75% May 2016
381 Plantation Street,
(development project)
Worcester, MA 2,625 9.00% October 2000
1201 Clopper Road,
(development project)
Gaithersburg, MD (3) 12,638 LIBOR + 1.75% October 2001
----------------
$ 158,512
================
(1) The balance shown includes an unamortized premium of $725,000; the
effective rate of the loan is 7.25%.
(2) The balance shown includes an unamortized premium of $2,062,000; the
effective rate of the loan is 7.25%.
(3) The balance shown represents the amount drawn on a construction loan
that provides for borrowings of up to $19,000,000.
29
The following is a summary of the scheduled principal payments for our
secured debt as of December 31, 1999 (in thousands):
YEAR AMOUNT
-------------------------------------------------
2000 $ 5,994
2001 16,292
2002 3,951
2003 4,272
2004 3,915
Thereafter 121,301
---------------
Subtotal 155,725
Unamortized premium 2,787
---------------
$ 158,512
===============
UNSECURED LINE OF CREDIT
At December 31, 1999, we had an unsecured line of credit that
provided for borrowings of up to $250 million. On February 11, 2000, we
amended our unsecured line of credit to provide for borrowings of up to $325
million. Borrowings under the line of credit, as amended, bear interest at a
floating rate based on our election of either a LIBOR based rate or the
higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For
each LIBOR based advance, we must elect to fix the rate for a period of one,
two, three or six months.
The line of credit, as amended, contains financial covenants,
including, among other things, maintenance of minimum net worth, a total
liabilities to gross asset value ratio, and a fixed charge coverage ratio. In
addition, the terms of the line of credit restrict, among other things,
certain investments, indebtedness, distributions and mergers. Borrowings
under the line of credit, as amended, are limited to an amount based on a
pool of unencumbered assets. Accordingly, as we acquire additional
unencumbered properties, borrowings available under the line of credit, as
amended, will increase. As of December 31, 1999, borrowings under the line of
credit were limited to approximately $226,000,000, and carried a weighted
average interest rate of 7.33%. As of February 11, 2000, borrowings under the
line of credit, as amended, were limited to approximately $248,000,000.
The line of credit, as amended, expires February 2003 and provides
for an annual extension (provided there is no default) for an additional
one-year period upon notice by the company and consent of the participating
banks.
In September 1998, we entered into an interest rate swap agreement
with FleetBoston Financial (the "Bank") to hedge our exposure to variable
interest rates associated with our line of credit. Interest paid is
calculated at a fixed interest rate of 5.43% through May 31, 2000 on a
notional amount of $50 million, and interest received is calculated at one
month LIBOR. The net difference between the interest paid and the interest
received is reflected as an adjustment to interest expense.
In October 1999, we entered into an additional interest rate swap
agreement with the Bank to further hedge our exposure to variable interest
rates associated with our line of credit. Interest paid will be calculated at
a fixed interest rate of 6.5% through May 31, 2001 on a notional amount of
$50 million and interest received will be calculated at one month LIBOR. This
agreement has no effect on our September 1998 interest rate swap agreement.
30
In January 2000, we entered into a third interest rate swap
agreement with the Bank to further hedge our exposure to variable interest
rates associated with our line of credit. Interest paid is calculated at a
fixed interest rate of 6.5% from February 1, 2000 to March 31, 2000, 6.75%
from April 1, 2000 to July 31, 2000, 7.00% from August 1, 2000 to December
29, 2000 and 7.25% from December 30, 2000 to December 31, 2001 on a notional
amount of $50 million and interest received is calculated at one month LIBOR.
This agreement has no effect on our September 1998 and October 1999 interest
rate swap agreements.
With respect to our swap agreements, we are exposed to losses in the
event the Bank is unable to perform under the agreements, or in the event one
month LIBOR is less than the agreed-upon fixed interest rates. The fair value
of the swap agreements outstanding as of December 31, 1999 and changes in
their fair value as a result of changes in market interest rates are not
recognized in the financial statements.
OTHER RESOURCES AND LIQUIDITY REQUIREMENTS
In February 1999, we completed a public offering of 1,150,000 shares
of common stock (including the shares issued upon exercise of the
underwriter's over-allotment option). The shares were issued at a price of
$28.125 per share, resulting in aggregate proceeds of approximately $29.8
million, net of underwriting discounts and commissions and other offering
costs.
In June 1999, we completed a public offering of 1,543,500 shares of
our Series A 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 $36.9
million, net of underwriters' discounts and commissions and other offering
costs. The dividends on our Series A preferred stock are cumulative and
accrue from the date of original issuance. We pay dividends quarterly in
arrears at an annual rate of $2.375 per share. Our Series A preferred stock
has no stated maturity, is not subject to any sinking fund or mandatory
redemption and is not redeemable prior to June 11, 2004, except in order to
preserve our status as a real estate investment trust ("REIT"). On or after
June 11, 2004, we may, at our option, redeem our Series A preferred stock, in
whole or in part, at any time for cash at a redemption price of $25.00 per
share, plus accrued and unpaid dividends.
We expect to continue meeting our short-term liquidity and capital
requirements generally through our working capital and net cash provided by
operating activities. We believe that the net cash provided by operating
activities will continue to be sufficient to make distributions necessary to
enable us to continue qualifying as a REIT. We also believe that net cash
provided by operations will be sufficient to fund our recurring non-revenue
enhancing capital expenditures, tenant improvements and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as
property acquisitions, property development activities, scheduled debt
maturities, renovations, expansions and other non-recurring capital
improvements, through excess net cash provided by operating activities,
long-term secured and unsecured borrowings, including borrowings under the
line of credit and the issuance of additional debt and/or equity securities.
31
EXPOSURE TO ENVIRONMENTAL LIABILITIES
In connection with the acquisition of all of our properties, we have
obtained Phase I environmental assessments to ascertain the existence of any
environmental liabilities or other issues. The Phase I environmental
assessments of our properties have not revealed any environmental liabilities
that we believe would have a material adverse effect on our financial
condition or results of operations taken as a whole, nor are we aware of any
material environmental liabilities that have occurred since the Phase I
environmental assessments were completed.
CAPITAL EXPENDITURES, TENANT IMPROVEMENTS AND LEASING COSTS
The following table shows total and weighted average per square foot
capital expenditures, tenant improvements and leasing costs (excluding
capital expenditures and tenant improvements that are recoverable from
tenants or are revenue-enhancing) for the years ended December 31, 1999,
1998, 1997, 1996 and 1995, attributable to leases that commenced at our
properties after our acquisition.
TOTAL/
WEIGHTED
AVERAGE 1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- ------------ ------------
CAPITAL EXPENDITURES:
Weighted average square feet
in portfolio 8,936,049 3,823,290 2,891,863 1,342,216 563,901 314,779
Property related capital
expenditures $ 1,564,000 $ 478,000 $ 341,000 $ 547,000 $ 181,000 $ 17,000
Per weighted average square
foot in portfolio $ 0.18 $ 0.13 $ 0.12 $ 0.41 $ 0.32 $ 0.05
TENANT IMPROVEMENTS AND
LEASING COSTS:
RETENANTED SPACE:
Retenanted square feet 579,867 220,397 88,181 40,953 180,398 49,938
Tenant improvements and
leasing costs $ 3,892,000 $ 1,454,000 $ 478,000 $ 164,000 $ 1,220,000 $ 576,000
Per square foot leased $ 6.71 $ 6.60 $ 5.42 $ 4.00 $ 6.76 $ 11.53
RENEWAL SPACE:
Renewal square feet 213,084 93,667 77,038 1,232 25,063 16,084
Tenant improvements and
leasing costs $ 266,000 $ 149,000 $ 69,000 $ - $ - $ 48,000
Per square foot leased $ 1.25 $ 1.59 $ 0.90 $ - $ - $ 2.98
Capital expenditures fluctuate in any given period due to the
nature, extent, and timing of improvements required and the extent to which
they are recoverable from our tenants. We maintain an active preventative
maintenance program at each of our properties to minimize capital
expenditures required.
Tenant improvements and leasing costs also fluctuate in any given
year depending upon factors such as the timing and extent of vacancies,
property characteristics, the type of lease (renewal tenant or retenanted
space), the involvement of external leasing agents and overall competitive
market conditions.
32
INFLATION
As of December 31, 1999, approximately 79% of our leases (on a
square footage basis) were triple net leases, requiring tenants to pay
substantially all real estate taxes and insurance, common area and other
operating expenses (including increases thereto). In addition, approximately
16% of our leases (on a square footage basis) required the tenants to pay a
majority of operating expenses. Approximately 85% of our leases (on a square
footage basis) contain effective annual rent escalations that are either
fixed (ranging from 2.5% to 4.0%) or indexed based on 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 of
inflation. An increase in inflation, however, could result in an increase in
our variable rate borrowing cost, including borrowings under the unsecured
line of credit.
IMPACT OF THE YEAR 2000
The year 2000 issue was the result of computer programs being
written using two digits rather than four digits to define the applicable
year. Any of our computer programs having time-sensitive software could have
recognized a date using "00" as the year 1900 rather than the year 2000. This
could have resulted in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, send tenant invoices, provide building
services or engage in similar normal business activities.
In October 1998, we formed an internal task force to identify,
assess and evaluate our critical systems to determine which year 2000 related
problems might cause system errors or failures. We identified three major
areas as critical systems: (i) internal accounting systems, (ii) systems of
significant tenants, vendors and financial institutions; and (iii) internal
building systems at our properties. We engaged consulting professionals from
a nationally recognized accounting firm to review our plans and assist us
with our solutions.
Our year 2000 project was designed to ensure that all critical
systems were evaluated and suitable for continued use into and beyond the
year 2000. We completed our identification and initial evaluation of our
critical systems in the first quarter of 1999, and implemented all of the
necessary remedial actions.
We completed our review and testing of our internal accounting
systems. All of these systems are year 2000 compliant.
We place a high degree of reliance on computer systems of third
parties, such as tenants, vendors and financial institutions. Although we
were assessing the readiness of these third parties, we could not guarantee
that they would be year 2000 compliant in a timely manner. We surveyed
significant third-party vendors and financial institutions, and all surveyed
indicated that they had implemented year 2000 programs. In addition, we
surveyed our significant tenants for their year 2000 readiness.We
participated in surveys with new tenants, vendors and other third-party
suppliers. If risk assessments of third-party suppliers or tenants indicated
significant exposure to the year 2000 problem, the supplier or tenant was
asked to demonstrate how the problems would be addressed.
