UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
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135 North Los Robles Avenue, Suite 250, Pasadena, CA 91101
(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 November 5, 2004, 19,535,311 shares of common stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
PART I. Financial Information | Page No. |
Item 1. Financial Statements (unaudited): |
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Condensed Consolidated Balance Sheets - As of September 30, 2004 and December 31, 2003 |
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Condensed Consolidated Income Statements - for the Three and Nine Months Ended September 30, 2004 and 2003 |
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Condensed Consolidated Statements of Cash Flows - for the Nine Months Ended September 30, 2004 and 2003 |
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Notes to Condensed Consolidated Financial Statements |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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PART II. Other Information |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Item 5. Other Information |
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Item 6. Exhibits |
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Signatures |
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31, 2004 2003 ------------ ------------ (Unaudited) Assets Rental properties, net $ 1,152,350 $ 982,297 Properties under development 196,617 153,379 Cash and cash equivalents 5,330 4,985 Tenant security deposits and other restricted cash 14,879 11,057 Tenant receivables 2,351 1,969 Deferred rent 40,285 31,503 Investments 62,349 47,126 Other assets 49,518 40,261 ------------ ------------ Total assets 1,523,679 1,272,577 ============ ============ Liabilities and Stockholders' Equity Secured notes payable 371,046 320,007 Unsecured line of credit and unsecured term loan 476,000 389,000 Accounts payable, accrued expenses and tenant security deposits 46,234 43,408 Dividends payable 16,289 13,027 ------------ ------------ Total liabilities 909,569 765,442 Stockholders' equity: Series A preferred stock -- 38,588 Series B preferred stock 57,500 57,500 Series C preferred stock 129,638 -- Common stock 195 193 Additional paid-in capital 413,569 409,926 Deferred compensation (1,224) (2,232) Retained earnings 6,735 8,635 Accumulated other comprehensive income (loss) 7,697 (5,475) ------------ ------------ Total stockholders' equity 614,110 507,135 ------------ ------------ Total liabilities and stockholders' equity $ 1,523,679 $ 1,272,577 ============ ============
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Income Statements
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------ ----------- ------------ ----------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Revenues Rental $ 35,911 $ 31,258 $ 104,174 $ 93,729 Tenant recoveries 9,615 8,122 26,355 24,431 Other income 984 705 2,279 1,421 ----------- ----------- ----------- ----------- 46,510 40,085 132,808 119,581 Expenses Rental operations 10,184 8,171 27,727 24,883 General and administrative 3,662 3,568 11,112 10,661 Interest 6,626 6,532 20,261 19,915 Depreciation and amortization 10,574 9,737 30,643 28,789 ----------- ----------- ----------- ----------- 31,046 28,008 89,743 84,248 ----------- ----------- ----------- ----------- Income from continuing operations 15,464 12,077 43,065 35,333 Income from discontinued operations, net -- 9,517 1,626 10,959 ----------- ----------- ----------- ----------- Net income $ 15,464 $ 21,594 $ 44,691 $ 46,292 =========== =========== =========== =========== Dividends on preferred stock 4,094 2,225 8,603 6,674 Preferred stock redemption charge -- -- 1,876 -- ----------- ----------- ----------- ----------- Net income available to common stockholders $ 11,370 $ 19,369 $ 34,212 $ 39,618 =========== =========== =========== =========== Basic income per common share: Income from continuing operations $ 0.80 $ 0.63 $ 2.23 $ 1.86 =========== =========== =========== =========== Income from discontinued operations, net -- 0.50 0.08 0.58 =========== =========== =========== =========== Net income $ 0.80 $ 1.14 $ 2.32 $ 2.44 =========== =========== =========== =========== Net income available to common stockholders $ 0.59 $ 1.02 $ 1.77 $ 2.09 =========== =========== =========== =========== Diluted income per common share: Income from continuing operations $ 0.79 $ 0.63 $ 2.20 $ 1.84 =========== =========== =========== =========== Income from discontinued operations, net $ -- $ 0.49 $ 0.08 $ 0.57 =========== =========== =========== =========== Net income $ 0.79 $ 1.12 $ 2.28 $ 2.41 =========== =========== =========== =========== Net income available to common stockholders $ 0.58 $ 1.00 $ 1.74 $ 2.06 =========== =========== =========== =========== Weighted average shares of common stock outstanding: Basic 19,352,670 19,023,162 19,281,678 18,957,609 =========== =========== =========== =========== Diluted 19,668,360 19,276,932 19,614,092 19,191,021 =========== =========== =========== ===========
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30, ----------- ---------- 2004 2003 ---------- ---------- Operating Activities Net income $ 44,691 $ 46,292 Adjustments to reconcile net income to net cash provided by operating activities: Gain/loss on sales of property (1,627) (8,322) Depreciation and amortization 30,643 29,034 Amortization of loan fees and costs 1,712 1,513 Amortization of premiums on secured notes (94) (259) Stock compensation expense 1,895 1,974 Changes in operating assets and liabilties: Tenant security deposits and other restricted cash (3,822) (1,226) Tenant receivables (382) 820 Deferred rent (8,790) (5,044) Other assets (12,260) (6,508) Accounts payable, accrued expenses and tenant security deposits 4,544 (2,865) ---------- ---------- Net cash provided by operating activities 56,510 55,409 ---------- ---------- Investing Activities Purchase of properties (103,354) (3,677) Proceeds from sales of property 5,454 33,478 Additions to rental properties (48,246) (34,290) Additions to properties under development (72,635) (68,234) Additions to investments, net (3,983) (5,348) ---------- ---------- Net cash used in investing activities (222,764) (78,071) ---------- ---------- Financing Activities Proceeds from secured notes payable 38,000 64,667 Proceeds from exercise of stock options 6,241 2,648 Proceeds from issuance of Series C Preferred Stock 124,009 -- Redemption of Series A Preferred Stock (38,588) Principal borrowings from (reductions to) unsecured line of credit and unsecured term loan 87,000 (4,000) Principal reductions of secured notes payable (8,640) (4,847) Dividends paid on common stock (34,830) (29,697) Dividends paid on preferred stock (6,593) (6,674) ---------- ---------- Net cash provided by financing activities 166,599 22,097 ---------- ---------- Net increase (decrease) in cash and cash equivalents 345 (565) Cash and cash equivalents at beginning of period 4,985 3,790 ---------- ---------- Cash and cash equivalents at end of period $ 5,330 $ 3,225 ========== ==========
See the accompanying Notes to Condensed Consolidated Financial Statements.
