ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003 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.
|
|
|
|
|
|
(626) 578-0777
N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [X] NO [ ]
As of March 13, 2003, 19,006,623 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
| PART I. Financial Information | Page No. |
| Item 1. Financial Statements (unaudited): |
|
|
Condensed Consolidated Balance Sheets of Alexandria Real Estate Equities, Inc. and Subsidiaries as of March 31, 2003 and December 31, 2002 |
|
|
Condensed Consolidated Income Statements of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 2003 and 2002 |
|
|
Condensed Consolidated Statements of Cash Flows of Alexandria Real Estate Equities, Inc. and Subsidiaries for the three months ended March 31, 2003 and 2002 |
|
| Notes to Condensed Consolidated Financial Statements |
|
| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
| Item 3. Quantitative and Qualitative Disclosures About Market Risk |
|
| Item 4. Controls and Procedures |
|
| PART II. Other Information |
|
| Item 6. Exhibits and Reports on Form 8-K |
|
| Signatures |
|
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(DOLLARS IN THOUSANDS)
March 31, December 31,
2003 2002
------------ ------------
Assets
Rental properties, net $974,015 $976,422
Properties under development 118,584 68,386
Cash and cash equivalents 3,674 3,790
Tenant security deposits and other restricted cash 8,779 8,020
Tenant receivables 3,306 2,641
Deferred rent 28,029 26,063
Other assets 74,904 73,921
------------ ------------
Total assets $1,211,291 $1,159,243
============ ============
Liabilities and Stockholders' Equity
Secured notes payable $312,405 $276,878
Unsecured line of credit 354,000 338,000
Accounts payable, accrued expenses and
tenant security deposits 45,264 47,118
Dividends payable 11,930 11,394
------------ ------------
Total liabilities 723,599 673,390
Stockholders' equity:
Series A preferred stock 38,588 38,588
Series B preferred stock 57,500 57,500
Common stock 190 190
Additional paid-in capital 400,851 399,831
Deferred compensation (764) (1,432)
Retained earnings - -
Accumulated other comprehensive income (8,673) (8,824)
------------ ------------
Total stockholders' equity 487,692 485,853
------------ ------------
Total liabilities and stockholders' equity $1,211,291 $1,159,243
============ ============
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended
March 31,
-----------------------
2003 2002
----------- -----------
Revenues
Rental $31,646 $26,470
Tenant recoveries 8,623 6,719
Interest and other income 344 483
----------- -----------
40,613 33,672
Expenses
Rental operations 8,786 6,658
General and administrative 3,549 3,473
Interest 6,871 6,359
Depreciation and amortization 9,461 7,994
----------- -----------
28,667 24,484
Income from continuing operations 11,946 9,188
Income from discontinued operations, net 203 415
----------- -----------
Net income $12,149 $9,603
=========== ===========
Dividends on preferred stock 2,225 1,905
----------- -----------
Net income available to
common stockholders $9,924 $7,698
=========== ===========
Basic income per common share:
Income from continuing operati $0.63 $0.56
=========== ===========
Income from discontinued operations $0.01 $0.03
=========== ===========
Net income $0.64 $0.59
=========== ===========
Net income available to common stockholder $0.53 $0.47
=========== ===========
Diluted income per common share:
Income from continuing operations $0.62 $0.55
=========== ===========
Income from discontinued operations $0.01 $0.02
=========== ===========
Net income $0.63 $0.57
=========== ===========
Net income available to common stockholder $0.52 $0.46
=========== ===========
Weighted average shares of
common stock outstanding:
-Basic 18,895,821 16,409,258
=========== ===========
-Diluted 19,136,372 16,720,857
=========== ===========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31,
----------------------
2003 2002
---------- ----------
Operating Activities
Net income $12,149 $9,603
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of property 455 -
Depreciation and amortization 9,461 8,237
Amortization of loan fees and costs 464 693
Amortization of premiums on secured notes (100) (83)
Stock compensation expense 955 952
Changes in operating assets and liabilties:
Tenant security deposits and other restricted cash (759) 2,130
Tenant receivables (665) 259
Deferred rent (1,966) (1,413)
Other assets (650) (4,699)
Accounts payable, accrued expenses and tenant
security deposits (1,708) (4,445)
---------- ----------
Net cash provided by operating activities 17,636 11,234
---------- ----------
Investing Activities
Purchase of rental properties (3,677) -
Proceeds from sale of property 6,558 -
Additions to rental properties (12,496) (8,893)
Additions to properties under development (43,531) (12,204)
Additions to investments, net (1,853) (4,246)
---------- ----------
Net cash used in investing activities (54,999) (25,343)
---------- ----------
Financing Activities