The task force completed its evaluation of internal systems in our
properties that may have had embedded microprocessors with potential year
2000 problems, mainly building systems, including heating, ventilation and
air conditioning systems, elevators and security systems. Based on the
results of our review, certain of our properties had critical systems that
required upgrades for year 2000 readiness. Upgrades were completed at all of
these properties in the second and third quarters of 1999. In some instances,
we used the services of outside experts to test and review our findings and
to confirm that our building systems are year 2000 compliant.
33
Our year 2000 project costs, including the costs of remedial
activities and outside experts, were not material. The aggregate cost of
purchasing conversion packages for the accounting systems and the cost to
survey tenants, vendors and financial institutions were also not material. In
addition, substantially all costs incurred to review the building systems and
to replace or upgrade them constituted property maintenance costs, and were
therefore generally recoverable from the tenants pursuant to the terms of
their existing leases.
FUNDS FROM OPERATIONS
We believe that funds from operations ("FFO") is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of our ability to
incur and service debt, to make capital expenditures and to make
distributions. We compute FFO in accordance with standards established by the
Board of Governors of the National Association of Real Estate Investment
Trusts ("NAREIT") in its October 1999 White Paper (the "White Paper"), which
may differ from the methodology for calculating FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs. Further,
FFO does not represent amounts available for our discretionary use because a
portion of FFO is needed for capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. The White Paper defines
FFO as net income (loss) (computed in accordance with GAAP), excluding gains
(or losses) from sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. FFO should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of our financial
performance or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of our liquidity, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions. (See "Cash Flows" for information regarding these measures of
cash flow).
The following table presents our FFO for the years ended December
31, 1999, 1998 and 1997 (in thousands):
YEAR ENDED DECEMBER 31
--------------------------------------------
1999 1998 1997 (1)
--------------------------------------------
Net income (loss) $ 22,053 $ 19,403 $ (2,797)
Less:
Preferred dividends (2,036) - -
Add:
Depreciation and amortization 18,532 10,296 4,866
------------ ------------- -------------
Funds from Operations $ 38,549 $ 29,699 $ 2,069
============ ============= =============
(1) FFO for 1997 has been restated to conform to the White Paper as amended in
October 1999. FFO for 1997 has been impacted by non-recurring expenses
associated with the Offering of $12,197,000, and the write-off of
unamortized loan costs of $2,295,000.
34
PROPERTY AND LEASE INFORMATION
The following table is a summary of our property portfolio as of December 31,
1999 (dollars in thousands):
NUMBER OF RENTABLE SQUARE ANNUALIZED OCCUPANCY
PROPERTIES FEET BASE RENT PERCENTAGE
---------------------------------------------------------------
REGION:
Suburban Washington D.C 17 1,537,338 $ 21,378 96.1% (1)
California - San Diego 10 569,467 13,336 90.0%
California - San Francisco Bay 8 489,870 10,406 94.2% (1)
Southeast 4 254,230 3,750 100.0%
New Jersey/Suburban Philadelphia 5 268,418 4,118 98.6%
Eastern Massachusetts 6 384,589 10,199 99.4%
Washington - Seattle 3 328,221 8,957 96.0%
---------------------------------------------------------------
Subtotal 53 3,832,133 72,144 95.7%
Renovation/Repositioning Properties 5 213,993 1,740 15.2%
---------------------------------------------------------------
Total 58 4,046,126 $ 73,884 91.5%
===============================================================
(1) Substantially all of the vacant space is office or warehouse space.
The following table shows certain information with respect to the lease
expirations of our properties as of December 31, 1999:
SQUARE PERCENTAGE OF ANNUALIZED BASE
YEAR OF NUMBER OF FOOTAGE OF AGGREGATE RENT OF EXPIRING
LEASE EXPIRING EXPIRING PORTFOLIO LEASE LEASES (PER
EXPIRATION LEASES LEASES SQUARE FOOT SQUARE FOOT)
-----------------------------------------------------------------------------------
2000 56 626,203 16.9% $22.97
2001 26 379,513 10.3% $19.45
2002 22 389,887 10.5% $17.06
2003 17 356,898 9.6% $15.64
2004 18 390,152 10.5% $19.48
Thereafter 30 1,557,898 42.2% $20.72
35
The following table is a summary of our lease activity for the year ended
December 31, 1999 computed on a GAAP Basis and on a Cash Basis:
RENTAL TI'S/LEASE AVERAGE
NUMBER SQUARE EXPIRING NEW RATE COMMISSIONS LEASE
OF LEASES FOOTAGE RATE RATE INCREASE PER FOOT TERM
-------------------------------------------------------------------------------------------
LEASE ACTIVITY - EXPIRED LEASES
Lease Expirations
Cash Rent 52 444,688 $ 15.67 - - - -
GAAP Rent 52 444,688 $ 16.08 - - - -
Renewed / Released Space
Cash Rent 26 314,064 $ 14.45 $ 17.86 23.6% $ 5.10 5.7 Years
GAAP Rent 26 314,064 $ 15.09 $ 19.10 26.6% $ 5.10 5.7 Years
Month-to-Month Leases
Cash Rent 13 53,763 $ 10.61 $ 10.61 0.0% - -
GAAP Rent 13 53,763 $ 10.46 $ 10.61 1.4% - -
Total Leasing
Cash Rent 39 367,827 $ 13.89 $ 16.80 21.0% - -
GAAP Rent 39 367,827 $ 14.42 $ 17.86 23.9% - -
VACANT SPACE LEASED
Cash Rent 15 103,087 - $ 17.60 - $ 5.85 3.8 Years
GAAP Rent 15 103,087 - $ 18.01 - $ 5.85 3.8 Years
ALL LEASE ACTIVITY
Cash Rent 54 470,914 - $ 16.97 - - -
GAAP Rent 54 470,914 - $ 17.89 - - -
36
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the exposure to loss resulting from changes in
interest rates, foreign currency exchange rates, commodity prices and equity
prices. The primary market risk to which we are exposed is interest rate
risk, which is sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political
considerations and other factors that are beyond our control.
In order to modify and manage the interest characteristics of our
outstanding debt and limit the effects of interest rates on our operations,
we may utilize a variety of financial instruments, including interest rate
swaps, caps, floors and other interest rate exchange contracts. The use of
these types of instruments to hedge our exposure to changes in interest rates
carries additional risks such as counter-party credit risk and legal
enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to
financial instruments are primarily dependent upon prevalent market rates of
interest, such as LIBOR. However, due to the purchase of our interest rate
swap agreements, the current effects of interest rate changes are reduced.
Based on interest rates at, and our swap agreements in effect on, December
31, 1999, a 1% increase in interest rates on our line of credit would
decrease annual future earnings and cash flows, after considering the effect
of our interest rate swap agreements, by approximately $920,000. A 1%
decrease in interest rates on our line of credit would increase annual future
earnings and cash flows, after considering the effect of our interest rate
swap agreements, by approximately $920,000. A 1% increase in interest rates
on our secured debt and interest rate swap agreements would decrease their
fair value by approximately $7.8 million. A 1% decrease in interest rates on
our secured debt and interest rate swap agreements would increase their fair
value by approximately $8.9 million. A 1% increase or decrease in interest
rates on our secured note receivable would not have a material impact on its
fair value.
These amounts are determined by considering the impact of the
hypothetical interest rates on our borrowing cost and our interest rate swap
agreements in effect on December 31, 1999. 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.
If we were to include the impact of our new interest rate swap
agreement effective February 2000 under the same conditions set forth above,
a 1% increase in interest rates on our line of credit would decrease annual
future earnings and cash flows, after considering the effect of our interest
rate swap agreements, by approximately $420,000. A 1% decrease in interest
rates on our line of credit would increase annual future earnings and cash
flows, after considering the effect of our interest rate swap agreements, by
approximately $420,000. A 1% increase in interest rates on our secured debt
and our interest rate swap agreements would decrease their fair value by
approximately $7.4 million. A 1% decrease in interest rates on our secured
debt and our interest rate swap agreements would increase their fair value by
approximately $8.4 million.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required by
Regulation S-X are included in this Report on Form 10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is incorporated by reference
from our definitive proxy statement to be mailed in connection with our
annual meeting of stockholders to be held on April 28, 2000.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated by reference
from our definitive proxy statement to be mailed in connection with our
annual meeting of stockholders to be held on April 28, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated by reference
from our definitive proxy statement to be mailed in connection with our
annual meeting of stockholders to be held on April 28, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated by reference
from our definitive proxy statement to be mailed in connection with our
annual meeting of stockholders to be held on April 28, 2000.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial information is included as a separate
section of this Annual Report on Form 10-K:
PAGE
Report of Independent Auditors...........................................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998.............................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997................................................F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997................................................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997................................................F-5
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1999, 1998 and 1997................................................F-6
Schedule III - Consolidated Financial Statement of Rental Properties
and Accumulated Depreciation....................................................F-22
(b) REPORTS ON FORM 8-K.
Alexandria did not file any reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 1999.
(c) EXHIBITS.
EXHIBIT
NUMBER EXHIBIT
- ------- -------
3.1++ Articles of Amendment and Restatement of Alexandria
3.2++ Certificate of Correction of Alexandria
3.3*++ Bylaws of Alexandria (as amended, adopted February 4, 2000; effective February 16, 2000)
3.4*++ Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle
8 of Title 3 of the MGCL
3.5*++ Articles Supplementary, dated February 10, 2000, relating to the Series A Junior Participating
Preferred Stock
3.6+** Articles Supplementary, dated June 9, 1999, relating to the 9.50% Series A Cumulative Redeemable
Preferred Stock of Alexandria
4.1*++ Rights Agreement, dated as of February 10, 2000, between the Company
and American Stock Transfer & Trust Company, as Rights Agent,
including the form of the Articles Supplementary setting forth the
terms of the Series A Junior Participating Preferred Stock, par value
$.01 per
40
EXHIBIT
NUMBER EXHIBIT
- ------- -------
share, as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Stock as
Exhibit C. Pursuant to the Rights Agreement, printed Rights
Certificates will not be mailed until after the Distribution Date (as
such term is defined in the Rights Agreement)
4.2+ Specimen Certificate representing shares of Common Stock
4.3+** Specimen Certificate Representing Shares of Alexandria's 9.50% Series A Cumulative
Redeemable Preferred Stock
10.1* Second Amendment to the Executive Employment Agreement and General and Special Release
by and between Alexandria and Jerry M. Sudarsky, dated May 30, 1997
10.2* Amended and Restated Executive Employment Agreement by and between Alexandria and Joel
S. Marcus, dated January 5, 1994, and amended as of March 28, 1997
10.3+++ Executive Employment Agreement between Alexandria and James H. Richardson, dated July 31,
1997
10.4*** Amended and Restated Executive Employment Agreement between Alexandria and Peter J.