Alexandria Real Estate Equities, Inc. And Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Background
As used in this Form 10-Q, references to the "Company," "we", "our" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
Alexandria Real Estate Equities, Inc. is a real estate investment trust ("REIT") formed in 1994. We are engaged primarily in the ownership, operation, management, acquisition, expansion and selective redevelopment and development of properties containing office/laboratory space. We refer to these properties as "life science properties". Our life science properties are designed and improved for lease primarily to pharmaceutical, biotechnology, life science product, service, biodefense, educational and translational medicine institutions/entities, as well as related government agencies. As of September 30, 2004, our portfolio consisted of 101 properties in nine states with approximately 6.5 million rentable square feet.
We have prepared the accompanying interim financial statements in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statements presented herein reflect all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statements. The results of operations for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Basis of Presentation and Significant Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Alexandria Real Estate Equities, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) consists of the following (in thousands):
September 30, December 31, 2004 2003 ------------ ------------ Unrealized gain on marketable securities $ 12,064 $ 824 Unrealized loss on interest rate swap agreements (4,367) (6,299) ------------ ------------ $ 7,697 $ (5,475) ============ ============
The following table provides a reconciliation of comprehensive income (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------ ------------- ------------ 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net income $ 15,464 $ 21,594 $ 44,691 $ 46,292 Unrealized gain (loss) on marketable securities 11,135 (177) 11,240 344 Unrealized (loss) gain on interest rate swap agreements (3,079) 1,776 1,932 1,376 ------------ ------------ ------------ ------------ Comprehensive income $ 23,520 $ 23,193 $ 57,863 $ 48,012 ============ ============ ============ ============
2. Rental Properties, Net
Rental properties, net consist of the following (in thousands):
September 30, December 31, 2004 2003 ------------ ------------ Land $ 182,005 $ 147,425 Buildings and improvements 1,002,372 854,152 Tenant and other improvements 134,487 122,280 ------------ ------------ 1,318,864 1,123,857 Less accumulated depreciation (166,514) (141,560) ------------ ------------ $ 1,152,350 $ 982,297 ============ ============
During the third quarter of 2004, we acquired seven properties aggregating approximately 478,000 square feet in four markets. We purchased one property in the San Diego market, one property in the Southeast market, two properties in the New Jersey/Suburban Philadelphia market and three properties in the Suburban Washington D.C. market. We paid approximately $65.6 million cash for the properties together with the assumption of two secured notes payable totaling $12.2 million. Also, during the third quarter of 2004, we purchased land parcels with entitlements of approximately 508,000 square feet for $31.0 million cash.
3. Investments
We hold equity investments in certain publicly-traded companies and privately-held entities primarily involved in the life science industry. All of our investments in publicly-traded companies are considered "available for sale" under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The following table summarizes our available-for-sale securities (in thousands):
September 30, December 31, 2004 2003 ------------ ------------ Adjusted cost of available-for-sale securities $ 2,980 $ 1,257 Gross unrealized gains 12,157 837 Gross unrealized losses (93) (13) ------------ ------------ Fair value of available-for-sale securities $ 15,044 $ 2,081 ============ ============
Investments in privately-held entities as of September 30, 2004 and December 31, 2003, totaled $47,305,000 and $45,045,000, respectively. Of these totals, $46,392,000 and $42,331,000 are accounted for under the cost method. The remainder ($914,000 and $2,714,000 as of September 30, 2004 and December 31, 2003, respectively) is accounted for under the equity method in accordance with Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" and Emerging Issues Task Force Topic D-46, "Accounting for Limited Partnership Investments".
For all of our investments, if a decline in the fair value of an investment below its carrying value is determined to be other than temporary, as defined under the provisions of Emerging Issues Task Force Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments", such investment is written down to its estimated fair value with a non-cash impairment charge to current earnings.
4. Unsecured Line of Credit and Unsecured Term Loan
We have an unsecured line of credit that provides for borrowings up to $440 million and an unsecured term loan for $150 million. Borrowings under our unsecured line of credit and our unsecured term loan bear interest at a floating rate based on our election of either a LIBOR-based rate or a rate related to the higher of the bank's reference rate and the Federal Funds rate. For each LIBOR- based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. The unsecured term loan expires in November 2008. As of September 30, 2004, outstanding borrowings of $326.0 million under the unsecured line of credit carried a weighted average interest rate of 3.09%. As of September 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.93%.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum of $590 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2004 (dollars in thousands):
Effective at Notional Sept.30, Interest Fair Transaction Dates Effective Dates Amounts 2004 Pay Rates Termination Dates Values - ------------------ --------------- ------------ ------------- -------- ---------------- -------- Hedges for Unsecured Line of Credit March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $ (431) July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (297) July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (299) December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238) December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238) November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (187) November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (200) March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47 March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47 June 2004 June 30, 2005 50,000 -- 4.343% June 30, 2007 (890) ------------- $ 200,000 Hedges for Unsecured Term Loan December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 53 December 2003 December 31, 2004 50,000 -- 3.000% December 30, 2005 (169) December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 (334) December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (742) April 2004 April 30, 2004 50,000 50,000 1.550% April 29, 2005 184 April 2004 April 29, 2005 50,000 -- 3.140% April 28, 2006 (92) April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 (276) April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (305) ------------- -------- $ 100,000 $(4,367) Total Interest Rate Swap Agreements in Effect ------------- ======== at September 30, 2004 $ 300,000 =============
5. Stockholders' Equity
In June 2004, we completed a public offering of 5,185,500 shares of our 8.375% Series C cumulative redeemable preferred stock ("Series C preferred stock") (including the shares issued upon exercise of the underwriters' over- allotment option). The shares were issued at a price of $25.00 per share, resulting in aggregate proceeds of approximately $124.0 million (after deducting underwriters' discounts and other offering costs). The proceeds were used to redeem our 9.50% Series A cumulative redeemable preferred stock ("Series A preferred stock") with the remaining portion used to pay down our unsecured line of credit. The dividends on our Series C preferred stock are cumulative and accrue from the date of original issuance. We pay dividends quarterly in arrears at an annual rate of $2.09375 per share. Our Series C preferred stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and is not redeemable prior to June 29, 2009, except in order to preserve our status as a REIT. Investors in our Series C preferred stock generally have no voting rights. On or after June 29, 2009, we may, at our option, redeem our Series C preferred stock, in whole in part, at any time for cash at a redemption price of $25.00 per share, plus accrued and unpaid dividends.