Proceeds from secured notes payable 34,000 2,913
Proceeds from exercise of stock options 720 1,694
Proceeds from issuance of common stock - 16,168
Proceeds from issuance of preferred stock - 55,129
Proceeds from repayment of note receivable - 6,000
Net borrowings from (principal reductions to)
unsecured line of credit 16,000 (55,000)
Principal reductions of secured notes payable (1,757) (1,719)
Dividends paid on common stock (9,491) (7,524)
Dividends paid on preferred stock (2,225) (916)
---------- ----------
Net cash provided by financing activities 37,247 16,745
---------- ----------
Net increase in cash and cash equivalents (116) 2,636
Cash and cash equivalents at beginning of period 3,790 2,376
---------- ----------
Cash and cash equivalents at end of period $3,674 $5,012
========== ==========
See accompanying notes.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Background
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of properties containing a combination of office and laboratory space. We refer to these properties as "life science facilities." Our life science facilities are designed and improved for lease primarily to pharmaceutical, biotechnology, life science product and service companies, not-for-profit scientific research institutions, universities and related government agencies. As of March 31, 2003, our portfolio consisted of 88 properties in nine states with approximately 5.7 million rentable square feet.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.
Basis of Presentation and Significant Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
1. Background and Basis of Presentation (continued)
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following (in thousands):
March 31, December 31,
2003 2002
------------ ------------
Unrealized gain on
marketable securities $219 $213
Unrealized loss on interest
rate swap agreements (8,892) (9,037)
------------ ------------
($8,673) ($8,824)
============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended
March 31,
--------------------
2003 2002
--------- ---------
Net income $12,149 $9,603
Unrealized gain (loss) on
marketable securities 6 (931)
Unrealized gain on
interest rate swap agreements 145 1,723
--------- ---------
Comprehensive income $12,300 $10,395
========= =========
Investments
We hold equity investments in certain publicly traded companies and privately held entities primarily involved in the life science industry. All of our investments in publicly traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"), and are recorded at fair value and included in other assets in the accompanying balance sheets. Fair value has been determined by the closing trading price at the balance sheet date, with unrealized gains and losses shown as a separate component of stockholders' equity. The classification of investments under SFAS 115 is determined at the time each investment is made, and such determination is reevaluated at each balance sheet date. The cost of investments sold is determined by the specific identification method, with realized gains and losses included in interest and other income.
Investments in privately held entities are included in other assets and accounted for under the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). As we do not influence any of the investees' operating or financial policies, investments in privately held entities are accounted for under the cost method.
1. Background and Basis of Presentation (continued)
Investments in privately held entities as of March 31, 2003, totaled $39,413,000 and are included in other assets in the accompanying balance sheets.
For all of our investments, if a decline in the fair value of an investment below its carrying value is determined to be other than temporary, such investment is written down to its estimated fair value with a non-cash charge to current earnings.
The following table summarizes our available-for-sale securities (in thousands):
March 31, December 31
2003 2002
----------- -----------
Adjusted cost of available-for-sale
securities $ 1,876 $ 1,876
Gross unrealized gains 275 214
Gross unrealized losses (56) -
----------- -----------
Fair value of
available-for-sale securities $ 2,095 $ 2,090
=========== ===========
2. Rental Properties and Properties Under Development
Rental properties consist of the following (in thousands):
March 31, December 31,
2003 2002
----------- -----------
Land $149,948 $151,297
Buildings and improvements 831,094 829,739
Tenant and other improvements 114,058 108,863
----------- -----------
1,095,100 1,089,899
Less accumulated depreciation (121,085) (113,477)
----------- -----------
$974,015 $976,422
=========== ===========
2. Rental Properties and Properties Under Development (continued)
In January 2003, we acquired a fully-leased property in the Eastern Massachusetts market containing approximately 51,000 rentable square feet from an unrelated third party for an aggregate purchase price (including closing and transaction costs) of approximately $7.1 million.