Nelson, dated May 20, 1998
10.5*+ Amendment to Amended and Restated Executive Employment Agreement between Alexandria
and Peter J. Nelson, dated August 31, 1999
10.6**+ Severance Agreement between Alexandria and Lynn Anne Shapiro, dated
January 1, 1999
10.7**+ Executive Employment Agreement between Alexandria and
Vincent R. Ciruzzi, dated April 20, 1998
10.8*+ Amendment to Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi,
dated August 31, 1999
10.9*+ Employment Letter Agreement between Alexandria and Tom Andrews, dated
June 1, 1999
10.10** Amended and Restated 1997 Stock Award and Incentive Plan of
Alexandria
10.11+ Form of Non-Employee Director Stock Option Agreement for use
in connection with options issued pursuant to the 1997 Stock Option Plan
10.12+ Form of Incentive Stock Option Agreement for use in connection with
Options issued pursuant to the 1997 Stock Option Plan
10.13+ Form of Nonqualified Stock Option Agreement for use in connection with Options issued
pursuant to the 1997 Stock Option Plan
10.14*+ Form of Employee Restricted Stock Agreement for use in connection with shares of restricted
stock issued to employees pursuant to Alexandria's Amended and Restated 1997 Stock Award and
Incentive Plan
10.15*+ Form of Independent Contractor Restricted Stock Agreement for use in connection with shares
of restricted stock issued to independent contractors pursuant to Alexandria's Amended
and Restated 1997 Stock Award and Incentive Plan
10.16 Second Amended and Restated Revolving Loan Agreement 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,
BankBoston, N.A., as Managing Agent, The Chase Manhattan Bank, as Syndication Agent, and
First Union National Bank, as Documentation Agent, dated February 11, 2000
10.17**+ Form of International Swap Dealers Association, Inc. Master Agreement and related Schedule and
Confirmation between BankBoston, N.A. and Alexandria, dated as of August 31, 1998
41
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.18+* Share Exchange Agreement, dated as of February 26, 1999, between Alexandria Real Estate
Equities, Inc. and Health Science Properties Holding Corporation
10.19+* First Amendment to Share Exchange Agreement, dated as of March 10, 1999, by and between
Alexandria Real Estate Equities, Inc. and Health Science Properties Holding Corporation
10.20+* Second Amendment to Share Exchange Agreement, dated as of March 11, 1999, by and between
Alexandria Real Estate Equities, Inc. and Health Science Properties Holding Corporation
10.21+* Escrow and Security Agreement, dated as of March 11, 1999, among Alexandria Real Estate
Equities, Inc., Health Science Properties Holding Corporation and Cedars Bank
10.22+* Registration Rights Agreement, dated as of March 11, 1999, by and
among Alexandria Real Estate Equities, Inc. and Health Science
Properties Holding Corporation (together with its permitted assigns)
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
21.1 List of Subsidiaries of Alexandria
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- ----------
+ Incorporated by reference to Alexandria's Registration Statement on Form
S-11 (No. 333-23545), declared effective by the Commission on May 27, 1997
++ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, filed with the Commission on August
14, 1997
+++ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, filed with the Commission on
November 14, 1997
* Incorporated by reference to Alexandria's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998
** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August
14, 1998
*** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q/A
for the period ended June 30, 1998, filed with the Commission on August
18, 1998
**+ Incorporated by reference to Alexandria's Annual Report on Form 10-K for
the year ended December 31, 1998, filed with the Commission on March 15,
1999
+* Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, filed with the Commission on May 17,
1999
+** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1999, filed with the Commission on August
13, 1999
*+ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended September 30, 1999, filed with the Commission on
November 15, 1999
*++ Incorporated by reference to Alexandria's Current Report on Form 8-K,
filed with the Commission on February 10, 2000
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
Dated: March 29, 2000 By: /S/ JOEL S. MARCUS
------------------------------
Joel S. Marcus
Chief Executive Officer
KNOW ALL THOSE BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jerry M. Sudarsky, Joel S. Marcus and
Peter J. Nelson, and each of them, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this report, and to file the same, with exhibits thereto and other
documents in connection therewith, if any, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each of
said attorneys-in-fact and agents of their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Jerry M. Sudarsky Chairman of the Board of Directors March 21, 2000
- --------------------------
Jerry M. Sudarsky
/s/ Joel S. Marcus Chief Executive Officer (Principal March 29, 2000
- -------------------------- Executive Officer) and Director
Joel S. Marcus
/s/ James H. Richardson President and Director March 22, 2000
- --------------------------
James H. Richardson
/s/ Peter J. Nelson Chief Financial Officer, Senior Vice March 29, 2000
- -------------------------- President, and Treasurer (Principal
Peter J. Nelson Financial and Accounting Officer)
/s/ Richard B. Jennings Director March 17, 2000
- --------------------------
Richard B. Jennings
/s/ Viren Mehta Director March 21, 2000
- --------------------------
Viren Mehta
/s/ David M. Petrone Director March 24, 2000
- --------------------------
David M. Petrone
/s/ Anthony M. Solomon Director March 22, 2000
- --------------------------
Anthony M. Solomon
S-1
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Alan G. Walton Director March 20, 2000
- --------------------------
Alan G. Walton
S-2
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
- ------- -------
3.1++ Articles of Amendment and Restatement of Alexandria
3.2++ Certificate of Correction of Alexandria
3.3*++ Bylaws of Alexandria (as amended, adopted February 4, 2000; effective
February 16, 2000)
3.4*++ Articles Supplementary, dated February 10, 2000, relating to the election to be subject to Subtitle
8 of Title 3 of the MGCL
3.5*++ Articles Supplementary, dated February 10, 2000, relating to the
Series A Junior Participating Preferred Stock
3.6+** Articles Supplementary, dated June 9, 1999, relating to the 9.50% Series A Cumulative Redeem
able Preferred Stock of Alexandria
4.1*++ Rights Agreement, dated as of February 10, 2000, between the Company
and American Stock Transfer & Trust Company, as Rights Agent,
including the form of the Articles Supplementary setting forth the
terms of the Series A Junior Participating Preferred Stock, par value
$.01 per share, as Exhibit A, the form of Rights Certificate as
Exhibit B and the Summary of Rights to Purchase Preferred Stock as
Exhibit C. Pursuant to the Rights Agreement, printed Rights
Certificates will not be mailed until after the Distribution Date (as
such term is defined in the Rights Agreement)
4.2+ Specimen Certificate representing shares of Common Stock
4.3+** Specimen Certificate Representing Shares of Alexandria's 9.50% Series A Cumulative Redeemable
Preferred Stock
10.1* Second Amendment to the Executive Employment Agreement and General
and Special Release by and between Alexandria and Jerry M. Sudarsky,
dated May 30, 1997
10.2* Amended and Restated Executive Employment Agreement by and between
Alexandria and Joel S. Marcus, dated January 5, 1994, and amended as
of March 28, 1997
10.3+++ Executive Employment Agreement between Alexandria and James H. Richardson, dated July 31,
1997
10.4*** Amended and Restated Executive Employment Agreement between Alexandria and Peter J.