In July 2004, we redeemed all 1,543,500 outstanding shares of our Series A preferred stock at a redemption price of $25.00 per share plus $0.5409722 per share representing accumulated and unpaid dividends to the redemption date. In accordance with Emerging Issues Task Force Topic D-42, "The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock", we recorded a charge of approximately $1,876,000 to net income available to common stockholders during the second quarter of 2004 for costs related to the redemption of the Series A preferred stock. We redeemed our Series A preferred stock with proceeds from the Series C preferred stock offering in the second quarter of 2004.
In September 2004, we declared a cash dividend on our common stock
aggregating $12,455,000
($ 0.64 per share) for the calendar quarter ended September 30, 2004. In
September 2004, we also declared a cash dividend on our 9.10% Series B
Cumulative Redeemable Preferred Stock ("Series B preferred stock") aggregating
$1,308,000 ($0.56875 per share) for the period July 15, 2004 through October 14,
2004. In September 2004, we declared the initial cash dividend for our Series C
Preferred Stock aggregating $3,197,000 ($0.6164931 per share) for the period
June 29, 2004 through October 14, 2004. The dividends on our common stock,
Series B preferred stock and Series C preferred stock were paid on October 15,
2004.
6. Stock Option Plan
For 2002 and all prior years, we elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for our employee and non-employee director stock options, stock grants and stock appreciation rights. Under APB 25, because the exercise price of the options we granted equals the market price of the underlying stock on the date of grant, no compensation expense had been recognized.
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation- Transition and Disclosure" ("SFAS 148"), which addresses alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. Effective January 1, 2003, we adopted the fair value recognition provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123"), prospectively to all employee awards granted, modified or settled after January 1, 2003. There have been no options issued since January 1, 2003.
The following table provides pro forma disclosures of the estimated fair value of the options amortized to expense over the options' vesting periods as if we had accounted for our stock options under the fair value method under SFAS 123 since the date they were granted (in thousands, except per share information):
Three Months Ended Nine Months Ended September 30, September 30, ------------ ----------- ------------ ----------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net income available to common stockholders, as reported $ 11,370 $ 19,369 $ 34,212 $ 39,618 Add: Stock-based employee compensation expense included in reported net income -- -- -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards (181) (329) (558) (997) ----------- ----------- ----------- ----------- Pro forma net income available to common stockholders $ 11,189 $ 19,040 $ 33,654 $ 38,621 =========== =========== =========== =========== Earnings per share: Basic - as reported $0.59 $1.02 $1.77 $2.09 =========== =========== =========== =========== Basic - pro forma $0.58 $1.00 $1.75 $2.04 =========== =========== =========== =========== Diluted - as reported $0.58 $1.00 $1.74 $2.06 =========== =========== =========== =========== Diluted - pro forma $0.57 $0.99 $1.72 $2.01 =========== =========== =========== ===========
7. Net Income Per Share
The following table shows the computation of net income per share of our common stock outstanding (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ------------ ----------- ------------ ----------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net income available to common stockholders $11,370 $19,369 $34,212 $39,618 =========== =========== =========== =========== Weighted average shares of common stock outstanding - basic 19,352,670 19,023,162 19,281,678 18,957,609 Add: dilutive effect of stock options and stock grants 315,690 253,770 332,414 233,412 ----------- ----------- ----------- ----------- Weighted average shares of common stock outstanding - diluted 19,668,360 19,276,932 19,614,092 19,191,021 =========== =========== =========== =========== Net income per common share: - Basic $0.59 $1.02 $1.77 $2.09 =========== =========== =========== =========== - Diluted $0.58 $1.00 $1.74 $2.06 =========== =========== =========== =========== Common dividends declared per share $0.64 $0.56 $1.86 $1.62 =========== =========== =========== ===========
8. Discontinued Operations
On January 1, 2002, Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") became effective. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Under SFAS 144, a property is classified as "held for sale" when all of the following criteria for a plan of sale have been met: 1) management, having the authority to approve the action, commits to a plan to sell the property, 2) the property is available for immediate sale in its present condition, subject only to the terms that are usual and customary, 3) an active program to locate a buyer, and other actions required to complete the plan to sell, have been initiated, 4) the sale of the property is probable and is expected to be completed within one year, 5) the property is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and 6) actions necessary to complete the plan of sale indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. When all of these criteria have been met, the property is classified as "held for sale" and its operations are classified as discontinued operations in our consolidated statements of income. When a property is designated as "held for sale", amounts for all prior periods presented are reclassified from continuing operations to discontinued operations. A loss is recognized for any initial adjustment of the asset's carrying amount to fair value less costs to sell in the period the asset qualifies as "held for sale". Depreciation of assets ceases commencing on the date they are designated as "held for sale". The accompanying statements have been presented in compliance with SFAS 144.