In February 2003, we sold a property for $6.8 million that was designated as "held for sale" as of December 31, 2002 (See Note 7).
In March 2003, we acquired for $34.7 million in cash, a property under development in Seattle, Washington. The property, upon completion, will contain approximately 165,000 square feet of office/laboratory space.
3. Unsecured Line of Credit
We have an unsecured line of credit that provides for borrowing of up to $425 million. The line of credit has a maturity date of July 2005, which may be extended at our sole option for an additional one-year period. Borrowings under our unsecured 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 a LIBOR period of one, two, three or six months.
Our 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. As of March 31, 2003, borrowings outstanding on the line of credit carried a weighted average interest rate of 2.91%.
Aggregate borrowings under the line of credit are limited to an amount based on the net operating income derived from a pool of unencumbered assets. As of March 31, 2003, the amount calculated under these provisions exceeded the maximum permitted borrowings of $425 million.
We utilize interest rate swap agreements to hedge certain of our exposure to variable interest rates associated with our unsecured line of credit. These agreements involve the exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and interest received is reflected as an adjustment to interest expense.
3. Unsecured Line of Credit (continued)
The following table summarizes our interest rate swap agreements as of March 31, 2003 (dollars in thousands):
Notional Interest
Transaction Dates Effective Dates Amounts Pay Rates Termination Dates Fair Values
- --------------- ---------------- ------------- ---------- ----------------- ------------
July 2000 May 31, 2001 $ 50,000 7.07% May 31, 2003 $ (507)
March 2002 December 31, 2002 $ 50,000 5.36% December 31, 2004 (3,341)
July 2002 January 1, 2003 $ 25,000 3.855% June 30, 2005 (1,137)
July 2002 January 1, 2003 $ 25,000 3.865% June 30, 2005 (1,143)
December 2002 January 2, 2003 $ 25,000 3.285% June 30, 2006 (754)
December 2002 January 2, 2003 $ 25,000 3.285% June 30, 2006 (754)
November 2002 June 1, 2003 $ 25,000 3.115% December 31, 2005 (615)
November 2002 June 1, 2003 $ 25,000 3.155% December 31, 2005 (641)
----------
Total $ (8,892)
==========
4. Stockholders' Equity
In March 2003, we declared a cash dividend on our common stock aggregating
$10,073,000
($ 0.53 per share) for the calendar quarter ended March 31, 2003. In March
2003, we declared a cash dividend on our Series A preferred stock aggregating
$916,000 ($ 0.59375 per share) for the period from January 15, 2003 through
April 14, 2003. In March 2003, we also declared a cash dividend on our Series B
preferred stock aggregating $1,308,000 ($0.56875 per share) for the period
January 15, 2003 through April 14, 2003. We paid these dividends on April 11,
2003.
5. Stock Option Plan
For 2002 and all prior years, we elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for our employee and non-employee director stock options, stock grants and stock appreciation rights. Under APB 25, because the exercise price of the options we granted equals the market price of the underlying stock on the date of grant, no compensation expense had been recognized.
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure" ("SFAS 148"), which addresses alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. Effective January 1, 2003, we have adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003.