Nelson, dated May 20, 1998
10.5*+ Amendment to Amended and Restated Executive Employment Agreement between Alexandria
and Peter J. Nelson, dated August 31, 1999
10.6**+ Severance Agreement between Alexandria and Lynn Anne Shapiro, dated
January 1, 1999
10.7**+ Executive Employment Agreement between Alexandria and
Vincent R. Ciruzzi, dated April 20, 1998
10.8*+ Amendment to Executive Employment Agreement between Alexandria and Vincent R. Ciruzzi,
dated August 31, 1999
10.9*+ Employment Letter Agreement between Alexandria and Tom Andrews, dated
June 1, 1999
10.10** Amended and Restated 1997 Stock Award and Incentive Plan of
Alexandria
10.11+ Form of Non-Employee Director Stock Option Agreement for use in connection with options
issued pursuant to the 1997 Stock Option Plan
10.12+ Form of Incentive Stock Option Agreement for use in connection with
Options issued pursuant to the 1997 Stock Option Plan
Ex-1
EXHIBIT
NUMBER EXHIBIT
- ------- -------
10.13+ Form of Nonqualified Stock Option Agreement for use in connection
with Options issued pursuant to the 1997 Stock Option Plan
10.14*+ Form of Employee Restricted Stock Agreement for use in connection
with shares of restricted stock issued to employees pursuant to
Alexandria's Amended and Restated 1997 Stock Award and Incentive Plan
10.15*+ Form of Independent Contractor Restricted Stock Agreement for use in
connection with shares of restricted stock issued to independent
contractors pursuant to Alexandria's Amended and Restated 1997 Stock
Award and Incentive Plan
10.16 Second Amended and Restated Revolving Loan Agreement 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, BankBoston, N.A., as Managing Agent, The Chase
Manhattan Bank, as Syndication Agent, and First Union National Bank,
as Documentation Agent, dated February 11, 2000
10.17**+ Form of International Swap Dealers Association, Inc. Master Agreement and related Schedule and
Confirmation between BankBoston, N.A. and Alexandria, dated as of August 31, 1998
10.18+* Share Exchange Agreement, dated as of February 26, 1999, between Alexandria Real Estate
Equities, Inc. and Health Science Properties Holding Corporation
10.19+* First Amendment to Share Exchange Agreement, dated as of March 10, 1999, by and between
Alexandria Real Estate Equities, Inc. and Health Science Properties Holding Corporation
10.20+* Second Amendment to Share Exchange Agreement, dated as of March 11, 1999, by and between
Alexandria Real Estate Equities, Inc. and Health Science Properties Holding Corporation
10.21+* Escrow and Security Agreement, dated as of March 11, 1999, among Alexandria Real Estate
Equities, Inc., Health Science Properties Holding Corporation and Cedars Bank
10.22+* Registration Rights Agreement, dated as of March 11, 1999, by and
among Alexandria Real Estate Equities, Inc. and Health Science
Properties Holding Corporation (together with its permitted assigns)
12.1 Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock
Dividends
21.1 List of Subsidiaries of Alexandria
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- -----------
+ Incorporated by reference to Alexandria's Registration Statement on Form
S-11 (No. 333-23545), declared effective by the Commission on May 27, 1997
++ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1997, filed with the Commission on August
14, 1997
+++ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended September 30, 1997, filed with the Commission on
November 14, 1997
* Incorporated by reference to Alexandria's Annual Report on Form 10-K for
the year ended December 31, 1997, filed with the Commission on March 31,
1998
** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed with the Commission on August
14, 1998
*** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q/A
for the period ended June 30, 1998, filed with the Commission on August
18, 1998
Ex-2
**+ Incorporated by reference to Alexandria's Annual Report on Form 10-K for
the year ended December 31, 1998, filed with the Commission on March 15,
1999
+* Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended March 31, 1999, filed with the Commission on May 17,
1999
+** Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended June 30, 1999, filed with the Commission on August
13, 1999
*+ Incorporated by reference to Alexandria's Quarterly Report on Form 10-Q
for the period ended September 30, 1999, filed with the Commission on
November 15, 1999
*++ Incorporated by reference to Alexandria's Current Report on Form 8-K,
filed with the Commission on February 10, 2000
Ex-3
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria
Real Estate Equities, Inc. and subsidiaries (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the index at item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Alexandria Real
Estate Equities, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 24, 2000, except for Note 5,
as to which the date is February 11, 2000
F-1
ALEXANDRIA REAL ESTATE EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31
1999 1998
---------------- ---------------
ASSETS
Rental properties, net $ 554,706 $ 471,907
Property under development 44,121 21,839
Cash and cash equivalents 3,446 1,554
Tenant security deposits and other restricted cash 4,681 7,491
Secured note receivable 6,000 6,000
Tenant receivables 3,432 2,884
Deferred rent 9,014 5,595
Other assets 17,718 13,026
-----------------------------------
Total assets $ 643,118 $ 530,296
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable (includes unamortized
premium of $2,787 and $2,262 at December 31,
1999 and 1998, respectively) $ 158,512 $ 115,829
Unsecured line of credit 192,000 194,000
Accounts payable, accrued expenses and tenant security
deposits 23,349 15,663
Dividends payable 6,674 5,035
-----------------------------------
380,535 330,527
Commitments and contingencies - -
Stockholders' equity:
9.50% Series A cumulative redeemable preferred
stock, $0.01 par value per share, 1,610,000 shares
authorized; 1,543,500 issued and outstanding at
December 31, 1999, $25.00 liquidation value 38,588 -
Common stock, $0.01 par value per share, 100,000,000
shares authorized; 13,745,622 and 12,586,263 shares
issued and outstanding at December 31, 1999
and 1998, respectively 137 126
Additional paid-in capital 225,180 199,643
Deferred compensation (1,494) -
Retained earnings - -
Accumulated other comprehensive income 172 -
-----------------------------------
Total stockholders' equity 262,583 199,769
-----------------------------------
Total liabilities and stockholders' equity $ 643,118 $ 530,296
===================================
SEE ACCOMPANYING NOTES.
F-2
ALEXANDRIA REAL ESTATE EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
1999 1998 1997
---------------------------------------------------------
Revenues
Rental $ 68,425 $ 48,469 $ 25,622
Tenant recoveries 16,305 11,313 8,388
Interest and other income 1,532 1,234 836
---------------------------------------------------------
86,262 61,016 34,846
Expenses
Rental operations 19,003 13,390 8,766
General and administrative 6,977 3,894 2,476
Interest 19,697 14,033 7,043
Non-recurring expenses associated with
initial public offering - - 12,197
Write-off of unamortized loan costs - - 2,295
Depreciation and amortization 18,532 10,296 4,866
--------------------------------------------------------
64,209 41,613 37,643
--------------------------------------------------------
Net income (loss) $ 22,053 $ 19,403 $ (2,797)
========================================================
Preferred dividends $ 2,036 $ - $ 3,038
========================================================
Net income (loss) allocated to common
stockholders $ 20,017 $ 19,403 $ (5,835)
========================================================
Net income (loss) per share of common stock
(pro forma for 1997):
- Basic $ 1.48 $ 1.60 $ (0.35)
========================================================
- Diluted $ 1.46 $ 1.58 $ (0.35)
========================================================
Weighted average shares of common stock
outstanding (pro forma for 1997):
- Basic 13,525,840 12,098,959 8,075,864
========================================================
- Diluted 13,670,568 12,306,470 8,075,864
========================================================
SEE ACCOMPANYING NOTES.
F-3
ALEXANDRIA REAL ESTATE EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
SERIES T SERIES U SERIES A NUMBER OF ADDITIONAL
PREFERRED PREFERRED PREFERRED COMMON COMMON PAID-IN
STOCK STOCK STOCK SHARES STOCK CAPITAL
-----------------------------------------------------------------------------
Balance at January 1, 1997 (restated) $ 1 $ 110 $ - 1,765,923 $ 18 $ 16,177
Accretion on Series V preferred stock - - - - - (1,911)
Cash dividends on Series T, U and V
preferred stock - - - - - -
Exercise of compensatory stock
options and issuance of stock
grants (including compensation
expense of $4,161) - - - 209,615 2 4,190
Issuance of common stock in
connection with initial public
offering, net of offering costs - - - 7,762,500 78 138,812
Conversion of Series V and Series U
preferred stock - (110) - 1,666,593 16 27,045
Redemption of Series T preferred stock (1) - - - - -
Dividends declared on common stock - - - - - (10,578)
Net loss - - - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1997 - - - 11,404,631 114 173,735
Issuance of common stock, net of
offering costs - - - 1,150,000 12 32,701
Exercise of stock options, net - - - 31,632 - 386
Dividends declared on common stock - - - - - (7,179)
Net income - - - - - -
-----------------------------------------------------------------------------
Balance at December 31, 1998 - - - 12,586,263 126 199,643
Net income - - - - - -
Unrealized gain on marketable
securities - - - - - -
Comprehensive income - - - - - -
Issuance of common stock, net of
offering costs - - - 1,150,000 11 29,818
Repurchase of common stock - - - (145,343) (1) (3,458)
Issuance of preferred stock, net of
offering costs - - 38,588 - - (1,712)
Stock compensation expense - - - 105,800 1 3,151
Amortization of stock compensation
expense - - - - - -
Exercise of stock options - - - 48,902 - 874
Dividends declared on preferred stock - - - - - -
Dividends declared on common stock - - - - - (3,136)
-----------------------------------------------------------------------------
Balance at December 31, 1999 $ - $ - $ 38,588 13,745,622 $ 137 $ 225,180
=============================================================================
ACCUMULATED
OTHER
DEFERRED RETAINED COMPREHENSIVE
COMPENSATION EARNINGS INCOME TOTAL
----------------------------------------------------
Balance at January 1, 1997 (restated) $ - $ (1,775) $ - $ 14,531
Accretion on Series V preferred stock - - - (1,911)
Cash dividends on Series T, U and V
preferred stock - (1,127) - (1,127)
Exercise of compensatory stock
options and issuance of stock
grants (including compensation
expense of $4,161) - - - 4,192
Issuance of common stock in
connection with initial public
offering, net of offering costs - - - 138,890
Conversion of Series V and Series U
preferred stock - - - 26,951
Redemption of Series T preferred stock - - - (1)
Dividends declared on common stock - (1,233) - (11,811)
Net loss - (2,797) - (2,797)
------------------------------------- ----------------
Balance at December 31, 1997 - (6,932) - 166,917
Issuance of common stock, net of
offering costs - - - 32,713
Exercise of stock options, net - - - 386
Dividends declared on common stock - (12,471) - (19,650)
Net income - 19,403 - 19,403
------------------------------------- ----------------
Balance at December 31, 1998 - - - 199,769
Net income - 22,053 - 22,053
Unrealized gain on marketable
securities - - 172 172
----------------
Comprehensive income - - - 22,225
Issuance of common stock, net of
offering costs - - - 29,829
Repurchase of common stock - - - (3,459)
Issuance of preferred stock, net of
offering costs - - - 36,876
Stock compensation expense (3,152) - - -
Amortization of stock compensation
expense 1,658 - - 1,658
Exercise of stock options - - - 874
Dividends declared on preferred stock - (2,036) - (2,036)
Dividends declared on common stock - (20,017) - (23,153)
---------------------------------------------------------
Balance at December 31, 1999 $ (1,494) $ - $ 172 $ 262,583
=========================================================
SEE ACCOMPANYING NOTES.