Income from discontinued operations, net includes the results of operations for two properties we sold during the first nine months of 2003 and one property we sold during the first quarter of 2004 under the provisions of SFAS 144. During the first quarter of 2004, we sold one property located in the Suburban Washington D.C. market that had been designated as "held for sale" during the fourth quarter of 2003. The total sale price for the property was approximately $5.7 million. In connection with the sale, we recorded a gain on sale of property of approximately $1.6 million. During the third quarter of 2003, we sold one property located in the Eastern Massachusetts market that had been designated as "held for sale" beginning in the fourth quarter of 2002. The total sales price for the property was approximately $46.5 million. In connection with this sale, we recorded a gain on sale of property of approximately $8.8 million during the third quarter of 2003. Interest expense included in discontinued operations for the three and nine months ended September 30, 2003 represents interest related to a secured note payable, which was assumed by the buyer in connection with this sale. During the first quarter of 2003, we sold one property located in the San Francisco Bay market which could not be redeveloped pursuant to our original strategic objectives and that had been designated as "held for sale" as of December 31, 2002. The total sale price for the property was approximately $6.8 million. In connection with this sale, we recorded a loss on sale of property of approximately $455,000 during the first quarter of 2003. Gain/loss on sales of these properties are included on the income statement in income from discontinued operations.
No properties have been designated as "held for sale" as of September 30, 2004.
The following is a summary of discontinued operations (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------ ----------- ---------- 2004 2003 2004 2003 ------------ ------------ ---------- ---------- Revenue $ -- $ 1,454 $ 14 $ 5,030 Operating expenses -- 415 15 1,224 ------------ ------------ ---------- ---------- Revenue less operating expenses -- 1,039 (1) 3,806 Interest -- 223 -- 924 Depreciation -- 76 -- 245 Income before gain/loss on ------------ ------------ ---------- ---------- sales of property -- 740 (1) 2,637 Gain (loss) on sales of property -- 8,777 1,627 8,322 Income from discontinued ------------ ------------ ---------- ---------- operations $ -- $ 9,517 $ 1,626 $ 10,959 ============ ============ ========== ==========
September 30, December 31, 2004 2003 ------------ ------------ Properties held for sale, net $ -- $ 3,518 Tenant security deposits and other restricted cash -- 6 Tenant receivables -- 82 Deferred rent -- 8 Other assets -- 66 ------------ ------------ Total assets $ -- $ 3,680 ============ ============ Accounts payable, accrued expenses and tenant security deposits $ -- $ 79 ------------ ------------ Total liabilities -- 79 ------------ ------------ Net assets of discontinued operations $ -- $ 3,601 ============ ============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Caution Regarding Forward-Looking Statements
Certain information and statements included in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes", "expects", "may", "will", "should", "seeks", "approximately", "intends", "plans", "estimates" or "anticipates", or the negative of these words or similar words, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements involve inherent risks and uncertainties regarding events, conditions and financial trends that may affect our future plans of operation, business strategy, results of operations and financial position. A number of important factors could cause actual results to differ materially from those included within or contemplated by the forward-looking statements, including, but not limited to, those described below in this report and under the headings "Business Risks" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2003. We do not take any responsibility to update any of these factors or to announce publicly any revisions to any of the forward-looking statements contained in this or any other document, whether as a result of new information, future events or otherwise. Readers of this Form 10-Q should also read our Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors.
As used in this Form 10-Q, references to the "Company," "we", "our" and "us" refer to Alexandria Real Estate Equities, Inc. and its subsidiaries.
The following discussion should be read in conjunction with the financial statements and notes appearing elsewhere in this report.
Overview
Since our formation in October 1994, we have devoted substantially all of our resources to the ownership, operation, management, acquisition, expansion and selective redevelopment and development of high quality, strategically located properties containing office/laboratory space leased principally to tenants in the life science industry. We refer to these properties as "life science properties".
As of September 30, 2004, our portfolio consisted of 101 properties containing approximately 6.5 million rentable square feet of office/laboratory space. As of that date, our properties were approximately 96% leased, excluding those properties in our redevelopment program. Our primary sources of revenue are rental income and tenant recoveries from leases at the properties we own. The comparability of financial data from period to period is affected by the timing of our property acquisition, development and redevelopment activities.
Results of Operations
Comparison of Three Months Ended September 30, 2004 ("Third Quarter 2004") to Three Months Ended September 30, 2003 ("Third Quarter 2003")
Rental revenue increased by $4.7 million, or 15%, to $35.9 million for Third Quarter 2004 compared to $31.3 million for Third Quarter 2003. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after July 1, 2003. Rental revenue from the properties operating continuously since July 1, 2003 (the "Third Quarter Same Properties") increased by $745,000, or 3%, primarily due to increases in rental rates and a slight increase in occupancy. The occupancy level of the Third Quarter Same Properties as of September 30, 2004 was 96.4%, compared to 95.6% as of September 30, 2003.
Tenant recoveries increased by $1.5 million, or 18%, to $9.6 million for Third Quarter 2004 compared to $8.1 million for Third Quarter 2003. The increase resulted primarily from tenant recoveries from properties acquired, placed in service or redeveloped after July 1, 2003. Tenant recoveries for the Third Quarter Same Properties increased by $540,000, or 8%, primarily due to increases in certain recoverable expenses during Third Quarter 2004.
Other income increased by $279,000, or 40%, to $1.0 million for Third Quarter 2004 compared to $705,000 for Third Quarter 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $2.0 million, or 25%, to $10.2 million for Third Quarter 2004 compared to $8.2 million for Third Quarter 2003. The increase resulted primarily from rental operating expenses from properties acquired, placed in service or redeveloped after July 1, 2003. Operating expenses for the Third Quarter Same Properties increased by $754,000, or 11%, primarily due to increases in utility expenses and repairs and maintenance expenses, substantially all of which are recoverable from our tenants through tenant recoveries.
General and administrative expenses were virtually unchanged, increasing by $94,000, or 3%, to $3.7 million for Third Quarter 2004 compared to $3.6 million for Third Quarter 2003.
Interest expense was virtually unchanged, increasing by $94,000, or 1%, to $6.6 million for Third Quarter 2004 compared to $6.5 million for Third Quarter 2003.