5. Stock Option Plan (continued)The following table provides pro forma disclosures of the estimated fair value of the options amortized to expense over the options' vesting periods as if we had accounted for our stock options under the fair value method under SFAS 123 since the date they were granted (in thousands, except per share information):
Three Months Ended
March 31,
--------------------------
2003 2002
------------ ------------
Net income available to common
stockholders, as reported $ 9,924 $ 7,698
Add: Stock-based employee compensation
expense included in reported net income - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (335) (223)
------------ ------------
Pro forma net income available to
common stockholders $ 9,589 $ 7,475
============ ============
Earnings per share:
Basic - as reported $ 0.53 $ 0.47
============ ============
Basic - pro forma $ 0.51 $ 0.46
============ ============
Diluted - as reported $ 0.52 $ 0.46
============ ============
Diluted - pro forma $ 0.50 $ 0.45
============ ============
6. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended
March 31,
-----------------------
2003 2002
----------- -----------
Net income available to common
stockholders $9,924 $7,698
=========== ===========
Weighted average shares of
common stock outstanding - basic 18,895,821 16,409,258
Add: dilutive effect of
stock options and stock grants 240,551 311,599
----------- -----------
Weighted average shares of
common stock outstanding - diluted 19,136,372 16,720,857
=========== ===========
Net income per common share:
- Basic $0.53 $0.47
=========== ===========
- Diluted $0.52 $0.46
=========== ===========
Common dividends declared per share $0.53 $0.50
=========== ===========
7. Discontinued Operations
On January 1, 2002, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") became effective. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Under SFAS 144, a property is classified as held for sale when all of the following criteria for a plan of sale have been met: 1) management, having the authority to approve the action, commits to a plan to sell the property, 2) the property is available for immediate sale in its present condition, subject only to the terms that are usual and customary, 3) an active program to locate a buyer, and other actions required to complete the plan to sell have been initiated, 4) the sale of the property is probable and is expected to be completed within one year, 5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and 6) actions necessary to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When all of these criteria have been met, the property is classified as held for sale and its operations are classified as discontinued operations. Amounts from prior periods are reclassified from continuing operations to discontinued operations. A loss is recognized for any initial adjustment of the asset's carrying amount to fair value less costs to sell in the period the asset qualifies as held for sale. The accompanying statements have been presented in compliance with SFAS 144.
7. Discontinued Operations (continued)
As of March 31, 2003, we have one property that has been designated as "held for sale" under the provisions of SFAS 144. Interest expense included in discontinued operations represents interest related to a secured note payable which is expected to be either assumed by the buyer or repaid at the close of the anticipated sale. During the first quarter of 2003, we sold one property located in the San Francisco Bay market which could not be redeveloped pursuant to our original strategic objectives and that had been designated as "held for sale" during the fourth quarter 2002. The total sale price for the property was approximately $6.8 million. In connection with this sale, we recorded loss on sale of property of $455,000 during the three months ended March 31, 2003. This loss is included on the income statement in income from discontinued operations in 2003. Properties held for sale are included in rental properties in the consolidated balance sheets.
The following is a summary of the properties designated as "held for sale" (in thousands):
Three Months Ended
March 31,
---------------------
2003 2002
--------- ----------
Revenue $ 1,210 $ 1,255
Operating expenses 213 236
--------- ----------
Revenue less operating expenses 997 1,019
Interest 339 361
Depreciation - 243
Income before loss on --------- ----------
sale of property 658 415
Loss on sale of property 455 -
Income from discontinued --------- ----------
operations $ 203 $ 415
========= ==========
March 31, December 31,
2003 2002
--------- ----------
Properties held for sale, net $ 36,394 $ 43,361
Cash and cash equivalents 4 3
Tenant security deposits and other
restricted cash 287 115
Tenant receivables 5 (1)
Deferred rent 1,103 1,081
Other assets 69 97
--------- ----------
Total assets $ 37,862 $ 44,656
========= ==========
Secured note payable 18,665 18,777
Accounts payable, accrued expenses
and tenant security deposits 1,273 1,112
--------- ----------
Total liabilities 19,938 19,889
--------- ----------
Net assets of discontinued operations $ 17,924 $ 24,767
========= ==========
8. Non-Cash Transaction
In January 2003, we assumed a $3.4 million secured note payable in connection with the acquisition of a fully-leased property in the Eastern Massachusetts market containing approximately 51,000 rentable square feet. The total purchase price for the property, including closing and transaction costs, was approximately $7.1 million. The cash paid for the property was approximately $3.7 million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, those described below in this report and under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2002. We do not take any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events or otherwise. Readers of this Form 10-Q should also read our Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors.
As used in this Form 10-Q, "we," "our," "ours" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing a combination of office and laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science facilities".
As of March 31, 2003, our portfolio consisted of 88 properties containing approximately 5.7 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 96% leased, excluding those properties in our redevelopment program. Our primary source of revenue is rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our property acquisition, development and redevelopment activities.