F-4
ALEXANDRIA REAL ESTATE EQUITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 22,053 $ 19,403 $ (2,797)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 18,532 10,296 4,866
Amortization of loan costs and fees 748 451 251
Amortization of premiums on secured notes (310) (32) -
Stock compensation expense 1,658 - 4,161
Changes in operating assets and liabilities:
Tenant security deposits and other restricted cash 2,810 (692) (1,214)
Tenant receivables (548) (1,752) (703)
Deferred rent (3,419) (3,097) (1,595)
Other assets (6,915) (7,971) (1,594)
Accounts payable, accrued expenses and tenant security
deposits 7,686 9,505 2,508
-----------------------------------------------
Net cash provided by operating activities 42,295 26,111 3,883
INVESTING ACTIVITIES
Purchase of rental properties (63,896) (200,590) (81,160)
Additions to rental properties (16,807) (21,218) (3,566)
Additions to property under development (29,130) (18,945) (2,894)
Issuance of note receivable - (6,000) -
-----------------------------------------------
Net cash used in investing activities (109,833) (246,753) (87,620)
FINANCING ACTIVITIES
Proceeds from secured notes payable 34,163 36,500 15,360
Net proceeds from issuances of common stock 29,829 32,713 138,919
Net proceeds from issuance of preferred stock 36,876 - -
Exercise of stock options 874 386 -
Net (principal reductions) borrowings from unsecured line of
credit (2,000) 171,000 23,000
Decrease in due to Health Science Properties Holding
Corporation - - (2,525)
Principal reductions on secured notes payable (3,303) (1,286) (80,725)
Dividends paid on common stock (22,278) (19,177) (8,800)
Dividends paid on preferred stock (1,272) - (1,127)
Redemption of Series T preferred stock - - (1)
Repurchase of common stock (3,459) - -
-----------------------------------------------
Net cash provided by financing activities 69,430 220,136 84,101
Net increase (decrease) in cash and cash equivalents 1,892 (506) 364
Cash and cash equivalents at beginning of year 1,554 2,060 1,696
-----------------------------------------------
Cash and cash equivalents at end of year $ 3,446 $ 1,554 $ 2,060
===============================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest and financing
costs, net of interest capitalized $ 23,512 $ 12,778 $ 13,552
===============================================
SEE ACCOMPANYING NOTES.
F-5
1. BACKGROUND
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT")
formed in 1994. We completed our initial public offering (the "Offering") on
June 2, 1997. We are engaged primarily in the ownership, operation, management,
acquisition, conversion, retrofit, expansion, and selective development and
redevelopment of properties containing a combination of office and laboratory
space. We refer to these properties as "Life Science Facilities". Our Life
Science Facilities are designed and improved for lease primarily to
pharmaceutical, biotechnology, diagnostic, device, contract research and
personal care products companies, major scientific research institutions,
related government agencies and technology enterprises. As of December 31, 1999,
our portfolio consisted of 58 properties in nine states with approximately
4,046,000 rentable square feet, compared to 51 properties in nine states with
approximately 3,588,000 rentable square feet as of December 31, 1998.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Alexandria and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
CASH EQUIVALENTS
We consider all highly liquid investments with original maturities of three
months or less when purchased to be cash equivalents.
MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale securities under
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and are
included in other assets in our balance sheets. Available-for-sale securities
are carried at fair value as determined by the most recently traded price at the
balance sheet date, with unrealized gains and losses shown as a separate
component of stockholders' equity.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
F-6
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RENTAL PROPERTIES AND PROPERTY UNDER DEVELOPMENT
Rental properties and property under development are stated at the lower of
cost or estimated fair value. Write-downs to estimated fair value would be
recognized when impairment indicators are present and a property's estimated
undiscounted future cash flows, before interest charges, are less than its
book value. In that situation, we would recognize an impairment loss to the
extent the carrying amount exceeds the fair value of the property. Based on
our assessment, no write-downs to estimated fair value were necessary for the
periods presented.
The cost of maintenance and repairs is expensed as incurred. Major
replacements and betterments are capitalized and depreciated over their
estimated useful lives.
Depreciation is provided using the straight-line method using estimated lives
of 30 to 40 years for buildings and building improvements, 20 years for land
improvements, and the term of the respective lease for tenant improvements.
RESTRICTED CASH
Restricted cash consists of the following (in thousands):
DECEMBER 31
1999 1998
------------------------
Reserve for tenant improvements established
pursuant to leases at two of our properties $ - 3,220
Funds held in trust as additional security required
under the terms of certain secured notes payable 2,982 3,360
Security deposit funds based on the terms
of certain lease agreements 1,699 911
-----------------------
$ 4,681 7,491
========================
LOAN FEES AND COSTS
Fees and costs incurred in obtaining long-term financing are amortized over
the terms of the related loans and included in interest expense. Loan fees
and costs, net of related amortization, totaled $3,018,000 and $3,424,000 as
of December 31, 1999 and 1998, respectively, and are included in other assets
in our balance sheets.
RENTAL INCOME
Rental income from leases with scheduled rent increases, free rent and other
rent adjustments are recognized on a straight-line basis over the respective
lease term. We include amounts currently recognized as income, and expected
to be received in later years, in deferred rent on our balance sheets.
Amounts received currently, but recognized as income in future years, are
included in accrued expenses as unearned rent on our balance sheets.
F-7
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTEREST AND OTHER INCOME
Interest and other income were generated through the operation of our
properties. Interest income was $1,013,000, $978,000 and $588,000 in 1999,
1998 and 1997, respectively.
LEASING COSTS
Leasing costs are amortized on a straight-line basis over the term of the
related lease. Leasing costs, net of related amortization, totaled $7,159,000
and $4,856,000 as of December 31, 1999 and 1998, respectively, and are
included in other assets in our balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value. The
carrying amount of our secured note receivable approximates fair value
because the applicable interest rate approximates the market rate for this
loan.
The fair value of our secured notes payable was estimated using discounted
cash flows analyses based on borrowing rates we believe we could obtain with
similar terms and maturities. As of December 31, 1999 and 1998, the fair
value of our secured notes payable was approximately $149,329,000 and
$118,310,000, respectively.
NET INCOME (LOSS) PER SHARE
Historical per share data has not been presented for 1997 because it is not
meaningful due to the material changes in our capital structure as a result
of the Offering. Instead, we have presented net loss per share for 1997 on a
pro forma basis, giving effect to the Offering and related transactions.
Pro forma shares of common stock outstanding for the year ended December 31,
1997 include all shares outstanding after giving effect to the 1,765.923 to 1
stock split, the issuance of stock grants, the issuance and exercise of
substitute stock options and the conversion of the Series U and Series V
preferred stock. In addition, shares issued to the public in connection with
the Offering have been weighted for the period of time they were outstanding.
We have adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share." Basic and diluted net income per share are the same for
1997 because the stock options outstanding as of December 31, 1997 were
antidilutive.
F-8
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NET INCOME (LOSS) PER SHARE (CONTINUED)
The following table shows the computation of net income (loss) per share of
common stock outstanding, as well as the dividends declared per share of
common stock:
YEAR ENDED DECEMBER 31
1999 1998 1997
----------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) available to common
stockholders $ 20,017 $ 19,403 $ (2,797)
==========================================================
Weighted average shares of common stock
outstanding- basic (pro forma for 1997) 13,525,840 12,098,959 8,075,864
Add: dilutive effect of stock options 144,728 207,511 -
----------------------------------------------------------
Weighted average shares of common stock
outstanding- diluted (pro forma for 1997) 13,670,568 12,306,470 8,075,864
==========================================================
Net income (loss) per common share - basic
(pro forma for 1997) $ 1.48 $ 1.60 $ (0.35)
==========================================================
Net income (loss) per common share - diluted
(pro forma for 1997) $ 1.46 $ 1.58 $ (0.35)
==========================================================
Common dividends declared per share (pro
forma for 1997) $ 1.69 $ 1.60 $ 1.60
==========================================================
OPERATING SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments.
Statement 131 also establishes standards for related disclosure about
products and services, geographic areas, and major customers. Since we
operate as a single segment, the implementation of Statement 131 did not have
an impact on how we report our results of operations.
F-9
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
As a REIT, we are not subject to federal income taxation as long as we meet a
number of organizational and operational requirements and distribute all of
our taxable income to our stockholders. Since we believe we have met these
requirements and our distributions exceeded taxable income, no federal income
tax provision has been reflected in the accompanying consolidated financial
statements for the years ended December 31, 1999, 1998 and 1997. If we fail
to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income at regular corporate tax rates. For the
years ended December 31, 1999 and 1998, we reported that none of our
distributions with respect to common stock represented a return of capital
for federal income tax purposes. For the year ended December 31, 1997, we
reported that 37.6% of our distributions with respect to common stock
represented a return of capital.
3. RENTAL PROPERTIES
Rental properties consist of the following (in thousands):
DECEMBER 31
1999 1998
------------------------------
Land $ 81,446 $ 76,254
Building and improvements 475,507 393,728
Tenant and other improvements 33,249 20,536
------------------------------
590,202 490,518
Less accumulated depreciation (35,496) (18,611)
------------------------------
$ 554,706 $ 471,907
==============================
Fourteen of our rental properties are encumbered by deeds of trust and
assignments of rents and leases associated with the properties (see Note 6).
The net book value of these properties as of December 31, 1999 is
$239,659,000.
We lease space under noncancelable leases with remaining terms of one to 17
years.
As of December 31, 1999, approximately 79% of our leases (on a square footage
basis) require that the lessee pay substantially all taxes, maintenance,
insurance and certain other operating expenses applicable to the leased
properties.
We capitalize interest to properties under development or renovation during
the period the asset is undergoing activities to prepare it for its intended
use. Total interest capitalized for the years ended December 31, 1999, 1998
and 1997 was $3,784,000, $2,199,000 and $96,000, respectively. Total interest
incurred for the years ended December 31, 1999, 1998 and 1997 was
$23,792,000, $16,264,000 and $7,139,000, respectively.
F-10
3. RENTAL PROPERTIES (CONTINUED)
Minimum lease payments to be received under the terms of the operating lease
agreements, excluding expense reimbursements, as of December 31, 1999, are as
follows (in thousands):
2000 $ 61,282
2001 55,140
2002 48,354
2003 43,179
2004 36,314
Thereafter 177,328
------------
$ 421,597
============
4. SECURED NOTE RECEIVABLE
In connection with the acquisition of a Life Science Facility in San Diego,
California in March 1998, we made a $6,000,000 loan to the sole tenant of the
property, fully secured by a first deed of trust on certain improvements at
the property. The loan bears interest at a rate of 11% per year, payable
monthly, and matures in March 2002. The loan is cross-defaulted to the lease
with the sole tenant. Under certain circumstances, we may obtain title to the
improvements that secure the loan, and, in such event, we may also require
the sole tenant at the property to lease such improvements back from us for
an additional rental amount.
5. UNSECURED LINE OF CREDIT
Alexandria has an unsecured line of credit that provides for borrowings of up
to $250 million. Borrowings under the line of credit bear interest at a
floating rate based on our election of either a LIBOR based rate or the
higher of the bank's reference rate and the Federal Funds rate plus 0.5%. For
each LIBOR based advance, we must elect to fix the rate for a period of one,
two, three or six months.