Depreciation and amortization increased by $837,000 or 9%, to $10.6 million for Third Quarter 2004 compared to $9.7 million for Third Quarter 2003. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after July 1, 2003.
Income from discontinued operations, net was $9.5 million for Third Quarter 2003, which reflects the results of operations of one property sold during Third Quarter 2003. No properties were sold during Third Quarter 2004.
As a result of the foregoing, net income was $15.5 million for Third Quarter 2004 compared to $21.6 million for Third Quarter 2003.
Comparison of Nine Months Ended September 30, 2004 ("Nine Months 2004") to Nine Months Ended September 30, 2003 ("Nine Months 2003")
Rental revenue increased by $10.4 million, or 11%, to $104.2 million for Nine Months 2004 compared to $93.7 million for Nine Months 2003. The increase resulted primarily from rental revenue from properties acquired, placed in service or redeveloped after January 1, 2003. Rental revenue from the properties operating continuously since January 1, 2003 (the "Nine Months Same Properties") increased by $1.6 million, or 2%, primarily due to increases in rental rates. The occupancy level of the Nine Months Same Properties as of September 30, 2004 was 96.5%, compared to 96.3% as of September 30, 2003.
Tenant recoveries increased by $1.9 million, or 8%, to $26.4 million for Nine Months 2004 compared to $24.4 million for Nine Months 2003. The increase resulted primarily from properties acquired, placed in service or redeveloped after January 1, 2003. Tenant recoveries for the Nine Months Same Properties were virtually unchanged, increasing by $80,000, or 0.4%.
Other income increased by $858,000, or 60%, to $2.3 million for Nine Months 2004 compared to $1.4 million for Nine Months 2003. The increase resulted primarily due to a general increase in miscellaneous sources of income.
Rental operating expenses increased by $2.8 million, or 11%, to $27.7 million for Nine Months 2004 compared to $24.9 million for Nine Months 2003. The increase resulted primarily from rental operating expenses from properties acquired, placed in service or redeveloped after January 1, 2003. Operating expenses for the Nine Months Same Properties increased by $326,000, or 2%, primarily due to increases in utility expenses, substantially all of which are recovered from our tenants through tenant recoveries.
General and administrative expenses increased by $451,000, or 4%, to $11.1 million for Nine Months 2004 compared to $10.7 million for Nine Months 2003 primarily due to general increases in administrative costs, primarily payroll and related expenses.
Interest expense was virtually unchanged, increasing by $346,000, or 2%, to $20.3 million for Nine Months 2004 compared to $19.9 million for Nine Months 2003.
Depreciation and amortization increased by $1.9 million, or 6%, to $30.6 million for Nine Months 2004 compared to $28.8 million for Nine Months 2003. The increase resulted primarily from depreciation associated with the properties acquired, placed in service or redeveloped after January 1, 2003.
Income from discontinued operations, net was $1.6 million and $11.0 million for Nine Months 2004 and Nine Months 2003, respectively. It reflects the results of operations of one property we sold during Nine Months 2004 and two properties we sold during Nine Months 2003.
As a result of the foregoing, net income was $44.7 million for Nine Months 2004 compared to $46.3 million for Nine Months 2003.
Liquidity and Capital Resources
Cash flows
Net cash provided by operating activities increased by $1.1 million to $56.5 million for Nine Months 2004 compared to $55.4 million for Nine Months 2003. The increase resulted primarily from increases in cash flows from our operating properties and a decrease in accounts payable, accrued expenses and tenant security deposits, partially offset by an increase in other assets.
Net cash used in investing activities increased by $144.7 million to $222.8 million for Nine Months 2004 compared to $78.1 million for Nine Months 2003. This was primarily due to an increase in property acquisitions, a decrease in proceeds from sales of property and an increase in additions to rental properties.
Net cash provided by financing activities increased by $144.5 million to $166.6 million for Nine Months 2004 compared to $22.1 million for Nine Months 2003. Cash provided by financing activities for Nine Months 2004 primarily consisted of net proceeds from our Series C preferred stock offering and an increase in borrowings from our unsecured line of credit. This was partially offset by the redemption of our Series A preferred stock and a decrease in proceeds from secured notes payable.
Contractual obligations and commitments
Contractual obligations as of September 30, 2004, consist of the following (dollars in thousands):
Payments by Period ----------------------------------------- Total 2004 2005-2006 2007-2008 Thereafter ------------- -------- --------- --------- ---------- Contractual Obligations Secured notes payable (1) $ 370,888 $ 1,619 $ 55,882 $ 55,428 $ 257,959 Ground lease obligations 65,776 430 3,634 3,737 57,975 Other obligations 384 142 242 -- -- ------------- -------- --------- --------- ---------- Total $ 437,048 $ 2,191 $ 59,758 $ 59,165 $ 315,934 ============= ======== ========= ========= ==========
Secured notes payable as of September 30, 2004 include 19 notes secured by 46 properties.
Ground lease obligations as of September 30, 2004 include leases at seven of our properties and one land development parcel. These lease obligations have remaining lease terms of 28 to 51 years, exclusive of extension options.
In addition to the above, we were committed under the terms of construction contracts to complete the construction of properties under development at a remaining aggregate cost of approximately $5.0 million.
As of September 30, 2004, we were also committed to fund approximately $30.3 million for the construction of building infrastructure improvements under the terms of leases and/or construction contracts and approximately $18.6 million for certain investments.