Results of Operations
Comparison of Three Months Ended March 31, 2003 ("First Quarter 2003") to Three Months Ended March 31, 2002 ("First Quarter 2002")
Rental revenue increased by $5.2 million, or 20%, to $31.6 million for First Quarter 2003 compared to $26.5 million for First Quarter 2002. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after January 1, 2002. Rental revenue from the properties operating continuously since January 1, 2002 (the "First Quarter Same Properties") increased by $615,000, or 2.8%, primarily due to increases in rental rates. The occupancy level of the First Quarter 2003 Same Properties as of March 31, 2003 was 97.7%, compared to 97.5% as of March 31, 2002.
Tenant recoveries increased by $1.9 million, or 28%, to $8.6 million for First Quarter 2003 compared to $6.7 million for First Quarter 2002. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after January 1, 2002. Tenant recoveries for the First Quarter Same Properties increased by $986,000, or 17.8%, primarily due to increases in certain recoverable operating expenses.
Interest and other income decreased by $139,000, or 29%, to $344,000 for First Quarter 2003 compared to $483,000 for First Quarter 2002. The decrease resulted primarily from a decrease in interest income from a secured note receivable that was paid off by the borrower in First Quarter 2002.
Rental operating expenses increased by $2.1 million, or 32%, to $8.8 million for First Quarter 2003 compared to $6.7 million for First Quarter 2002. The increase resulted partially from rental operating expenses from properties acquired, placed in service or redeveloped after January 1, 2002. Operating expenses for the First Quarter Same Properties increased by $1.0 million, or 18.9%, primarily due to increases in property taxes, utilities and snow removal, substantially all of which are recoverable from our tenants through tenant recoveries.
The following is a comparison of property operating data computed under accounting principles generally accepted in the United States ("GAAP Basis") and under accounting principles generally accepted in the United States, adjusted to exclude the effect of straight line rent adjustments required by GAAP ("Cash Basis") for the First Quarter Same Properties (dollars in thousands):
For the Three Months
Ended March 31,
-----------------------
2003 2002 Change
----------- ----------- ---------
GAAP BASIS (1):
Revenue $29,236 $27,838 5.0%
Operating expenses 6,318 5,313 18.9% (2)
----------- ----------- ---------
Revenue less operating expenses $22,918 $22,525 1.7%
=========== =========== =========
CASH BASIS (1):
Revenue $28,555 $26,765 6.7%
Operating expenses 6,318 5,313 18.9% (2)
----------- ----------- ---------
Revenue less operating expenses $22,237 $21,452 3.7%
=========== =========== =========
_________
General and administrative expenses increased by $76,000, or 2%, to $3,549,000 for First Quarter 2003 compared to $3,473,000 for First Quarter 2002 primarily due to general increases in costs, primarily payroll and related expenses.
Interest expense increased by $512,000, or 8%, to $6.9 million for First Quarter 2003 compared to $6.4 million for First Quarter 2002. The increase resulted from indebtedness incurred to acquire two properties. The increase was slightly offset from a reduction in the floating interest rate on our unsecured line of credit. The weighted average interest rate on our borrowings (excluding the effect of swap agreements) decreased from 3.57% as of March 31, 2002 to 2.91% as of March 31, 2003.
Depreciation and amortization increased by $1.5 million, or 18%, to $9.5 million for First Quarter 2003 compared to $8.0 million for First Quarter 2002. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after January 1, 2002.
Income from discontinued operations of $203,000 for First Quarter 2003 reflects the results of operations of two properties that have been designated as held for sale. In the first quarter 2003, we sold one property in the San Francisco Bay market that had been designated as "held for sale". In connection with this sale, we recorded a loss on sale of property of $455,000.
As a result of the foregoing, net income was $12.1 million for First Quarter 2003 compared to $9.6 million for First Quarter 2002.
Liquidity and Capital Resources
Cash flows
Net cash provided by operating activities for First Quarter 2003 increased by $6.4 million to $17.6 million compared to $11.2 million for First Quarter 2002. The increase resulted primarily from increases in cash flows from our portfolio of operating properties, offset by a decline in accounts payable, accrued expenses and tenant security deposits.