The line of credit contains financial covenants, including, among other
things, maintenance of minimum net worth, a total liabilities to gross asset
value ratio, and a fixed charge coverage ratio. In addition, the terms of the
line of credit restrict, among other things, certain investments,
indebtedness, distributions and mergers. Borrowings under the line of credit
are limited to an amount based on a pool of unencumbered assets. Accordingly,
as we acquire additional unencumbered properties, borrowings available under
the line of credit will increase, but may not exceed $250 million. As of
December 31, 1999, borrowings under the line of credit were limited to
approximately $226,000,000, and carried a weighted average interest rate of
7.33%.
The line of credit expires May 31, 2000 and provides for annual extensions
(provided there is no default) for two additional one-year periods upon
notice by the company and consent of the participating banks.
F-11
5. UNSECURED LINE OF CREDIT (CONTINUED)
On February 11, 2000, we amended our unsecured line of credit to provide for
borrowings of up to $325 million. Borrowings under our unsecured line of
credit, as amended, bear interest at a floating rate based on our election of
either a LIBOR based rate or the higher of the bank's reference rate and the
Federal Funds rate plus 0.5%. Financial covenants for our unsecured line of
credit, as amended, are substantially similar to those under the original
line. The line, as amended, expires February 2003 and provides for an
extension (provided there is no default) of an additional one-year period,
upon notice by the company and consent of the participating banks.
We enter into interest rate swap agreements to modify the interest
characteristics of our outstanding debt. These agreements involve an exchange
of fixed and floating interest payments without the exchange of the
underlying principal amount (the "notional amount").
In September 1998, we entered into an interest rate swap agreement with
FleetBoston Financial (the "Bank") to hedge our exposure to variable interest
rates associated with our line of credit. Interest paid is calculated at a
fixed interest rate of 5.43% through May 31, 2000 on a notional amount of $50
million and interest received is calculated at one month LIBOR. The net
difference between the interest paid and the interest received is reflected
as an adjustment to interest expense.
In October 1999, we entered into an additional interest rate swap agreement
with the Bank to further hedge our exposure to variable interest rates
associated with our line of credit. Interest paid is calculated at a fixed
interest rate of 6.5% through May 31, 2001 on a notional amount of $50
million and interest received is calculated at one month LIBOR. This
agreement has no effect on our September 1998 interest rate swap agreement.
In January 2000, we entered into a third interest rate swap agreement with
the Bank to further hedge our exposure to variable interest rates associated
with our line of credit. Interest paid is calculated at a fixed interest rate
of 6.5% from February 1, 2000 to March 31, 2000, 6.75% from April 1, 2000 to
July 31, 2000, 7.00% from August 1, 2000 to December 29, 2000 and 7.25% from
December 30, 2000 to December 31, 2001 on a notional amount of $50 million
and interest received is calculated at one month LIBOR. This agreement has no
effect on our September 1998 and October 1999 interest rate swap agreements.
With respect to our swap agreements, we are exposed to losses in the event
the Bank is unable to perform under the agreements, or in the event one month
LIBOR is less than the agreed-upon fixed interest rates. The fair value of
the swap agreements outstanding as of December 31, 1999 and changes in their
fair value as a result of changes in market interest rates are not recognized
in the financial statements. The fair value of our swap agreements
outstanding as of December 31, 1999 was approximately $160,000.
F-12
5. UNSECURED LINE OF CREDIT (CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in fiscal years beginning after June 15, 2000. When
adopted, Statement 133 will require us to recognize all derivatives on the
balance sheet at fair value. Based on the definitions provided in Statement
133, our interest rate swap agreements will be classified as cash flow
hedges, with changes in their fair value recorded as an adjustment to
comprehensive income, a separate component of shareholders' equity. We
believe the implementation of Statement 133 will not have a significant
impact on how we report our results of operations.
6. SECURED NOTES PAYABLE
Secured notes payable consists of the following (in thousands):
DECEMBER 31
---------------
1999 1998
--------- ---------
8.75% note, due January 2006, with an effective interest rate of
7.25% (includes unamortized premium of $725), secured by One
Innovation Drive, Worcester, MA $ 11,720 $ -
8.68% note, due December 2006, secured by 100/800/801 Capitola Drive,
Durham, NC 12,435 12,547
9.125% note, due October 2007, with an effective interest rate of
7.25% (includes unamortized premium of $2,062 and $2,262 at December
31, 1999 and 1998, respectively), secured by 620 Memorial Drive,
Cambridge, MA 19,842 20,149
7.22% note, due May 2008, secured by 14225 Newbrook Avenue, Chantilly, VA
and 3000/3018 Western Avenue, Seattle, WA 35,995 36,326
8.71% note, due December 2009, secured by 377 Plantation Street, Worcester, MA
and 6166 Nancy Ridge, San Diego, CA 18,900 -
7.165% note, due January 2014, secured by 1431 Harbor Bay Parkway,
Alameda, CA 7,146 8,500
9.00% note, due December 2014, secured by 3535/3565 General Atomics
Court, San Diego, CA 17,063 17,578
7.75% note, due May 2016, secured by 1102/1124 Columbia Street, Seattle,
WA 20,148 20,729
9.00% note, due October 2000, secured by 381 Plantation Street,
Worcester, MA (development project) 2,625 -
Construction loan at LIBOR plus 1.75%, due October 2001, providing for
borrowings of up to $19,000,000, secured by 1201 Clopper Road,
Gaithersburg, MD (development project) 12,638 -
----------- ------------
$158,512 $115,829
=========== ============
F-13
6. SECURED NOTES PAYABLE (CONTINUED)
All of our secured notes payable, except for the notes secured by 1431 Harbor
Bay Parkway, 381 Plantation Street and 1201 Clopper Road, require monthly
payments of principal and interest. The note secured by 1431 Harbor Bay
Parkway requires monthly payments of interest and semi-annual payments of
principal. The notes secured by 381 Plantation Street and 1201 Clopper Road
require monthly payments of interest only.
Future principal payments due on secured notes payable as of December 31,
1999, are as follows (in thousands):
2000 $ 5,994
2001 16,292
2002 3,951
2003 4,272
2004 3,915
Thereafter 121,301
-------------
Subtotal 155,725
Unamortized premium 2,787
-------------
$ 158,512
=============
As of December 31, 1999, the weighted average interest rate of our short-term
debt, including our unsecured line of credit, was 7.37%.
7. ISSUANCE OF COMMON STOCK
In February 1999, we completed a public offering of 1,150,000 shares of
common stock (including the shares issued upon exercise of the underwriter's
over-allotment option). The shares were issued at a price of $28.125 per
share, resulting in aggregate proceeds of approximately $29.8 million, net of
underwriting discounts and commissions and other offering costs.
In March 1999, we completed a transaction with Health Science Properties
Holding Corporation ("Holdings"), a significant stockholder. In connection
with the transaction, Holdings delivered to us all of the 1,765,923
restricted shares of our common stock it owned in exchange for (i) the
assumption by us of a $3,136,000 obligation of Holdings and (ii) the issuance
by us to Holdings of 1,620,580 new shares of our common stock. The new shares
issued were not registered under the Securities Act of 1933, as amended;
however, we have granted registration rights to the holders of new shares. In
connection with the issuance of the new shares, stockholders of Holdings have
agreed to certain limitations on transfer of any of the shares of our common
stock received by them upon the redemption or liquidation of Holdings, which
occurred in March 1999.
F-14
8. NON-CASH TRANSACTIONS
As described in Note 7, in March 1999, we repurchased common stock in part in
exchange for the assumption of a $3,136,000 obligation. We repaid this
obligation with funds borrowed under our line of credit.
In connection with the acquisition of One Innovation Drive in 1999 and
100/800/801 Capitola Drive and 620 Memorial Drive in 1998, we assumed secured
notes payable. The following table summarizes these transactions (in
thousands):
1999 1998
---------- ----------
Aggregate purchase price (including
closing and transaction costs) $ 17,294 $ 58,581
Cash paid for the properties 5,997 25,751
---------- ----------
Secured notes payable assumed $ 11,297 $ 32,830
========== ==========
In 1999 and 1997, we incurred $1,658,000 and $4,161,000, respectively, in
non-cash stock compensation expense. The stock compensation expense recorded
in 1997 was associated with stock grants and stock options issued to our
officers, directors and certain employees in connection with the Offering
(see Note 11).
In connection with the Offering in 1997, all previously outstanding shares of
Series U preferred stock and Series V preferred stock were converted into
shares of common stock. The common stock issued was recorded at the book
value of the Series U preferred stock and the Series V preferred stock (an
aggregate of $27,061,000).
9. PREFERRED STOCK AND EXCESS STOCK
SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
In June 1999, we completed a public offering of 1,543,500 shares of our 9.50%
Series A cumulative redeemable preferred stock (including the shares issued
upon exercise of the underwriters' over-allotment option). The shares were
issued at a price of $25.00 per share, resulting in aggregate proceeds of
approximately $36.9 million, net of underwriters' discounts and commissions
and other offering costs. The dividends on our Series A preferred stock are
cumulative and accrue from the date of original issuance. We pay dividends
quarterly in arrears at an annual rate of $2.375 per share. Our Series A
preferred stock has no stated maturity, is not subject to any sinking fund or
mandatory redemption and is not redeemable prior to June 11, 2004, except in
order to preserve our status as a REIT. Investors in our Series A preferred
stock generally have no voting rights. On or after June 11, 2004, we may, at
our option, redeem our Series A preferred stock, in whole or in part, at any
time for cash at a redemption price of $25.00 per share, plus accrued and
unpaid dividends.
F-15
9. PREFERRED STOCK AND EXCESS STOCK (CONTINUED)
PREFERRED STOCK AND EXCESS STOCK AUTHORIZATIONS
Our charter authorizes the issuance of up to 100,000,000 shares of preferred
stock, of which 1,543,500 shares were issued and outstanding as of December
31, 1999. In addition, 200,000,000 shares of "excess stock" (as defined) are
authorized, none of which was issued and outstanding at December 31, 1999.
10. COMMITMENTS AND CONTINGENCIES
POST-RETIREMENT BENEFIT
In 1997, in connection with the Offering, an officer of Alexandria retired.