Tenant security deposits and other restricted cash
Tenant security deposits and other restricted cash as of September 30, 2004 consist of the following (in thousands):
Amount --------- Funds held in trust under the terms of certain secured notes payable $ 10,972 Security deposit funds based on the terms of certain lease agreements 2,039 Other funds held in escrow 1,868 --------- $ 14,879 =========
Secured debt
Secured debt as of September 30, 2004 consists of the following (dollars in thousands):
Balance at Stated September 30, Interest Market Location of Collateral 2004 Rates Maturity Dates - ----------------------------------------------- ------------ ------------- ---------------- San Francisco Bay (two properties) $ 22,257 LIBOR + 1.70% January 2005 (1) Eastern Massachusetts (2) 9,294 8.75% January 2006 Southeast (two properties) 11,753 8.68% December 2006 Suburban Washington D.C. (three properties) 9,616 8.25% August 2007 Suburban Washington D.C. and Seattle 34,065 7.22% May 2008 Suburban Washington D.C. 3,645 LIBOR + 2.15% March 2009 San Diego (four properties) 39,401 6.95% July 2009 Eastern Massachusetts and San Diego 18,283 8.71% January 2010 Eastern Massachusetts (two properties) 9,464 5.35% September 2010 Suburban Washington D.C. (two properties) 23,974 8.33% November 2010 San Diego (six properties) 23,474 7.75% July 2011 Southeast 8,593 5.88% December 2011 Suburban Washington D.C. (three properties) 27,583 7.40% January 2012 San Francisco Bay (three properties) and San Diego 33,106 6.21% March 2013 Suburban Washington D.C. (three properties) 29,659 6.36% September 2013 San Francisco Bay 1,352 7.165% January 2014 Eastern Massachusetts (two properties), Southeast and New Jersey/Suburban Philadelphia 37,744 5.82% April 2016 Seattle (two properties) 16,682 7.75% June 2016 San Diego 11,101 7.50% August 2021 ------------ $ 371,046 ============
_________
The following is a summary of the scheduled principal payments for our secured debt and the weighted average interest rates as of September 30, 2004 (in thousands):
Weighted Average Year Amount Interest Rate - ---------------------- ----------- ----------- 2004 $ 1,619 6.84% 2005 29,139 (1) 7.07%(1) 2006 26,743 7.06%(1) 2007 16,318 7.00% 2008 39,110 6.95% Thereafter 257,959 6.94% ----------- ----------- Subtotal 370,888 6.98% Unamortized Premium 158 =========== ----------- Total $ 371,046 ===========
(1) Of this amount, $22,257,000 represents the outstanding balance on a loan which has a maturity date of January 2005 and currently carries interest at 3.35% per annum. In November 2004, we exercised our option to extend the maturity date of this loan to January 2006. The weighted average interest rates for 2005 and 2006 would be 6.84% and 7.06%, respectively, based on this extended maturity date.
Unsecured line of credit and unsecured term loan
We have an unsecured line of credit that provides for borrowings of up to $440 million and an unsecured term loan for $150 million. Borrowings under our unsecured line of credit and our unsecured term loan bear interest at a floating rate based on our election of either a LIBOR-based rate or a rate related to the higher of the bank's reference rate and the Federal Funds rate. For each LIBOR- based advance, we must elect a LIBOR period of one, two, three or six months.
Our unsecured line of credit and our unsecured term loan contain financial covenants, including, among other things, maintenance of minimum net worth, a total liabilities to gross asset value ratio and a fixed charge coverage ratio. In addition, the terms of the unsecured line of credit and unsecured term loan restrict, among other things, certain investments, indebtedness, distributions and mergers. The unsecured line of credit expires November 2006 and may be extended at our sole option for an additional one-year period. The unsecured term loan expires in November 2008. As of September 30, 2004, outstanding borrowings of $326.0 million on the unsecured line of credit carried a weighted average interest rate of 3.09%. As of September 30, 2004, the unsecured term loan carried a weighted average interest rate of 2.93%.
Aggregate borrowings under the unsecured line of credit and unsecured term loan may be limited to an amount based on the net operating income derived from a pool of unencumbered properties. Accordingly, as we acquire or complete the development or redevelopment of additional unencumbered properties, aggregate borrowings available under the unsecured line of credit and unsecured term loan will increase up to a maximum of $590 million.
We utilize interest rate swap agreements to hedge a portion of our exposure to variable interest rates associated with our unsecured line of credit and unsecured term loan. These agreements involve an exchange of fixed and floating interest payments without the exchange of the underlying principal amount (the "notional amount"). Interest received under all of our swap agreements is based on the one-month LIBOR rate. The net difference between the interest paid and the interest received is reflected as an adjustment to interest expense.
The following table summarizes our interest rate swap agreements as of September 30, 2004 (dollars in thousands):
Effective at Notional Sept. 30, Interest Fair Transaction Dates Effective Dates Amounts 2004 Pay Rates Termination Dates Values - ------------------ --------------- ------------ ------------- -------- ---------------- -------- Hedges for Unsecured Line of Credit March 2002 December 31, 2002 $ 50,000 $ 50,000 5.364% December 31, 2004 $ (431) July 2002 January 1, 2003 25,000 25,000 3.855% June 30, 2005 (297) July 2002 January 1, 2003 25,000 25,000 3.865% June 30, 2005 (299) December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238) December 2002 January 2, 2003 25,000 25,000 3.285% June 30, 2006 (238) November 2002 June 1, 2003 25,000 25,000 3.115% December 31, 2005 (187) November 2002 June 1, 2003 25,000 25,000 3.155% December 31, 2005 (200) March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47 March 2004 December 31, 2004 25,000 -- 2.956% December 31, 2006 47 June 2004 June 30, 2005 50,000 -- 4.343% June 30, 2007 (890) ------------- $ 200,000 Hedges for Unsecured Term Loan December 2003 December 31, 2003 $ 50,000 $ 50,000 1.530% December 31, 2004 53 December 2003 December 31, 2004 50,000 -- 3.000% December 30, 2005 (169) December 2003 December 30, 2005 50,000 -- 4.150% December 29, 2006 (334) December 2003 December 29, 2006 50,000 -- 5.090% October 31, 2008 (742) April 2004 April 30, 2004 50,000 50,000 1.550% April 29, 2005 184 April 2004 April 29, 2005 50,000 -- 3.140% April 28, 2006 (92) April 2004 April 28, 2006 50,000 -- 4.230% April 30, 2007 (276) April 2004 April 30, 2007 50,000 -- 4.850% April 30, 2008 (305) ------------- -------- $ 100,000 $(4,367) Total Interest Rate Swap Agreements in Effect ------------- ======== at September 30, 2004 $ 300,000 =============
We do not believe we are exposed to more than a nominal amount of credit risk in our interest rate swap agreements as the counterparties are established, well-capitalized financial institutions.