Net cash used in investing activities increased by $29.7 million to $55.0 million for First Quarter 2003 compared to $25.3 million for First Quarter 2002. This increase was primarily due to additions to properties under development partially offset by a sale of a property previously designated as "held for sale".
Net cash provided by financing activities increased by $20.5 million to $37.2 million for First Quarter 2003 compared to $16.7 million for First Quarter 2002. Cash provided by financing activities for First Quarter 2003 primarily consisted of net proceeds from our unsecured line of credit and secured debt, partially offset by distributions to stockholders.
Contractual obligations and commitments
Contractual obligations as of March 31, 2003, consists of the following (dollars in thousands):
Payments by Period
----------------------------------------------
Total 2003 2004-2005 2006-2007 Thereafter
------------- -------- --------- --------- ----------
Contractual Obligations
Secured notes payable (1) $ 310,753 $ 4,246 $ 36,727 $ 56,750 $ 213,030
Ground lease obligations $ 25,960 $ 548 $ 1,460 $ 1,461 $ 22,491
Other obligations $ 666 $ 349 $ 317 $ - $ -
------------- -------- --------- --------- ----------
Total $ 337,379 $ 5,143 $ 38,504 $ 58,211 $ 235,521
============= ======== ========= ========= ==========
1. Excludes unamortized premium of two secured notes payable.
Secured notes payable as of March 31, 2003 includes 16 notes secured by 37 properties.
Ground lease obligations as of March 31, 2003 includes leases at five of our properties and one land development parcel. These lease obligations have remaining lease terms of 14 to 53 years, exclusive of extension options.
In additions to the above, as of March 31, 2003, we were also committed under the terms of construction contracts and certain leases to complete the development of buildings and related improvements at a remaining aggregate cost of $15.6 million.
As of March 31, 2003, we were also committed to fund approximately $27.4 million for the construction of building infrastructure improvements and for certain investments.
Tenant security deposits and restricted cash
Tenant security deposits and restricted cash as of March 31, 2003 consists of the following (in thousands):
Amount
---------
Funds held in trust under the terms of certain
secured notes payable $6,460
Security deposit funds based on the terms of certain
lease agreements 1,957
Funds held in escrow to complete the development of an
office/laboratory facility 362
---------
$8,779
=========
Secured debt
Secured debt as of March 31, 2003 consists of the following (dollars in thousands):
Balance at Stated
March 31, Interest
Location of Collateral 2003 Rates Maturity Dates
- ------------------------------------------ ------------ ------------ --------------
Lexington, MA $3,373 8.45% August 2004
San Francisco, CA (two properties) 21,853 LIBOR + 1.70% January 2005 (1)
Worcester, MA (2) 10,152 8.75% January 2006
Durham, NC (two properties) 11,999 8.68% December 2006
Gaithersburg, MA (three properties) 9,779 8.25% August 2007
Cambridge, MA (3) 18,665 9.125% October 2007
Chantilly, VA and Seattle, WA 34,736 7.22% May 2008
San Diego, CA (four properties) 41,007 6.95% July 2009
Worcester, MA and San Diego, CA 18,501 8.71% January 2010
Gaithersburg, MD (two properties) 24,273 8.33% November 2010
San Diego, CA (six properties) 23,783 7.75% July 2011
San Diego, CA 11,564 7.50% August 2011
Gaithersburg, MD (three properties) 27,962 7.40% January 2012
San Diego, CA (four properties) 34,000 6.21% March 2013
Alameda, CA 2,841 7.165% January 2014
Seattle, WA (two properties) 17,917 7.75% June 2016
------------
$312,405
============
_________
The following is a summary of the scheduled principal payments for our secured debt as of March 31, 2003 (in thousands):
Year Amount
-------------------------------------
2003 $4,246
2004 9,221
2005 27,506
2006 25,367
2007 31,383
Thereafter 213,030
-----------
Subtotal 310,753
Unamortized Premium 1,652
-----------
Total $312,405
===========
Unsecured line of credit
We have an unsecured line of credit that provides for borrowing of up to $425 million. The line of credit has a maturity date of July 2005, which may be extended at our sole option for an additional one-year period. Borrowings under our unsecured 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 a LIBOR period of one, two, three or six months.