In connection with the officer's retirement, we agreed to pay a
post-retirement benefit equal to $150,000 for each of the first three years
following the Offering, and $90,000 per year (plus an annual increase of 2%
per year) thereafter for the remainder of the longer of the executive's life
and the life of the executive's spouse as of the date of the agreement. In
1997, a post-retirement expense associated with this agreement was recorded
for past services equal to $632,000. As of December 31, 1999 and 1998, the
accrued liability for post-retirement benefit was $1,184,000 and $1,110,000,
respectively. For the years ended December 31, 1999 and 1998, we paid
$150,000 in each year under the retirement agreement, of which $58,000 and
$77,000, respectively, represented interest.
EMPLOYEE RETIREMENT SAVINGS PLAN
Effective January 1, 1997, we adopted a retirement savings plan pursuant to
Section 401(k) of the Internal Revenue Code ("Code") whereby our employees
may contribute a portion of their compensation to their respective retirement
accounts, in an amount not to exceed the maximum allowed under the Code. The
plan provides that we contribute a certain percentage of our employees'
salary, which amounted to $185,000, $89,000 and $36,000, respectively, for
the years ended December 31, 1999, 1998 and 1997. Employees who participate
in the plan are immediately vested in their contributions and in the
contributions of the company.
CONCENTRATION OF CREDIT RISK
We maintain our cash and cash equivalents at insured financial institutions.
The combined account balances at each institution periodically exceed FDIC
insurance coverage, and, as a result, there is a concentration of credit risk
related to amounts in excess of FDIC insurance coverage. We believe that the
risk is not significant.
We are dependent on rental income from relatively few tenants in the life
science industry. The inability of any single tenant to make its lease
payments could adversely affect our operations. As of December 31, 1999, we
had 169 leases with a total of 160 tenants, and 27 of our 58 properties were
each leased to a single tenant. At December 31, 1999, our three largest
tenants accounted for approximately 14.8% of our aggregate annualized base
rent.
F-16
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONCENTRATION OF CREDIT RISK (CONTINUED)
We generally do not require collateral or other security from our tenants,
other than security deposits. As of December 31, 1999, we have $6.2 million
in irrevocable letters of credit available from certain tenants as security
deposits for 16 leases.
COMMITMENTS
As of December 31, 1999, we were committed under the terms of certain leases
to complete the construction of buildings and certain related improvements at
a remaining aggregate cost of $33.2 million.
As of December 31, 1999, we were also committed to fund approximately $20.9
million for the construction of tenant improvements under the terms of
various leases and for certain investments in limited partnerships.
11. STOCK OPTION PLANS AND STOCK GRANTS
1997 STOCK PLAN
In connection with the Offering, we adopted a stock option and incentive plan
(the "1997 Stock Plan") for the purpose of attracting and retaining the
highest quality personnel, providing for additional incentives, and promoting
the success of the company by providing employees the opportunity to acquire
common stock pursuant to (i) options to purchase common stock; and (ii) share
awards. As of December 31, 1999, a total of 352,829 shares were reserved for
the granting of future options and share awards under the 1997 Stock Plan.
Options under our plan have been granted at prices that are equal to the
market value of the stock on the date of grant and expire ten years after the
date of grant. Employee options vest ratably in three annual installments
from the date of grant. Non-employee director options are exercisable
immediately upon the date of grant. The options outstanding under the 1997
Stock Plan expire at various dates through October 2009.
In addition, the 1997 Stock Plan permits us to issue share awards to our
employees and non-employee directors. A share award is an award of common
stock which (i) may be fully vested upon issuance or (ii) may be subject to
the risk of forfeiture under Section 83 of the Internal Revenue Code. For
employees, these shares generally vest over a one-year period and the sale of
the shares is restricted prior to the date of vesting. For non-employee
directors, these shares are fully vested upon issuance and the sale of the
shares is not restricted. During 1999, we awarded 105,800 shares of common
stock. These shares were recorded at fair value with a corresponding charge
to stockholders' equity. The unearned portion is being amortized as
compensation expense on a straight-line basis over the vesting period.
F-17
11. STOCK OPTION PLANS AND STOCK GRANTS (CONTINUED)
1997 STOCK PLAN (CONTINUED)
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for our employee and non-employee director
stock options, stock grants and stock appreciation rights. Under APB 25,
because the exercise price of the options we granted equals the market price
of the underlying stock on the date of grant, no compensation expense has
been recognized. Although we have elected to follow APB 25, pro forma
information regarding net income and net income (loss) per share is required
by Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." This information has been determined as if we had
accounted for our stock options under the fair value method under Statement
123. The fair value of the options issued under the 1997 Stock Plan was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1999 and 1998:
1999 1998
-------------------------------
Risk-free interest rate 6.48% 4.66%
Dividend yield 5.66% 5.20%
Volatility factor of the expected market price 24.6% 24.5%
Weighted average expected life of the options 5.8 YEARS 5.0 years
For purposes of the following pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting periods (in
thousands, except per share information):
FOR THE YEAR ENDED DECEMBER 31
1999 1998
--------------------------------------
Pro forma net income available to common
stockholders $ 19,083 $ 18,299
Pro forma net income per common share:
- Basic $ 1.41 $ 1.51
- Diluted $ 1.40 $ 1.49
F-18
11. STOCK OPTION PLANS AND STOCK GRANTS (CONTINUED)
1997 STOCK PLAN (CONTINUED)
A summary of the stock option activity under our 1997 Stock Plan, and related
information for the years ended December 31, 1999 and December 31, 1998 follows:
1999 1998
--------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
STOCK EXERCISE STOCK EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------------------------------- -------------------------------
Outstanding-beginning of year 821,500 $ 24.49 701,000 $ 20.80
Granted 70,500 29.56 290,500 31.00
Exercised (75,000) 20.11 (57,333) 20.00
Forfeited (32,000) 23.98 (112,667) 20.64
-------------------------------- -------------------------------
Outstanding-end of year 785,000 $ 25.37 821,500 $ 24.49
================================ ===============================
Exercisable at end of year 426,003 $ 24.36 252,834 $ 23.33
================================ ===============================
Weighted-average fair value of
options granted $ 5.28 $ 4.88
============== =============
Exercise prices for options outstanding as of December 31, 1999 range from
$20.00 to $32.94. The weighted average contractual life of options
outstanding is 8 years.
PRIOR STOCK OPTION PLAN
Prior to the Offering, we had a ten-year incentive and nonqualified stock
option plan for certain of our employees and non-employee directors.
Under this prior plan, holders of options to purchase common stock of
Holdings granted under stock option plans of Holdings ("Holdings Stock
Options") were eligible, under certain circumstances (including the
Offering), to receive substitute stock options of Alexandria in substitution
for previously granted Holdings Stock Options. As such, in connection with
the Offering, our officers, directors and certain employees received
substitute stock options to purchase 57,000 shares of our common stock under
the prior plan. These substitute stock options were exercised in connection
with the Offering at a nominal exercise price. No further stock options were
issued under the prior plan. In connection with the issuance of the
substitute stock options, we recognized $1,187,000 of stock compensation
expense in 1997.
STOCK GRANTS
In connection with the Offering, we granted our officers, directors and
certain employees an aggregate of 152,615 shares of common stock. As a result
of the grants, we recorded stock compensation expense of $3,052,000 in 1997.
F-19
12. PURCHASE OF ACQUISITION LLC
During January 1997, we assigned our right to purchase three Life Science
Facilities to an entity (the "Acquisition LLC") owned by affiliates of
PaineWebber Incorporated ("PaineWebber"), the lead managing underwriter of
the Offering. In January 1997, the Acquisition LLC acquired the three Life
Science Facilities for $51,871,000 from unaffiliated sellers. In connection
with the Offering, we acquired 100% of the membership interests in the
Acquisition LLC from the PaineWebber affiliates.
The purchase price we paid for the membership interests ($58,844,000)
exceeded the cost incurred by the Acquisition LLC to acquire the properties
($51,871,000). The excess of this purchase price over the cost of the
Acquisition LLC to acquire the properties ($6,973,000) is included in
non-recurring expenses associated with the Offering in 1997.