Other resources and liquidity requirements
We expect to continue meeting our short-term liquidity and capital requirements generally by using our working capital and net cash provided by operating activities. We believe that net cash provided by operating activities will continue to be sufficient to make the distributions necessary to enable us to continue qualifying as a REIT. We also believe that net cash provided by operations will be sufficient to fund recurring capital expenditures and leasing commissions.
We expect to meet certain long-term liquidity requirements, such as for property acquisitions, property development and redevelopment activities, scheduled debt maturities, expansions and other non- recurring capital improvements, through net cash provided by operating activities, long-term secured and unsecured indebtedness, including borrowings under our unsecured line of credit and unsecured term loan, and the issuance of additional debt and/or equity securities.
Capital Expenditures and Leasing Costs
The following provides additional information with respect to capital expenditures and leasing costs incurred during the nine months ended September 30, 2004 (in thousands):
Property-related capital expenditures (1) |
$ 3,258 |
Leasing costs (2) |
$ 584 |
Property-related redevelopment costs (3) |
$ 48,659 |
Property-related development costs |
$ 74,118 |
_______
Inflation
Approximately 83% of our leases (on a square footage basis) are triple net leases that require tenants to pay substantially all real estate taxes and insurance and common area and other operating expenses, including increases therein. In addition, approximately 6% of our leases (on a square footage basis) require the tenants to pay a majority of operating expenses. Approximately 93% of our leases (on a square footage basis) contain effective annual rent escalations that are either fixed (generally ranging from 3% to 3.5%) or indexed based on the consumer price index or another index. Accordingly, we do not believe that our earnings or cash flows from real estate operations are subject to any significant risk from inflation. An increase in inflation, however, could result in an increase in the cost of our variable rate borrowings, including our unsecured line of credit and unsecured term loan.
Funds from Operations
GAAP basis accounting for real estate assets utilizes historical cost accounting and assumes real estate values diminish over time. In an effort to overcome the miscorrelation between real estate values and historical cost accounting for real estate assets, the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") established the measurement tool of Funds From Operations ("FFO"). Since its introduction, FFO has become a widely used non-GAAP financial measure by REITs. We believe that FFO is helpful to investors as an additional measure of the performance of an equity REIT. We compute FFO in accordance with standards established by the Board of Governors of NAREIT in its April 2002 White Paper (the "White Paper") and related implementation guidance, which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. While FFO is a relevant and widely used measure of operating performance of REITs, it should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance, or to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. (See "Cash Flows" for information regarding these measures of cash flows.) We believe that net income is the most directly comparable GAAP financial measure to FFO.
The following table presents our FFO for the three and nine months ended September 30, 2004 and 2003 and a reconciliation of GAAP net income to FFO (in thousands):
For the Three Months Ended For the Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Net income $ $15,464 $ $21,594 $ $44,691 $ $46,292 Add Depreciation and amortization (1) 10,574 9,813 30,643 29,034 Subtract Dividends on preferred stock (4,094) (2,225) (8,603) (6,674) Preferred stock redemption charge (2) -- -- (1,876) -- (Gain) loss on sales of property (3) -- (8,777) (1,627) (8,322) ----------- ----------- ----------- ----------- Funds from operations (FFO) $ $21,944 $ $20,405 $ $63,228 $ $60,330 =========== =========== =========== ===========
Property and Lease Information
The following table is a summary of our property portfolio as of September 30, 2004 (dollars in thousands):
Rentable Annualized Number of Square Base Occupancy Properties Feet Rent Percentage ----------- ----------- ---------- ----------- Markets California - Pasadena 1 31,343 $602 79.4%(1) California - San Diego 21 1,007,413 27,750 96.3% California - San Francisco Bay 10 642,578 19,918 100.0% Eastern Massachusetts 12 730,633 21,934 87.1% New Jersey/Suburban Philadelphia 7 456,785 7,625 100.0% Southeast 6 340,994 5,451 81.4%(1) Suburban Washington D.C. 21 1,629,734 28,638 97.8% Washington - Seattle 7 597,273 21,913 100.0% ----------- ----------- ---------- ----------- Total 85 5,436,753 $133,831 95.6%(2) =========== =========== ========== ===========
________
The following table provides information with respect to the lease expirations at our properties as of September 30, 2004:
Square Percentage of Annualized Base Year of Number of Footage of Aggregate Rent of Expiring Lease Expiring Expiring Portfolio Leased Leases (per Expiration Leases Leases Square Footage square foot) - ------------- ------------ -------------- ---------------- ---------------- 2004 40 (1) 232,500 4.1% $ 24.29 2005 37 367,277 6.5% $ 27.70 2006 41 862,691 15.3% $ 24.44 2007 19 341,825 6.1% $ 23.98 2008 14 368,045 6.5% $ 26.45 Thereafter 74 3,469,022 61.5% $ 26.12
_________
(1) Includes 24 month-to-month leases for approximately 67,000 square feet.