Our 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. As of March 31, 2003, borrowings outstanding on the line of credit carried a weighted average interest rate of 2.91%.
Aggregate borrowings under the line of credit are limited to an amount based on the net operating income derived from a pool of unencumbered assets. As of March 31, 2003, the amount calculated under these provisions exceeded the maximum permitted borrowings of $425 million.
We utilize interest rate swap agreements to hedge certain of our exposure to variable interest rates associated with our unsecured line of credit. These agreements involve the exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of March 31, 2003 (dollars in thousands):
Notional Interest
Transaction Dates Effective Dates Amounts Pay Rates Termination Dates Fair Values
- --------------- ---------------- ------------- ---------- ----------------- ------------
July 2000 May 31, 2001 $ 50,000 7.07% May 31, 2003 $ (507)
March 2002 December 31, 2002 $ 50,000 5.36% December 31, 2004 (3,341)
July 2002 January 1, 2003 $ 25,000 3.855% June 30, 2005 (1,137)
July 2002 January 1, 2003 $ 25,000 3.865% June 30, 2005 (1,143)
December 2002 January 2, 2003 $ 25,000 3.285% June 30, 2006 (754)
December 2002 January 2, 2003 $ 25,000 3.285% June 30, 2006 (754)
November 2002 June 1, 2003 $ 25,000 3.115% December 31, 2005 (615)
November 2002 June 1, 2003 $ 25,000 3.155% December 31, 2005 (641)
----------
Total $ (8,892)
==========
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements, as the counterparties are established, well-capitalized financial institutions.
Other resources and liquidity requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using our working capital and net cash provided by operating activities. We believe that net cash provided by operating activities will continue to be sufficient to make the distributions necessary to enable us to continue qualifying as a real estate investment trust. We also believe that net cash provided by operations will be sufficient to fund recurring capital expenditures and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as for property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non- recurring capital improvements, through net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our line of credit, and the issuance of additional debt and/or equity securities.
Capital Expenditures and Leasing Costs
The following provides additional information with respect to capital expenditures and leasing costs incurred during the three months ended March 31, 2003 (dollars in thousands):
|
Property-related capital expenditures (1) |
$ 370 |
|
Leasing costs (2) |
$ 90 |
|
Property-related redevelopment costs |
$ 13,127 |
|
Property-related development costs |
$ 7,199 |
|
Purchase of property under development |
$ 36,332 |
|
Purchase of rental property |
$ 3,677 |
_______
Inflation
Approximately 87% of our leases (on a square footage basis) are triple net leases that require tenants to pay substantially all real estate taxes and insurance, and common area and other operating expenses, including increases therein. In addition, approximately 8% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 92% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 4%) or indexed based on a CPI index. Accordingly, we do not believe that our earnings or cash flow are subject to significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable borrowings, including our unsecured line of credit.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the mis-correlation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of funds from operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper"), which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from assets, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance of REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the three months ended March 31, 2003 and 2002 (in thousands):
For the Three Months
Ended
March 31,
-----------------------
2003 2002
----------- -----------
Net income $12,149 $9,603
Add
Depreciation and amortization (1) 9,461 8,237
Loss on sale of property (2) 455 -
Subtract
Dividends on preferred stock (2,225) (1,905)
----------- -----------
Funds from operations (FFO) $19,840 $15,935
=========== ===========
Property and Lease Information
The following table is a summary of our property portfolio as of March 31, 2003 (dollars in thousands):
Rentable Annualized
Number of Square Base Occupancy
Properties Feet Rent Percentages
----------- ----------- ---------- -----------
Markets
California - Pasadena 1 31,343 $602 95.7%
California - San Diego 20 845,548 23,503 94.5%
California - San Francisco Bay 10 614,490 19,564 100.0%
Eastern Massachusetts 11 746,734 24,682 91.0% (1)
New Jersey/Suburban Philadelphia 6 346,919 6,251 100.0%
Southeast 5 259,414 4,281 85.1% (2)
Suburban Washington D.C. 20 1,675,934 27,306 97.1%
Washington - Seattle 5 440,284 16,074 100.0%
----------- ----------- ---------- -----------
Subtotal 78 4,960,666 122,263 95.9%
Redevelopment properties 10 766,516 9,381 50.0%
----------- ----------- ---------- -----------
Total 88 5,727,182 $131,644 89.8%
=========== =========== ========== ===========
________
The following table provides information with respect to the lease expirations at our properties as of March 31, 2003:
Square Percentage of Annualized Base
Year of Number of Footage of Aggregate Rent of Expiring
Lease Expiring Expiring Portfolio Leased Leases (per
Expiration Leases Leases Square Footage square foot)
- ----------- -------------- -------------- ---------------- ----------------
2003 (1) 50 519,614 10.1% $23.16
2004 39 536,792 10.4% $20.57
2005 19 278,405 5.4% $27.96
2006 32 775,641 15.1% $23.50
2007 15 332,085 6.5% $24.13
Thereafter 51 2,697,974 52.5% $27.63
_________
(1) Includes 14 month-to-month leases and leases expiring between April 1, 2003 and December 31, 2003.