13. RELATED PARTY TRANSACTIONS
During 1999, 1998 and 1997, we were reimbursed $166,000, $270,000 and
$21,000, respectively, for payroll, accounting and office space incurred on
behalf of Holdings.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Following is a summary of consolidated financial information on a quarterly
basis for 1999 and 1998:
QUARTER
---------------------------------------------------------------
FIRST SECOND THIRD FOURTH
---------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999
- ----
Revenues $ 19,539 $ 21,094 $ 22,395 $ 23,234
Net income available to common
stockholders $ 5,298 $ 5,613 $ 4,933 $ 4,173
Net income per common share:
- Basic $ 0.41 $ 0.41 $ 0.36 $ 0.30
- Diluted $ 0.40 $ 0.41 $ 0.36 $ 0.30
1998
- ----
Revenues $ 11,696 $ 15,160 $ 15,811 $ 18,349
Net income $ 4,635 $ 4,724 $ 5,117 $ 4,927
Net income per share:
- Basic $ 0.41 $ 0.40 $ 0.41 $ 0.39
- Diluted $ 0.40 $ 0.39 $ 0.40 $ 0.39
F-20
15. NON-RECURRING EXPENSES ASSOCIATED WITH INITIAL PUBLIC OFFERING
In June 1997, we incurred the following non-recurring expenses associated with
the Offering (in thousands):
Stock compensation expense (see note 11) $ 4,239
Post-retirement benefit (see note 10) 632
Special bonus 353
Acquisition LLC financing costs (see note 12) 6,973
--------------
$ 12,197
==============
F-21
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III
Consolidated Financial Statement Schedule of Rental Properties
and Accumulated Depreciation
December 31, 1999
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
INITIAL COSTS COSTS
--------------------------- CAPITALIZED
SQUARE BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS ACQUISITION
- ------------------------------------------------------------------------------------------------
129/153/161 N. Hill Street 51,980 $ 230 $ 2,754 $ 91
10933 N. Torrey Pines Road 107,753 3,903 5,960 1,052
11099 N. Torrey Pines Road 86,962 2,663 10,649 1,947
3535 General Atomics Court 76,084 2,651 18,046 585
3565 General Atomics Court 43,600 1,227 9,554 1
11025 Roselle Street 18,173 463 1,840 765
4757 Nexus Centre Drive 67,050 2,548 13,638 --
3550 John Hopkins Court 55,000 1,683 -- 5,287
6166 Nancy Ridge Drive 29,333 733 2,273 1,836
10505 Roselle Street 17,603 443 1,699 1,389
3770 Tansy Street 15,410 650 1,375 752
9363 Towne Centre Drive 45,030 275 8,621 10
9373 Towne Centre Drive 53,688 320 10,070 67
9393 Towne Centre Drive 41,794 258 8,170 9
1311 Harbor Bay Parkway 27,745 775 1,917 380
1401 Harbor Bay Parkway 47,777 1,200 3,880 36
1431 Harbor Bay Parkway 68,711 1,800 9,731 87
1201 Harbor Bay Parkway 61,015 1,507 5,357 2,023
819/863 Mitten Road 153,584 4,751 12,612 269
2625/2627/263 Hanover Street 32,074 -- 6,628 14
2425 Garcia Avenue &
2400/2425
Bayshore Parkway 98,964 -- 21,323 22
1102/1124 Columbia Street 209,828 6,566 23,528 8,458
3005 First Avenue 70,647 2,119 11,275 3,135
3000/3018 Western Avenue 47,746 1,432 7,497 1,996
150/154 Technology Parkway 37,080 370 4,191 26
100 Capitola Drive 65,114 334 5,795 74
800/801 Capitola Drive 119,916 570 11,688 401
5 Triangle Drive 32,120 161 3,410 31
1413 Research Boulevard 105,000 2,317 9,611 480
300 Professional Drive 47,558 871 5,362 1,843
401 Professional Drive 62,739 1,129 6,940 20
25/35/45 West Watkins
Mill Road 138,938 3,281 14,416 127
1550 East Guide Drive 44,500 775 4,122 164
1330 Piccard Drive 131,511 2,800 11,533 197
708 Quince Orchard Road 49,225 1,267 3,031 5,140
940 Clopper Road 44,464 900 2,732 484
1401 Research Boulevard 48,800 1,533 4,391 302
TOTAL COSTS
--------------------------------------
BUILDINGS AND ACCUMULATED YEAR
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION (1) ENCUMBRANCES BUILT/RENOVATED
- ----------------------------------------------------------------------------------------------------------------------------------
129/153/161 N. Hill Street $ 230 $ 2,845 $ 3,075 $ 6 $ -- 1940's/1950's/1960's
10933 N. Torrey Pines Road 3,903 7,012 10,916 1,541 -- 1971/1994
11099 N. Torrey Pines Road 2,663 12,596 15,259 2,429 -- 1986/1996
3535 General Atomics Court 2,651 18,631 21,283 3,210 11,219 1986/1991
3565 General Atomics Court 1,227 9,555 10,781 1,606 5,844 1991
11025 Roselle Street 463 2,605 3,068 297 -- 1983
4757 Nexus Centre Drive 2,548 13,638 16,186 1,437 -- 1989
3550 John Hopkins Court 1,683 5,287 6,970 92 -- 1999
6166 Nancy Ridge Drive 733 4,109 4,842 293 -- 1997
10505 Roselle Street 443 3,088 3,531 37 -- late 1970's/1999
3770 Tansy Street 650 2,127 2,777 17 -- 1978/1999
9363 Towne Centre Drive 275 8,631 8,906 77 -- 1987
9373 Towne Centre Drive 320 10,137 10,457 88 -- 1987
9393 Towne Centre Drive 258 8,179 8,437 72 -- 1987
1311 Harbor Bay Parkway 775 2,297 3,072 166 -- 1984
1401 Harbor Bay Parkway 1,200 3,916 5,116 319 -- 1986/1994
1431 Harbor Bay Parkway 1,800 9,818 11,618 787 7,146 1985/1994
1201 Harbor Bay Parkway 1,507 7,380 8,887 470 -- 1983/1999
819/863 Mitten Road 4,751 12,881 17,632 698 -- 1962/1997
2625/2627/263 Hanover Street -- 6,642 6,642 1,487 -- 1968/1985
2425 Garcia Avenue &
2400/2425
Bayshore Parkway -- 21,345 21,345 775 -- 1980
1102/1124 Columbia Street 6,566 31,986 38,552 2,780 20,148 1975/1997
3005 First Avenue 2,119 14,410 16,529 602 -- 1980/1990
3000/3018 Western Avenue 1,432 9,493 10,925 683 35,995 1929/1990
150/154 Technology Parkway 370 4,217 4,587 198 -- 1976/1985/1993
100 Capitola Drive 334 5,869 6,203 360 -- 1986
800/801 Capitola Drive 570 12,089 12,659 667 12,435 1985
5 Triangle Drive 161 3,441 3,602 147 -- 1981
1413 Research Boulevard 2,317 10,091 12,408 881 -- 1967/1996
300 Professional Drive 871 7,205 8,075 460 -- 1989
401 Professional Drive 1,129 6,960 8,089 608 -- 1987
25/35/45 West Watkins
Mill Road 3,281 14,543 17,824 1,224 -- 1989/1997
1550 East Guide Drive 775 4,286 5,061 304 -- 1981/1995
1330 Piccard Drive 2,800 11,730 14,530 794 -- 1978/1994
708 Quince Orchard Road 1,267 8,171 9,438 1,028 -- 1982/1997
940 Clopper Road 900 3,216 4,116 243 -- 1989
1401 Research Boulevard 1,533 4,693 6,226 294 -- 1966
F-22
Alexandria Real Estate Equities, Inc. and Subsidiaries
Schedule III (continued)
Consolidated Financial Statement Schedule of Rental Properties
and Accumulated Depreciation
December 31, 1999
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
INITIAL COSTS COSTS
------------------------------ CAPITALIZED
SQUARE BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS ACQUISITION
- -----------------------------------------------------------------------------------------
1500 East Gude Drive 45,989 748 3,609 1,058
8000/9000/10000 Virginia
Manor Road 191,884 -- 13,679 48
10150 Old Columbia Road 75,500 1,510 5,210 1,496
19 Firstfield Road 25,175 376 3,192 44
15020 Shady Grove Road 41,062 840 3,115 32
2001 Aliceanna Street 179,397 1,848 6,120 378
50 West Watkins Mill Road 57,410 859 4,149 63
14225 Newbrook Drive 248,186 4,800 27,639 366
5100/5110 Campus Drive 42,782 654 4,234 62
702 Electronic Drive 40,000 600 3,110 3,060
215 College Road 106,036 1,943 9,764 463
170 Williams Drive 37,000 740 4,506 45
100 Phillips Parkway 74,000 1,840 2,298 3,383
279 Princeton Road 42,600 1,075 1,438 1,858
79/96 Charlestown Navy Yard 24,940 -- 6,247 13
280 Pond Street 24,867 622 3,053 38
60 Westview Street 32,000 960 3,032 31
One Innovation Drive 113,571 2,734 14,567 107
377 Plantation Street 92,711 2,352 14,173 141
620 Memorial Drive 96,500 2,440 37,754 62
------------------------------------------------------------
4,046,126 $ 81,446 $ 456,508 $ 52,248
============================================================
TOTAL COSTS
--------------------------------------
BUILDINGS AND ACCUMULATED YEAR
PROPERTY NAME LAND IMPROVEMENTS TOTAL DEPRECIATION (1) ENCUMBRANCES BUILT
- ---------------------------------------------------------------------------------------------------------------------------------
1500 East Gude Drive 748 4,667 5,415 289 -- 1981/1986
8000/9000/10000
Virginia Manor Road -- 13,727 13,727 759 -- 1990
10150 Old Columbia Road 1,510 6,706 8,216 398 -- 1983/1997
19 Firstfield Road 376 3,236 3,612 146 -- 1974
15020 Shady Grove Road 840 3,147 3,987 164 -- 1987
2001 Aliceanna Street 1,848 6,498 8,346 255 -- early 1950's/1995
50 West Watkins Mill Road 859 4,212 5,071 154 -- 1988
14225 Newbrook Drive 4,800 28,005 32,805 1,910 -- 1992
5100/5110 Campus Drive 654 4,296 4,950 210 -- 1989
702 Electronic Drive 600 6,170 6,770 592 -- 1983/1998
215 College Road 1,943 10,227 12,170 533 -- 1968/1974/1984
170 Williams Drive 740 4,551 5,291 196 -- 1982/1994
100 Phillips Parkway 1,840 5,681 7,521 -- -- late 1960's
279 Princeton Road 1,075 3,296 4,371 129 -- 1984
79/96 Charlestown Navy Yard -- 6,260 6,260 328 -- 1880/1991
280 Pond Street 622 3,091 3,713 146 -- 1960's
60 Westview Street 960 3,063 4,023 119 -- 1975
One Innovation Drive 2,734 14,674 17,408 360 11,720 1991
377 Plantation Street 2,352 14,314 16,666 503 18,900 1993
620 Memorial Drive 2,440 37,816 40,256 1,128 19,842 1920's/1997
---------------------------------------------------------------------------------
$ 81,446 $ 508,756 $ 590,202 $ 35,496 $ 143,250
=================================================================================
(1) The depreciable life for buildings and improvements ranges from 30 to 40
years, 20 years for land improvements, and the term of the respective lease for
tenant improvement.
F-23
A summary of activity of consolidated rental properties and accumulated
depreciation is as follows (in thousands):
RENTAL PROPERTIES
DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Balance at beginning of period $ 490,518 $ 235,880 $ 151,154
Improvements 16,807 21,218 3,566
Acquisition of land, building and improvements 82,877 233,420 81,160
------------ ------------ ------------
Balance at end of period $ 590,202 $ 490,518 $ 235,880
============ ============ ============
ACCUMULATED DEPRECIATION
DECEMBER 31
-------------------------------------------
1999 1998 1997
------------ ------------ ------------
Balance at beginning of period $ 18,611 $ 8,804 $ 4,194
Depreciation expense 16,885 9,807 4,610
------------ ------------ ------------
Balance at end of period $ 35,496 $ 18,611 $ 8,804
============ ============ ============
F-24