The following table is a summary of our lease activity for the three months ended September 30, 2004 computed on a Cash Basis and on a GAAP Basis:
TI's/Lease Rental Commissions Average Number Square Expiring New Rate Per Lease of Leases Footage Rates Rates Changes Square Foot Terms --------- --------- --------- --------- -------- ------------ --------- Leasing Activity Lease Expirations Cash Basis 45 371,625 $28.69 -- -- -- -- GAAP Basis 45 371,625 $30.55 -- -- -- -- Renewed/Releasable Space Leased Cash Basis 17 229,474 $30.73 $32.57 6.0% $0.27 2.0 years GAAP Basis 17 229,474 $34.44 $37.11 7.8% $0.27 2.0 years Month-to-Month Leases In Effect Cash Basis 24 67,065 $22.80 $22.85 0.2% -- -- GAAP Basis 24 67,065 $22.80 $22.85 0.2% -- -- Redeveloped/Developed/ Vacant Space Leased Cash Basis 12 266,820 -- $18.64 -- $14.68 6.8 years GAAP Basis 12 266,820 -- $20.49 -- $14.68 6.8 years Leasing Activity Summary Excluding Month-to-Month Leases Cash Basis 29 496,294 -- $25.08 -- $8.02 4.6 years GAAP Basis 29 496,294 -- $28.18 -- $8.02 4.6 years Including Month-to-Month Leases Cash Basis 53 563,359 -- $24.82 -- -- -- GAAP Basis 53 563,359 -- $27.54 -- -- --
The following table is a summary of our lease activity for the nine months ended September 30, 2004 computed on a Cash Basis and on a GAAP Basis:
TI's/Lease Rental Commissions Average Number Square Expiring New Rate Per Lease of Leases Footage Rates Rates Changes Square Foot Terms --------- --------- -------- -------- -------- ----------- --------- Leasing Activity Lease Expirations Cash Basis 74 955,762 $24.37 -- -- -- -- GAAP Basis 74 955,762 $25.80 -- -- -- -- Renewed/Releasable Space Leased Cash Basis 38 625,983 $24.09 $24.80 2.9% $2.50 4.7 years GAAP Basis 38 625,983 $26.01 $28.05 7.8% $2.50 4.7 years Month-to-Month Leases In Effect Cash Basis 24 67,065 $22.68 $22.85 0.7% -- -- GAAP Basis 24 67,065 $22.65 $22.85 0.9% -- -- Redeveloped/Developed/ Vacant Space Leased Cash Basis 25 364,805 -- $23.64 -- $20.66 8.6 years GAAP Basis 25 364,805 -- $28.92 -- $20.66 8.6 years Leasing Activity Summary Excluding Month-to-Month Leases Cash Basis 63 990,788 -- $24.37 -- $9.19 6.1 years GAAP Basis 63 990,788 -- $28.37 -- $9.19 6.1 years Including Month-to-Month Leases Cash Basis 87 1,057,853 -- $24.27 -- -- -- GAAP Basis 87 1,057,853 -- $28.02 -- -- --
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk, which may result from many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counter-party credit risk and the legal enforceability of hedging contracts.
Our future earnings, cash flows and fair values relating to financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. Based on interest rates at, and our swap agreements in effect on September 30, 2004, we estimate that a 1% increase in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements, would decrease annual future earnings and cash flows by approximately $1.8 million. We further estimate that a 1% decrease in interest rates on our unsecured line of credit and unsecured term loan, after considering the effect of our interest rate swap agreements in effect on September 30, 2004, would increase annual future earnings and cash flows by approximately $1.8 million. A 1% increase in interest rates on our secured debt and interest rate swap agreements would decrease their aggregate fair value by approximately $25.0 million. A 1% decrease in interest rates on our secured debt and interest rate swap agreements would increase their aggregate fair value by approximately $26.3 million.
These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost and our interest rate swap agreements in effect on September 30, 2004. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would consider taking actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.
We have exposure to equity price market risk because of our equity investments in certain publicly-traded companies and privately-held entities. We classify investments in publicly-traded companies as available-for-sale and, consequently, record them on our balance sheet at fair value with unrealized gains or losses reported as a component of comprehensive income or loss. Investments in privately-held entities are generally accounted for under the cost method because we do not influence any of the operating or financial policies of the entities in which we invest. For all investments, we recognize other than temporary declines in value against earnings in the same period the decline in value was deemed to have occurred. There is no assurance that future declines in values will not have a material adverse impact on our future results of operations. By way of example, a 10% decrease in the fair value of our equity investments as of September 30, 2004 would decrease their fair value by approximately $6.2 million.
Item 4. CONTROLS AND PROCEDURES
As of September 30, 2004, we performed an evaluation, under the supervision of our chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to September 30, 2004.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 12, 2004, we held our Annual Meeting of Stockholders.
At the meeting, eight directors were elected to serve for a one-year term and until their successors are duly elected and qualify. The following directors were elected to pursuant to the votes indicated:
Director |
"For" |
"Withheld" |
Jerry M. Sudarsky |
10,336,190 |
7,300,850 |
Joel S. Marcus |
17,261,615 |
375,425 |
James H. Richardson |
17,315,461 |
321,579 |
Richard B. Jennings |
16,606,907 |
1,030,133 |
Richard H. Klein |
16,639,857 |
997,183 |
Anthony M. Solomon |
17,486,475 |
150,565 |
Alan G. Walton |
17,453,525 |
183,515 |
Richmond A. Wolf |
17,486,475 |
150,565 |
At the meeting, our stockholders also voted to ratify the selection of Ernst & Young LLP as our independent public accountants for the fiscal year ending December 31, 2004. A total of 15,589,194 shares voted "for" the ratification, 1,042,594 shares voted "against" and 5,222 shares abstained.
Item 5. OTHER INFORMATION
Peter J. Nelson stepped down from the position of Chief Financial Officer and Treasurer effective after August 10, 2004. Dean A. Shigenaga, Vice President has been appointed Acting Chief Financial Officer and Etsuko Mason, Vice President, has been appointed Treasurer, both effective after August 10, 2004. Mr. Nelson continued as Senior Vice President - Operations through October 20, 2004, and terminated his full-time employment as of such date. As previously announced, Mr. Nelson will be continuing as Corporate Secretary and as a senior financial advisor to management of the Company and its Board of Directors through at least April 30, 2007.
Anthony M. Solomon resigned from his position on our Board of Directors on August 4, 2004 for personal health reasons.
Item 6. EXHIBITS
12.1 |
Computation of Consolidated Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. |
31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 |
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 9, 2004.
ALEXANDRIA REAL ESTATE EQUITIES INC. |
/s/ Joel S. Marcus Joel S. Marcus |
/s/ Dean A. Shigenaga |