The following table is a summary of our lease activity for the three months ended March 31, 2003 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 Rates Rates Changes Per Foot Terms
--------- --------- --------- --------- -------- ------------ ---------
Lease Activity - Expired Leases
Lease Expirations
Cash Basis 29 215,979 $25.34 -- -- -- --
GAAP Basis 29 215,979 $25.40 -- -- -- --
Renewed / Released Space
Cash Basis 11 139,562 $27.52 $23.51 -14.6% (1) $1.99 2.1 Years
GAAP Basis 11 139,562 $27.73 $25.18 -9.2% (1) $1.99 2.1 Years
Month-to-Month Leases
Cash Basis 14 47,296 $17.26 $17.22 -0.2% -- --
GAAP Basis 14 47,296 $17.17 $17.22 0.3% -- --
Total Leasing - Expired Leases
Cash Basis 25 186,858 $24.92 $21.92 -12.0% (2) -- --
GAAP Basis 25 186,858 $25.06 $23.17 -7.5% (2) -- --
Redeveloped/Developed/
Vacant Space Leased
Cash Basis 11 50,289 -- $29.78 -- $1.63 2.5 Years
GAAP Basis 11 50,289 -- $30.23 -- $1.63 2.5 Years
All Lease Activity
Cash Basis 36 237,147 -- $23.59 -- -- --
GAAP Basis 36 237,147 -- $24.67 -- -- --
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on, March 31, 2003, we estimate that a 1% increase in interest rates on our line of credit, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $1.5 million. We further estimate that a 1% decrease in interest rates on our line of credit, after considering the effect of our interest rate swap agreements in effect on March 31, 2003, would increase annual future earnings and cash flows by approximately $1.5 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $19.8 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $20.9 million.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on March 31, 2003. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
We have exposure to equity price market risk because of our equity investments in certain publicly traded companies and privately held entities. We classify investments in publicly traded companies as available-for-sale and, consequently, record them on our balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. Investments in privately held entities are generally accounted for under the cost method, as we do not influence any of the investees' operating or financial policies. For all investments, we recognize other than temporary declines in value against earnings in the same period the decline in value was deemed to have occurred. There is no assurance that future declines in values will not have a material adverse impact on our future results of operations. By way of example, a 10% decrease in the fair value of our equity investments would decrease their fair value by approximately $4.2 million.
Item 4. CONTROLS AND PROCEDURES
As of March 31, 2003, we performed an evaluation, under the supervision of our chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to March 31, 2003.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2003.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
/s/ Joel S. Marcus
Joel S. Marcus
Chief Executive Officer
(Principal Executive Officer)
/s/ Peter J. Nelson
Peter J. Nelson
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
I, Joel S. Marcus, Chief Executive Officer and Principal Executive Officer of Alexandria Real Estate Equities, Inc., certify that:
Date: May 15, 2003
/s/ Joel S. Marcus
Joel S. Marcus
Chief Executive Officer
Principal Executive Officer
I, Peter J. Nelson, Chief Financial Officer and Principal Financial and Accounting Officer of Alexandria Real Estate Equities, Inc., certify that:
Date: May 15, 2003
/s/ Peter J. Nelson
Peter J. Nelson
Chief Financial Officer
Principal Financial and Accounting Officer